Gary Mobley: I know I was asking us for a lot there, but I appreciate the color. So it sounds like your OpEx management is more so variable versus structural. And you’ve, obviously, done this in the past. In this recent round when you’ve asked employees to take a 10% pay reduction, what was communicated to them in terms of when that might be recouped based on some revenue or performance metrics?
Ganesh Moorthy: I have not been able to speak to the entire Microchip community until I do that on Monday morning. I did write them all a message today after the market closed and before this call to let them know what we were doing. So those are details that I would prefer to first speak to our employees and give them all of that. But this is not new to us. We have done this multiple times. Our culture allows people to understand how shared sacrifice and shared rewards go hand in hand and how that creates excellent outcomes for the company and for the individuals in the process of doing that. And so I’m confident that our team, especially the team that has been through many cycles with us. We’ll see it, will help us with it and pull everybody else along as well.
Gary Mobley: Thank you, Ganesh.
Ganesh Moorthy: You’re welcome.
Operator: Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question.
Vivek Arya: Thanks for taking my question. Ganesh, I appreciate you’re not going beyond the quarter, but I still wanted to get some help in getting some directional sense of whether June could be flat, up or down because you do have some shutdowns in June, right? You are already planning for that. So that’s not a great data point. But then June tends to also be seasonally up for you historically. So, just give us some more color, what is true demand right now? And if you were sitting in our shoes, would you think about June being kind of up, down, flat, even if you don’t have an absolute sense of where June might take out?
Ganesh Moorthy: I think the shutdowns that we communicated based on the days of inventory that we closed December and what we have indicated are going to be at the end of March are required steps we need to take. Those are not necessarily trying to provide an indication of where the June business is going to be at. Vivek, the real answer is I don’t know. And I think the world is not falling apart. So, we know that consumption is taking place. We know that inventory needs to drain. We’re trying to gauge between the environment in the market, the inventory at multiple levels and how all that will drain. We know this business will come back, right? It has – and every previous cycle done that. But I think what you’re asking for is a level of precision, which we don’t have any empirical data to be able to say, yes, this is what’s going to happen and when.
Vivek Arya: And then my bigger question, Ganesh, is that how would you contrast your strategy of maintaining kind of a hybrid manufacturing model, right, where lead-times can suddenly get extended, but your CapEx is low, your profitability is high? To say your other U.S. competitor who has high CapEx, they can usually keep lead-times very low, and they have managed to avoid, right, these kind of very, very large swings. How would you kind of contrast the two strategies? And do you think what you’re going through could make you change your strategy about maybe having higher CapEx in the future and always trying to maintain lower lead-times?
Ganesh Moorthy: Again, there are many people that fit into what you described. I’ll describe our strategy, which is we run inside of Microchip the products that we know how to run cost effectively and consistently within our manufacturing footprint. That includes both our front end as well as our back end. We have grown that front-end footprint over time, but also our foundry products have grown over time. And that balance has been roughly 40% plus or minus internal, 60% external. We don’t try to guide where that percentage needs to go. The market demand drives is it higher or lower from there. But we know what products and technologies make sense within our footprint and what makes sense to drive with our partners. And that’s the way we think about it.
And in the aggregate, barring any near-term changes like we’ve had last quarter and this quarter, it’s been a very successful strategy in terms of how gross margins over time have accreted and how over many cycles, we’ve got higher highs and higher lows. So, we’re very happy with the strategy we have, and I leave others with their strategy to speak for themselves.
Vivek Arya: Thank you.
Ganesh Moorthy: You’re welcome.
Operator: Thank you. Our next question comes from the line of Tore Svanberg with Stifel. Please proceed with your question.
Tore Svanberg: Yes, thank you. So, my first question is on the PSP program. It was obviously put in place to try and avoid volatility and doesn’t look like that happened. Maybe it was just the nature of the pandemic cycle, I don’t know. But why do you think the PSP program did not sort of buffer the volatility that we’re actually seeing?
Ganesh Moorthy: It’s a great question. Although the PSP program was aimed at discouraging speculative demand by making orders NCNR and then giving us confidence to make investments on it. I think there was a combination of very strong OEM market demand, our customers and their customers and what they were seeing. They were persistent shortages over a long period of time and very long lead times. And I think when you put all that together, OEM customers ended up placing more backlog because they believe their business was a lot stronger than they thought, and they were trying to place orders for a lot longer than they normally would in that. So that’s the way it, in our perspective, played out. How it did phenomenally for them in the 2021, 2022 time frame where those that were in the program, we’re able to keep their business going, take market share away and driving.
But at the end of the day, the longer lead times get the further out someone is trying to predict where their business is going to be. And I think that’s the issue at some point in time is you don’t know what your demand is with any kind of high confidence one year or 18 months out, that people were placing those orders as non-cancelable, thinking that the demand was strong and assuming that the risk was a good risk for them to take.
Tore Svanberg: No, that’s very fair. And then as my follow-up, I recognize that all end markets are going to be weak in the March quarter. But any sort of relative comment on the end markets, anything holding up a little bit relatively better than others?
Ganesh Moorthy: Yes. I would say if you look at our aerospace and defense market, there are strengths in those. The commercial aviation remains strong. The defense remains strong. Space has always been very lumpy in where it’s at. Our portion of the data center, which is around AI platforms, those are doing extremely well. It’s not big enough to move the Microchip needle overall, but it’s certainly a pocket of strength that we see as well.
Tore Svanberg: Great. Thank you very much.
Ganesh Moorthy: You’re welcome.
Operator: Thank you. Our next question comes from the line of Chris Danely with Citi. Please proceed with your question.
Chris Danely: Thanks guys. I guess just a little clarification on the decline here. Any comments on just your sense of end demand, maybe talk about the end markets that have been the worst? And then also, given your revenue decline is notably more than some of your peers, why do you think it’s hitting you more than some of the competition?
Ganesh Moorthy: Sorry, what was the last part of your question? Why do you think what?
Chris Danely: Why is your revenue declining much more than some of your competitors?
