Ganesh Moorthy: No, great question, Chris. When you look at peak to trough, it’s always a question of when does it start? And when does it bottom out, right? You’ve seen one of our peer group companies that try to do a peak to trough in one quarter. And you could say, boy, that was one way to do it. Our objective has always been to try to respond as the business is changing. And so we’ve had different end markets responding at different times. We had a lot of automotive and industrial. They were later in the cycle. And our mix is higher in some of those markets as well. And in this case, the downturn is substantially deeper than what anybody had expected on that. And that’s probably a component of PSP that may have amplified some of those things, et cetera.
But a lot of it has to do with we started later, and we are correcting stronger. And the end markets that we are predominantly represented in were the ones with the later in the cycle correction than perhaps those that are more consumer or phone or PC, that kind of exposure.
Chris Danely: Got it. Thanks Ganesh.
Ganesh Moorthy: You’re welcome.
Operator: Thank you. Our next question is from Vijay Rakesh with Mizuho Securities. Please proceed with your question.
Vijay Rakesh: Yeah. Just a quick question on the competitive landscape, I guess, especially as you look at kind of China supply. Is there any worry around them being aggressive on the microcontroller supply coming out from there? What are you seeing in those trends?
Ganesh Moorthy: China has always been a competitor in many of the spaces that we’re in. Their approach is a little bit different. They have a lot of their attention going into things that can be faster to market quicker. And those tend to take them into places like consumer electronics and the other areas that are faster designed in cycle, a lot of the power supplies for cell phones and those kind of things. Clearly, they are also making products that can go into other end applications. And that’s a competitive environment that is not different today. You could argue perhaps that there’s a lot of attendant priority that they have. But we win with new products, we win with competitive solutions that we have. And we win by providing the customer with a solution that is better than what they can get otherwise. And that remains the way in which we’ve gone to market, and we’ll continue to fight for new business in China and anywhere else.
Vijay Rakesh: Got it. And then as you look at the utilization, I don’t know if you give a hard number there. But how do you see that playing out through the rest of the year? I know there’s a lot of moving parts to that. But any way to look at what utilization looks like? I know you cut CapEx pretty significantly to so that should help.
Eric Bjornholt: Yes. So we don’t break out a specific utilization in total, we have — it varies very much by factory. We have had some attrition in employee headcount, which I mentioned in response to an earlier question that just makes it as we go by the months and aren’t rehiring that capacity utilization would come down modestly. So I’m not expecting a huge change from March to June, maybe just a little bit lower. And then obviously, actions depending on what our outlook is on revenue and inventory will drive what the rest of the year looks like as we gain a little bit more confidence in understanding where the business is heading over the coming months.
Vijay Rakesh: Got it. Thanks.
Operator: Thank you. Our next question is from William Stein with Truist Securities. Please proceed with your question.
William Stein: Great. It was interesting to see a couple of tuck-in acquisitions this quarter. I’m wondering if you could talk about the relative focus of that approach to capital deployment or, let’s say, product development going forward relative to internal development?
Ganesh Moorthy: So we have an internal development that works on the model that we have provided, which over the long term is the 68% gross margin, 23% operating expense, 45% operating margin. That allows for the prioritization of our internal activities and where we want to apply it for different opportunities that we have in front of us. From time-to-time, we find our external opportunities where the speed at which we could do something or the time that it would involve in trying to get to a solution can be a lot longer if we were to do it just organically. And there, we have applied these tuck-in acquisitions as a way to speed up what we’re able to do, consistent with the direction that we are interested in or have been following for a while.
And we’ve done about six or eight of them now in the last four or five years of time ever since. Microsemi was the last major public acquisition we did. We’ve done about six to eight smaller ones since then. And it always to speed up our agenda with a very tactical and a pinpoint strike on what the acquisition can do for the areas that we’re driving growth in. And we will do more of those, as we continue on as well. Let’s say we’ve always been public. That’s an essential part of our strategy.
William Stein: As a follow-up, it does sound that while you anticipate revenue to grow in September, I would imagine the inventory burn isn’t done at the end of June. I wonder if you can maybe help us understand when we should expect a situation where your revenue is approximately the same as in demand? In other words, when the inventory reductions will be mostly done? Do you think that’s — have I misread you and that actually does happen in June? Or do you think it is more like September or even further out? Thank you.
Eric Bjornholt: So I will start with the response here. I mean I think the bottom-line is, well, with 125,000 customers, it is impossible to know when — and all customers a majority of customers have kind of corrected in their inventory to what they think the right level is and that’s somewhat a moving target as lead times adjust based on whatever point in the cycle that we’re at. So we don’t have a good answer to be able to answer your question there. We’ll obviously, give guidance for the next quarter, and we’ll have more information that we can share at that time. But I think that from customers, this inventory correction is going to last beyond this quarter. I think that absolutely is the case.
Ganesh Moorthy: Yes. I think many customers made their own mistakes on how they viewed their business, what they thought the prospects were. Many other customers were very thoughtful, continue to be strong players and where they’re at. And as we gave you some indications of certain end markets where there is strength as well. So it’s all over the place. And just as a preponderance of people who are done with their inventory correction and are now going back into buying for their consumption and/or into growth that they may be seeing. The weighted average begins to shift, and that’s the weighted average that begins to shift in September.
William Stein: Thank you.
Ganesh Moorthy: Thank you.
Operator: Our next question is from David O’Connor with BNP. Please proceed with your question.
David O’Connor: Hi, thanks for taking my questions. Two from my side. Maybe firstly just on the green shoots, can you talk about them from a geographical perspective? Is it mainly China driven? And now you’re seeing that continue in Europe and the US? Or how would you describe it geographically?
Ganesh Moorthy: Yes. So the green shoots are not limited to any one geography, not limited to any one end market. it’s really across all of them. And as I mentioned, you’re going to have in a geography or in an end market, both customers with continued pain and other customers who are starting to look at how to get back into growth mode and what they’re doing. So no specific end market or geography leading to the green shoots.
David O’Connor: Okay. Got it. Thanks for that. And then maybe just on the acquisition, the Neuronix Labs acquisition. It seems like it helps you address the AGI market with your [MCUs] (ph), can you maybe talk about the kind of content tailwind for your MCUs for AGI that this can generate? Or how much of your MCU portfolio are customers looking to add AI content in the next-gen products to kind of run those AGI models? Can you give us any more color on that would be helpful. Thank you.
Ganesh Moorthy: I don’t know if there’s a numerical way to give you that. I think — that’s all I said. I believe that embedded customers are thinking about how AI can be used in delivering better solutions than what they have in the past. No different from — if you go back in the chronology from 20 years, 25 years ago, people added intelligence first because you could make a product better with intelligent add it, then further out in time, people added connectivity as a way to now make it even better than just adding intelligence and then they added security thing. And now finally, I think AI is the next leg of how people will add capability to the products to make them better. So it’s a journey, and there’s going to be many customers who don’t need to do anything with AI.
Others who are seeing the opportunity, and we’ll take advantage of that in the next generation of their products. But I think, you should think of it as a continuum of customers. They’re all looking to innovate. AI gives them another opportunity in their platforms to be able to innovate and provide better products than their previous generations.
David O’Connor: That’s helpful. Thanks Ganesh.
Ganesh Moorthy : Thank you.
Operator: Thank you. Our next question is from Mark Lipacis with Evercore ISI. Please proceed with your question.
Mark Lipacis: Thanks for taking my question. I think this is for Ganesh or Steve. I’m wondering what is the difference between the setup for Microchip’s business over the next six months and the setup that you see at the bottom of every cycle? It seems like there’s a lot of similarities, and I’m hoping you can tell me the difference. The similarities I see are — there is some kind of demand shock or a big inventory build and then our customers and the supply chain downstream from them, recognize that, so they decide that they are going to supply themselves out of their own inventories, they cancel orders or they take orders down and then you don’t get any visibilities. So you and your peers take your utilization rates down and sometimes do temporary fab shutdowns.
And then your customers have an epiphany that they overcorrected on the downside and in three, four quarters from here everybody is taking their numbers up and everybody scrambled in to get components. So those are the similarities I see. What are the differences? And if you have a disagreement over those similarities, I’d love to hear that, too. Thank you.
Steve Sanghi: Mark, I think you have answered your question. We couldn’t say any better. You asked the question when you answered it, I think it’s perfect.
Ganesh Moorthy: Mark, I was going to welcome you back — answer as well. And as you said, I think this is a cycle we’ve seen play out many times, and the elements that you answered or the elements that you proposed are there. I don’t know if any differences in this one. Obviously, the length of the up cycle sometimes affects the depth of the down cycle. But other than that, the elements are very similar.
Mark Lipacis: I was hoping you might say, well, the supply chain has learned or lessen over the last three years and recognize that you guys need to have visibility because there’s a manufacturing cycle time. So is that — is the supply chain not learned anything downstream from you? Is it — we’re just doing the same over and over again?
Ganesh Moorthy: No. So yes, I had assumed that during the depth of the constraints with all the different discussions I was having with the senior executives at our customers that they would come out of this cycle with a better understanding of how semiconductor supply works and what they would need to be to be more strategic. But I have been surprised at how quickly people have forgotten and how quickly people have returned back to the way they used to think. Basically, they think semiconductors are like water in your tap. You turn on the tap and the water comes and you turn off the tap, and it goes away. And so I am of the belief that those lessons will have to be relearned again as we go through the cycle. And we’ll see how the cycle goes. But no, there has not been any — there are a few. But for the most part, those learnings have not carried forward.
Mark Lipacis: So last is repeat off the bottom?
Steve Sanghi: Yes. Mark, from time to time, some people have written or talked about industry has matured, and there will not be any cycles anymore. I think, all those predictions have been wrong. Industry has always been cyclic and will always be cyclic. I think our customers, our distributors, vendors, suppliers, they don’t learn. And I think, people change new purchasing managers come in, new people come in. And as Ganesh described, the lessons I’ve forgotten very rapidly, leading just these cycles never going away. And this one was the most pronounced cycle, both on the upside and now we’re seeing on the downside.
