Chris Danely: Got it. Thanks, Ganesh.
Ganesh Moorthy: You’re welcome.
Operator: Our next question comes from the line of Chris Caso with Credit Suisse. Please proceed.
Chris Caso: Yes, thank you. Good afternoon. I have a question about the manufacturing plan, given your decision not to go forward with the 300-millimeter investment. I guess for one, just what’s driving that decision? And does that remove any possibility of internal capacity expansion going forward? And then following that, what do you think that means for Microchip competitively? Are you confident in your ability to get third-party wafers at competitive prices to support your growth going forward?
Ganesh Moorthy: Yes. So let me parse your question. So number one, we are continuing to expand the existing facilities we have. Those are the three fabs in the U.S., our assembly and test facilities in the Far East, et cetera. So there is no backing off from capacity where we believe we can bring on cost effective capacity that will go forward. Now 300-millimeter was a fairly large step for us, right? We don’t have that infrastructure. We had a lot of thinking to do on how would we load a fab because you can build a fab and you can get the help to get the government funding, whatever else, to do that. But still, at the end of the day, there are several things that are important to have. And the most important one is do you have enough wafers to load it and have the cost per wafer and the absorption cost effective or not.
That was going to be a challenge we knew at all times. And second, we need to be able to license the technologies because unlike in 200-millimeter where we own the vast majority of our technologies, in 300-millimeters, we would need to license that technology from our partners. That all said, as we looked at on balance, how could we achieve our business objectives. In the conversations we were able to have at the highest levels of our partners, we came away with plans and commitments for what was needed to support our business that we felt very confident that being able to work in the model we have today with our partners was completely supportive of our business and substantially derisk the execution of a greenfield 300-millimeter fab.
Chris Caso: Okay. Thank you. As a follow-up, there’s obviously been a lot of discussion about the PSP program. And I wanted to ask on it, in the context of as you achieve your goals of getting lead times down, what do you expect your customers’ reaction to be? Obviously, the PSP program and bookings so far ahead was something we hadn’t typically seen in the industry for Microchip generally. Do you expect that customers would naturally wean themselves off of PSP or at least put a smaller part of the backlog in PSP if the lead times come down? And clearly, it sounds like that’s not happening right now.
Ganesh Moorthy: It’s — the jury is still out. But let me tell you right in the middle of all of this, we continue to have customers approaching us for long-term supply agreements, long-term supply agreements that are predominantly in a 5-year window of time. So many, many of our customers build substantially valuable end equipment. I mean if you think of aerospace defense, commercial aviation, medical, automotive, many of the large industrial equipment, et cetera, they are trying to have assurance of supply as the most critical element of what they are planning for. Now how they want to do it with us, whether it is standard backlog, PSP backlog, long-term supply agreements is really a business decision that they need to make on the risk rewards or where they want to go.
But I can tell you that for the customers that we’re dealing with for many, many, many of them, the value of the supply assurance is extremely high on their agenda and is the reason why they are continuing to be a participant in the PSP program and signing up to be an increasing number of long-term supply agreements that they’re signing up for.
Stephen Sanghi: We said in our prepared remarks that we collected $385 million just last quarter from customers who signed up for a long-term supply agreement. So our customers do not see the environment that has lots of excess capacity and people are shutting down factories and laying off people. The capacity on the nodes that we use is still largely constrained and customers are still concerned about getting long-term capacity, and they’re giving us money and signing up long-term supply agreements for us to put that capacity in place ourselves or to sign up with our foundry partners.
Ganesh Moorthy: Yes, Chris, a lot of conversations are taking place at the CEO, CPO levels for these. And I think customers are much more thoughtful about a long-term view. They’re not looking at a one or two quarter. The cycle may be slower than what we thought. They’re as much worried about what happens in 2024 and what happens in 2025 and how do they build a supply chain that is reliable, resilient and enables their growth on these very, very high valued and equipment.
Chris Caso: Got it. Thank you.
Ganesh Moorthy: Thanks, Chris.
Operator: Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.
Joe Moore: Great. Thank you. I guess, I just wonder how you see the progression of bookings here. You’ve got this elevated backlog. You have lead times coming in. It seems like the book-to-bill should go pretty far below 1, but then we probably — it’s just math at that point, it’s not really that there’s an air pocket at the end. But I guess, historically, a lot of times, there’s been air pockets at the end. So as — I know you guys have seen a lot of these types of environments. Just how are you thinking about it? And how will you know if that lead time reduction means you need to take more action to kind of — the actions you’ve already discussed to protect your earnings power?
Ganesh Moorthy: Joe, book-to-bill in our business has never been a meaningful indicator. We’re making proprietary products, but the customer doesn’t buy from anybody else. It has always been an indicator of what is the customer sentiment about where the business is going and what kind of lead times are they going to have to prepare for. So clearly, in an environment in which lead times will start to come in, customers will pull back on some of the bookings. And I actually — I said that in my prepared remarks as well. It doesn’t mean that their needs have changed. It doesn’t mean that their usage patterns are going to change, right? It’s just how they want to work with us. Now customers also have been burned pretty badly over the last couple of years on trying to kind of optimize the last 5% of where they’re going to hold inventory, et cetera.
And so they do have an approach that is not tactical. They’re trying to be more strategic in how they think about things. And where the bookings are low, our bookings are high, we know that they’re going to come. And if I go back four quarters ago, bookings were out of this world. And we were seeing levels of bookings that were incredible. But that didn’t mean we expected business was going to double next quarter or the quarter after that. They were being placed out in time. And so we feel good about where our backlog still is. We still have multiple quarters of backlog. We are still getting bookings that are coming in at a lower rate, but we think they’re high-quality bookings because we’re not expecting that they have to place backlog beyond a point where they’re comfortable with.
So I think it’s a good environment at this point and bookings are low, but that’s okay.
Joe Moore: Great. Thank you.
Operator: Our next question comes from the line of Vivek Arya with Bank of America. Please proceed.
Vivek Arya: Thanks for the follow-up. Actually, just a comment and a question. Comment, if I just annualize your March quarter guidance, it suggests annual sales growth somewhere in the 10% to 11% for this year, and I just wanted to make sure that, that is kind of the message you are giving. My question is on gross margin. Usually, when you grow sales, you have been able to grow gross margin. But I know I’m nitpicking, but I think for March, you are guiding gross margins to go down somewhat and you’re also kind of at the higher end of your gross margin outlook. So what’s happening to gross margins? Why are they going down? And is 68.5% kind of that final destination or is there more leverage in the model?
James Eric Bjornholt: Okay. So I will take both the questions and Ganesh or Steve can add on to it. So you’re asking a guidance for the next year, does 10% or 11% make sense. We’ve made no comment beyond what we are going to grow in the March quarter other than we will grow again in the June quarter. So I can’t really provide any color on what you’re saying there. On gross margin, we are actually guiding gross margins to be up modestly in the quarter. Last quarter, we were at 68.1% non-GAAP gross margin. And if you look at the guidance table in our release, the midpoint of guidance is 68.2%. There’s a GAAP and a non-GAAP column in there, and maybe you’re just looking at the wrong one, but non-GAAP and GAAP margins should both be up in the quarter.
Vivek Arya: And any leverage beyond the 68.5%, Eric?
James Eric Bjornholt: So we aren’t at 68.5% yet. We are guiding to 68.2%. Our long-term model is a range of 67.5% to 68.5%. And we’ve done extremely well. We got to where we are very quickly. We just announced those targets at our Analyst Day in November of 2021. And we are always looking to continuously improve. So I would say that over time, as the top line grows, we think we will be efficient. We will be introducing highly value-added products that can drive higher gross margins, but we have not changed that target at this point.
Ganesh Moorthy: And Vivek, we’re always balancing growth and gross margin, right? We want both. And so we got to be careful that we don’t take one up so high that it affects the other. So we will improve, but we also want growth to continue at the rate that we want.
Vivek Arya: Understood. Thank you.
Ganesh Moorthy: Thank you.
Operator: Next question comes again from the line of Harlan Sur with JPMorgan. Please proceed.
