The Microchip session here at the Stifel 2022 Cross Sector Insight Conference. My name is Tore Svanberg. I'm a senior semiconductor analyst, and I cover analog connectivity, and processor semiconductor companies. It is a great pleasure, and I'm very honored that we have Steve Sanghi here, who is Executive Chair of Microchip. We also have Sajid Daudi, who is Head of Investor Relations. The particular format for this session is gonna be a presentation by Steve, and then we'll have a little bit of time for Q&A after that. Welcome, and I'm gonna pass it over to the company. Steve.
Thank you, Tore, and good afternoon, everyone. I think it's still morning. Before I begin today, I wish to remind you that during this presentation, I will be making some projections and other forward-looking statements regarding the future financial performance of Microchip. These statements involve predictions, and the actual results may vary materially. Please look at the filings with SEC regarding some important risk factors about the company. This is just a longer version of what I just said. In the presentation today, I'll just spend two or three slides on telling you what Microchip makes, our end markets and our long-term growth. Then I'll switch and talk a lot about the cycle. Now I see a lot of the eyebrows go up when I say cycle.
I'm sure you're interested in that topic, and we'll spend a lot of time on that. What does Microchip do? Microchip is a leading total system solutions provider for the embedded control market. We make all types of microcontrollers, all the related products that go around the microcontroller, mixed-signal, analog, interface, security solutions, clocks and timing, wired and wireless connectivity, nonvolatile memory, both EEPROM and flash. The company was $6.8 billion in revenue in fiscal year that ended in March, and we have a number of these attributes that I will cover in slides later, elite long-term non-GAAP profitability, a very resilient and diversified business model, durable end markets, and a very solid track record of value creation for the shareholders. These are our end markets. The largest end market is industrial.
One change we have made is we have combined defense and aerospace and industrial together into a single market, industrial. We saw that's what all of our competitors do in the industry. The defense aerospace is about 9-10% of the business, if you're interested. Otherwise, it's included in industrial. We cover all these 5 end markets, and they're very good, durable end markets. Participating in these end markets, we have created a very consistent revenue growth. Go back to our humble beginnings in 1993, when Microchip first went public with sales of only $89 million. We finished our fiscal year 2022, ended this last March, with sales of $6.8 billion. Quite a long way we have come. Now, a few things you can see on this slide.
You can see the split of MCU, analog, and others. While MCU is still a majority of the business, analog is now about 27-28% of our business. The other thing you can see is a long-term compounded annual growth rate of 16.2%, which is quite remarkable. The third thing you see is, we have posted 126 consecutive quarters of non-GAAP profitability. Even through all the downturns of the industry, various cycles, we have never lost money. Some of the cycles that you can see on this slide, like 2001, 2009, while they were very, very major events for the industry back then, looking back at it, they look like a mere blip on the slide because the slide is really on a long-term basis up and to the right.
With that, now let me quickly cover the last quarter and the current quarter guidance. Everything here is in the public domain. Last quarter was record in every respect, and in the current quarter, we guided again 6% quarter-over-quarter growth and 24.6% year-over-year growth. Slightly higher gross margin, 40 basis points at the midpoint, and slightly higher operating margin, 50 basis points up at the midpoint. On the earnings per share, I have a few stars on it. In the last quarter, the earnings per share included $0.07 of non-repeatable one-time tax benefit. The baseline for EPS last quarter would be $1.28, and the current quarter is $1.34, significant growth despite having a much higher tax rate in the current quarter.
Because the fiscal year 2023 tax rate would be higher than fiscal year 2022. As the debt is getting paid down, we're losing a lot of the interest rate deductions. Looking at the long-term model, we have guided to a long-term model of 10%-15% organic revenue growth from a baseline of fiscal year 2021. We have guided to a gross margin of 67.5%-68.5% and an operating margin of 44%-46%. The midpoint of that is 45%. We're already guiding the current quarter to be slightly higher than that midpoint 45.2%. That kind of makes it interesting. Now let's talk about cycle.
I would say, you know, with all the news that we read and all the news that we watch on TV, on any of the financial news stations, talk to any of the investors, talk to analysts, we would agree that we recognize that macro conditions are weakening. With interest rate increasing, with all sorts of shortages, high inflation, gas price and all that, the macro conditions in the world with China lockdowns are decreasing. Although we saw zero signs of that in our business. Our bookings are still very strong. We have large amount of delinquency. We have still very capacity constraint. So ordinarily, for many, many cycles in the past, you know, I saw the cycle coming from a distance and actually called it ahead of time.
Today, I can stand here and say, I see zero sign of any weakness in the business. We expect to be supply constrained in 2022 and 2023. I say, okay, let's say sometime in the future, if and when those macro weaknesses catches up to our business, what are we doing today and why we believe that we can achieve a softer landing, you know, in that downturn? Those are the items I covered. There are about seven of them. The first being a very, very strong PSP backlog, which is well in excess of 50% of our backlog. In PSP backlog, customer gives us non-cancelable, non-reschedulable orders for a year. Every month, as we ship the product, they add another month on the tail end.
You know, we will get a year worth of notice if a customer is thinking of lowering their orders out in time because they see us, you know, anything in their business, and that gives us a year to really adjust to whatever we need to adjust to manage that soft landing. Second being a significant cushion from the near-term unsupported backlog. If you look at the current quarter based on the prior slide, we're shipping $1.955 billion. That's our current quarter guidance at the midpoint. Well in excess of that number, almost well above $2 billion of additional product is unsupported in the current quarter. Which means if I had all the capacity in the world, you know, we would be shipping double the business.
That unshipped has increased every quarter in the last six quarters and will increase again this quarter. Any kind of macro weakness catching up has to work through really large portion of that unshipped backlog, which will take many quarters to really, you know, work through. Usually by that time, the business is rising again. Downturns are usually two, three quarters. The next two points are from the inventory. First, we have to replenish disty inventory. Distributors are carrying only 17 days of inventory, which is historical low. A more normal inventory will be almost twice that. Today, distribution is not able to build inventory because we don't have enough to ship them, and whatever we do ship them goes out the door because demand is very strong. Significant distribution inventory has to be rebuilt, which will keep our factories loaded.
We have to build internal inventory. For the last 6 quarters, we have shipped product more than what we have built. The finished goods are all drawn down. The die inventory is all drawn down. We're largely running on fumes. In any equipment we're able to add in the quarter or the prior quarter, we're growing through that. You have seen us grow quarter after quarter, and we expect to continue to keep growing. That has not allowed us to really replenish any of the die and finished goods inventory, which we will have to do if the macro weakness catches up to us. Finally, a couple of more points. Our Total System Solutions that I will talk about later and mega trends also I'll talk about later.
Megatrends revenue is growing at 2x the rate of the normal overall, and that combined with TSS will give us, you know, above average secular growth rate. Our capital needs usually dry up in a macro weakness. Our maintenance capital is a much smaller portion of the overall capital. If we're no longer adding capital to expand, then all the cash flow comes down. Cash flow is maintained even in down cycle because you're not spending all that money on CapEx. A very high variable compensation, which in every cycle you have seen in the past, buffers our operating expenses. Because of all those factors, we think we have a very good chance.
We feel confident that we can really soft land the plane in the next down cycle if it ever comes. Let's continue talking about the cycle. You know, these are the semiconductor industry year-over-year growth rates for the cycle, all the way going back to 2007. One thing it does prove is the industry is cyclic. You're right there. Industry is cyclic, and based on that history, there would be another cycle. I do not see it yet. When we see it, we will call it. And I'll let you know, but we don't see it today. What we are seeing today is really, let's look at our performance.
Now I'll show you a series of slides in which I will add Microchip metrics on top of that cycle and have you look at how we performed in the prior cycles, which could give you a clue on how we can perform in the next cycle. On top of that, some of the items I talked about. Why the next cycle performance could actually be even better because of how we have prepared. First one is cash flow. Through the cycles, our cash flow has been excellent. You know, minor dip in every cycle, but combination of the strong, resilient business model, maintaining gross and operating margins, low CapEx during the down cycles, all those things have cushioned the cash flow tremendously. The second one is gross margin.
You can see that in most cycles, the gross margin impact hasn't been any more than about 300 basis points. In some of the prior cycles, we had a lot of the acquisitions also. We did a number of acquisitions, and acquisitions, when we buy them, would have a lower gross margin. Then we will work over two or three years to get their gross margin to Microchip standard. Some of this slide has acquisitions built in. When we stopped doing acquisitions after 2018, which was the last acquisition of Microsemi, you can see gross margin has been kinda up and to the right.
You know, I have heard many people on the Street think, you know, gross margins are highly inflated and our 67% gross margin, you know, could go down to like 60% or something. Well, you know, it never has before, and we're even better prepared this time to keep the factories loaded. I think real resilient profitability through the cycles. This one is operating margin. Very similarly, the operating margin plotted over the cycles, very, very resilient profitability and improving efficiency through the cycles. Now kinda let's talk about organic growth. Before I talk about organic growth, let me take you back to 2009, when Microchip sales were about $700 million. I basically found that we had two issues.
One, we were subscale and had scale disadvantage to many of our larger competitors in microcontrollers and analog. Second, while we provided the microcontroller, all the associated components in mixed-signal, analog, USB, Ethernet, Wi-Fi, connectivity, everything else came from our competitors. Our competitors were surrounding the microcontroller on a customer's board. I wanted to elbow them out because when they visit the customer to ship any of the analog or mixed-signal or other products, they would knock on a microcontroller telling the customer their product line, what they could do. I had two goals. One, to remove the scale disadvantage, and second, to elbow out the competition from our sockets, which is what we achieved in the subsequent 10 years.
Organic growth as well as a series of very high-profile acquisitions that all became very, very successful, we scaled the company 10x with $6.8 billion of sales in fiscal year 2022. We scaled it 10x, which we set out to do. Second, in the process of acquiring as well as building inside, we built out everything that's needed by our customers around our microcontroller to the point where we provide total system solution to our customers and can now successfully elbow out the competition. In fact, just prior to this, I was talking to an investor who spoke with the ex-employee, senior sales employee of one of our competitors, who admitted to him that why we lose in analog is because Microchip wraps it along with the microcontroller now providing complete solution.
Now a current employee of any of those companies will never admit to that. This was an ex-employee who was admitting. I think that thing is working. After having completed that path, we have now switched to an organic growth strategy by focusing on Total System Solution with what we have built in the last 10, 12 years, and by you know having software, firmware, reference designs, all of them to speed our customers' time to market and focusing on mega trends which are providing 2x the growth rate overall. We think we are well positioned to really drive organic growth for Microchip. This is the Total System Solution I talked about. Is this slide a build? No? Okay. In the center, you see the microcontroller, which is a Microchip. We also, with various acquisitions, we have some microprocessors.
We now have FPGA and SoCs. That is usually the mother chip where the customer sits down and decides, "What am I going to build around? Am I gonna use a microcontroller, 8, 16, or 32? Am I gonna use an FPGA?" That is what they decide first. As they start building their application, then, you know, 6 months down the line, I need the power management, I need an A-to-D, I need some memory, I need to connect to internet, I need this, I need that. You know, by the time the competitors show up, Microchip has swooped it all up. You know, 10 years ago, I would have many of those blocks in different color because we didn't have them.
Today, every single color, you know, block around is in the same blue color because we provide chips for every one of those blocks, having completed the solution. I think that has been sort of a decade-long journey to go from a microcontroller supplier to a complete solution supplier, which is very, very successful. Here on the right are the six megatrends, 5G, IoT, data center, electric vehicles, artificial intelligence, and advanced driving assist. On the left are our end markets, and many of those have crosscurrents. For example, 5G, we find 5G in industrial data centers, communication, even automotive selectively. When you look at, you know, IoT or artificial intelligence, you find those in all the end markets. Artificial intelligence is being added in the consumer market on appliances, in communication, in automotive, in driver assist, and all these things.
Our megatrend business is growing at 2x the rate of our overall business. As far as the end markets are concerned, I showed you a split of the end market in an earlier slide. Consistent, disciplined, and balanced capital return strategy. After Microsemi acquisition, from fiscal year 2019 to fiscal year 2022, we generated $7 billion of free cash flow. How we spent it, we spent $5 billion in paying down debt and brought the leverage ratio down from over 5 to now 2.3, and we have paid down debt for 15 straight quarters now. We spent $1.6 billion in paying dividend to the shareholders. We have paid dividend for 79 consecutive quarters, and we have guided that we'll be increasing dividend 9% sequentially, which becomes almost 40% year-over-year when you compound it.
We have spent $426 million in share repurchases. Share repurchases, we only began 2 quarters ago and will now be doing it. We have announced active, programmatic stock buyback of $4 billion, you know, over time, and we are executing to that. We are targeting that once our leverage ratio drops to 1.5, then we will return 100% of free cash flow back to the owners of the business, which are our shareholders. In our November Analyst and Investor Day in New York, we also unveiled many of the things I talked about today into this logo, Microchip 3.0. Most of these ingredients on this slide I've already talked about. I talked about our sustained organic effort to grow. I talked about our 5-year organic growth rate.
I talked about our non-GAAP business model of high gross and operating margin. I didn't talk about EBITDA margin target of 48% and a free cash flow target of over 38% of the business. We talked about end market. We didn't talk about inventory. Our long-term goal is to actually carry a slightly higher inventory of 130-150 days to be able to better serve our customers than we have been able to in the last couple of years. Invest in capacity for trailing-edge technologies. As you have heard, many of our foundries are now saying that they will not invest in trailing-edge technologies. Many of the analog and microcontrollers are built on trailing-edge technology, so that is putting some of that burden on us.
We have expanded our CapEx target between 3% and 6% of our revenue. In the current year probably will be higher than 6%, where the guidance has been. Then the increasing capital return to the shareholders I talked about. As we hit 1.5x leverage ratio, we will then give 100% of the cash back to you. Very strong business foundation based on culture and profitability. Winning formula, just summarizing some of the same things I talked about. Organic growth rate of 10%-15% with expanding gross and operating margins. Significant cash generation, which we give back to the shareholders and extend a strong foundation that has been built on culture and sustainability. The best of Microchip is still ahead of us.
The final slide, and I will close with this, a compelling valuation. On the Y-axis is the next 12 months forward PE multiple. If you look at on the extreme right, that's where the Philadelphia Semiconductor Index forward PE multiple is at 16.7. ADI is right there. TI is slightly ahead of it. And Monolithic Power and Silicon Labs are kind of outliers. Microchip on the left is at 13.2. If Microchip multiple were to catch up, and as we're paying down debt and increasing the cash flow back to the shareholders over the next couple of years, if Microchip multiple, without any other growth, were to simply catch up with, where the Philadelphia Semiconductor Index is or TI, you know, it would require, you know, 30%-50% growth in stock price just to close that multiple.
On top of that, the earnings are growing substantially. Like in the current quarter, earnings growth is 45.2% versus the same quarter a year ago. I think all that strong combination of growth, business durability, increasing profitability, lots of free cash flow generation, leverage reduction, and enhanced capital return strategy that we have talked about, all that available at a significant discount, I think creates a strong, compelling value proposition. Thank you very much.
Sorry. Thank you, Steve. We have a little bit of time for a few questions, and I really wanted to ask you this question, Steve, because I think it's something that's on investors' minds a lot, which is pricing in the industry. You know, we all know the historical pricing. You know, we know how pricing has been through cycles. It just feels like things are a little bit different now. By the way, there's two camps out there, right, of thinking here. Some investors believe that this is transitory, it's very similar to global inflation. Eventually it will cool down. There's also a camp that say, "You know what? No, it's not that transitory. You know, the industry has changed.
Semiconductors have become critical, you know, for everyone's economies." I would love to hear your thought on pricing, especially since you've seen it, you know, year in and year out for so long.
You know, one of the things you have seen in the slide I showed on gross margin over the cycles, we never lowered our prices during the cycle when there's a down cycle. Majority of our products are proprietary today. 95% plus of our revenue is really proprietary products which are designed in. Almost a decade ago, we started training our customers that we don't give year-over-year price decreases. You know, the things that we buy, we have had to pay more to the people, sometimes cost of products we buy are inflationary in chemicals and gases and other things. Why is semiconductor industry the only industry where the prices go down year after year? You know, we began essentially saying there's no year-over-year price decrease. You know, we sell on value almost a decade ago.
Now, a decade ago, we would win only 20% of the time, and 80% of the time, you know, the buyers will beat us down to really get a year-over-year, some sort of low single-digit kind of price reduction. We kept winning more and more often. The 20 went to 30, went to 40. Pre-COVID, we were winning them eighty, ninety percent of the time, that we were not giving a price reduction. That has nothing to do with COVID. We had achieved that going from 20% to eighty-five, 90% pre-COVID. Then since COVID now, the prices have gone up. We had increased some prices over the prior ten years, especially on the trailing-edge technologies.
Now with all the costs that foundries and assembly test subcontractors have passed to us, some of the equipment costs have gone up because the used market for the equipment has dried up, and even on trailing-edge technologies, you have to add new equipment. All that has been well explained to the customers. They know this. Our customers in large majority are not expecting that these prices go back down in the next cycle, because some of the costs are now institutionally built in. High-cost capital has been put in place. It's depreciating. They can't get a price decrease. I'm confident that our prices do not go down in the next cycle.
That's great perspective. The other question that I have is a bit more Microchip specific. So you talked about this big delinquent backlog, and obviously, that means you have to prioritize and some of that is captured in your PSP program, obviously. But how do you prioritize the other big chunk of backlog? Is it based by customers and market? I mean, do you have conversations with the CEO of those companies to sort of make sure that it is true demand?
Yes. The engagement with customers is all-time high. You know, our executive team is in daily escalation calls with multiple customers through the day. You know, we have understood every customer's minimum requirements to keep their factories running. The first goal is that we provide minimum, and then we provide, you know, above that, more than the minimum with the remaining capacity. You know, the goal is not to provide everything to the automotive and shut down the consumer appliances or industrial. You know, the goal is to keep everybody alive. We serve 120,000 plus customers around the world, and in each one, many of them we have served for a long period of time. Longevity, consistency, delivery over cycles for 30 years, you know, that has been the hallmark of Microchip.
You know, I still, in my current role, I see customers, I talk to them all the time. I go to work, you know, still three times, you know, three times a week. With all the information that I personally experience, customers are telling us that Microchip has served them the best in this environment, despite the shortages. Why? Because we didn't prioritize all our availability to one market, you know, industrial or automotive and starve everybody else. We kept everybody alive. Since we did that, you know, everybody can complain, but also everybody's happy that they got served better than from any other company. This large backlog, you know, customers could have canceled this backlog if they didn't need the product.
I mean, they have a good excuse saying, "You haven't supplied this to me quarter after quarter, you're delinquent, I no longer need it." They haven't canceled it. In fact, many of the customers are expediting. They are daily expedites, they're daily escalations. The backlogs are very high quality and we have gotten there through a very, very substantial engagement with the customers. We serve about, you know, 5,000 customers directly, and the large tail then is through distribution. Both direct customers as well as distribution, there has been a very, very high level of engagement.
Great. I just want to wrap up with one last question before we do our lunch. So you talked quite a bit about the TSS, you know, the TSS, the Total System Solution business. Just give us a bit of perspective, you know, what inning we're in because, you know, you said it's been in the works for 10 years, but I'm sure some customers, you know, they may be in the sixth inning, but I'm sure there's a lot of customers that might maybe only in the second inning. Overall, you know, where would you say we are in that process of capturing so much more value with customers?
I think we're barely probably in the top of the second inning.
Mm.
You know, for years, we were building the entire ecosystem. You know, when 8, 9 years ago, you know, I talked to a customer and they said, "Yep, you know, sure, we're buying your microcontroller. We'll look at your analog." Then they will look at handful of our analog parts, and they won't find the right fit, and they go back to TI or ADI, and they do that again in the next design and again in the next design. Then eventually say, "Well, you know, you don't have enough deep enough portfolio for me to meet my needs. I always have to go to somebody else.
Yeah.
You know, I don't think the first inning even began till about 2018, 2019, maybe, you know, 2, 3 years ago. I think now we're just really in the top of the second inning, and there's a long runway ahead, where there are some customers who are buying the whole plate from us. You know, the steak and all the trimmings are all ours. You know, those are in the ninth inning. There are customers who are still in the first inning. I think when I, you know, just average it overall regarding where the customers are, I would say we're in the second inning.
Great. That's great perspective. With that, we're out of time. Thank you everyone for coming to the Microchip session. Steve and Sajid Daudi, thank you so much for coming to our conference. Really appreciate it.
Thank you very much.