Microchip Technology Incorporated (MCHP) Earnings Call Transcript & Summary

Thank you, everyone. Thank you for joining the session. I'm Vivek Arya, I cover semiconductor, semi-cap equipment at BofA. Really delighted to have the team from Microchip, Ganesh Moorthy, CEO; and Eric Bjornholt, CFO, join us this afternoon. We will go through a short set of introductory remarks and slides from the team, and then we will jump into Q&A. But if you have any questions in the meanwhile, please feel free to raise your hand, and I'll be sure to get you in. Over to you, Ganesh.

Thank you, Vivek. During the course of this presentation, 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. And we refer you to our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. So that's the short form of this slide. And if you really want to read the rest of it, it's all in there. And with that, why don't we get started? A couple of 2, 3 slides of Microchip overall, then we'll talk a little bit more about our business and where we're seeing things. So we're a leading total system solutions company. We have a broad range of solutions that fit into the brains of systems, microcontrollers, processors, et cetera, a lot of the things that surround those brains and analog, mixed signal, timing, power, et cetera, flash, IT solutions. $6.8 billion was the revenue we had in our fiscal year '22, which finished in March of this year. And then we'll talk about 3 or 4 main themes as you go through the slides -- as we go through the slides here. We have an elite non-GAAP profitability model. I'll show you how that has endured over time and where it is going. And diversified and resilient business model. And you can see that, too, how it has weathered time. How durable the end markets are and why that gives us some specific competitive advantages. And then a solid track record of shareholder value creation accentuated by what we've been doing over the last couple of years on the capital return, which is a change that we have made a little over a year ago. So this is over the time we've been a public company, so fiscal year '93 through today. And in that entire time, you can see the compounded annual growth rate is 16-plus percent. You can see the growth has come, in some cases, in spurts. We had some acquisitions that were in the last 4, 5 years of time, but it's been pretty consistent throughout this time. Microcontrollers in blue remain the biggest piece of our business. Analog in orange is a growing portion of our business. And then in green is everything else we have. Importantly, over this entire window of time in what is a typically cyclical industry, we have made a profit, non-GAAP profit in every single quarter, 126 consecutive quarters, and we intend to keep doing that, including with what we have guided for this quarter. Our revenue by end market is an important characteristic of how that business is built durably. So this has been updated for the end of fiscal year '22. So it's slightly different from what you may have seen before. In dark blue is industrial, and we have included industrial, aerospace and defense. We used to break it out. It's about 9%, 10% of our revenue. So industrial -- and that's the way everybody else reports that as industrial includes aerospace and defense. Biggest market, 40% of our revenue. Data center and computing is about 18% of our revenue, staying pretty consistent year-over-year, so having the same growth as a company. Automotive as a percentage has ticked up a little bit as automotive, in general, has strengthened its 17% of our revenue. And then some of the other parts, communications infrastructure. We're on the infrastructure only. We don't have anything in the phones, about 11%. And consumer for us is really consumer appliances, home appliances. They can be on your kitchen top. They can be built into your home as the case might be. That's a big part of what we have in our consumer appliances business. So -- and these end markets tend to be much less volatile, much more durable over time. Looking at our guidance for this quarter. The first column shows you the actual results in our March quarter, which was FQ4. This quarter, the midpoint of our guidance is to be up 6%, $1.955 billion at that midpoint of the guidance, again, year-over-year growth of 24.6%. Gross margin is hitting a new record. Operating margins hitting a new record and actually just above the midpoint of our long-term guidance and $1.34 in earnings per share. Now a point on the earnings per share, you'll see the asterisk on it. So last quarter, we had a $0.07 tax benefit. So excluding that, $1.28 would be the baseline for last quarter. This quarter, at $1.34, we actually have a tax increase because of the way R&D expenses are going to be treated and a few other things. So it's about a 250, 300 basis point change in taxes. With that, it still will be record earnings per share and $1.34 at the midpoint. And year-over-year, 35.4% growth in EPS at the midpoint of this quarter's guide. And you can see the long-term guidance. It's growth in the 10% to 15% range using fiscal year '21 as a baseline over a 5-year period of time. Gross margins to get a midpoint of 68%, plus or minus 0.5%. Operating margins at the -- our operating expenses at 23% midpoint, and the operating margins at 45%, plus or minus 1%. So a very consistent and continuously improving set of long-term model targets that we have. The question in many investors' minds and the many questions that we're getting is, "Hey, what is really happening in the macro?" And we thought we'd give you some color on what do we see in the business and how are we thinking about things. So first of all, we are -- we recognize -- we still read the same news. We hear the same things about the concerns that are there, whether it's in the consumer end of things or something else, et cetera. We see absolutely no weakness in any part of our business. But we recognize it's a concern. And with that, we'll talk about some of the actions we're taking that would help us. But we're expecting, as we said in our earnings call, that we remain constrained throughout 2022 and into 2023. So what happens if this macro change does come in and does affect us? And how are we preparing to soft land whatever happens in that period of time. So that's the next 6 or 7 points that I want to go through. Whenever that happens, whether it's in 2023, 2024, we don't have a good line of sight into when it does happen. But we think we can achieve a soft landing because of things we are doing that are in our control to prepare for it. The first one is we have an extremely solid backlog, which is substantially more than 50% that is in what we call a preferred supply program. That is noncancelable backlog with a continuous minimum 12 months of visibility that we get and an extra month added every month. Many customers choosing to give us 15, 18 and even 24 months of noncancelable backlog. We think that gives us a great visibility into when change comes and how to prepare for that change. Second, we continue to have 6 quarters in a row. And this quarter, I think we'll be continuing on that same trend. More unsupportable backlog in a given quarter. And unsupportable just means customers want it, we just can't ship it to them. This quarter, at the midpoint of our guidance, $1.955 billion, we will have at least that much more that we could have shipped if we had the supply. So that's kind of the gap between supply and demand is as big as what we're actually supplying in the quarter. And we see that continuing for many quarters to come. We have the lowest distribution inventory ever that we have seen. Typically, in history, they've run between about 27 days and 37 days and back in time. We're at 17 days right now. And that is unhealthy for the channel. It's unhealthy for customers. And so if there is any kind of weakness in the macro that affects our business, that will be one important place to keep running and building products and rebuilding inventory in our channels. And likewise, we have very low inventory for what we need in our die banks and our finished goods that will also be something we will replenish. And our products are almost no obsolescence associated with them, very long-life cycles and building some inventory not only helps us to keep running things, but it helps our customers when the up cycles come and it allows us to push out when capital intensity returns for whenever that next cycle is on the other side. We're expecting above-average secular growth. We've shown 10% to 15% annualized growth over a 5-year period of time, and that is driven by our total system solutions and our megatrends, and I'll speak to both of those. We also expect that from a cash standpoint, our CapEx requirements will be significantly lower in a down cycle. We basically go from needing expansion capital to just needing maintenance capital. And I'll show you some trends over history how we have performed in terms of cash flow in the ups and downs of the industry, but it will help drive taking the CapEx down significantly, will help drive significant cash flow improvement to offset whatever cash flow decrease that might be in the business. And finally, on the OpEx side, we run a substantial variable compensation program which through the cycles we've been able to manage our OpEx up and down with very small changes with respect to the OpEx intensity through the cycle. So all of those are key elements of levers we will use when we see a change that we need to go prepare for. But we know what needs to be done, we're ready to go do it. We just need to see when does the data actually get to the point where we need to do any of it. This is a chart showing industry cycles and not Microchip data, but overall semiconductor industry. And you can see, anyone questions, do we have a cyclical industry? This would be the chart to look at. It is a cyclical industry. It has been, no one has repealed these cycles yet. And you can see over these 14, 15 years of time how things have changed on it. Now what's interesting is, how has Microchip's performance done over this time frame? And I want to give you 3 dimensions of that view. So here is overlaid on that cyclicality. What have we done from a cash generation standpoint? And you can see, there are small ripples that take place, but this is what I meant in terms of what happens with CapEx and what we're able to do to continue to have strong cash flow generation. And you can see in the last 3, 4 years of time, that cash generation as we have paid off our debt, the free cash flow has continued to improve. So this is free cash flow generated through the cycles, strong through the up and down cycles of time. Second thing to look at is how our gross margins performed. Now gross margins from 2018 and before are impacted not only by the cycle but also by acquisitions. We were doing a lot more public acquisitions at that time. Almost everybody we bought had lower gross margins that we then took upon ourselves to improve over time. So some of that ripple that you'll see as a component of it, which is the acquired company's weighted average of our gross margin. But even if you exclude all that, you can see peak to trough in these through histories has been about 300-ish points -- basis points of change on gross margin. And that is with the acquisitions adding into the same [ line ]. And you can see in the last 4 years, without any acquisitions, how gross margin has changed. And it's up and to the right over this time. So we have a very resilient profitability through the cycles as measured by gross margin. And then when you look at the operating expenses and, therefore, where the operating profits are at. Same characteristic. You can see we've been able to manage all of the cycles in time with how our variable compensation and our ability to manage discretionary expenses over time. And you'll see higher highs, higher lows in these -- in both these slides both for gross margin as well as operating margin. So we know we can run the business through the cycles and deliver the results on cash, gross margin and operating margin. And you can just look at our history to give you the sense of how do we do it and what is the playbook that we use, some of which are listed in the earlier slide. Now on the growth side, the organic growth strategy that we have embarked on for multiple years at this point are driven by 2 key strategies. The first is building total complete system, we call them total system solutions. And that means it is a portfolio of products, smart connected, secure. But more than just products, it is about software that is integral to the solution, firmware, reference designs and services that we provide. All of these make these designs very sticky, high-margin and durable designs. And second is to focus on the highest growth market trends. We call them the mega trends, and those drive about 2x of what we think our ordinary growth for the rest of the business that will be. And all of that is with the purpose we wake up every morning. And our purpose every morning when we wake up is how do we have power innovation, which enhances the human experience, by delivering these smart, connected and secure solutions? And that's what drives all 21,000 Microchip employees on a daily basis. And this is what the total system solutions looks like, and the dark blue is it's brains of any system that our customer is building. We've got a range of solutions for them. And surrounding that brains are a number of other solutions that they're going to need. And we have the unique advantage because we're very strong in the dark blue with all of the brains of the system. We see early what a customer requires, and we see very early what is going to surround that customer's requirement and how best can we bring in and position the rest of our solutions. Power, clock, analog, mixed signal, networking, whatever those requirements are and bring in a combination of hardware, software, which increasingly is becoming a big part of the solution that we provide and what makes it a sticky and more complete solution and services that enable the customer to get to market faster, lower the risk of -- after launching the product and bringing the total -- the cost of ownership down as well. On the mega trend side, I'll focus on the right-hand side. There are 6 mega trends that we think are 5-, 10-year secular growth well above our average. And we are in every one of these with our solutions. They crisscross the end markets, which are on the left-hand side, 5G infrastructure, as it embarks over as -- in the first couple of years of a 10-year window of time. Edge computing and IoT, as that becomes more and more pervasive in computing. Data centers where we play substantial roles in storage computing, desktop servers and compute servers in electric vehicles. And as that shift happens and increasingly happens over many, many years, as well as the driver assist and what is required to bring many of the technologies to enable higher and higher levels of driver assist. And finally, artificial intelligence and machine learning, which crosses many of these markets as well. So these are the market mega trends we're focused on, where our investments are and where we're winning designs with our customers. Now on the capital return side of this thing, we have always had a consistent capital return, but we've added some new dimensions. So if you look at the last 4 years, fiscal year '19 through '22, 4 years in history, we've generated about $7 billion of free cash flow. And the way we have allocated that free cash flow is big pressure [ vent ] to bring the debt down and our leverage has come down substantially from close to 5 to just about 2.3 at the end of March and continue to come down. The dividends paid have been $1.6 billion. And then a new feature we added is the share repurchase on a more programmatic basis, which we began late last year and have continued every year. On the dividend, we've been growing them now at about 9% sequentially or 40% year-over-year. So an increasing part of the free cash flow is being allocated to dividends as well as share buybacks. And what we're committed to do is to continue to increase the percentage of our free cash flow that is allocated as capital return. It was at 50% for the December quarter. It's at 52.5% for the March quarter. It's at 55% for the June quarter, and we will continue to edge that up as our leverage ratios continue to come down, heading towards a 100% return of our free cash flow in capital return to shareholders as we get to about 1.5x leverage. At the Investor Day, we encapsulated all of this into Microchip 3.0, many of the points that I've talked about. So sustained growth, above average growth that we think we can achieve through our TSS mega trends, the long-term business model of an elite model with 68% midpoint gross margin, 45% midpoint operating margin. We haven't talked as much about EBITDA and free cash flow. We have an EBITDA target of 48%, and we're pretty close to that at this point in time. We have a free cash flow of 38% is our target, and we're about 36% or so in the last year or so. We're working our way up to making sure that all of that growth and profitability works its way into cash generated. The businesses that we're in are very diversified and very durable. And that's what gives us confidence in the up cycles and the down cycles to be able to manage through whatever they are and to have consistent profitability and cash generation. We have decided to make an investment in inventory because our product lines are so long term in their nature that we are taking the inventory days to between 130 and 150 days, and that gives us some consistency in gross margins through the cycles. It builds product to help us at the up cycles to capitalize and it actually slows down the CapEx requirement so that you're not planning for the peak CapEx, you're actually using some of the inventory in the cycles to be able to slow down or delay when CapEx is required. We are spending more on CapEx as compared to our history, used to be 3% to 4%. We are now at 3% to 6%. We're at the higher end of that range and some of the strong quarters and years that we're at. This year, I think we've indicated would be between $450 million and $550 million in our CapEx spending. But we're also going to take it dramatically below 3% whenever the cycle changes as we go adjust our maintenance capital itself, talk about the shareholder increase. And then finally, what we do is as important as how we do it. And we believe how we do it is a combination of an extremely strong culture that enables to achieve all the things that we do and a commitment to sustainability, which is another important part of how we provide doing things. So the winning formula for Microchip has 3 components, which is growth while expanding gross margins and operating margins, substantial cash generation that we're able to return back to the shareholders in the process. And to do all of that the right way, which is focused on culture, focused on sustainability. And we really think, as we've looked at all that we have done, the best for Microchip continues to be ahead of us. I'll leave you with one slide, which is, we think, given all the dimensions on which we're showing results and expecting results, growth, business durability, profitability, free cash flow generation, leverage reduction and the enhanced capital return. We're at a compelling valuation versus the SOX versus some of the other companies that are listed out there. We trade a significant discount, and we think this is one of the best opportunities to be able to take advantage of that discount as well. While in time, we think all of the reasons, as I mentioned at the bottom of that slide, begin to catch up and close the valuation gap. And with that, I'll hand it back to you.

Thank you, Ganesh. Thanks for the update. So if the semiconductor industry is cyclical, why aren't the semiconductor companies feeling the cycle?

Well, it may be what aspects of the industry are feeling the cycle, right? So today, a bit of what you read in the news is the part of the industry which seems to be seeing the most at this point is in smartphones in some of the consumer-related areas, in consumer PCs. So those with more exposure there are probably going to see it more so. Other parts of it are not seeing that today. And we don't know what happens in the future, but that would be my guess.

So it's the business mix, you think, is...

At the end of the day, right. And we think our end market exposure over years has shown a level of durability which is quite different. Even as recently as 2020 when the whole pandemic hit, if you look at Microchip's performance on it, it was a blip. We hardly noticed it because we had end markets that compensated, where there were weaknesses, others had strengthened and were able to give us that overall growth profitability.

Got it. And is it possible, Ganesh, that just given how tight the supply chain is maybe delaying when the semiconductor industry gets the signal about the slowdown that if customers are not willing to cut orders that quickly because they don't want to lose their position in the queue, that you could just be getting that signal about the end demand later than you would have otherwise?

It could be one of the reasons. I don't know. I think it also is different based on what the end markets are seeing, but also what the supply constraints are. And much of where Microchip plays is in the types of technologies that remain extremely constrained. They are more in specialized technologies, more in trailing edge technologies where not as much investment has taken place. And so a lot of that capacity is still very, very stretched in what is happening. So there could be a number of reasons why at this point in time what we can see is what is our business doing; and two, what the executive team, Eric, myself and 12 others that are on it, watch like a hawk on a constant basis, we have our index of leading indicators when a down cycle comes. And we watch it every month, sometimes more frequently than that. And it's got about a dozen-plus different things that we look at that gives us a span of all aspects of the industry. And for our business, that is still flashing green where we're going.

Got it. And you mentioned the PSP program, the noncancelable, nonreturnable program. How flexible are those relationships with the customer in terms of the unit and pricing? Is it truly completely noncancelable? Or are there still opportunities? Because I ask that, that if, let's say, there is a downturn and if the customer is on the hope to just buy it, is it just possible they buy it at that time and then it just -- you create a problem for later on?

PSP has at least 12 months of visibility, right? So what's important for us is to continue to look at where is the customer's PSP backlog going as you look beyond 12 months. So number one, we will get a fairly early warning as things are changing to allow us to adjust. Beyond that, by the terms of the purchase orders that customers are placed on us; they are indeed noncancelable and nonreschedulable. So you can't push it out either. Now where we -- with a given customer in the grand scheme of our overall relationship, provide ways that we can accommodate that helps them and helps us, et cetera. And of course, those are normal business things that we do. But by and large, and we -- it's not -- this is not the first time we've had noncancelable orders -- they've been much smaller in the past. We've had noncancelable orders for a long, long time on semi-customer custom products or certain market segments and all that. And we manage through it. And they are enforceable and they'll be there. But we intend to make sure that we also adjust with as much lead time as we can. I think I would change the question differently. If we didn't have PSP, I think what we would see is far more irresponsible backlog being placed on us. Because when a customer has responsibility, when they have to get their leaders to sign off on a purchase order that has a noncancelable requirement on it, they are much more careful with orders they place. When we do that with our suppliers and it's noncancelable, right, it gets scrutiny from multiple people, sometimes big enough to where Eric make sure that we're not trying to do something which is not well thought out. So I think PSP actually makes customers much more responsible in deciding what do they want to place as noncancelable. They can also place non-PSP orders if they wanted to on top of that. But the PSP backlog is extremely important for the customer to receive priority, for us to be able to plan for the [indiscernible].

Got it. How about your relationship with the foundries, right, in that I imagine that the visibility you get then obviously translates into visibility with them? Are your relationships with your foundries also on a noncancelable basis?

So in normal times, when you have orders that you place on a foundry, those orders are typically noncancelable. They're fairly short cycle, right? So they are coming out in 4, 5, 6 months, et cetera. We will take steps if need be, depending on the discussions and what is needed, to provide our partners with the confidence that they need to support our backlog without fear that we're going to pull the rug out underneath them, right? We are manufacturers. We know what it takes for a manufacturer to commit to what we're doing. But we have excellent relationships. I know the CEO of all of our key suppliers, and it's relationship that's built on trust, for many years of having worked together, and we're quite comfortable that those relationships are strong for whatever conditions we're going to be in.

The one other thing that you mentioned was balance sheet inventory that you are comfortable, right, with a greater level of inventory than before. When a lot of investors see that, they think, well, how come the semiconductor industry talks about supply shortages, yet the amount of balance sheet inventory continues to build up? Isn't that a yellow flag or red light in some cases?

Great question. Let me give that to Eric. He can give you kind of the breakdown of how that inventory sitting on our balance sheet looks.

So I mean we've been very focused on building raw material inventory, so our factories, as we're ramping them can run productively. We're increasing the work in process in all of our factory because they're ramping at record levels today. So that's where the majority of the build is. It's not in die bank, which we need to replenish at some point in time, get the product through the factory and then have it ready to go through the assembly and test process, which is typically a shorter process. So that's where the focus has been. And we're really looking to position that appropriately to, over time, bring lead times down more effectively support our customers.

Our factories are running on fumes. There is no slack anywhere in the system. And it's been running that way now for 5, 6 quarters. And it's not very healthy to run that way because normal manufacturing has issues. You get a piece of equipment that goes down, a bad yield, a power outage, something that happens. And today, whenever that happens, it kind of ripples through the entire line. We need to build, but we're not building in finished goods of die bank. We're building in semi-finished goods, materials. In some cases, there's end-of-life dies that we're making to make sure. But we need to secure our manufacturing so that it can keep running as well as it can in an era of uncertainty. And today, there's lots of uncertainty in terms of materials and shortages and where they're receiving it of many shortages as well.

So should we be just prepared to see higher levels of inventory in that? And is there an offset that is that, even though your inventory is going up, there isn't as much in the distribution channel, right? So does that maybe [indiscernible] you better?

Yes. If you look at the combined -- and we entirely look at it as combined inventory, what does Microchip have on our books, what does our distribution channel have as well. And so typically, you would need our inventory to be kind of a little bit out of balance with it where our inventory is low and their inventory is high and vice versa. There is a tremendous amount of constraints in distribution and at Microchip today, which is why we think all this in any down cycle, whenever it happens, will just help us to get the channel and our own inventory to get healthy again.

All right. The other interesting, I think, trend that you showed, Ganesh, was the gross margin improvement over time. What has been the big factors for that? Because if you had spoken 5, 6 years ago and you had said that we'll be doing 67% gross margin, right, as a primarily microcontroller, right, franchise, obviously, with an increasing analog portion, then that would have been -- I would have been skeptical about that number, but you're achieving that and you still have more headroom. So what has helped you drive margin expansion in the past? And what are the next few steps to get to within your target range?

Great question. So it begins with margin is a mindset, and it needs to be a mindset that everybody in the company owns their portion of what needs to happen. Margin is not about just cost. Many companies say, "Well, you price it to whatever and somebody figures out the cost." And it is about cost, it is about being -- having operational excellence and what we need to do. And we've done a lot on that side of it with what we've done in our internal factories, what we've done to scale, what we do on a daily basis to take pennies of cost out of many, many products. But it is as much about discipline of what markets, what applications, what pricing and what strategy you employ there and making sure that you extract the value for the products that you're shipping. And then it is about mix. And over time, how do you shift the mix to products that have higher and higher gross margins. And that's where having products that have not just a hardware element, but a hardware element, a pretty significant software element and the services that go with it, makes them far higher gross margin. So our products that include software in them are some of the highest gross margin products because they're complete solutions. They make -- they have much lower risk to the customer. They get them to market faster. Their cost of ownership is much lower on what they're doing. And in many of our businesses, as much as 50% of our R&D investment is in software. So I think that's a conscious choice we make on what are we building and how are we building it to be much more robust in its gross margin characteristics. And that has been a slow shift over time as we've done more and more of that. So all those fit into how has gross margin continue to accrete? It's operational excellence on the one side, it's correct market product and features on the other side and its pricing discipline on the final side.

So what are the next few steps? I think that you have another 50 to 150 basis points.

Rinse and repeat. All of those items that we have to do. And we -- it's a mindset. We come in every morning; the company is looking at what every one of us can do that makes that gross margin improvement happen. And it isn't one group or another group. Each person looks at their part of that puzzle.

Got it. One other interesting slide you showed was that in the prior downturn, right? You saw maybe, I think, about 300 basis points or so of gross margin headwinds, right? Is that kind of a level that if we do get into some downturn, whether it's next year, year after that, is that the kind of level investors should be expecting in case of a medium-sized downturn, let's say?

I'm not going to be able to tell you how to forecast the future. But I can tell you that when you look at that, that includes the Global Financial Crisis in that window of time. So you can see 2008, 2009 what was the performance on an annualized basis. By quarter, it may have been deeper than that in any given quarter, but on an annualized basis. So if you look at that -- and by the way, when we had the global financial crisis, we were more 80%, 90% in-house manufacturing. So we had a much higher component of fixed manufacturing costs. Today, we're more like 40% in-house, 60% outside from a fabrication standpoint. So I do believe that we have characteristics that are as good or better than what we have had in history in terms of how to weather the storm in terms of gross margin.

Got it. And then since you showed that chart about stock valuation versus peers, I have to ask you a question about that. Why do you think there is that discount versus peers?

I think that is for you to answer, Vivek, not for me.

I think that investors are perhaps not appreciating enough. About the story.

I think some of it is it takes time. And our capital return strategy has been less than a year of time. And I think people are beginning to appreciate that. It will -- some of it is just the macro weighs on everything and at the same time. We think these rational markets close these gaps. And it may be irrational for some portion of time, but it will close the gap. And when that happens precisely in time, I don't know. But I think you're in a better position to answer that than I am.

I think another piece of it is probably based on our history of M&A, which we've moved away from at this point in time. But I think there's a set of investors out there that still think they're going to wake up some morning and Microchip's leverage goes to over 4 again, and that's not the case. But I think that needs to be proven over time as well as being able to show that organically that we can grow at the rates that we believe we can. And I think we're proving that over the last several years.

Got it. Absolutely. We're buying back shares at whatever price it is that's out there.

You said it's programmatic, right, in that it's whatever the math turns out the amount to be -- it's not opportunistic that look at the PE level you're going to buy X,Y or Z, it is indeed programmatic.

So we have the flexibility to do both. We're early in our journey of doing share buybacks on a consistent basis. And so at this stage, we have chosen to be more programmatic. But if the opportunity should present itself, we have the firepower and the authorization to do more, right? So the authorization that the Board gave us was $4 billion of buybacks. We've done just over 10% of that at this point in time. But I think we're also trying to learn how to do this the right way. But nothing stops us from doing it opportunistically.

Got it. You mentioned you have 12-plus months of -- what are lead times now versus historically?

For the vast majority of our products, we're still running lead times that are in that 10-, 12-, 14-month window of time, right? So it is largely booked out for 2022 and into 2023. And so a new order -- and there's always exceptions to the rule. But in general, something new being placed as an order today is going to have a lead time that is in that 10- to 14-month window, I would say, an average of about 12 months.

I see. Are these lead times extending? Are they holding steady as you bring on more capacity?

So by definition, because the gap between demand and supply is growing every quarter, the only way to solve it is on time, right? So as much as we're bringing capacity on, the demand has grown faster than the -- our ability to grow supply. So 6 quarters in a row that has grown and expanded. And so it gets sold on time. And right now, that is not pulling in lead times.

Got it. And then finally Ganesh, you're adding to CapEx, right, so are a number of your analog, right, and microcontroller peers. When should investors start to get nervous when they see all these CapEx projects, right, all coming in at the same time? When do -- when does all that CapEx actually translate into excess capacity? Because I imagine there's a distinction between the two.

So CapEx has to be an investment decision that is made many quarters, perhaps many years, before you realize its benefits. So CapEx decisions are not based on kind of current backlog, et cetera. You're looking at your backlog, the strength of where you see things going, what your design wins are, what's the secular growth that you're driving towards. And you're making that directional bet, make adjustments for any cyclical changes that may happen. Our CapEx relative to many others out there, including some of our peers, is very modest. We're at 3% to 6% in terms of where we're at. And we don't have any concern with where the CapEx investments we have made are at this point in time. We also have all of these going into investments that are proprietary products, sole sourced from us. So there's not a substitutability where somehow we put the CapEx and somebody else gets the demand and where we're at. So all that plays into where we have high confidence in what the CapEx we put in place is to be able to productively use it and to also, if there's any weakness, to be able to plug some of the inventory gaps that are there in the channel and internally in that time frame.

Perfect. Thank you so much, Ganesh. Thank you, Eric. Thank you for your time. I appreciate it.

Thank you, everybody.

Thank you, everyone.