Microchip Technology Incorporated (MCHP) Earnings Call Transcript & Summary

Good morning, everyone. I'm Chris Danely, your friendly neighborhood semiconductor analyst here at Citigroup. Apologies for being a little late. I had the Chips for America guys asking for more money next door. At any rate, up is one of my favorite companies. It's actually the first company I covered in semis 25 years ago. And on a personal note, I'm very proud to have had more buy ratings on them than any other company through the years. Really love these guys. So up here, we have Ganesh Moorthy, the President and CEO. We also have Nawaz Sharif, the VP of European Finance. I believe Ganesh is going to do a short presentation, and then we will jump right into Q&A. So Ganesh, I'll let you take it away. Thanks very much for coming.

Thank you. Okay. Quick safe harbor. During the course of this presentation, we will be making projections. 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 the actual events or results may differ materially, and we refer you to our SEC filings that can identify these important risk factors. To start with, we wake up 22,000-plus employees worldwide with a singular purpose, which is how do we empower innovation that enhances human experience by delivering the smart, connected and secure solutions. So I want to show you some examples of what does that mean? And it's in diverse markets and very durable markets. And I won't go through each and every one of these, but picture sometimes says 1,000 words. So industry by industry end market by end market, you can see how do our technologies change, what is able and what is possible to be able to deliver these game-changing solutions. I want to spend today on Microchip 3.0, which is really a summation of the strategy of the company that drives the growth, profitability, cash generation and the capital return that we have. So I'm going to start with the growth part of it. So the growth is focused organically. We have a 5-year growth target of 10% to 15% annualized growth on a base of fiscal '21. And it comes from 2 major strategies that we're following, which is total system solutions, aggregating all that we bring into solutions and a focus on 6 major market megatrends. We'll speak about those here in a minute. So this is our history over 30 years. You see over this whole time frame, it's 16-plus percent compounded annual growth rate. You can see some acceleration in more of the recent years as we've had this wind in our back for the industry as a whole. And the last quarter, we just finished -- the June quarter was $2.29 billion and again, 16.6% year-over-year growth. I'll talk about total system solutions, and this is the entirety of what we have very broad, probably the broadest portfolio in the industry of everything that is needed in an embedded system from the brains to the signal chain to the power to the clock to the networking that's needed. We put it all together in how we take solutions to market, how we help our customers complete their solutions. And those are just not hardware, the hardware, the software and their services that then bind the solution together into something that is very sticky solutions that we provide. And then the other is our focus on major market megatrends. And there are 6 market megatrends. That is where we're putting a lot of our energy into. These are growth areas that will grow much faster than Microchip on average. And I'll show you what it has done in the last 2 years. But it's 5G infrastructure, it's IoT and in particular, edge computing. It's data centers, EVs, autonomous driving or advanced driver assist and sustainability. And across many of these, and in fact, all 6 of them, AI and ML play an increasing role with how these solutions become more effective. So I want to double-click on 3 areas. This is data centers first. And you may not think of us in the data center, but we are in many, many places inside of the data center. So in the infrastructure for compute and storage, SSD solutions, and SSD becomes an increasingly important requirement for many of the high-performance AI type of servers as well. The infrastructure for memory, timing, very critical in these systems. Security, the boot and many, many other areas. So all of these take product from across Microchip and are present on the data center products that our customers are building. Second, perhaps something we haven't talked a whole lot about, but edge computing and AI, in particular, is moving to not just be on the server, but actually on the edge. And the edge means many different things, depending on what end market. So here are some examples of what it is in the 5G and data networks and the industrial edge, in precision diagnostics for medical, in the car and how it does. So each of these areas offloads the processing and the intelligence that you need to the edge so that the latency is low and the performance is better than that. And in every one of these edge nodes, we have products from us, from our FPGAs, our microprocessors, our microcontroller, analog that all go in to enabling this edge computing itself. And we believe that is a major trend and in fact, it's going to be a very large growth area for us and for the industry. And then the third area to double click on is sustainability. And this has many components to it, but there's a tremendous amount of money being spent on how to improve energy storage, the grid infrastructure, distribution of how energy happens, monitoring of these resources and optimizing these resources, how and when this usage of energy is more efficient, et cetera. And semiconductors are at the core of how all of this is being enabled and all our products are at the core of how we enable sustainability. So not only what we do as a company for our own sustainability, but what we enable the rest of the world for their sustainability as well. So just 3 of major mega trends in terms of double clicking down on them. Now I talked about the mega trends and a good way to look back. As we said 2 years ago, we expect that this will grow roughly 2x the company. And in fact, that's exactly what it did. If you take fiscal '23 versus fiscal '21. In that period of time, overall company grew 55%. The contribution from the megatrends grew 110%, so almost spot on at 2x. And the size of the pie that is in the mega trends grew from about 34% of the total revenue to 45% of the total revenue in that period of time. So major growth over that time. And we expect continued growth, probably not at 2x forever, but certainly much faster growth than the rest of the company to enable overall company growth. Now the next 2 parts of Microchip 3.0 are the business model. We do all this growth, but how do we drop down to the bottom line. And that comes from both the end markets that we're in and in the durability of those markets and the performance, the financial performance that follows this growth in those end markets. So here's the end markets, and you can see these are very, very durable markets. 41% of our revenue is industrial and that includes aerospace and defense, another 17% is automotive, 19% is our data center business. And so these are very, very nice long-term businesses that have, over 3 years, been the bedrock of how the company is growing, particularly industrial and automotive. Now I want to show you a little bit of our financial performance, but also put the backdrop of the semi industry, and there's always been talk sometimes that all these cycles are over, and you can see the cycles aren't over, close to over. We continue to be a cyclical industry. This is the industry overall, what it has done in the last 15, 16 years or so. Now our performance through this all has been outstanding. So this is the gross margin performance over that time frame. You can see through the highs and the lows, how resilient the gross margin and how much improvement we have seen, higher highs, higher lows throughout this window of time, continuing through this cycle as well. Now in Q1 of the -- this is the June quarter, again, a record gross margin, 68.4% that we got to. Looking at operating margin, what drops us down? You see the same trend. We're continuing to have improvement. And some of this operating performance includes many acquisitions that we did in the years from 5 years ago to 10 years ago, where the performance came in, dropped the average down, and then we were able to bring it back up on our clock as well. And we've taken a -- and in the last quarter, we had record operating margin, 48.1%. And we also put a floor down saying we don't see a scenario in which our operating margin, at least no reasonable scenario in which our operating margin drops below 40%. And we think, in fact, it will be substantially better than that as we go through this cycle. The next element is what are we doing to achieve these results in terms of our capital that we're deploying inside of the company itself. And that's 2 different areas. One is in the capital intensity. We have a 3% to 6% capital intensity over the cycle. We were closer to 6% in the last year. We're going to be a lot lower than that this year, probably closer to 4%, and it will go down most likely again into fiscal '25 depending on how business conditions are. Our inventory is a little higher than the range. Some of that is last time buys and where we're at, but still well inside of what we have. And we have a very, very long-lived products. So inventory obsolescence risk is almost 0 in where we're at. And you take it all and you measure it on the return on invested capital, and here we are in the top 25% of all companies in the S&P 500 in terms of the ROIC that we're able to deliver. The next 2 areas is around cash generation and what are we doing with that cash generation in terms of capital return itself. So firstly, looking at the EBITDA margin, over 50% of EBITDA, 51% last quarter. And you can see how it's been rising through this time. So $4.5 billion over the last 4 quarters of EBITDA margin generation. And through the cycles, this is going back, again, 15 years. You can see the blue section is how the cash generation of the company has performed. It's growing at a 23% compounded annual growth rate over this window of time and continues to be a tremendous part of what the business is able to do is generate cash in up cycles and in down cycles. And last quarter, we had $776 million, almost 34% of free cash -- adjusted free cash flow that we generated. Now not only is it the adjusted free cash flow, but what are we doing in terms of free cash flow per share, as we're buying back shares in -- as part of our capital return. You can see how the free cash flow per share is also rising over this time frame. And just last quarter, we had $1.41 of free cash flow per share. And now you take that same S&P 500 and look at how do we rate, and we're in the top 8% of all companies in terms of free cash flow as a percent of revenue that we're generating. Over the last 5 years, and I know 5 years ago there were a lot of concerns about the leverage we had after the last big acquisition that we did, and we have systematically driven that leverage down, paid back the debt. We're well, well under the 1.3 -- 1.5% at one time, now we're under 1.3% -- or 1.45% where we guided. Last quarter, we actually did 1.29% in terms of leverage. So leverage has come down dramatically as we've taken all that cash generation and paid down a significant portion of the debt. And as that has happened, we've been able to increase the capital that we can return to our shareholders. And starting from 2 years ago, we began to accelerate the rate at which both dividends would grow, but also started to have a programmatic share buyback. And we continue to be on track to have 100% of our capital returned to shareholders by the March quarter of 2025. And this quarter, we will return 72.5% of last quarter's free cash flow. So every quarter, we're bumping it up by 5 percentage points. So next quarter will be 77.5% and so on and so forth. So a key part of the profitability, the cash generation is then eventually to be able to return it to our shareholders. And again, if you measure cash return as a percent of revenue against the entire S&P 500, we're in the top 22% of all companies. And then the last piece of it is more inward focused, which is not just what results we get, but how we get it. And for us, that is as important. It is based on a company with a very strong culture for 30-plus years that we have built. And a company that is committed to sustainability and what we want to be able to achieve within the company itself. So we believe we have a compelling valuation as the company over the last 5 years has changed dramatically in terms of where the focus is, what the results are, the cash generation is and what the capital return is. And I won't read all the slides in there or the bullets down in there, but we think Microchip 3.0 should drive higher multiple expansion. And I show you some benchmarks there against peers who have similar business models against the S&P 500 against the SoCs as well. And that expansion is ahead of us. We think this premium performance, that is available at a significant discount today but not for long. In summary, consistent long-term growth of durable end markets. You've seen some of those here in the pictures I just showed. Outstanding and improving gross and operating margin performance, strong free cash flow generation through the cycle. So -- and strong in up cycles and down cycles, a reduction in the net leverage rapidly taking place and giving us the opportunity to return all of our free cash flow to our shareholders. And again, a compelling valuation relative to peers itself. Thank you.

Thanks, Ganesh. I guess to start in looking at those gross and operating margin charts, pretty good track record. They've been going up over I guess, 25 years since the '90s. There's a pretty big spike last year in gross and operating margins. Can you discuss why that happened? And then is it achievable in the next upturn, whenever that may happen.

Yes. So there are 2 major reasons why the gross margin improved as dramatically as it did in the last 2 and 3 years. Coming into the up cycle, we had a significant underloading of our factories. And so we were actually writing off every quarter, part of the underutilized capacity. What happened in the early stages, we were able to rapidly reuse all that capacity, get our factories running in full. And so that was the one big contributor to start with. The second big contributor was in a constrained environment, we allocated our resources to where we had the best returns. And so the mix of our product line also began to shift and to have a much higher gross margin profile mix. And of course, you dropped some of the low gross margin, even low compared to where we're at and were at. So those are the 2 big reasons where the gross margin made as big a change as it did and as quickly on it. The operating margin improvements came in addition because the rate of growth of the revenue, we could not have operating expenses that could grow at that rate. So it dropped down even further, the operating margin went.

Okay. Now in terms of your business model, the semi industry is in the middle of a correction, especially on the analog and embedded side. You guys are not immune to that. Historically, and I put out this chart/table in notes for literally the last 15, 20 years, Microchip has been very resilient and has outperformed during corrections and downturns. Maybe share with us what enables you guys to get through this better than your average semiconductor company?

There's many aspects of how we manage the company. So first, let's look at on the gross margin side of things, right? We have a mix of inside and outside. So we have flexibility in terms of how the overall capacity overhang is during a down cycle. On the inside, we have these products that have such long life cycles that we're able to continue to have the factories run building some of that inventory because it's a high gross margin product, we'll sell it through. There's no obsolescence. We use up the factories in the down cycle. And then we drain that inventory in the up cycles. That pushes out when we need our CapEx to be spent. And then the rest of the company has a cost structure that has a significant flexibility. So our operating expenses as a percentage, as well as in the absolute, have a significant amount of movement that we can have in a down cycle without laying off employees just with the way the bonuses are structured and the other ways in which our discretionary expenses can be managed. And so through it all, we've been able to manage both the gross margins, not that we're immune to it. That will be something that we will continue to work hard on, same with the OpEx. But we have levers that we have honed in over many, many years of how to manage the gross margin and the operating margin in these cycles and in a down cycle in particular.

Yes. And maybe talk about specifically what you're doing in terms of your own inventory and utilization rates in terms of managing this part of the cycle?

Yes. So our internal factories, we paused on the expansion. So we had a lot of expansion that was planned and in the works. We paused the expansion because we were getting to a point where we were able to meet demand. And we had some uncertainty on where the demand would be and where it would go. We were growing inventory. And inventory always allows us to very quickly respond to whenever there could be market changes. So at this point in time, our overall inventory has grown. It's sitting at 167 days exiting March. About 8 or 9 of those days are what I call last-time buys. These are our partners who are closing down their factories, but we have high, high margin products from them. We've built ahead for 8, 10 years of time for them. But on the rest of it, our range is 130 to 150 days. We're slightly above that. We will come down. We came down last quarter, 2 days. We'll come down a few more days this quarter as well. And we're balancing between the internal and the external. We have obligations to our external partners. But at the same time, we want to keep running the internal factories as consistently as we can so that they absorb all the fixed costs. All that inventory is in great shape, will all sell-through, will contribute to long-term gross margin and cash generation.

And so is there, I guess, an ideal inventory level you have right now during this period of softness? Or is it still within that range? And when do you think you will be there?

So we're within -- 130 to 150 days is notionally what our range we want to be in it. That's our comfort zone and where we're at.

And that's whatever the cycle gives us, right?

Whatever the cycle is, yes. And typically, in a down cycle, we'll be at the higher end of that range and an up cycle we'd be at the lower end of the range. Now in the last 2, 3 years, we were down as low as, I think, 108, 109 days. We've been as high as 169. So the reality is you do go beyond those and you're taking actions. When you're below the low end, you're taking actions to expand and get capacity in place. When you're above the high end, you're taking actions to pause where you're going. So we'll get back there, and in the meanwhile, the inventory has no concern to us in terms of any risk of obsolescence.

Okay. And then your 2 competitors you mentioned on that chart, they felt the correction before you guys did. We asked them what caused it or what triggered it, and they said it was their lead times dropping below a certain level. In retrospect, what do you think triggered it for you guys? Was it a sort of a lead time thing? Or was it a macro demand falling off, or a certain geo? Now that we've had a few months to look back and think about it, what do you think triggered it for Microchip? And why did it hit you guys later? Do you think it's the resiliency of the business model or something else?

All right. You've got multiple questions. Let me see if I can remember them all.

I wrote them all down. So if you...

Okay. Good. So you might need to. So I look at lead times as an output of the system, not an input into the system. So lead times coming down aren't the reason why things are down. Lead times are going to do what the are. Lead times reflect customers' view of how much do they need to be able to place backlog for to fit to get secure where they're at. We have always preferred to run low lead times. Historically, we run 4 to 8 weeks lead time for 90-plus percent of our line items because short lead times allow the most responsiveness from our side and the best flexibility for our customers who respond to their business. That's where we want to run. Now supply and demand got so far out of whack in the last 2 years, lead times went to 52 weeks, sometimes longer than 52 weeks. And it's difficult for everybody. It's difficult for us. It's difficult for our customers. They're trying to guess what their demand is going to be out in time. So we've been working hard to get that. And you catch a breath to bring lead times down when the supply/demand imbalance begins to start narrowing. And when your own capacity investments start to come into play. And so between the beginning of this year and the end of June, we cut lead times in half from 52 weeks to 26. And I expect we will cut it at least half, if not more, before the end of this year and where we go. So heading back to what I call is normal, normal is 4 to 8 weeks. It's where we'd like to be. I don't know if we'll get there all the way this year or not. But that's what gives everybody the best chance to be market responsive to where things are at. You had more questions, why don't you ask me to ask me the rest.

No, that's fine. I think you went through it. So just to reiterate, the lead times were at 52 weeks at the beginning of the year, 26 weeks in June and the goal is 4 to 8 weeks at some point at the end of this year.

We're driving hard to make it this year, whether we get to 10 weeks, 12 weeks, 8 weeks, I'm not completely sure yet.

Got it. And would we see the same dynamics on the shortages side? Shortages are everywhere, but they do seem to be going away. Do you think that most of these shortages will be gone by the end of the year...

And so there are always going to be constrained corridors, they were there even pre COVID where we were at. So that you always work. It's a one-off. You have to find and knock itself down. But by and large, the constraints of the last 2 years all the customer escalations and all of that, will have tamped down to something which is much more normal. Now there will always be somebody who has an upside in business who has something else, a factory that has a yield issue or something to work on. But those will be the nature of constraints for the most part. And there could be some very specific corridors where we're still getting the capacity to get to the point where it meets with supply and demand. But by and large, I think constraints are behind us. Now I don't think they're behind us forever. And I think this industry and what we provide and the solutions that Microchip has for all these megatrends, this is the engine of innovation. This is what so many customers applications and markets are using to drive their innovation. And just as a year ago no one could see a slowdown here, we're sitting here. A year from now, we could be back into a very strong environment as all of the other parts of the market slowness get behind us in it. So -- but long term, we are very, very confident in the strength of semiconductors, in the nature by which they change the playing field for our customers and what they offer and the innovation that they will build. And it's got a great long-term compounded annual growth.

And like you said, your -- by nature of your programmable products, your lead times have historically been among the lowest in the industry. And so traditionally, you guys have felt the upturn and the downturn and whatever the heck else is in between before your competitors, this time was a little different. Some of your competitors felt it before you guys. Any reason why? Was it just a quirk of the cycle?

Yes. I think this cycle has been different from any other cycle that we've had. I think not all segments of the business were hit at the same time. Consumer electronics and mobile phone and some of the PC seemed to feel it the earliest. A year ago, we -- those were already down, but automotive and industrial and medical, and aerospace and defense, and some of the infrastructure had continued to be strong. So we are fortunate that the mix of our business has more of these stronger and more resilient end markets. And that has continued longer than some of the other markets as such. So I think this year, this cycle has been different in that different end markets are slowing down or growing at different time lines and different rates. And whose end market exposure has advantages to what's staying on longer or disadvantages for what's been going down sooner, has reflected when they saw the recession. And that's largely playing itself out, which is why you said earlier on some of the analog guys are starting to see it as well. And I think automotive and industrial. For anybody who has had that exposure has been the most resilient for the longest. But as I mentioned in our conference call a month ago, I said, we're beginning to see -- automotive and industrial starting to see some of the slowing down as well. And then regionally, I talked about seeing China being weak, which has been weak for some time. But also we said, hey, we're starting to feel that Europe has an impending slowdown coming. All the GDP reports that you will read out of Europe and you're welcome to ask Nawaz if you want some more detail because he's got a closer feel on it. Germany is in a recession effectively. Many other parts of Europe are slow. And Europe has a very large export economy. And so when you have an export economy and if China is a big part of your exports, you're going to feel the slowing in China as well.

Yes. Nawaz, why don't you step up to the plate here, 2 of your bigger competitors we had yesterday, both of them mentioned European weakness. So I think that's out there. Maybe give us some insights as to what's going on across the pond.

Yes. So as Ganesh mentioned, I mean, the struggle is that the macro headwinds are there and will stay a little bit longer in Europe than the U.S. It took a little bit longer, I think, maybe for the governments or the ECB to react. It was late in changing its QE. It was late in terms of raising interest rates. So there's still more medicine to be taken, energy costs are obviously picking up across the board again. And so that's I think going to stifle inflation coming down, particularly for the month of August, I think it's actually going to go up. ECB has a meeting next week at the event is that it's going to go up by 25, maybe 50 basis points still and there's more to come until the end of the year. So it's going to work itself out. But as Ganesh mentioned, being such a large exporter and one of your largest customers being China being particularly weak, how do you fill the gap? And there is no gap to be filled until China decides or it is able to manage its own issues and generally, business picks up. But energy costs are a big piece. Wage pressure is enormous. There's obviously a lot more unions in Europe than the U.S. I know UAW here is exerting pressure, but there's a lot more of that taking place in Europe, and that wage increase is adding to that inflation problem, which then just extends that cycle. And so I think that's what we're seeing across the board, it's just going to take them 1 to 2 quarters longer to resolve these issues. As a company, we're still robust. We have great locations. We have very engaged employees working on a phenomenal number of designs and activity, all of which will come to fruition and continue on the mega trends and end markets that we have. It's just that it will be 3, 6, maybe 9 months later.

Yes. And Ganesh, as you guys have always been one of the more honest semi companies, you call it like you see it. When things are great, you say things are great. And when things are bad you say, you know what, it's not working right now. And so you came out and said this quarter's weak and probably next quarter's weak, and I think folks appreciate that. Give us some confidence that it's not going to get much worse than this, that we're sort of seeing the bottom here and maybe in whatever, 6 months or something like that, that things turn around. So maybe not.

I don't have any guidance to provide that is beyond what we've provided in the last conference call. But I think you can look at historically, how have these cycles gone? What does an inventory cycle look like? And historically, inventory cycles in the semiconductor industry have been 2 to 3 quarters of time is what it takes. And within that, the supply and demand begin to normalize and perhaps the cycle -- the demand cycle begins to strengthen by that time as well. So that's the only benchmark that we have against which to try to plan for things. What we also see is, unlike last year and year before, where our customers were enmeshed in just dealing with shortages and how to redesign products so that they could get supply and all of that, we're seeing some of the strongest design moving momentum ever in the company over the last 9 months or so, as all our customers put their effort into new products, technologies, innovation. And I think all of that ultimately creates demand because you create products that have more value, that a customer desires, that an end market will want to buy. And I think that innovation that is being fueled today will become the growth that you see as we go at some point into '24 and '25. More than anything else what gives me the confidence in the long term growth of the business is how much customers have just refocused on getting new products and new solutions and innovation into their pipeline all of which will be coming out over the next 1, 2, 3 years?

Yes. I had a couple of people ask me in the halls yesterday. We've had a few of your competitors present, especially on the microcontroller side, saying that they are not seeing any weakness out there. So any explanation for that? It's like you've got a certain group of analog and microcontroller companies saying things are weaker and then a certain group saying that we're fine. How do we interpret that as investors here?

I don't know who the companies are and where they're at. So within -- let's look at within Microchip, we have a very, very broad portfolio of products. We have areas that have strengths that are going on like there is no recession. It's going well, right? So if I look at anything that we do that is tied to AI and AI servers doing really well as well as some of the edge computing things. Anything that has to do with renewable energy, is doing well. Anything doing with EV is doing really well. Anything to do with aerospace and defense is doing really well. So what you see when we present is a blend of the entire company. But inside of that are micro pockets that have strength and micro pockets that have weakness .

So you mentioned -- and I like the slide that says, I think it's 75% exposure to the 3 best end markets, auto, industrial and data center. Within those 3 end markets that we're looking out over the next year or 2 years, which do you feel best about? And which would you be relatively more concerned on?

I think the natural answer that may come out is everybody is down on data center today. I think if you look at a 3-year horizon, there's a substantial amount of investment that will take place there. Not all of it is AI, some of it will be AI. I like all 3 markets, I'm not good enough to call which one is going to do better or worse over a 3-year window of time, which is why we stay invested in the megatrends in the key end markets because we're not going to prognosticate which one will do well, but we're going to make sure that whichever one does well, we have an outsized presence in to drive the growth of the company. .

And on the geographic side, you mentioned China and Europe. Between those 2, which do you think will recover first? And do you think either is a bigger concern or both the same?

I think they're both concerns for different reasons and how they go by. And Nawaz outlined the case for what's going on in Europe. And I don't know how and when the policy actions there will help to bring that back. But I think for Europe to recover, it's also going to need China to recover because it is a large export market for them. And I was just in China all of last week, so I got a kind of on-the-ground view of where things are.

Glad you escaped. They didn't hold you...

They let me go, yes, at the end of the week. And I do think even inside China, there is a vibrancy in many areas. I visited multiple EV companies as well as the Tier 1's that supply them, and that's doing really well and where they're at. But there's a malaise in China that is being felt that for multiple quarters our industry has been able to feel it. The law of averages is that the longer that goes the more likely a recovery is coming and coming sooner right? This is the second largest economy in the world. It isn't going to stay in a malaise forever. But when you go through it, it feels like it's just going to be like this forever. And so I do expect that China will recover. I do expect that it's a large economy, a very capable economy. And I can't put the date on exactly when, but as every day goes by, where it looks bad, it's going to get better sooner.

Yes. Ganesh, so you spend a lot of time with customers. Would you say that any -- that this is more of an inventory issue or a demand issue? And has anything, I guess, changed in the last 3 months as to what your customers are asking for or concerned about or anything like that? Any insight there?

I think a demand issue and an inventory issue, in many cases, are 2 sides of the same coin. So when your demand slows down, and clearly, at this point, there are macro headwinds, there's business uncertainty that's out there, demand is slowing down. Customers' confidence is slowing down. As you -- as that happens, the same inventory you have or that you were planning on now looks to be high because your business is changing or your business concerns have grown. So those 2 are -- they go hand in hand. Just as on the other side, when your demand strengthens, you feel I don't have enough inventory. I've got to go order more product and et cetera, because you're anticipating a better future. And I think today, there's more uncertainty that our customers are facing. There's more macro headwinds that they're facing, they're reading about. And I think that just causes them to be more cautious. And that's why short lead times actually are even more important in the current environment because we're not asking them to bet 6 and 12 months out, when they can barely see the next 3 and 6 months. And that's how we make ourselves more responsive, make our customers more competitive.

And how has the PSP program fared during this time of tumult. You guys are one of the pioneers of incentivizing customers to sign up this. Have you seen any PSPs get renegotiated or try to get renegotiated?

So let's be clear. We weren't trying to incentivize customers to do anything they didn't want to do. We were offering them priority in exchange for certainty. We would go make investments, we would go expand the capacity, they would get priority in exchange for doing that. And they didn't have to do it. They could do part of their backlog with PSP, part of it without PSP, completely their choice. But the take rate was very high because our end market exposure has many customers with very high-end value products. They wanted to make sure that semiconductor content didn't stop them. That remains high. We still have well over 50% of our backlog that is in PSP today. And while backlog is coming down and PSP backlog as a result is coming down as well, the program effectively is the customer's choice and do they see value in it or not? I suspect there will be a point at which it doesn't have the same value as it did 2 years ago. We're adjusting the program. We're adjusting the window of time from 12 months, it's now 6 months. We're providing more flexibility. We're responding to the environment so that the program serves a purpose for the customers' business success.

So have you had people say, "Hey, we need less units". And do you say tough noogies, you have to take it? Or are you working with them? Or how do those -- maybe give us some insight into how that's going...

Yes. We have plenty of customers for them, including PSP customers for whom what they planned on as their business 9 months ago, 12 months ago is different from where the business is today. And they need help. They need help with pushouts, with cancellations. I've been publicly on the record that says, hey, I'm not in favor of just letting people off with cancellation people. And we will help them on lots of push out windowing. We're doing large amounts of pushouts. And you can see that part of our inventory is reflected in the fact that we have held on to product that customers had wanted and have committed to buy to enable them to have some breathing room and to be able to run their business. So we have huge pushouts in what we have done over multiple quarters. But I do think that there is a sudden responsibility or end responsibility that it would encourage, if we just said we're just kidding, we don't mean anything about noncancelable because people place orders when they don't need it, if there isn't a certain amount of skin in the game that they would have. And we want less orders with higher certainty rather than saying, yes, you can place all your orders as NCNR. When push comes shove, we'll just forgive everything. So we are extremely flexible on a nonreschedule ability but not in the noncancel ability.

Great. And I have time for one last quick question. So any issues or any lack of confidence in the ability to get back to those peak margins you achieved only a few quarters ago whenever we come out of this?

Well, we had peak margins last quarter. And I expect that we're not going to be very far from those. And in the long term, those margins will come back to where they're at. And you've seen our long-term targets are 48 -- 68% for gross margins. It's 45% for our operating margins. We've been doing better than that. Let's go through the cycle and where we're at. But these are phenomenal gross and operating margins in the top 5 in the entire industry where we're at and we're proud of how we've been able to get it. And we have shown in the past that once we get there, we have higher highs, higher lows.

Great. Thanks, again, guys. I appreciate it. Thanks, everyone.

Thank you.