Joshua Buchalter: Thank you.
Ganesh Moorthy: You’re welcome.
Operator: Thank you. Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.
Quinn Bolton: Thanks for taking my question. I guess, first one is for Eric. You talked about the lower utilization, you’re shutting down factories for two weeks in both March and June. I’m just kind of wondering, if you could walk us through the accounting. How much of that hits you in the current period? How much of those lower utilization charges flow-through inventory? And given how much inventory you have could be something that hits gross margin for a longer period of time as that flows through inventory and then the income statement then I’ve got a quick follow-up.
Eric Bjornholt: Yes. So our three large wafer fabs will even without the shutdowns, with the attrition that we’ve had, be running below what we would call normal utilization. And so these two-week shutdowns will be period costs in the quarter and not capitalized to inventory. Now we are running at lower utilization rates than we were at the peak. So the costs that are being capitalized to inventory on a per unit basis are higher than what they were when we were running at full board. But I think that answers your question. Essentially, the two-week shutdowns will be an impact to the current period and not capitalized into inventory.
Quinn Bolton: That’s very, very clear. Thank you. And then I guess just for Ganesh, you mentioned you’re ending the PSP program. And so I’m curious, does that just mean you’re not signing anyone to new PSP? Does that mean that existing PSPs have now been canceled and folks have greater rights to cancel the existing backlog? Just what happens with the current PSP participants?
Ganesh Moorthy: The backlog has been shrinking for some time. And really, what we’re telling customers is that no more orders get accepted that our PSP orders, and customers have seen that lead times are short, capacity is available. As I said, the premise of why we kicked it off no longer exists. And, therefore, it will come to a natural end here fairly quickly, and we just stopped taking more orders that anyone may – if they didn’t already understand, replacing as PSP.
Quinn Bolton: Got it. Thank you.
Ganesh Moorthy: Welcome.
Operator: Thank you. Our next question comes from the line of William Stein with Truist. Please proceed with your question.
William Stein: Great. Thanks for squeezing me. I was also going to ask about PSP and the mechanics of how it rolls out of backlog. But I think you just answered that but I do have a sort of financial question around it. I believe for many of these orders, you were getting prepaid by customers and you might have been likewise prepaying for capacity at foundry. Can you walk through how those roll off of the financial activity of the company and when you expect them to be sort of in the rearview mirror? Is that do you think by the end of the March quarter?
Eric Bjornholt: Okay. So, with PSP, those were not typically customer paying cash in advance for any of that. We have certain long-term supply agreements and those had a cash prepayment element to them. Those are still in place. Those aren’t – there’s nothing that’s happening with those programs related to the cancellation of PSP. So, those programs are still in place, and those tend to be three to five-year agreements, most of them five-year agreements, and those will just kind of run out over time. In some cases where customers’ demand is not as strong as originally anticipated. We work with them to find a mutually workable answer on that, maybe to extend the program longer, they can add something else into the program for their volume commitments.
But we’re not looking to penalize customers with that program. And then on the supplier side, we have had certain prepayments that are made and contractual obligations that we have. That’s the same thing there. It’s a negotiation with our suppliers, and they’re working with us, and I don’t see that there’s any significant financial disadvantage to us coming from those. But in some cases, we have taken on more inventory, maybe raw materials than what we would have otherwise.
William Stein: Great. Thank you.
Eric Bjornholt: Welcome.
Operator: Thank you. And our next question will come from the line of Janet Ramkissoon with Quadra Capital. Please proceed with your question.
Janet Ramkissoon: Hi yes. thanks for taking my questions. Can you guys give us a sense of what’s going on with design activity? I know you’ve seen this real cutback and you’re saying that there is really not much of a shortfall in terms of actual demand. Do you have any visibility, less visibility the same as before? Could you give us some sense on what’s going on to give us a better sense of the long-term outlook beyond the June quarter?
Ganesh Moorthy: Yes. No, thank you. So, design activity, as I said in my prepared remarks, is at very high levels. And I think it is because for a number of reasons, customers were in triage for some time as they were dealing with shortages. And as all that went behind, they went back to focusing on innovation. Our products and technologies are enabling innovation in many new fields. And so by many measures, both what we measure internally in terms of design wins and design funnel and all that and what some of our partners who are more design and focused particularly, the catalog distributors are a good example where much of the seeding activity that takes place are also seeing very high levels of that. So, I think the innovation machine is strong.
And the inventory correction will pass and go and ultimately, the long-term growth of the business, as you noted, will come from how this innovation plays out and how the overall role content that semiconductors will play in that innovation being delivered on end products.
Janet Ramkissoon: That’s very helpful. And just one last one, if I could sneak it in. Is there any particular geography or a particular segment that you saw a faster rate of decline. I noticed that industrial as a percent of total was down just from the supplemental slides. Is there any color that you could give us in terms of geography or end markets where you saw most of the weakness?
Ganesh Moorthy: I think they’re all weak. I don’t have a numerical way to give you. I can tell you that China, for example, has been weak for an extended period of time. So going back all the way to 2022 when they had the shutdowns, and it really hasn’t recovered from there. But I think we’ve seen weakness in all geographies and pretty much all end markets with the exception of the aerospace and defense and a bit of the data center that was all AI focused.
