Microchip Technology Incorporated

Good day everyone and welcome to Microchip's first quarter fiscal 2023 financial results. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. Eric Bjornholt, our CFO. Please go ahead, sir.

Thank you and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Ganesh Murthy, Microchip's president and CEO, Steve Sange, Microchip's executive chair, and Saja Dowdy, Microchip's head of investor relations. I will comment on our first quarter financial performance. Ganesh will then provide commentary on our results and discuss the current business environment as well as our guidance. And Steve will provide an update on our cash return strategy. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the investor relations page of our website at www.microchip.com and included reconciliation information in our press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of the operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based compensation, and certain other adjustments as described in our press release. Net sales in the June quarter were $1.964 billion, which was up 6.5% sequentially. We have posted a summary of our gap net sales by product line and geography on our website for your reference. On an on-gap basis, gross margins were a record at 67.1%, operating expenses were at 21.5%, and operating income was a record 45.6%. Non-gap net income was a record $767.2 million, Non-GAAP earnings per diluted share was a record $1.37 and a penny above the high end of our guidance range. On a GAAP basis in the June quarter, gross margins were a record at 66.7%. Total operating expenses were $608.6 million and included acquisition and tangible amortization of $167.6 million, special income of $16.9 million, $1.7 million of acquisition-related and other costs, and share-based compensation of $33.5 million. GAAP net income was a record $507.2 million, resulting in $0.90 per diluted share and was adversely impacted by a $6.2 million loss on debt settlement associated with our convertible debt refinancing activities and positively impacted by a $22 million litigation accrual adjustment. Our June quarter GAAP tax expense was impacted by a variety of factors, notably the tax benefits recorded as a result of the loss on the debt settlement. Our non-GAAP cash tax rate was 9.4% in the June quarter and was in line with our guidance. The June quarter tax rate was up approximately 450 basis points from the rate in fiscal year 2022. We expect our non-GAAP cash tax rate for fiscal 23 to be between 8.5% and 10.5%, exclusive of the transition tax, any potential tax associated with restructuring the microsemi operations into the microchip global structure, and any tax audit settlements related to taxes accrued in prior fiscal years. A reminder of what we communicated last quarter, our fiscal 23 cash tax rate is higher than our fiscal 22 tax rate for a variety of factors including lower availability of tax attributes such as net operating losses and tax credits, as well as the impact of current tax rules requiring the capitalization of R&D expenses for tax purposes. Our inventory balance at June 30, 2022, was $911.8 million. We had 127 days of inventory at the end of the June quarter, which was up two days from the prior quarter's level. A major part of the increase in days of inventory was driven by the 50 basis point sequential increase in gross margins. Our levels of raw materials and work in progress increase in the quarter which helps position us for the increased production we are expecting from our internal factories and helps buffer to a degree some against unexpected shortages or changes in material lead times. The carrying cost of our inventory has been and will be increasing due to rising input costs from our supply chain as well as several last time buys we are forced to make because of capacity restructuring actions being taken by our suppliers. We are continuing to ramp capacity in our internal and external factories so we can ship more product to support customer requirements. Inventory at our distributors in the June quarter was at 19 days, which was up two days from the prior quarter's level. In the June quarter, we repurchased $34.6 million of principal value of our 2027 and 2037 convertible subordinated notes for cash, and we also paid cash for the value of these bonds above the principal amount. We use cash generation during the quarter to fund the amount of convertible debt repurchases, and we believe that these transactions will benefit stockholders by reducing share count dilution to the extent our stock price appreciates over time. The principal amount of convertible debt on our balance sheet at June 30th was $803.5 million. This includes $665.5 million of convertible bonds maturing in November of 2024 with a cap call option in place that offsets any potential dilution from these convertibles up to a stock price of $116.34. At the beginning of calendar year 2020, Microchip had $4.481 billion of convertible bonds outstanding. So today, our overall capital structure is in a much better long-term position. Our cash flow from operating activities was $840.4 million in the June quarter. Our free cash flow was $718.5 million and 36.6% of net sales. As of June 30th, our consolidated cash and total investment position was $379.1 million. We paid down $233.6 million of total debt in the June quarter, and our net debt was reduced by $293.3 million. Over the last 16 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so, We have paid down almost $5.2 billion of debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt. We have accomplished this despite the adverse macro and market conditions during the earlier years of this period, which we feel is a testimony to the cash generation capabilities of our business, as well as our ongoing operating discipline. We continue to expect our debt levels to reduce significantly over the next several years. Our adjusted EBITDA on the June quarter was a record at $986.7 million and 50.2% of net sales. Our trailing 12-month adjusted EBITDA was also a record at $3.521 billion. Our net debt to adjusted EBITDA was $2.05 at June 30, 2022, down from $2.32 at March 31, 2022, and down from $3.34 at June 30, 2021. Capital expenditures were 121.9 million in the June quarter. Our expectation for capital expenditures for fiscal year 23 is between 500 and 550 million as we continue to take actions to support the growth of our business and the ramp of our manufacturing operations. We continue to prudently add capital equipment to maintain, grow, and operate our internal manufacturing operations to support the expected long-term growth of our business. We expect these capital investments will bring gross margin improvement to our business and give us increased control over our production during periods of industry-wide constraints. Depreciation expense in the June quarter was $71.7 million. I will now turn it over to Ganesh to give us comments on the performance of the business in the June quarter, as well as our guidance for the September quarter. Ganesh?

Thank you, Eric, and good afternoon, everyone. Our June quarter results continue to be strong across the board. setting several records in the process. Revenue grew 6.5% sequentially and 25.1% on a year-over-year basis to achieve another all-time record at 1.96 billion. This was our seventh consecutive quarter where we achieved a record revenue mark. During the quarter, we worked through several COVID-related operational challenges, including but not limited to the shutdowns in Shanghai, which affected our customers and our supply chain partners. Non-GAAP gross margin was another record at 67.1 percent, up 50 basis points from the March quarter and up 230 basis points from the year-ago quarter, benefiting from improved operational efficiencies as well as product mix changes. Non-GAAP operating margin was also a record at 45.6 percent, up 90 basis points from the March quarter and up 390 basis points from the year-ago quarter, achieving the high end of our guidance. Due to our rapid increase in revenue, operating expenses at 21.5% were 100 basis points below the low end of our long-term model range of 22.5% to 23.5%. Our long-term operating expense model will continue to guide our investment actions to drive the long-term growth and profitability of our business. Our consolidated non-GAAP diluted EPS was a record $1.37 per share up 38.4% from the year-ago quarter and just above the high end of our guidance. Adjusted EBITDA at 50.2% of revenue and free cash flow at 36.6% of revenue were both very strong in the June quarter, continuing to demonstrate the robust cash generation capabilities of our business. Net debt declined by $293.3 million, driving our net leverage ratio down to 2.05, exiting the June quarter. as we continue to aggressively drive down our net leverage. Recalling that our net leverage was almost 5x at the end of the 2018 June quarter, right after the microsemi acquisition, it is satisfying to see how far we have come in the four years since to bring down our net leverage so significantly. During the June quarter, we returned $348.2 million to shareholders in dividends and share repurchases, representing 55% of the prior quarter's free cash flow. I would like to take this opportunity to profusely thank all of our stakeholders who enabled us to achieve these outstanding results and especially thank the worldwide Microchip team for their concerted effort and never-give-up attitude to deliver results for our customers despite a historic and persistent imbalance between supply and demand. Taking a look at our revenue from a product line perspective, our microcontroller revenue was sequentially up 1.6% as compared to the March quarter and set another all-time record On a year-over-year basis, our June quarter microcontroller revenue is up 17.8%. Microcontrollers represented 54.1% of our revenue in the June quarter. Our analog revenue sequentially increased 12.5% in the June quarter, setting another record in the process. On a year-over-year basis, our June quarter analog revenue was up a strong 34.2%, and analog represented 29.5% of our revenue in the June quarter. The difference in growth rate in the June quarter between microcontrollers and analog is in part based on quarter-to-quarter differences, as we have seen in the past, and in part because we are comparatively less constrained on analog products, which are predominantly produced through internal factories. Although we no longer break them out, it was notable that in the June quarter our FPGA revenue, as well as our technology licensing royalty revenue, were both up strongly and achieved new records. Taking a look at our revenue from a geographic and end market perspective, Americas was up 33% over the prior year quarter. Europe was up 28.4% over the prior year quarter. Asia was up 20.7% over the prior year quarter. Our major end markets remained strong and were supply constrained. Business conditions continue to be strong as viewed through our internal indicators. We expect to remain supply constrained through the rest of 2022 and into 2023. demand continued to be insatiable, despite the capacity increases we have implemented so far. As a result, our unsupported backlog, which represents backlog customers wanted shipped to them in the June quarter, but which we could not deliver in the June quarter, climbed again. We exited the June quarter with our highest unsupported backlog ever, with unsupported backlog coming in well above the actual revenue we achieved. We are cognizant of the weakening macro conditions resulting from rising inflation and the actions being taken by central banks in response. We're also aware that there is some inventory bill that our customers, as can be seen in their balance sheets, some of which we believe is due to strategic buffer inventory bills and some of which is due to incomplete kits or the infamous golden screw effect. While we have seen sporadic requests to push out backlog, these requests are a small fraction of the very large unsupported backlog we have over multiple quarters. and hence have not had a material impact on our business. At the same time, the level of expedites and customer escalations we're experiencing has not abated, indicating that demand and supply remain imbalanced for many customer situations. In order to best utilize the available supply and reduce customer inventory bills, we continue to thoughtfully reallocate future supply from customers who self-identify inventory positions to customers in distress with imminent lines down situations. Given the cross currents of strong internal business indicators and some uncertainty in the macro environment, we have modeled a range of potential scenarios and are monitoring our leading indicators which should enable us to take deliberate actions swiftly and early when appropriate. Our goal is to deliver a soft landing for our business if or when the softer macro environment catches up with it. And so here's how we're thinking about it. We continue to have strong PSP backlog, which is non-cancellable for at least 12 months, which comprises well over 50% of our total backlog. In addition, over the last six months, we have entered into multi-year, long-term supply agreements with a number of large customers, in effect, giving them reserved capacity in exchange for guaranteed purchases, typically over five years. We have a significant demand cushion with unsupported backlog that is much greater than 100% of supported backlog and which can readily absorb any push-outs and cancellations. Distribution inventory at 19 days is low when compared to what the channel has historically required to serve customers effectively. Any business weakness will give us the opportunity to replenish depleted channel inventory and position our channel partners to respond to business growth as well as better serve customers. Our internal die bank and finished goods inventory has been substantially depleted as demand outstripped supply for the last seven quarters. Any business weakness will enable us to replenish this inventory to better position us to support our customers. We expect continued above average secular growth trends resulting from our focus on total system solutions and megatrends. In addition, our end market exposure is concentrated in the industrial, aerospace and defense, automotive, data center, and communications infrastructure markets, all of which have demonstrated much higher durability in prior cycles. With any business weakness, we expect our capital intensity will shift to the lower end or even below the low end of our CapEx guidance of 3 to 6 percent of revenue, thus liberating free cash flow. And finally, as you've seen in prior cycles, we expect our variable compensation programs to buffer our operating expenses and protect our operating model. If you study Microsoft's peak-to-trough performance through the business cycles over the last 15 years, you will observe our robust and consistent cash generation, gross margin, and operating margin results. The investor presentation posted on our IR website today provides details about our performance through the business cycles, If or when there is a macro slowdown that impacts our business, we expect our cash generation, gross margin, and operating margin to once again demonstrate consistency and resiliency. This will help us to continue to execute our long-term Microchip 3.0 growth strategy and insulate it from whatever short-term market challenges there may be. We continue to expect constraints in our internal and external factories and their related manufacturing supply chains. We are ramping our internal factories and working closely with our supply chain partners to secure additional capacity wherever possible. We expect our capital spending in fiscal year 23 to be modestly above the 3 to 6 percent of revenue range we have shared with you as we respond to growth opportunities in our business. We believe our calibrated increase in capital spending will enable us to capitalize on growth opportunities, serve our customers better, increase our market share, improve our gross margin, and give us more control over our destiny, especially for specialized trailing edge technologies. We're also pleased to see the Chips and Science Act approved by Congress with bipartisan support and expect the President will sign it into law imminently. This bill is good for the semiconductor industry and for America as it enables critical investments which will even the global playing field for U.S. companies while being strategically important for our economic and national security. We expect to be eligible to benefit from the grants under this legislation, as well as the investment tax credit provisions of the bill, as we do our part to invest in ensuring U.S. economic and national security. Now let's get into the guidance for the September quarter. Our backlog for the September quarter is strong, and we have more capacity improvements coming into effect. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the September quarter to be up between 3% and 7% sequentially. And we expect sequential revenue growth again in the December quarter. At the midpoint of our revenue guidance, our year-over-year growth for the September quarter would be a strong 25%. For the September quarter, we expect our non-GAAP gross margin to be between 67.3 and 67.7% of sales. We expect our non-GAAP operating expenses to be between 21.3 and 21.7 percent of sales. We expect non-GAAP operating profit to be between 45.6 percent and 46.4 percent of sales. And we expect our non-GAAP diluted earnings per share to be between $1.42 per share and $1.46 per share. At the midpoint of our EPS guidance, our year-over-year growth for the September quarter would be a strong 34.6 percent. Finally, as you can see from our June quarter results and September quarter guidance, Every element of our Microchip 3.0 strategy is firing on all cylinders as we continue to build and improve what we believe is one of the most diversified, defensible, high-growth, high-margin, high-cash generating businesses in the semiconductor industry. To summarize the essential elements of Microchip 3.0, they are organic growth, organic revenue growth rate of 10 to 15 percent in the fiscal year 22 to 26 timeframe by focusing on total system solutions and our six key market megatrends. Long-term non-GAAP operating margin target of 44% to 46%, and free cash flow target of 38%, consistently increasing capital return to shareholders as net leverage drops, such that 100% of free cash flows return to shareholders after net leverage drops to 1.5x. CapEx investment of 3% to 6% of revenue, and inventory investment of 130 to 150 days over business cycles. and a strong company foundation that is built on culture and sustainability. Now let me pass the baton to Steve to talk more about our cash return to shareholders. Steve?

Thank you, Ganesh, and good afternoon, everyone. I would like to reflect on our financial results announced today and provide you further updates on our cash return strategy. Reflecting on our financial results, I continue to be very proud of all employees of Microchip that have delivered another exceptional quarter while making new records in many respects. Namely, record net sales, record net, record non-GAAP gross margin percentage, record non-GAAP operating margin percentage, record non-GAAP EPS, and record adjusted EBITDA. And all of that in a very challenging supply environment. The Board of Directors announced an increase in the dividend of 9.1% from last quarter to 30.1 cents per share. This is an increase of 37.8% from the year-ago quarter. During the last quarter, we purchased $195.2 million of our stock in the open market. We also paid out $153 million in dividend. Thus, the total cash return was $348.2 million. This amount was 55% of our actual free cash flow of $633.1 million during the March 2022 quarter. Our paydown of debt as well as record-adjusted EBITDA drove down our net leverage at the end of June 2022 quarter to 2.05%. from 2.32 at the end of March quarter. Ever since we achieved investment grade rating for our debt in November of 2021 and pivoted to increasing our capital return to shareholders, we have returned $1.04 billion to shareholders through June 30, 2022 by a combination of dividends and share buybacks. In the September quarter, we will use the June quarter's actual free cash flow of $718.5 million and plan to return 57.5% or $413.1 million of that amount to our shareholders. Out of this $413.1 million, the dividend is expected to be approximately $166.5 million, and the stock buyback is expected to be approximately $246.6 million. With that, operator, will you please poll for questions?

Thank you, sir. Please note that due to these time constraints, please limit your questions to only one question. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will take the first question from Gary Mobley from Wells Fargo. Your line is open. Please go ahead.

Hi, guys. Thanks for taking my question, and congrats on some solid results. I want to start out with the inevitability of the CHIPS Act being passed. I know you guys have a relatively high U.S.-oriented manufacturing footprint, employee base, and not to mention a lot of U.S.-centric military business And so I'm wondering if maybe you can give us a little more color in how the CHIPS Act may benefit you from the CapEx subsidization perspective or from an R&D tax credit perspective, anything you can add there.

So there are various components of the CHIPS Act, and the rules of engagement of how they will be handed out are going to be different. So the most obvious one is the investment tax credit. And for any capital expenses and factories that are built, et cetera, that is the first thing that we think will take effect. And it's probably the end of the year, the beginning of next year before that comes into effect. And that's a 25% investment tax credit. There are then grants that are for both manufacturing and for R&D. And we have opportunities on both of those with the expansion plans that we have and some of the R&D programs that we are pursuing. But honestly, it's too early because Those are not quite clear yet in terms of how the requirements will be. We have, of course, been engaged with both Department of Commerce and Department of Defense for many months to give them an understanding of what the aligned interests are between what we are planning to do, are interested in doing, and what the government sees as national security imperatives. And so we expect that as that rolls out, we'll have more to share, but not at this point in time.

Thank you, Ganesh. Appreciate it.

We will take the next question from Raji Gill, Needham & Company. Your line is open. Please go ahead.

Yes, thank you, and congrats again on managing through this very volatile period of time with great results. Just a question on your unsupported backlog. You mentioned it climbed again. It's well above the actual revenue that you achieved. And you mentioned as part of your kind of scenario analysis that you can absorb any potential order push-outs or order cancellations. Wondering if you could maybe elaborate further and maybe help us understand if there is a significant decline in demand in some of these end markets, how much do you think you'll be able to kind of absorb? And you mentioned there are some indications of order volatility. Wondering if you could maybe describe that as well. And where are you seeing it? Thank you.

So on your last question, the order volatility we see is sporadic. It's very small. And it is well, well below the unsupported orders that we have. And they're easily substitutable with other orders we have. And we have indicated that the unsupported is in excess of what we are shipping. So you can see the backlog would have to be cut by more than half just to get to where we're at. And that's a far, far cry from where today's activity is taking place.

Thank you.

Thank you.

We will take the next question from Matt Ramsey from Cohen. Your line is open. Please go ahead.

Hey, guys. This is Josh Buckhalter on behalf of Matt. Thanks for taking my question, and congrats on the solid results. You know, the revenue and gross margins speak for themselves, but I was wondering, are there any metrics you can provide to help us understand how much of the upside was driven by pricing versus units as we try to square away how much your capacity investments on the CapEx line are flowing through to the model already and what's still on the come? Thanks, guys.

So, it's not an easy way for us to break out pricing versus units. the increased number of units. Obviously, we have a component of both that go into it. On the units, we have a component which is what are we doing from our own factories, and then we have components of what are we trying to do and get from our partners. And what is coming from our factories, we at least have plans and things that we can measure. What comes from our partners, we can have upsides sometimes that are unexpected that help us. So it is very clear we're shipping more parts. And there is a component of price that is included. The price increases we have made are to offset cost increases that we have experienced. And so the primary driver for us is to grow by growing units, not by growing price.

Okay, we should move to the next question.

The next question from William Stein from Truist Securities. Your line is open. Please go ahead.

Great. Thanks for taking my question. With regard to the strength of the backlog and the increase in capacity that you're expecting, it sounds like you're expecting that to continue over the next few quarters. Would you be willing to provide us information you know, perhaps not guidance, but some way to think about revenue growth in subsequent quarters. Could we think about at least, for example, into the December quarter having relative, you know, having, let's say, a relatively strong feeling that that will be an up quarter?

So we don't provide guidance, obviously, for subsequent quarters, but I did in my prepared remarks say we will grow in the December quarter. And if you look at historically, December is a declining quarter from any measure of historical seasonality. And so we are quite confident we will grow into the December quarter. Does that answer your question, Will?

Again, it's not on the line right now. All right, go ahead. Again, dear participants, please press star one to ask a question. Again, press star one to ask a question. In the meantime, we will take the next question here from Chris Dainley from Citi. Your line is open. Please go ahead.

I guess just a question on capacity and the shortages. So are you seeing any improvement in the shortage or capacity situation? You talk about trying to squeeze a little bit more both internally and externally. Has your projected capacity gone up a little bit over the last few months? as you've been able to maybe hunt around and find a few more parts out there, maybe just give us a little more color on that supply-demand balance situation?

Yeah, so for our internal factories, we have been investing in CapEx for many quarters. We made progress in our back-end factories first because it was a shorter cycle time and easier to bring on. We have been making progress on our front-end factories and still have many quarters of capacity that we think we can bring on as we are able to get equipment. And some of the equipment that we have needed has been delayed as being able to hire people. And it has been harder in some prior quarters, but we're getting better in terms of being able to fill our positions in the factories, et cetera. So clearly, internal capacity is growing and helping us support some of the backlog that we're unable to support at this point in time. We have had incrementally more constructive capacity improvements from our external partners, although it is still very small in the grand scheme of what we need in terms of that. And we are hopeful that, you know, some of perhaps the weaknesses that may be out there in other segments will in fact help free up some of the capacity we need, although there's not an exact mix between where things are getting freed up and where things are that we require. But I think incrementally it will be constructive and positive for us.

Got it.

Okay.

Thanks, Ganesh. Thank you.

The next question from Harlan Sir from JP Morgan. Your line is open. Please go ahead.

Good afternoon and congratulations on the strong execution. Your near to mid-term business continues strong, right? You've talked many times about the unsupported backlog being strong. But I think the market concern continues to be for a broader slowdown next year, not so much for this year, just given the mix of your business. Maybe as a reflection of your customer's view on next year, maybe it's worthwhile to look at your PSP customers because they're giving you 12 months order visibility, but they have to continue to keep that 12-month PSP funnel going, right? So they're continuing to add orders to the back end of their PSP funnel every single month. So given that they're booking well into next year, combined with the concerns on a macro slowdown, have you guys seen a deceleration or decline in the PSP sort of order true-ups on a sequential basis as sort of a reflection on customer demand concerns next year?

Nothing perceptibly changing. If you look at PSP as a percentage of our total backlog, it's pretty rock steady within about one percentage point. through pretty much the last 13, 14 weeks of time. So it's certainly a good indicator we pay attention to, and we are watching where that is going. I think the strength of our business also is driven by the end markets we're exposed to. And what is out there today where you see many of the concerns and people who are seeing weakness, it's predominantly in consumer-driven segments. whether that is consumer PCs, consumer mobile phone, consumer electronics, et cetera. And, you know, we have no consumer PC exposure. We do have enterprise PC exposure. It's very strong. You know, we have almost no phone exposure. Our consumer appliances, you know, we don't have consumer electronics, so to speak. We do have home appliances. And, you know, they could be a part of it, but it's such a small piece. of our overall thing. So our end market exposure, we're very fortunate to have very durable markets.

And I think Eric wants to add a comment to it as well.

Yeah, I mean, so on PSP specifically, the dollars amount of PSP backlog that we had leaving June was higher than it was at the end of March. So, I mean, the program is still quite effective. Customers are participating in it and adding orders out in time.

Well, thank you for the insights.

We'll take the next question from Tori Svanberg from Stifa. Your line is open. Please go ahead.

Yes, and congratulations on the record quarter. You talked about being able to manage a bit of a soft landing in case macro continues to deteriorate. Obviously, you've got the PSP program. Could you talk about some of the other levers that you have and maybe put them into perspective of your financial, especially gross margin and operating margin Because I do know you have a very, very strong variable cost structure. So, yeah, any more color you could add, it would be great.

So I had outlined multiple points that help us with a soft landing. So you mentioned PSP, which is clearly one part of the demand cycle. I think we have, in the last six months, also been adding to that with some long-term supply agreements which bolster PSP. the demand side of the equation even farther than just what PSP did. We've talked about how large unsupported is and how that continues to provide a buffer against any ups and downs that may be there in the shorter term. You know, we will, with any slowing down that we might see, use that as an opportunity to rebuild what is a supply chain running on fumes, right? We have our internal die banks and finished goods inventories that have been substantially depleted. While you see some of our days of inventory perhaps moving a little bit up, a lot of that has come from the change in gross margin and really raw materials and end of life product that we're buying. On an ongoing basis, to be healthy, we need to be able to run with more inventory both with our channel partners and our internal factories. All of that will continue to provide absorption and gross margin protection. in whatever happens in the cycle. And then we've talked about our capital intensity coming down, coming below the range, again, from a cash preservation standpoint, cash generation standpoint. That'll help. And then finally, on the OPEX side, we've always had a large variable compensation element that gives us a large buffer for how we can have expenses come in or out during the different cycles. And I think those are all the elements that give us the comfort on a soft landing, which is to ensure that what we're able to do in terms of our gross margin, our operating margin, our cash generation, all remain strong through whatever that soft landing requirement is.

All good perspective. Thank you.

The next question is from Chris Rowland from Saskiana. Your line is open. Please go ahead.

Hi, guys. Thanks for the question. You guys, either Ganesh or Steve, you guys have talked about analog capacity additions for the industry coming in 23 and beyond. We're now starting to hear about potentially equipment pushouts and stuff like that, and maybe a little pumping of the brakes. I don't know if that's the opinion that you guys may have as well, but would love to see kind of longer term how you view capacity for the analog industry overall, and would it have any sort of effect on your business? Thanks.

Let me take a quick shot, and then maybe Steve can answer to it. So, You know, I don't want to speak for what the overall industry is doing because different people have different plans and thoughts and what they're doing. I think what we can see is that those technology nodes that are very specialized, and analog tends to be that, that tend to be from the trailing edge of the technology nodes that are out there, are underinvested and yet are, you know, critically important in being able to drive the growth or even the leading edge technology so that you have more complete solutions. So in that sense, we believe that that whole end of the market that requires analog solutions, mixed signal solutions, et cetera, is getting insufficient capital attention, and we are taking some actions for it. I don't know what everybody else is doing, but we think it is going to be constrained for quite a while to come. Steve, do you want to add more?

Certainly. You know, much more of our analog business comes from internal production than the microcontrollers do. And we earlier described, you know, Ganesh described in his prepared comments about the growth of the microcontroller business versus the growth of the analog business. We are doing much better in capacity increase inside than we are doing it outside at our partners. And with microcontrollers having large component of production outside and analog having large production inside, we have been able to make more capacity available for analog, hence stronger near-term growth that we have seen. The inside capacity on trailing edge technologies where analog runs is also a bit easier to add than to really get capacity outside. You talked about equipment push-outs. Some of the equipment push-outs happened in the last 12 to 18 months, and a lot of the equipment is here now. After push-out, something that was supposed to come in September arrived in January, February, but it is in production now, and it's contributing to the growth, and we believe will continue to contribute to the growth in the December quarter, as Ganesh mentioned before. We're not hearing of a brand new, new kind of push out. I mean, push out has been a continuous phenomena as our suppliers are dealing with their own COVID-19 shutdown based on where they produce, ability to hire and all that. We have substantial equipment coming in line this quarter. Some came in line last quarter and some will come in line in December quarter. which we think will continue to add to internal capacity to grow our business.

And we are clearly not instructing our capital equipment suppliers to push anything out. We still need this equipment coming in as soon as we can get it.

If anything, as I've mentioned in other calls, we are preferentially helping all of our capital equipment suppliers by providing them semiconductor solutions to the extent they are constrained so that it helps not just us but helps the industry complete the equipment that they're building.

So the other point I wanted to reemphasize, and I think Ganesh said that, where to the extent our foundry and assembly and test partners are seeing some slowdown in their business coming from consumer PCs and cell phones, we are taking advantage of it because we have been able to increase the output by taking that slack both at the foundries and assembly test OSET guys, in addition to our incremental capacity. And hopefully we will continue to take advantage of that and capitalize on the upside. That's where we're able to say, you know, the growth in the business again this quarter that we guided a 5% midpoint, and we're talking about growth again next quarter.

That's great. Thanks, guys. That's always insightful.

Great. Thank you.

It appears that there is no further question at this time. Mr. Speaker, I'd like to turn the conference back to you for any additional or closing remarks.

We thank you all for attending and taking time from your day to be in this call, and we look forward to speaking to many of you as well as seeing some of you at some of the conferences we'll be at. So thank you, and good afternoon, everyone.

This concludes today's conference. You may now disconnect.