Microchip Technology Incorporated (MCHP) Earnings Call Transcript & Summary

Good afternoon, everybody. My name is Raji Gill. I'm the head of global semiconductors and automotive technology research here at Needham & Company. Welcome to our 24th Annual Growth Conference. We're very pleased to be hosting a fireside chat with Microchip. With us from Microchip is Ganesh Moorthy, President and CEO; as well as Eric Bjornholt, Chief Financial Officer of Microchip. For folks that are listening on the webcast, if you have a question, there is a question box. Enter your question there, and I'll be monitoring that. I'll relay your question to Ganesh and Eric. Also, if you want to e-mail me, my e-mail is [email protected], and I can ask the question also. In terms of the fireside -- in terms of the format, Ganesh would like to make some introductory comments, and then we'll move into a -- the fireside chat. So with that, the floor is yours.

Great. Thank you, Raji. Let me get this out of the way in the beginning. During the course of this discussion, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company, and we wish to caution you that such statements are predictions and that actual results and events may differ materially. And we refer you to our recent filings with the SEC that identify important risk factors that may impact our business and results of operations. So a few points about the business itself, to kick this thing off and hopefully leading into some of the Q&A. Business remained strong, the demand increase continuing to outpace the supply increase. We expect the demand-supply imbalance to persist through much of '22 and possibly into 2023, and we expect to be in a position to support revenue growth for multiple quarters. The strong debt paydown dropped our net leverage ratio at the end of the September quarter to just under 3. With that and a strong business outlook, Moody's and Fitch both upgraded our debt to investment grade. And this has enabled us to commence our stock buyback activity, adding to our capital return strategy of strong dividend growth. We expect our net leverage ratio to again decline meaningfully in the December quarter when we announce those in early February. Our Microchip 2.0 strategy over the last decade, employed serial acquisitions to give us a solid foundation to build scale and breadth of products and also significantly improved our gross and operating margin models. We have transitioned to the next phase of Microchip strategy, which we call Microchip 3.0. The essential elements of Microchip 3.0 are: one, organic growth of 2x the industry growth rate, focused on total system solutions and key mega trends; two, an operating margin target of 44% to 46% and a free cash flow target of 38%; three, an increased capital return to shareholders, starting at 50% of free cash flow and then gradually increasing that to 100% of free cash flow as net leverage drops to 1.5x; increasing our CapEx investment to 3% to 6% of revenue, so marginally bumping that up as well as investing in 130 to 150 days of inventory over the business cycles; and finally, maintaining a strong company foundation, built on culture and sustainability. With that, Raji, we are ready for your questions.

All right. Ganesh, I appreciate that framework. So taking a step back, as you enter into this year, I was wondering if you could describe the demand environment across the major end markets? And maybe compare and contrast what you're seeing this year versus last year? If you could maybe perhaps do a forced ranking by demand, if we were to characterize it that way?

Sure. So let me first paint the overall picture, and then we'll get to your last question. I think if I go back a year ago, we were just seeing the first signs of these constraints. And automotive was the loudest voice in the room because they were seeing it early, they had, had some issues in 2020 with inventory reduction. So that's where a lot of the communication around what you saw on the news was, we began to really see that more broad-based. And as we went through the year, really, there is no market that isn't facing constraints. That isn't screaming loudly about needing more product. So at this point in time, we have this level of imbalanced demand versus supply across all of our end markets. And it is not reducing the number of escalations we see and not escalating them [ or ] lines down, we're hearing about. None of that is reducing. As far as a forced ranking, kind of hard for us to do. We don't really track our business with a level of specificity to say what is automotive as a percent of sales in any given quarter. We operate across 120,000 customers, we've got 200 different distribution partners [ and ] what people do. But I can tell you, there is no market. There is no customer that isn't feeling pain that we're working with to try and alleviate.

Just sticking with the end market dynamics, are you able to identify any discernible trends or partner developments in some of the end markets, whether it's by MCU, or analog, or FPGA or any other particular end markets, whether it's data center or auto that is particularly exciting this year that might be standing out? Or is it a continuation of what we saw in 2021 in terms of the demand picture?

The demand intensity is so strong. It's hard to look at the -- is there a rate of change in one versus the other because they're all so far above what normal growth trends would look like, a demand intensity would look like. So at this point, it looks like all end markets are strong. We know that somewhere that might change out in time. But as I mentioned, we have extreme constraints in every one of those segments. And it's just a matter of different discussions we're having with different customers.

And then with respect to capacity and if we're going to continue to be in a supply constrained environment, last year, you were building internal capacity. You're investing your CapEx. You had guided to $350 million to $400 million for fiscal '22. Some of these efforts continue to be slowed because of a long lead time for equipment. The additions are being made [ both for ] the wafer capacity and the packaging and test level. I wanted to get an update with respect to that CapEx that -- where are we with your internal capacity going into 2022? Are we -- characterize if you can in terms of the wafer side, the packaging and test? And just compare and contrast where we are, say, 6 months ago or 3 months ago? I'm trying to figure out what the trend line is looking like.

Sure. So the CapEx we had identified as what it was going to be this year, in that $350 million to $400 million spending, is pretty much on track. However, the delivery dates for many of the pieces of equipment that we have ordered have stretched out. And so there are delays in bringing on capacity driven by delays in equipment, constraints in materials and difficulty in hiring people, particularly in the U.S., to be able to staff the ramp that we have. That said, if I were to separate front-end from back-end, back-end being wafer level testing, packaging and test -- and back-end finished goods testing, we have made far more progress in the last 5 quarters on that. And you will see that in the percentage of internal assembly and test and the progression we have made over the last 5 quarters. And we started earlier, but it's also a shorter time to be able to get that kind of equipment. The labor issues are less where we have our factories, which are Thailand and the Philippines there. And so we've made much more progress on that. We have made progress on the fab side of things. We have incrementally brought on more capacity, but we're behind where we would like to be. And that has been a challenge just in getting equipment in, qualifying it, getting people in, structuring the -- bringing the infrastructure to be able to handle the higher volumes and all of that. And we will continue to see improvements in those as we go through calendar year '22. We expect every quarter, we're bringing on more capacity, more wafers, in addition to whatever we bring in the back end above and beyond what we have done.

I want to flesh out that point a little bit further. So is it a function of the fact that the demand has continued -- the demand versus supply, is it a function that the demand has continued to accelerate this year versus last year? And you're kind of still catching up. Or is it also the fact that -- I mean, you are incrementally increasing the capacity. We've now been in this situation for now a year. So even the lead times equipment are long, I get that, but it's not like this is new to us. And so more supply has been coming online, yet you and others are continuing to say that we're -- the demand versus supply is still an imbalance. Is it -- is the gap between demand and supply just as great as it was, say, 6 months ago, 9 months ago? Or is it lessening as best as you can understand? And the reason why we ask this question is it really speaks to the demand part of the equation, because we -- just logically, there will be more supply of wafers versus, say, 6 months ago or 9 months ago. Bottlenecks will start to ease. So the gap is what I'm trying to get an understanding. Is it the same? Or is it worse? Or is it getting better?

Great question. So we have said in our conference calls and other communication that the gap between demand and supply has grown every single quarter for the last 5 or 6 quarters, and December will be no different. December ending gap will be much larger than it was September ending. So despite bringing on capacity, and if you look at one measure of that, midpoint of our revenue guidance for December quarter is about 29-plus percent over the December 2020 quarter. With that growth, we're falling much further behind at December 2021 than we were in December 2020. So that gives you a sense of the intensity of demand. And I'm not sure that, that gap between supply and demand is coming back into balance because as much as we grow capacity at the problem, demand continues to outgrow that capacity. It will, at some point, hopefully begin to normalize in where it goes. And that's the confidence that we have because we have said also, for 2 consecutive quarters, that we see 4 quarters in a row of growth available to us. And that is not a demand-limited situation, that's a supply-driven situation where, as we bring on that capacity, we have the confidence to say that we have 4 consecutive quarters of growth ahead of us. Eric, were you trying to make a point?

It was more on the capacity side, and I was just going to highlight for investors where we were at in terms of percentages of what we do in terms of freight. We're roughly 40% internal fab today, and our targets that we laid out in our Investor Day was to take that to 45%. And on the assembly and test side, we're just under 60% on assembly. I think we can take that to about 70%. And on the final test side, we're 63% or so at the end of September and taking that to 80% over time. So making these strategic investments that are gross margin accretive and give us more control of our supply chain, I think it's really an important aspect of what we're executing on today.

So Ganesh, just to follow up on the back-end. So you mentioned that you are making progress on the back-end assembly and final test, say, relative to the wafer side. Any impact from flooding in Malaysia during the last few weeks of December to your back-end operations?

No. So we have no internal manufacturing that we do in Malaysia. We do have partners who have manufacturing sites in Malaysia. There have been no effects from the flooding or any other things. There were some effects in the August time frame from COVID at that time, but nothing in the December quarter of consequence.

And just another question from investors coming in. It really speaks to the demand question, and a question I'm sure you get in terms of the true picture of this demand. Is this capacity that's being added and the demand that you're seeing, is this for kind of true end consumption? Is it for inventory buffering? Is there any kind of signs of double ordering that you can discern from this? So it's really about the demand picture, in general. How would you characterize it?

Judging by what we see as channel inventory as one measure, right, it gives us a sense of what is sitting at the distributor's shelf versus what is selling through. And we have been at historic lows on channel inventory for many, many years. It looks like we set a record every quarter for how low that is. So that is a sign of product that is not sitting on the shelves anywhere, but is being sold through. Judging by the OEM customer discussions and the intensity of a number of shortages and issues, I mean, they're working real issues. They can't finish the products that they're building. And so I don't see a letup in our OEM customers saying "Okay, I've got enough product. I don't need any." Nor do we see it in their demand patterns on us as to what they need. You obviously read about the fact that there are going to be places where customers have -- are waiting to complete their kits. And so they may have some product that is available, and they're waiting to complete kits and what is not available. And you could look at that as, hey, there's some inventory that's there. But right now, the demand is just so strong. You could take significant cut in the demand and still not be anywhere close to satisfying what the supply can do for that.

Just to clarify -- just to elaborate on the demand, what is your best guess for why we're seeing kind of this unprecedented level of demand?

I will give you kind of 3 reasons, 2 that are more historical and 1 which is more forward-looking. I think if you go back and look at, how did semiconductor consumption do in 2019 and 2020, we were significantly under. And it was -- for various reasons, there was a trade war going on at that point in time that created a demand issue in it. But industry overall was down in 2019. And then in 2020, we had the second effect, which is the shock effect of the pandemic. And that shock effect was first on the supply side, as supply chain shut down in various places. And then even into the demand side as certain industries began to panic on what they were building, cut back their builds, automotive being the best example of that, that has been visible. There were others, too. And then the fact that all of that resulted in consumers starting to have money in their pockets. They were still working. They were -- they had nothing to spend it on. And the shift, I think, in spending from services to goods as they needed to outfit their homes for working from home, for entertainment or whatever it is, then they began to buy things to feel better, whether it was bigger homes, more cars, et cetera. So it fueled, coming off of about 1.5 years of where demand was well below where it needed to be. Then you overlay on it the third item, which is we got these major trends that are driving digitization, that are driving consumption of semiconductors. So these are not short-term issues, these are long-term trends, 5G infrastructure on the initial phases of a 10-year -- a whole data center as that explodes on more and more need for compute, more and more need for storage and so on and so forth goes with it. IoT finally becoming something that is, in the industrial side, much more prevalent. Edge computing that's going with it. Electric cars, and you're familiar with the whole automotive story and what's going on there and how fast that is beginning to come online. Driver assist and other capabilities in cars. So cars have been a big driver as well. And then, lastly, a little bit of how machine learning and all that has come about, crisscrossing all these. So I think there are these large mega trends driving consumption in the long term, plus a starved environment that have to get compensated for as there were delays in spending that took place from that 18-month window of time.

I think that made sense coming after -- coming off 2 years of these external events, whether it's trade war in China, the sanctions that hit Huawei and then COVID. Yet the industry has continued to persist and persevere. Just a question from some investors. Sorry to kind of sprinkle in and out, but I want to get some of these questions asked. A question is, we heard about semi companies prioritizing selling more into the distribution channel, and direct customers seemingly less receptive to PSP because they have inventory of less constrained parts and just prefer to wait for the really constrained components to become available. So I'm wondering if you could kind of address that concern. Is that what you're seeing?

So we do not prioritize distribution over direct or direct over distribution. It's really...

Okay.

Customers place their orders in the sequence in which they want to place them. And what we have offered is PSP as a way to get priority. At this point, and it has since the inception of the program, there are far more OEM customers who are able to participate in the PSP program than distribution customers. And that kind of stands to reason because participating in the PSP requires a degree of financial strength, requires an ability to commit over 12 months of noncancelable window of time and requires you to be in certain end markets that have the resilience for them to be able to enter that program. So we, in fact, have far more OEM demand in the PSP program than distribution. And we don't differentiate in priority of distribution versus priority of OEM.

Got it. So a question on the inventory. Because throughout the cycle, companies have had different decisions in terms of how they're managing inventory. So I wanted to get a sense of how you're thinking about building internal inventory versus distribution channel inventory? So you mentioned that [ disti ] inventory is at historical low levels at 19 days. Your goal in your Analyst Day, though, on the internal is to, I guess, keep inventory days at 130 to 150. So I'm wondering, Eric and Ganesh, how you're thinking about building an internal inventory versus low distribution channel inventory as you kind of navigate through the cycle?

Let me get it started, and then I'll see if Eric wants to add more to it. So building at the channel is not something we decide on, right? The channel decides what they want to build, and they decide what they want to carry for their model of turns and working capital, et cetera. We think historically, that number is in the high 20s, low 30s. That's kind of where it's run. It's sitting at about 19 days right now. And of course, channel would like more inventory. We're just not able to ship them more inventory at this point in time. And so that's what it's reflective of. But we don't guide the channel for what they need to do, and we don't try to differentiate between what are they carrying versus what we're carrying. Internally, our targets were 115 to 120 days. And of course, we were below that. And we've been slowly trying to see how can we get our internal capacity and internal inventory. For the long term, our targets are 130 to 150 days, and that's a different strategy. It's really intended at looking at our portfolio of long-lived products. And as the cycle turns at some point in time, using our internal capacity to build up inventory so that we are more efficient in the usage of our capital and we don't try to build CapEx for peak demand, we're able to grow inventory in down cycles, drain inventory in up cycles. Eric, would you add something to that?

I think you've summarized it well. I think the only thing I would add is we are increasing inventory today, but that's not because finished goods is increasing. Essentially, what we're producing and manufacturing in the finished goods are being shipped out the door to customers, but we're increasing -- the WIP in our factories is increasing significantly. Our investment in raw materials to make sure we can run the product that we need is increasing. So we're making some progress, but what we're manufacturing in the finished parts is being shipped out the door immediately to customers to satisfy their demand.

And we've had [ some end lives ] that we've had to buy ahead for. So it is inventory, but it's not inventory that is contributing to shipment of products right away.

So that's an important distinction between finished goods and work in progress and raw materials, that separation?

Yes.

Okay. I think that makes sense. With your preferred supplier program gaining significant momentum as it was launched, and last quarter, you mentioned 50% of your backlog is on PSP, are you continuing to see demand for long-term visibility from your customers?

Yes. So firstly, I think we said it's much higher than 50%, and without having the exact number, just to be -- to put that in perspective. Yes, I think what is -- we have continued to grow PSP as a percentage of the total backlog. It will probably plateau out at some point here. And I think some customers were wise and went into the program early. Others didn't recognize some of the risk because they may not get allocation if all the PSP customers come in and took priority and where they were at. So they have been more people signing on as we went into the last 3, 4 months of time. And we have also had more customers wanting to place PSP backlog in excess of 12 months. So people who want to place 15 months, 18 months, even as high as 24 months based on how they see their business. And again, you need a certain confidence in your market, a certain financial strength in being able to do that. So it's really those kind of customers who are more able to go do that. And so it's -- program is doing. It's exceeded all of our expectations for what we thought would be the sign-up rate and the number of customers and the volume of units and dollars.

Any kind of average duration of the visibility? You mentioned some customers 15 months, 24 months? Has it been increasing?

I would say that the center of gravity is still at 12, and then there's a tail of people that are beyond 12 months.

Okay. So well over 50% of the backlog is on this PSP and it's at least 12 months if not greater.

Yes.

Okay. In terms of seasonality, seasonality has become less relevant in the last few years, given these external events we just talked about. Your March quarter typically is up, if I look back historically. Without talking about specifically into March, how do we -- so there basically won't be any seasonality this year. You're saying it's going to be 4 consecutive quarters of growth. Is there, I guess, any effect on the growth rate sequentially throughout the year that is noticeable or something that you can pick up at this point?

All of our growth is supply constrained. So it is not demand patterns that you can discern to say what's really changing or driving. And so -- which is why I think seasonality is less critical because seasonality usually reflects demand, not supply. But we're actually in an environment where it's supply that drives growth, less so demand. I mean, the demand is just pouring out of our ears.

Got it. Okay. And in terms of your gross margins, the gross margins were at a kind of a record level. At the Analyst Day, you mentioned kind of 67.5% to 68.5% continuation of internalization and manufacturing consolidation. If it's 65% now, the first half -- well, the first half run rate was 65% and kind of going higher. How do we think about the kind of -- the cadence of that? Is it going to be more linear as you move more production internally on the back end, as you just noted? Is it going to be driven by mix? By price? If you could characterize kind of those -- each of those attributes as you think about that shift from 66% to 68%?

Yes. So the midpoint of our guidance for our now unreported [ quarter ] number is 66%, right? So we're making progress towards that 68% target. I'd like to think it's going to be kind of slow and steady from here, but it always is impacted by business environment, product mix in any quarter and those types of things. But we've got a plan that we're executing on in terms of the investment that we're making in manufacturing, and we have confidence that those investments are going to drive us to that 68% midpoint target over the course of time. And we haven't put a time frame or a revenue dollar on it, but these are strategic investments that we're making that are gross margin accretive that should allow us to gradually make progress to it. And there's always a balance. And when you have margins that are this high, to make sure that you're balancing out, to make sure that you're not impacting future revenue growth, right? We've got this 2x industry growth rate revenue target that we're striving for, and we want to make sure that we're maximizing overall operating margin dollars through that process.

The pricing environment, there's been a lot of discussion with companies around pricing dynamic. How much of this is, say, structural versus temporary given the supply constraints? So I'm wondering if you could kind of discuss that dynamic? How much of the price increases that you're seeing in the industry are related to kind of passing those price increases because of your suppliers? And how much of this really reflects something that's happening across your customers, a change in your customer behavior and your pricing leverage over -- because of the importance of your products?

So the price adjustments we've made have largely been to account for cost increases we've experienced, right? Pricing for us has always been a strategic exercise. We sell products that are sole-sourced products, that are proprietary products. When a customer makes a design decision 2 years before they're buying product from us, any peace of mind with respect to what is the pricing. We don't raise prices when supply is tight. We don't lower prices when supply is loose. We have a very unique situation in the last 12-plus months where input costs have gone up very, very rapidly and overcoming any kind of normal improvements that we would be making in cost. And in that environment, a lot of that cost, I think, is structurally up. It's not going to come down in 6 months, or 12 months, or 18 months, whenever the demand-supply imbalance gets better. Because the costs are going into, capital costs have gone up, so equipment is a lot more expensive now. We -- for our internal fabs, for example, we usually bought equipment at a discount to normal price because we bought used equipment to fill our fabs. Well, there is no used equipment available. You have to buy new equipment. And not only do you have to buy new equipment, you often have to buy 12-inch equipment to outfit an 8-inch fab, which is even more expensive. So the capital costs are higher than what they would have been in a normal environment. Labor costs have gone up significantly. To be able to keep these factories running, material costs, energy costs, logistics costs, you name it. Cost is going up significantly in every single element, right? Even when we buy equipment, we can't get equipment shipped over the normal shipping lines. Either it's not available or it takes too long. And so you're using air shipping. Now there's a significant cost that goes into not just buying the equipment, but even the shipping costs that are associated with it that are all part and parcel of what it is. So those structural costs, which will be in the form of depreciation and the wafer cost from that -- from the labor cost that goes into it, all of those have gone up. And those are the costs that we have passed on in the form of pricing to customers. And I don't see those coming down. It could be that there was some element of copper pricing went up, aluminum pricing went up, something else pricing went up and those are commodity costs that go up and down. And those may change in the future, but they're a small part of the total cost and the total price increases.

Yet, your gross margins continue to move up, and you're targeting 68%. So if you're just passing on those costs to your customers, it would be kind of margin neutral. So the way you described it, it actually could even be detrimental to the margin because everything -- all the costs are moving up structurally.

But if you look at our gross margins...

Yet, your margins are moving up. So there's something else going on.

If you look at our gross margins, look before all this last year, they've grown from 60% to 64%, 65%, and we didn't do that with price increases. We did that with operational improvements. We did that with pricing discipline. We did that with mix. We did a number of other ways in which we do it, and that's really the thought process. We're not trying to use price as a tactical weapon to go get more gross margin. Pricing is a strategic exercise.

Yes. I'm not implying that. What I was trying to get at is, is there something in the shift in the bargaining position, the bargaining power of semis now over the customers because of the importance of semis in the digital economy because of what we just saw with the shortages impacting the auto industry, that you're -- not just you specifically, but the industry's leverage, bargaining power has really increased and improved, and that's reflected in more permanent structural kind of increases in pricing that are going to be there for a while. And you see this with kind of the movement toward long-term supply agreements that have been happening all over the place. But that's what I was trying to get a sense from you, kind of seems like [ that's what ]...

No.

But there's also all these mix shift operational improvements?

I think you're right. And I think that start -- for us, that started -- that journey started almost 7, 8 years ago when we stopped doing this madness of annual price reductions, right? There was this expectation that an industry that grows 3% or 4% is going to give up 7% to 10% of pricing every year. And so as we took a harder stand on it, as acquisitions began to take some of the bad actors out of the equation, pricing became more disciplined. The [ more set ] of rational actors are there. And so the first step is to stop digging the hole, and that really had taken place for any number of years. The second step that has taken place now is that price has gone up because the input costs have gone up. And it doesn't mean it has to keep going up every year. And I'm not expecting that in the long run costs are going to continue to go up and pricing has to continue to go up. But it is making a change in direction now, given the factors that we're running into, than would have historically been expected. Historically, we would expect that prices don't go down. Now we've said prices have to go up in the short term.

Ganesh, I think it's probably also fair that, through this semiconductor supply shortage, that our customers and our customers' customers have a better appreciation for the value that semiconductor companies bring to them and the complexity of the supply chain.

Absolutely. And I think there are so many more conversations we have at the executive level with the customers, where I think they're coming to grips with an understanding of how important this is, how much more they need to be engaged and how much they need to change the thinking that this isn't just something that you turn on the faucet and turn off the faucet.

Yes. Yes, exactly. And my understanding last year was really emblematic of that, the shortages, the impact of ship shortages. The dramatic impact it has had on the auto industry and industrial. Just some questions from investors to follow up on the PSP question, if I may. How many of your customers in the market have the scale to enter into a PSP agreement? Is there any noticeable difference in behavior between large customers and small customers?

The number of customers is in the thousands. But clearly, a small customer may not necessarily want to sign up for PSP, right? It may not be something they're comfortable with. They may not be in an industry that they participate that has the stability. So it does have a requirement of financial strength and end market resilience that doesn't suit all customers.

And this is another question from an investor. Earlier in the discussion, you mentioned not able to get enough workers to meet the ramp in some situations. Is this cost, wage, salaries? Or is it finding qualified people?

It's both. So it has pushed wages up both for the people we have, but also for the people we're trying to hire. So there's significant wage inflation that the current environment has created. And then second, you have -- you can't just take someone who comes in to go run a semiconductor manufacturing facility. It takes time to bring them on board, to train them, put them through the safety requirements and all of that so that they are effective at what they go do. And there's a bit of the Great Resignation that affects even people who are in our manufacturing areas as well. And so there is not just the hiring, but there's also the replacement of people that are leaving for whatever reason, that all go into this.

And with the remaining minutes that we have left, Eric, at your Analyst Day, you outlined a new capital return strategy. Can you walk us through how you will prioritize the return of cash to shareholders with regards to dividends and share repurchases versus additional CapEx?

Sure. Sure. So the CapEx is something that we need to invest in the business, and we're really driving our shareholder returns based on free cash flow, which is operating cash flow less CapEx. So CapEx is factored into it. We've made very clear representations that our Board's intent is to increase the dividend on a quarterly sequential basis by at least 7% on a go-forward basis. And then the difference between the percentage of free cash flow that we're targeting to return, which is 50% today and will be growing. So 50% in the December quarter is what our target was, less dividend, is the resulting share buyback. And we started that in the December quarter, we executed well. We'll share the details of that with you in our February -- early February earnings call. And then Steve Sanghi, our Executive Chair, kind of walked through how he views this and how the Board views it going forward, is that every quarter, we expect that percentage of free cash flow that we're returning to investors to increase. So it's going to be a very systematic program, and we're very committed to it. And we think it's an exciting opportunity for investors. And ultimately, we hope it closes the valuation gap that we have with some of the larger semiconductor high-quality analog peers.

Yes, I agree. I think it makes a lot of sense, that strategy in order to close the valuation gap. We'll leave it at that. Thank you so much, Ganesh and Eric. Very insightful. Best of luck for the rest of the year. Very exciting historic times for semis. Thank you, everyone, also for joining, and we'll talk to you soon.

Thank you, Raji.

Thank you, everybody.

Thank you.