Microchip Technology Incorporated (MCHP) Earnings Call Transcript & Summary

All right. Good morning, and welcome to JPMorgan's 50th Annual Technology, Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Eric Bjornholt, Chief Financial Officer; and Sajid Daudi, Head of IR of Microchip here with us today. Microchip, for those of you that don't know, third largest microcontroller company in the world, strong analog franchise. Eric is going to kick us off with some opening commentary, and then we'll go ahead and kick off the Q&A. So with that, gentlemen, thank you for joining us this morning. And Eric, let me go ahead and turn it over to you.

All right. Thanks, Harlan, and good morning, everybody. During the course of this discussion, we'll be making certain projections and other forward-looking statements about the future financial performance of Microchip. Such projections and predictions involve certain risks, and we refer you to our SEC filings that identify certain risk factors about the company. So our business is really executing well on all fronts. We closed the March quarter with records across the board in revenue, and non-GAAP gross profits, and earnings, and all those things. So everything is going good. From a backlog perspective, our total backlog is at record levels. We have our PSP program, preferred supply program that we'll likely talk about further in this discussion. That backlog closed at record levels also. And our unsupported backlog, which is backlog that customers have requested for delivery in the current quarter that can't be delivered until a future quarter continues to grow. So right now, it's really all about executing on the supply side. Demand is not the issue at this point in time, really seeing strength in all of the end markets that we service. The biggest challenges we have is securing capacity, particularly on trailing edge technologies from the foundries, but there's other obviously, issues within the supply chain that our operations team is working on a regular basis. We've guided the June quarter to more records. I expect that the midpoint of guidance to be up about 6%. Our non-GAAP gross margins are predicted to be a record at about 67%, inching closer to our long-term model, which is at 68% gross margins and 45% operating margins. On the operating margin front, in the current quarter, we expect to increase that again and expected the midpoint of guidance for that to actually be over 45% at 45.2%. We're continuing to execute on our capital return strategy. So our Board is committed to increase dividends on a sequential quarterly basis at, at least 9%. That translates into about a 40% compounded annual growth rate, and we are increasingly, every quarter, increasing the amount of our free cash flow that we're returning to shareholders with -- in the current quarter, we're returning 55% of our free cash flow from the previous quarter. So business is good. Cash flow is strong. And with that, I'm going to turn it over to Harlan for questions.

Yes. Thanks. Those great opening comments. Back in the March quarter, the team raised its 5-year revenue CAGR, right, from 6% to 8%, revenue CAGR, which is 2x semiconductor industry growth. You raised it to 10% to 15%, which is 3.5x the industry growth rate. What's driving the higher revenue growth outlook? Is it your megatrend segment, which we'll go into a bit later, but is it your megatrend segments that are growing faster than expected? Is it better than anticipated success on your Total System Solution strategy? Is it share gains? Any color would be great to help us understand the better revenue growth outlook?

Right. So at our Investor and Analyst Day back in November, we talked about growing at about 2x the industry growth rate. We've looked at, over the last quarter, where we think that can be on a 5-year basis using fiscal '21 as a baseline. And with that, we've come up with, from fiscal '22 to fiscal '26, growing at a CAGR of about 10% to 15%. And at the low end of that range, we factored in a recessionary period. So we feel good, obviously, fiscal '22 that we just finished in March was a strong year for us. We're predicting another good year for fiscal '23. We're looking at our design win funnel, the backlog that we have in place, the interactions that we have with our customers. And we think we're really positioned well to grow at these higher rates through fiscal '26. And really, that's driven by the design activity that we've done over the last few years, our selling of total system solutions or what we call TSS to our customers. And essentially, that's integrating all these acquisitions that Microchip has done over the last 12 or so years and selling more and more products in every customer opportunity on their board and becoming a more valued supplier to them. And mixing that with our focus on some of the faster-growing mega trends in the industry, which we may talk about in a little bit, really is what's giving us the confidence that we can grow at that level.

And then from more from a near-term perspective, as you mentioned in your opening commentary, demand has been broad-based. It's been well ahead of your ability to supply for multiple quarters in a row now. And obviously, that demand supply gap appears to be widening even sort of near term. And you expect the supply tightness to persist into calendar '23. So when you look at your PSP visibility, you look at your internal, external supply expansion plans, I mean, when does the team expect some normalization of the supply-demand gap? Is it not '23? Is it second half? Is it 2024? What's the team's sort of best view at this point?

So it's hard to predict that on a longer-term basis. Right now, we don't really see an end in sight, right? We've got record backlog, as I mentioned. The commitments that we're getting from our customers for our PSP program, preferred supply program where they're giving us at least 12 months of noncancelable, non-rescheduled backlog. It's a high percentage of our backlog. We've said it's over 50% of our total backlog, and it has grown every quarter since we've implemented the program. So that's giving us the confidence on the growth that we have in the short term. Capacity is coming on slow. I mean we're making pretty good progress in what we're investing in, internally. And there we're seeing good opportunity in what we've been able to invest in CapEx. But the trailing edge technologies that we utilize our foundry partners for that capacity is coming on slow, and we don't expect a material increase there in calendar '22. And more capacity will come on in '23 and '24. But we think to some extent, that's going to help kind of delay the cycle because that capacity is just coming on slow. Foundries are investing for us, but the rate of improvement that we're seeing there is not coming on as quickly as we'd like.

From a customer perspective, your channel of distribution inventories dropped to levels that are almost 55%, 60% below pre-pandemic levels, your own inventory is going to be at the low end of your target range exiting this quarter. Sort of a similar question, I mean, given the capacity expansion plans and the demand profile, the backlog, your DSPs 6-, 9-month, 12-month forecast, I mean, does the team anticipate making any improvements on increasing inventories, either at your customers or on Microchip's balance sheets?

Yes. So we are making progress on increasing the inventory on our balance sheet. As you said, our expectation is this quarter to get kind of the low end of our range of guidance long term, which is between 130 and 150 days. And reminder, the products that we sell, sell for years and years and years, 5, 10, 15, 20 years. So we are wanting to make that investment in inventory. Distribution is at the lowest level of inventory that we've seen in our history at 17 days. That has ranged over the last 10 or 12 years between this low of 17 that we have today to as high as 47 days. And where distribution inventory returns to over time, it's hard to predict. But clearly, what we're shipping to distributors today is immediately being sold through to their end customers, and there will need to be some restocking at some point in time, but distribution just has not had the capability to do that. They were, in most cases, a little bit slower to sign up for our PSP program and therefore, didn't get the same priority in supply that some of our direct customers got. And the PSP program was implemented in the March time frame of last year, but the priority on supply didn't kick in until September 1. And so the December quarter of this year -- of this past year was really the first full quarter of that priority of supply. And in that quarter alone, our distribution business fell from 50% of our business down to 45% because they didn't have that priority. Now that switched a little bit in the March quarter. They were back to 47% of the business, but distribution is challenged right now to get the inventory that they need just like our customers are. And I think the last piece of your question was really on customer inventory. And that one is harder for us to measure. We hear about this golden screw effect that customers are waiting for a product from Microchip or another semiconductor supplier or other material that they need for their bill of materials. And there's no doubt that, that is an issue in the industry. What we kind of judge from our direct customers are what is the level of escalation calls that we're getting from customers saying, "Hey, I need product tomorrow or you've given me a lead time of 45 weeks on this product that I need in 30 weeks, how can you help me get there quicker because I'm going to be lines down, if you can't." Those level of escalation calls continue to increase, so they're not diminishing and the supply and demand gap is also growing. So we're not significantly worried about inventory growing at the customers. There's a lot of talk, will customers move to just in case inventory versus just in time. And I'm sure some of that's going to happen. I'm sure it's going to be customer and industry specific, but measuring end customer inventory is something that is challenging for us to do.

So you actually mentioned something interesting when you were -- we were talking about the increased long-term revenue growth CAGR. And you said that if you factor in a macroeconomic slowdown or classical semiconductor down cycle within this 5-year period of time, you'd be able -- you'd still be able to hit the low end of your range, right, in other words, a 10% CAGR, right over that 5-year period, which is quite good. So I'm curious to know, in your factoring in of slowdown or a cyclical downturn in the semi industry, what's your assumption about sort of where Microchip's revenues could drop during your sort of normal classical type of semi down cycle?

So I'm not going to give you specific percentages, but we've done modeling at the executive level within Microchip and kind of looked at what past cycles have looked like. We're not factoring in kind of a 2008, 2009 where revenue for the industry, I think, was down about 35% over a couple of quarters and came back relatively quickly after that. But kind of factoring in kind of what a normal recessionary type period could be.

I got 2015, 2016, 2018, 2019 type down cycle scenario.

Exactly.

Okay. Quite strong. So on that note, the market is concerned on slowdown in global demand looking into the back half of this year, certainly, maybe potentially next year. At the top level, your overall bookings and backlog are strong. But if you go a level deeper, right, geographies, channels, product categories has the team seen any negative changes in bookings momentum, rescheduling maybe as an early indicator of customer concerns on demand for '23?

So we haven't. We are not getting any sort of material pushouts or request for cancellations from customers. That backlog has continued to grow, as I mentioned. And so we aren't really seeing anything by end market that gives us different color than that. Things continue to be quite capacity supply constrained and bookings activity remains high across all geographies.

And then sort of my last near-term question, and we'll move on to some of the product and strategy. On the COVID-19 lockdowns in China, you guys have been able to do a really good job of mitigating some of the revenue impacts. You've reallocated some of your production to other sites, also reallocated products to other customers. And you've baked in some impact here in the June quarter. I know the team has R&D, sales, marketing, a small distribution hub in Shanghai. First question, has this been impacted? And then number two, post the COVID-19 level is dropping in Shanghai and China region starting to slowly open back up. Are you starting to see the level of activity of your partners starting to pick back up as well?

Sure. So from a manufacturing perspective, we do not have a large footprint. We have none of our own, but I do have subcontractors in China. During the tariff situation, we did move away from some of the suppliers that we were relying on in China. And then as demand came back so strong, some of that production has actually moved back if there was capacity in place. So we do have some exposure there. And clearly, there has been shutdown activity, logistical challenges in China, but we factored that into the guidance that we provided to the Street, which was a range of revenue about 4% to 8%, sequentially. So we factored all that in. We have almost an endless supply of demand at this point in time. And so, we -- if we can't ship to one customer, we can reallocate. But the thing that we'd really be careful of doing is a customer that has given us backlog visibility, been a participant in our PSP program, we want to make sure that product is available for them when they need it or when logistics opened up. So we're careful in doing that. And it's not really an easy process within our systems to reallocate capacity. But if there's an opportunity to do that, support another customer and still support the customer in China or whatever reason the challenge might be, we do that. So with 120,000 customers, 100,000 SKUs that we're selling, it's a complex manufacturing and operations, logistics process, and we think we've done pretty well with that. I think there was a second part to your question.

Just -- so as COVID cases have come down and Shanghai, Shenzhen regions have started to open back up, have you seen some of your manufacturing partners in that value chain activity levels start to pick back up as well.

Yes, we have. I'd say it's stage though. They're not 100% back. They can bring 10%, 20%, move to 50% back. And so it's gradually coming back in some locations and others we're still waiting for it to open up.

Before I move on to the products and the strategy, do we have any questions from the audience? No. Okay. Perfect. So let's talk about the products and your Total System Solution strategy. Microcontrollers, record March quarter, and you also had a record calendar year '21. And I think that in looking at the market share numbers, you're strong #3 global share leader. You gained share in calendar year '21. You've had a consistent record of annual share gains. You've got your PIC microcontroller architecture, your ARM-based microcontroller architecture. On the share gains, what's driving new customers to the Microchip MCU platforms?

Yes. So I would not say that it's driven by architecture. You mentioned PIC and ARM. We also have MIPS. We have ADR, which we acquired in the Atmel transaction several years ago. So we support all of these. We've got a common tool suite of development tools that these products run on to make things easy for customers to move up and down our chain. The bottom line on our growth in microcontrollers, it's something that we've been at, been working at for a long, long time. We obviously entered at the low end of the 8-bit market and expanded our portfolio up to the high end of 32-bit, and offer customers everything in between. And so why we win in microcontrollers, we've got a very broad set of products. We can go into a customer and find the right product at the right cost, the right power consumption, the right space constraints and bring that to market quickly. And really, that's why customers value Microchip, is the investment that we've made over the long term in the hardware and the software and the tools to support their needs.

I guess on that note, the team has talked for several years now about the Total Systems Solution strategy, right? TSS strategy. The idea here is that over time, with the portfolio and the systems focus, you're going to drive more dollar content or attach for customer opportunity, right? And I went to 2 of your major distributors' websites, they listed over 4,000 reference designs for Microchip, right? Some of them are subsystems, some of them are full-blown systems, designs. How effective are the reference designs in helping to drive the TSS strategy? And does the team actually have an active program internally to incentivize the engineering, the marketing team to continue to build out the reference platform or sort of TSS model.

Okay. So absolutely. So TSS or Total System Solutions is a large focus within our company. We have roughly 25 business units within the company, spanning various microcontroller divisions, analog, connectivity, timing, security, memory, et cetera. And it's really the desire of every business unit to be able to sell jointly with the other business units to provide our customers with complete working solutions. And so these reference designs are important. You can go into a customer and you might go in with what we'd call an anchor product, which might be microcontroller or an FPGA or one of the first chips or maybe the first chip that a design engineer is utilizing and when starting their design and then be able to position the rest of the product portfolio around that with that early look in terms of what the customer is trying to do in their system and get more share in analog, connectivity, security, whatever that other product might be. And so we have a noncommissioned sales force. They actively work on the same types of bonus compensation structures that the rest of the company do. So everybody is incentivized in the same way to maximize the overall dollar content that Microchip gets in any system. And these reference designs is just one of the ways that we make sure we're positioning the product portfolio appropriately to win as much as we can. And this is a growing opportunity for us. We've kind of shifted away from what we call Microchip 2.0, where we were doing acquisitions. Now we feel that we have the right product portfolio in place doesn't mean that we're not continuing to invest, we are, but not needing to add another significant acquisition to drive what our customers need. And we think we can offer the complete solution set and again, become a more valuable supplier to them and sell into more sticky sockets because of it.

We've got a question here. Please wait for the mike. Thank you.

Just a follow-up to that. I'm curious as to what your strategy is for the edge because you have the MCU, you have the analog, I'm curious as to what your strategy will be to address the processing part, whether you see your FPGAs as a companion device going inside the same system? Or maybe you have any other processors that you plan to put out in the market in the future?

Okay. So I think the question is kind of along the lines of those anchor products or the central products within the system, and we've got the full set of microcontrollers today, FPGAs and what's the question, is there anything else that we need to add?

Yes. So you're not acquiring. I think I'm wondering what is the type of device that you have that will do the processing of the edge?

Okay. So we do have -- also, we've got some microprocessors in the portfolio. In addition to MCU. We have some ASICs that could be that centralized process --

FPGAs.

Yes, at FPGAs he mentioned. So with that, all these devices sell into varying degrees of complex systems, an FPGA typically is selling into a very complex system. And we saw when we acquired Microsemi, which is where the FPGA business came to us through their previous acquisition of Actel, that in most cases, there wasn't any Microchip product being sold around that. And so as the things come up for redesign or new opportunities arise, now we're positioning all of our analog and other products around that. And in these complex systems, that's a large opportunity for us. And on top of that, we can bring where Microsemi had a larger focus, which would have been on like the aerospace and defense market with their FPGAs. They also had industrial exposure, but we can take that to the automotive market as an example. So we're using the strengths of each of the companies that we've acquired combined with Microchip's strength to maximize that opportunity. But we aren't really lacking anything in the portfolio on the processor side that we think we need to add other than just continue to develop within the business units that we have in the portfolio today.

That's actually a good point because I don't -- I didn't know until a few years into covering Microchip, but you guys actually do have a microprocessor portfolio. Is your SAM line of products? Is that what it's called?

That is correct. That came to us through the Atmel acquisition back in 2016.

And how has that microprocessor line been doing, let's say, relative to your MCU products?

It's doing well, doing really well. So it services a little bit different piece of the market. And we're not competing with the Intels [indiscernible] with our processors, but it's another good opportunity for us to expand our footprint. That business has grown since we've acquired Atmel and --

And that's a business that the team is committed to sort of investing in it on a selective basis?

Absolutely. We've continued to invest and we'll continue to invest in that business.

Perfect. Any other questions? Okay. Let's talk about your analog franchise, $2 billion annualized run rate, it grew 25% in calendar '21, record revenues last quarter. You've got a very strong portfolio of high performance mixed signal, power, power management products, networking products. You guys are also doing silicon carbide-based power modules, right, empower transistor products for things like EV and energy conversion. What are some of the faster-growing segments within analog? And is it more being driven by the Total System Solutions strategy? Or do just a lot of these products you sell on the merit on a stand-alone basis just because of the performance relative to, let's say, competitive solutions?

Yes. So we entered the analog market in the late '90s did our first acquisition in analog back in 2001 of a company called Telecom Semiconductor, and there's been a lot of analog acquisitions that kind of started in the 2010 time frame through our recent period. And so we've added a lot to the portfolio. Like you said, it's sizable today. We're a top 10 player in analog. And the products are good enough where we can compete with the larger competitive competitors that we see in analog on a part-for-part basis. Now it does fit in very well with our TSS strategy, but that's not the only reason that you win. You have to have the right product that provides the functionality that the customer needs. And we have that. So it's a sizable business for us today. Like you say, it's about a $2 billion business, and it's growing nicely. It's complementary to what we're doing in TSS, supports what our customers need. The margin profile is fantastic. And it's a very similar business to our microcontroller business and sells quite well alongside it.

We've got an e-mail question coming in from one of our clients. We hear a lot about companies redesigning their products to be able to shift to products like MCUs where availability might be better. Are they -- is the Microchip team potentially a beneficiary of that trend as a reliable supplier? Or are they possibly a victim with people designing in maybe smaller competitors or other competitors?

So I think I would view it as a little bit more of an opportunity, but everybody in the industry right now has long lead times. So it's not really an exception to that. What we are trying to do is be responsive to what our customers need. There's tons of customers that are calling us, these escalation calls that I mentioned, where they need help. And the product lead time is long. Redesign activity is not easy. It takes time. It's not what the customer really would necessarily want to do because they've chosen whatever supplier they're using, Microchip or somebody else or because they have the right product. And so it's not easy, but we try to find alternatives for customers if they come in and the product that they're buying is not available, can we help them tweak their design modestly and use another product within our portfolio that has a shorter lead time. So that's what we're doing. We're trying best to support our customers. Are there cases where we're losing? Are there cases where we're winning? I think yes, but I think those are small in the edge. I think mostly customers are sticking with the suppliers that they've chosen and looking for the supply and demand imbalance to correct itself over time.

Before I shift to manufacturing and financials, does anybody have a question? Okay. Perfect, right there.

Just a quick question on, what role do brokers play in your distribution? I mean, we keep hearing from OEMs that are paying multiples to get that golden screw. I'm just sort of wondering how that -- how prevalent that is in your distribution of product?

Yes. So we work with our distribution partners to try to avoid product ending up in a broker channel. It is not necessarily easy to do. You can have contract manufacturers that end up with excess inventory, and then they sell that to monetize it, right? And that can go to a broker and these are typically lower volumes of products that they have, but they can charge in an environment like this and absorbing a price, and we hate to see that happen to our customers. So we monitor it the best that we can. We try to identify who it is that we are selling to, who it is that our distributors are selling to and making sure that these are ongoing customers that have long-standing relationships with us and that those are the customers that we're trying to get priority and supplying to. The broker channel has been there forever and will continue to be, and obviously, they're trying to maximize their profits in a very capacity-constrained environment today.

Any other questions? On the manufacturing front, I believe that the highest volumes for Microchip are centered around 40 nanometer, all the way through 180-nanometer manufacturing technology nodes. We all know that overall semiconductor industry CapEx is growing strongly, right, kind of low to mid-teens type growth rates. But majority of this CapEx is focused on the leading edge, not mature or specialty nodes. In fact, one of your foundry partners recently did some analysis and articulated a view that mature and specialty capacity expansion by the industry is only growing low to mid-single digit percentage rate over the next few years versus the demand profile that's sort of mid- to high single digits type of percentage rates. First of all, do you agree with this assessment? And does this mean that mature and specialty manufacturing will remain tight for the next few years, especially maybe with your foundry partners?

So I can't comment on the specific percentages quoted there. I think it varies by foundry partner. And we work with like 20 different foundry partners. Many of those have been inherited by us and the acquisitions that we've had, where they've designed with the foundry partner, and that's who we continue to buy our products from. We are doing the best we can to make investments in the capacity that we have internally, but there's a few instances where we actually manufacture the same product internally that the foundries are manufacturing. We would call that a customer-owned technology where we have the ability or at least the rights to be able to manufacture it in-house. At our Investor and Analyst Day, we laid out that today, we do about 40% of our wafer fab in-house, and rely about 60% on professional foundries. We expect that percentage to grow modestly over time to about 45%. We have taken a license to -- from one of our foundry partners to a technology that they were not going to invest in, where we see 10, 15, 20 years of opportunity for us. And so we've taken that in-house into our Oregon wafer fab and are working to bring that up to manufacturability and expect to have that ready in 2023. So we're doing what we can, but we don't have a 12-inch factory. Even if we did, we wouldn't own the process technology rights to run in a factory like that. And so we are dependent on the third-party foundries. And they are definitely working to expand capacity. We don't see a lot of capacity coming on in calendar '22, and we think it improves in '23 and '24. But we can definitely see that this trailing edge process technology constraint is going to be there for a long period of time.

Yes. Sorry, I might have missed this. So I know that the team exited fiscal '21 with your internal front-end capacity at 39%. What did you guys exit at fiscal '22 at the March quarter?

It was 40% for fiscal '22.

And then the target is 45%.

That's correct. O

On the financials, the team pretty sustainably has been driving strong incremental gross margin, somewhere in the range of 73% to 77% over the past 18 months. Given a richer mix of internal manufacturing and a richer mix of newer products, is this how we should think about the gross margin profile on incremental revenues on a go-forward basis for the team?

So obviously, the gross margin trajectory that we've been on has been pretty steep, right? We went from an underutilization of capacity, got rid of all those underutilization charges are now really maximizing the output that we have from our factories and are running them harder than we ever have in our history and are ramping. And as we continue to grow capacity and the top line grows, we would expect that gross margin percentage would continue to improve. But we're at 67% at the midpoint of guidance for the current quarter on a non-GAAP basis, and our long-term model is 68%. So it gets harder. The higher your gross margin goes to continue to show improvement, but the internalization of manufacturing in the back end, which we haven't talked about, the assembly and tests, taking those percentage higher, those are all accretive to gross margin. We're continuing to introduce a mix -- a richer mix of products with higher capabilities, and that should drive higher margins over time, too. So we're in a good position today from gross margins and expect to see continued improvement.

On the OpEx front, the team's long-term range for OpEx is 22.5% to 23.5%. Your guidance for this quarter implies that OpEx is about 100 basis points below the low end of that range. It's driving strong operating leverage for the company, right? But I know that the team does want to continue to invest in the business. One of the big factors I would assume is finding good talent. Many semiconductor companies are expanding their design resources. So what is the team doing to attract talent? And given your revenue visibility, do you at least anticipate being within your OpEx target range sometime this calendar year?

So it depends on how quickly revenue grows, but it's been a challenge. We're up 25% year-over-year and investing at that rate, trying to find the right resources in what many locations has been a pretty tight labor market has been challenging. But we're adding people every quarter. Our OpEx dollars are increasing. At the midpoint of guidance this quarter, our OpEx percentage of revenue is expected to be about 21.8% and the low end of our model, as you mentioned, is 22.5%. So I think it's going to be difficult in the environment that we're currently in to get into that range. But eventually, that's where we want to be. And if our CEO, Ganesh Moorthy, was here, he would tell you that, that in order to drive the long-term health of this business, you need to invest in R&D activities for new product development. You need to have your customer support activities and then all the other administrative support functions that are in place to drive the health of the business. So we will be making investments. We are every quarter, but getting back to that model in the short term is going to be challenging, and that's a high-class problem.

In line with your capital return target, right, we were turning the bar about 52% of your free cash flow in the March quarter, or 65% buyback, 35% dividend. As you guys continue to bring down your leverage ratio, right, and concomitantly bring up your payout ratio, how do we think about that allocation buyback sort of versus dividend?

Yes. So the dividend is on a very fast increase at this point. Our Board is committed to increasing it on a quarterly sequential basis, 9%. So 40% CAGR on the dividend for a period of time. Our goal is when we get down to about 1.5x levered, we just ended the most recent quarter at 2.3x, is that we're returning 100% of free cash flow to shareholders. We're returning 55% of free cash flow to shareholders from last quarter in the current quarter split between dividend and buyback. Buyback is higher than dividend. And we're going to try to close that gap. So get to about a 50%, 50% split between dividend and share buyback. We think that's the right metric to have in place for us, and some of that will be driven on where the dividend yield goes over time. But I think we're on a very good trajectory on capital returns and the percentage of free cash flow that we're returning should increase each quarter.

Great. Eric, Sajid, good -- thanks for the participation, great insights and looking forward to another strong year from the Microchip team.

Great. Thanks, everybody.