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Microsemi (NASDAQ:MSCC)

Q1 2013 Earnings Call

January 24, 2013 4:45 pm ET

Executives

Terri Donnelly

John W. Hohener - Chief Financial Officer, Chief Accounting Officer, Executive Vice President, Treasurer and Secretary

James J. Peterson - Chief Executive Officer, President, Director and Chairman of Executive Committee

Paul Pickle - Former Senior Vice President of Integrated Circuit Group

Steven G. Litchfield - Chief Strategy Officer and Executive Vice President

Analysts

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Mark Delaney - Goldman Sachs Group Inc., Research Division

Harsh N. Kumar - Stephens Inc., Research Division

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Quinn Bolton - Needham & Company, LLC, Research Division

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Amit Chanda - Wells Fargo Securities, LLC, Research Division

Patrick Wang - Evercore Partners Inc., Research Division

Andrew Huang - Sterne Agee & Leach Inc., Research Division

Christopher Rolland - FBR Capital Markets & Co., Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Microsemi's First Quarter Earnings Call. [Operator Instructions] Thank you.

I will now like to turn today's conference over to Terri Donnelly. Please go ahead.

Terri Donnelly

Good afternoon, and welcome to Microsemi's Earnings Conference Call for Microsemi's First Quarter of Fiscal 2013. I am Terri Donnelly, coordinator of this call.

In a few moments, you will hear from and have an opportunity to ask questions of Jim Peterson, our President and Chief Executive Officer; John Hohener, our Executive Vice President and Chief Financial Officer; Steve Litchfield, our Executive Vice President and Chief Strategy Officer; and of Paul Pickle, our Executive Vice President, Integrated Circuits Group.

A recording of this conference call will be available on the Microsemi website under the Investors section. Our website is located at www.microsemi.com. Microsemi issues guidance in the form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of January 24, 2013, and is continually subject to reassessment due to changing market conditions and other factors, therefore, must be considered only as management's present opinion.

Actual results may be materially different. However, management undertakes no obligation to update these or any forward-looking statements, whether as a result of new information, future events or otherwise. If an update to our business outlook is provided, the information will be in the form of a news release.

We wish to caution you that all of our statements, except the company's past financial results, are just our current opinions, predictions and expectations. Actual future events or results may differ materially.

For a review of Risk Factors, please refer to Microsemi's report on Form 10-K for the fiscal year ended September 30, 2012, which was filed with the SEC on November 21, 2012.

With that said, I am going to turn the call over to John to discuss our financial results, and then Jim will address our end markets and overall business strategy. Here is John Hohener.

John W. Hohener

Thank you, Terri. Net sales for the quarter ended December 30, 2012 were $247.6 million, up 2.8% from the $240.9 million reported a year ago. This was at the low end of our guidance, due to on overall difficult environment. Bookings were down for the quarter, resulting in a book-to-bill ratio of less than 1:1.

Microsemi expects that net sales in the second quarter of fiscal year 2013 will decline 4% to 8% sequentially, as we continue to see weakness in our industrial and communication end markets.

As the market further softened during the quarter, we took a number of actions. We accelerated planned consolidation activities, and also made reductions in headcount to help reduce our overall cost structure at the lower revenue expectations.

Our GAAP and non-GAAP gross margin was 57.6%, a sequential increase of 40 basis points. Our gross margin improvement was driven by growing sales of newer higher margin products and a continued realization of operational cost reductions. We expect non-GAAP gross margins to be between 55.5% and 56.5% next quarter, as a result of lower utilization.

This quarter, non-GAAP selling, general and administrative expenses were $42.7 million, a favorable decrease of $500,000 compared to $43.2 million in the prior quarter.

Next quarter, we forecast a further decrease in SG&A of between $700,000 and $1.5 million based on a number of actions around accelerating consolidation, offshore moves and headcount cuts, initially offset by higher payroll taxes that reset at the beginning of the calendar year.

Research and Development costs were $43.2 million, compared to $42.8 million in the prior quarter increase of $400,000. We continue to be very committed to new product development and will invest R&D dollars in our core strategic initiatives.

That said, we are working to streamline our cost in this area and do expect the decline of between $1 million to $2 million next quarter. Our non-GAAP operating income was $56.7 million or 22.9% of sales compared to $64.5 million or 24.5% of sales in the fourth quarter of 2012, and $51.8 million or 21.5% reported last year.

We recorded $8.3 million in non-GAAP interest and other expense compared to $8.5 million last quarter, reflecting the previously announced pay down of our term debt of $25 million.

In subsequent to the December quarter, we paid down an incremental $25 million of our term debt. This paydown will allow us to see a decrease in interest and other expense of approximately $200,000 the next quarter. Non-GAAP net income was within our guidance, at $45 million or $0.50 per diluted share, compared to $51.8 million or $0.58 per diluted share last quarter, and up significantly from the $33.6 million or $0.39 per diluted share reported a year ago.

The company expects second quarter non-GAAP earnings per diluted share of between $0.37 and $0.43. Our non-GAAP effective tax rate for the quarter was 7% and we expect our -- our tax rate will hold at this level next quarter.

For the first quarter, we recorded GAAP operating income of $25.5 million compared to $26.6 million last quarter and GAAP operating loss of $700,000 reported a year ago.

We recorded GAAP net income of $14.2 million compared to $11.6 million last quarter and a net loss of $44.6 million reported a year ago.

For the first quarter, our GAAP results included noncash expenses of $21.7 million in amortization, $8.1 million stock-based compensation and $1.4 million in restructuring and other expenses.

We estimate the second quarter stock-based compensation will be between $10 million and $11 million.

Capital spending was $8.5 million, compared to $9.3 million in the prior quarter. Next quarter, we expect capital spending to be approximately $9 million.

Depreciation and amortization expense was $29 million compared to $34.6 million in the prior quarter. Our amortization of intangibles dropped significantly and certain elements were fully amortized in the fourth quarter.

Accounts receivable was $159.4 million compared to $153.2 million at the end of the fourth quarter. Inventories were $158.9 million, relatively flat compared to the fourth quarter.

DSO increased to 58 days from 53 days of inventory increase to 138 days as a function of lower revenue. Our goal is 125 days.

We ended the quarter with a cash balance of $203.3 million and our GAAP operating cash flow was $28.1 million. Our cash flow in the December quarter of each year is impacted by the payment of year-end expenses in certain tax payments.

As I also mentioned earlier, subsequent to the end of the quarter, we prepaid $25 million in principle on our term loan.

Our best estimate of the end market percentage breakout of net sales for the first quarter was approximately: Communications, 31%; Defense and Security, 31%; Aerospace, 19%; and Industrial, 19%.

With that, I will turn the call over to Jim Peterson.

James J. Peterson

Okay. Thanks, John. With that, let's get to our end markets. Let's start off with Communications, which accounted for 31% of our total business in the December quarter.

Revenues in the end market declined 4.6% sequentially to $76.7 million, but up 2% year-over-year. We expect similar results in our second fiscal quarter but within this environment, we continue to lay the foundation for growth. In fact, we're increasingly confident in our long-term prospects in Communications.

That's just one example. Our timing and synchronization product revenue has been relatively stable throughout the slowdown. In Q1, we continue to see strong design wins and we are well-poised to grow the market share as this end market recovers.

During the quarter, we expanded our market opportunities, with the introduction of a family of clock synthesis products, an incremental $150 million of sales from Microsemi, with products that nicely complement our existing portfolio.

Defense and Security grew approximately 3.2% sequentially, and a 9.4% over the year-ago quarter to $75.6 million, and accounted for approximately 31% of the total revenue in the December quarter.

While the uncertainty of sequestration remains, this end market performed better than many expected. As we focused on electronic content, cybersecurity, our solutions roadmap and this increasing value to our customers, we're optimistic about Microsemi's future prospects in the Defense and Security markets.

Casting out some content-rich programs, which already have been received their funding, we expect a strong second half in the calendar of 2013.

Aerospace revenues totaled $48.2 million in Q1, down from $54.7 million in the prior quarter and accounted for 19% of total revenue. As we've said before, this end market can be lumpy. Shipments are strong, as OEM subcontractors fill their channel to prepare for production, and then they slow when the manufacture begins, before the cycle starts again.

We saw a strong space level shipments over the course of the last year as 2 major satellite programs, Galileo and the Iridium NEXT, began to ramp. Our Space revenues have slowed over the last 2 quarters. Bookings were strong last quarter and in line with our expectations. Based on the activity, we continue to forecast solid performance for Microsemi in the Aerospace markets, with sequential patterns improving in the June quarter.

Our Industrial end markets slowed noticeably in the quarter after a strong midyear run. Q1 revenues came in at $47 million, down from $54.6 million sequentially. That accounted for 19% of the total revenue. Activity slowed across the board in December, resulting in caution in our customers that we expect it to continue through the current quarter.

Over the longer term, we are confident that ultra low power radio ramp at Medtronic will strengthen this end market, and we have seen a lot of really design win activities for our SmartFusion product family in the industrial automation applications.

So kind of wrap it up in closing. Let me reiterate when I said to many of you in our Analyst Day last September, we're better poised for growth than we've ever been at any time in the company's history. That message is not changed. I am disappointed in our results in the current environment. But within that environment, Microsemi is taking the steps to manage everything it can control. We're lowering expenses, executing on crucial product roadmaps and getting mind share with market-leading customers, so as to deliver our commitments to our shareholders.

With that, I thank you for your interest and support. I will now take questions from our analysts. In the interest of time, please limit yourself to one well thought out question and if necessary, a brief follow-up. Susan?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Steve Smigie with Raymond James.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Jim, I noticed you guys took some pretty quick action on the cost, given the slowness that other folks are seeing as well. I'm just curious, how does that roll out through into the next couple of quarters? Is the cuts in the dollar amount that we see coming up, is that just a one quarter phenomenon? We see it to continue to step down going forward?

James J. Peterson

Cost controlling as you know, right? That's the #1 function of the macro environment like this. We talked in the analyst meeting, we're going to do when we accelerating something, right? We're accelerating the consolidation activity. We're increasing our content offshore. But we did aggressively cut in headcount. We focused on what we should cut in COGS and OpEx. I think what you'll see, you'll see roll out on the next 3 or 4 quarters. You'll see a lesser business quarter, and I think strengthening over the next 3 or 4 quarters. Maybe, John, you want to touch a little bit?

John W. Hohener

Yes, exactly. I think in -- we took action actually starting -- we've always been taking actions. We always look at our business and take actions accordingly. But as we've said in the Analyst Day, we took significant action moving into this quarter and we will see that roll out this quarter and the following. The other thing I want to mention right now is, we're still committed to our 60/30 model. And by taking out these costs, we're able to do it in a lower revenue level. Previously, we had said that revenue level was going to be around $290 million. We think that comes to us now about $280 million.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Great. And just as a follow-up on that gross margin. So I appreciate the color you've already given for March. How quickly does it start to get a pattern of reacceleration again? Could we start to potentially reaccelerate again in the June quarter?

John W. Hohener

I think the trough is the March quarter. I think you'll see it coming back nice in the June quarter and stronger for the -- and I never like to -- this is a one quarter update, but this first I want to say, I think second half of the year, and certainly the calendar year are going to be okay and strong.

Operator

Your next question comes from the line of Rick Schafer with Oppenheimer.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Couple questions. I guess first just back on the 60/30 thing for a second. I guess can you remind us how much of your production is internal now versus external, and where internal utilization is today? Or it sounds like it's going to trough here in the March quarter, so maybe what it's going to be in the March quarter?

James J. Peterson

80% plus of our manufacturing is outside boundary. So about 15% to 20% inside, Rick. So for 60/30, I think John is right. We're still driving towards it. I would have liked to have done it in this fiscal year. It looks like that's going to be some heavy lifting, but I still have your eye on the ball. But I think if you listen to John, it might take me -- $280 million is the right number, down from $290 million. So I'd like to see us get this thing within 4 quarters, give or take 1, either direction.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

John, as part of that question, I mean can you quantify, I know it's only 20% internal now, but I mean is it -- how many points of improved utilization could sort of give you a point of better gross margin?

James J. Peterson

I think the real type of gross margin -- I'll let him answer it. The whole thing is really driven by revenue. Yes. So then I'll let John answer.

John W. Hohener

Yes. And the revenues rise to utilization. Exactly, Rick. So I mean, you can see that our past pattern as the revenue grows up, we're going to see a strong metric of that follow the bottom line. We don't have to have a lot of OpEx to support the revenue growth from this point forward.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Okay. Okay. And just my follow-up, I guess. You kind of hit on sequestration. Have you seen a noticeable impact to orders post this fiscal cliff resolution? I don't want to put words in your mouth, Jim, but it sounded like you were kind of hinting that we might get another quarter or 2 of kind of sluggish or even negative growth on the defense business and then have it reaccelerate in the second half? Is that the right way to think of the defense order patterns?

James J. Peterson

Let's talk about Microsemi's business, Defense and Security. We're up calendar year-over-year of 9.3%, 9.4%. Last quarter, we're up over 3% and I'm telling you, it's going to get stronger in the next 2 quarters and possibly through the next year. I mean sequestration, right? It's a little difficult with budgeting, right? Electronic content has increased, Rick. I mean, there's going to be less channels. There's going to be less military bases. There's going to be cuts in administration and on some projects, right? But I'm here to tell you, in Microsemi's focus over the last 5 years in Defense and Security, Cybersecurity, or we're doing the SoC business, the drones, the C41S. The Scanner business is another examples which falls into there. We have some very, very market share taking electronic programs going forward. And I'm confident it goes on for Microsemi. I mean, the sequestration's a real thing. It's going to be -- you're going to hear that name for years. Right? It looks like the administration is playing that interesting kind of a quarterly kick the can. Right? Administration does like the way Wall Street works, but they shouldn't be pulling things out by quarter. The sequestration is going to be implemented in baby steps. So expect more kick the can. But Microsemi is making quite a bit of money there. It's good -- it's a nice place. My shareholders should be saying, "Thank you for being in that space". Next year, I think defense and security and our military will outgrow SIA, the semiconductor industry as a whole. It's good space.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

So to sum that up, Jim, you said in the past that worse case, I think you said 2% or 3% impact in the top line this year from sequestration? I mean, is that...

James J. Peterson

That's right.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Is that sort of the assumption you've got embedded in your internal model and then anything less bad that is actually upside? Is that kind of the way you're...

James J. Peterson

Anything -- yes, anything less -- we gave you a model for the worst it could be, and we're outperforming the worst it could be.

Operator

Your next question comes from the line of Mark Delaney with Goldman Sachs.

Mark Delaney - Goldman Sachs Group Inc., Research Division

I was hoping you guys could you talk a little bit about some of the nearer-term order trends. I know, Jim, your review is that there's a recovery in the second half and some of your peers have talked about in the month of January some order improvement in certain parts of the market. So I was curious to what extent were orders were weaker in the fourth quarter that you're starting to maybe see a pickup that's giving you that confidence?

James J. Peterson

That's a good question. I'm not applauding the strength to the bookings at this point by any means, right? Well, we're seeing out there from our peer and a little of ourselves. Bookings have improved over expectations is what they should drop in there. Bookings have improved over expectations. And I think going forward, it will continue. Now realize Microsemi has been different, right? Our lead time to cycle times are 8 to 12 weeks even for our commercial products. Our defense is 20 to 30 weeks; and satellite, 36 weeks plus. So we see a little different vision than most, but I do see strengthening in bookings. I think we'll -- and we'll see, for us, because of our lead times, cycle times, we'll see the benefit of that in the June quarter. So the March quarter, obviously, we're guiding down 4% to 8%, but that could be what they call the mighty trough.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Understood. And then John, I know you gave a little bit of detail on when you can get to the model the lower revenue rates. So I can kind of back into the amount of actual cost per quarter you're taking out of cost. My math is $6 million per quarter. Can you talk about the dollar value of the OpEx that you guys are taking out with the cuts that you announced?

John W. Hohener

Yes. The dollar value has been coming out for -- in the last couple of months. Excuse me, last couple of quarters. And certainly, I think that there's going to be a significant to -- when we get to the $280 million, you're going to see the 16% R&D and the 14% SG&A model that we want in terms of percentage of revenue.

Operator

Your next question comes from the line of Harsh Kumar with Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

First of all, you guys have done a great job paying down debt here in the last couple of quarters. Jim or John, if I can ask you what you think of free cash flow will be based on what you're seeing in the marketplace, not just for the quarter, but let's just say for the next 12 months? And what do you think your plans will be primarily? In other words, do we expect to see the debt continue to get paid down? Or any color.

James J. Peterson

Let me take a ballpark then I give -- and John give you some of the detail. We told our shareholders we're paying down $100 million this year. We just did $25 this quarter. So we're on track of what we said we're going to do. We're paying debt down. And the one thing we do, do, right, we generate cash. John?

John W. Hohener

Yes, and actually towards that $100 million, we've already paid down $50 million. We just paid an incremental $50 million in January that you don't see in the financials that we just reported. And so to answer your question overall, we're going to guide this quarter. We're looking like our cash flow with the reduced revenues, still going to be in the $45 million range. That's operating cash flow. You're going to have to take out $9 million kind of in CapEx to get to your free cash flow there. Once we get the revenue trend going back, we're still committed to getting back to that $200 million level on an annualized basis.

Harsh N. Kumar - Stephens Inc., Research Division

Great. That's helpful. And then I want to go back to the question earlier, Jim. I think, let me try to ask it another way. Can you talk about the linearity of bookings maybe on a monthly basis? Have you actually seen -- I couldn't understand from your answer, have you actually started to see an improvement yet, or are you expecting one?

James J. Peterson

Well, let me just give you a little color we have in December. December, around the first week of December, right, I’m like, okay, good, this will be a normal December. I'm going to see an inflection point the last couple of weeks, because that's what you saw. So in the spirit -- normalized towards linearity of bookings, but I didn't get the kick in bookings at the end of December that I would normally get. Okay. Now, let's get into where we are today about the date, we're 3 weeks into the mission. So let's not make this a prime indicator. We're guiding down 4% to 8%. I would expect next quarter to report a positive book-to-bill.

Operator

Your next question comes from the line of Dale Pfau with Cantor Fitzgerald.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Can you talk a little bit about what you're seeing on the communication side, the puts and takes where you're seeing strength, where you're seeing weakness and how you see that's playing out here in the March quarter?

James J. Peterson

Just a reminder, we're down sequentially, right? I think we're seeing, Dale, some of the macro concern everybody is seeing, right? The numbers reflected here are not a Microsemi thing, that's a macro event. However, Dale, we do have a new guy to the party here, Paul Pickle. Paul is the Executive Vice President to our Communications Products. And I think since Paul is sitting here, you might jump in on this. This is actually Paul. Let me hear you, Paul.

Paul Pickle

So strengths and weaknesses with income, we were at one of our key customers a few weeks back. They're expecting a very strong 2013. So in CPE, I think we'd expect to continue to see a strong year in 2013 going forward. Timing product has just been -- we continue to gain additional sockets and the positioning at the market makers, I think is quite good there. We're seeing some of the legacy follow-ups, so it's kind of a mixed bag, but it's just kind of, it's a steady -- I'd characterize it as a steady growth right now. RF, you saw a press release from it the last quarter. In RF, that product has gotten a lot of attention, the activity and print position there. We're just now starting to deliver those products. That's been quite strong going into kind of a second half 2013, 2014 kind of story. So [indiscernible] is down this quarter-on-quarter. The activity there is still quite good for us. Also, I'd also characterize the topic a little bit about PoE. PoE, we've seen some nice steady activity, particularly in Midspan. I think this surprised us a little bit. The small sale activity with the LTE-A rollout has been picking up traction there, especially in microwave backhaul. So we see it -- still see a strong future going forward there and very nicely positioned.

Operator

Your next question comes from the line of Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company, LLC, Research Division

Two quick ones for you, Jim. Just first on the organic growth that you guys have been spending a lot of time talking about at Analyst Day and Investor Conference over the last few months. You've had a little bit of macroeconomic downdraft hear from 263 in the September quarter. While you guys talk about organic growth, are you going to be sort of talking off the March trough, or you kind of think that as the economy recovers, you get back to that 263 high water mark and then organic growth sort of kicks in and allows you to grow off that 263 base. And then I've got a follow-up.

James J. Peterson

I'm going to take you to softball. I'm going to tell you that I'm going to increase organic growth up the March quarter, you know that? So let's go there. But on the other hand the important part for Microsemi is our strategy here is build the company on or about 12% implying. But with 2/3 organic, with our new product development, taking market share one of design wins, a 1/3 trough real high end strategic carve up or acquisitions that bring us some technology entries to our competitors. So overall, the strategy is 2/3, 1/3 revenue, see off the March quarter as you think, make it easier for me.

Quinn Bolton - Needham & Company, LLC, Research Division

Look. So you're just kind of looking at fiscal '13. I understand you haven't guided. I mean it looks, unless they have a real strong second half, that you're probably down mid-single digits on a year-over-year basis, or maybe low-single digits year-on-year. So is that all macro? Or can you help us frame why the step back in fiscal '13?

James J. Peterson

Yes. I think the frame is real plain and simple. It's called, baby it's cold outside. We're talking each time about cycles, we're going to keep the trough, right? We're pretty much where the large, diversified guidance is, right? So I think it's just macro kit. So I'm going to take the opportunity. It was a little colder outside than we thought. The macro was greater than we thought, but we're doing the right sizing, we're doing the things that we should do. And once again, I pick off the March quarter, you're going to see a 12% year-over-year next year.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay. And then just one quick one for John. You mentioned some of these cuts, the acceleration of moving manufacturing offshore, headcount reductions, the consolidation, do you expect further cuts to OpEx beyond the March quarter? Or is March kind of the trough in OpEx and then it likely starts to creep higher with revenues beginning the June quarter?

John W. Hohener

I think you still see it coming down a little bit. And then as the revenue starts to go up, we'll start to talk about it as percentage of revenue. But we do have some things that are slated to lay out in the June quarter.

Quinn Bolton - Needham & Company, LLC, Research Division

Okay. So down again in June and then may be trending with revenues from there? Or trending as percent of revenues beyond June?

John W. Hohener

Yes.

Operator

Your next question comes from the line of Tore Svanberg with Stifel.

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

It's Erik calling for Tore. Just getting back to some of the growth you're talking about. Given your results in guidance are down 6% at the midpoint, do you expect to see this calendar year '13 up?

James J. Peterson

You know what, John, what do our model look like?

John W. Hohener

Calendar year '13, well, I'm looking at fiscal year '13. The previous question addressed that, and we certainly see it from a fiscal standpoint that we're going to be down. But we can't guide that. We're only looking to guide one quarter out.

James J. Peterson

We do see March as the trough and then strengthening in, which I felt like to tell people. But certainly, strengthening in the second half of the year, whether it'd be calendar or fiscal.

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just on the Communications again. You've seen any lift or increase in activity from the AT&T announcement last year?

James J. Peterson

We saw clarity of it last quarter. Paul?

Paul Pickle

Yes, we're definitely seeing -- anticipating some activity results from expedites kind of late in the quarter, early this quarter. More related to carrier spend. So we are seeing that activity kind of ramp up.

John W. Hohener

I think there's going to be momentum behind it if it occurs.

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Great. Can I just have one quick then, just a clarification on the margins. Are you getting -- if you're getting close to your target, but are these going to be more efficiency costs, or is it really more of a mix in revenue to drive the margins higher?

James J. Peterson

The answer is yes, we're going to get there. John?

John W. Hohener

No, I think we every -- Jim said it right. All the levers will help the gross margin improve. Higher gross margin products, some of the cost savings that we're doing. And of course, as the revenue grows, it's going to help us as well.

Operator

Your next question comes from the line of David Wong with Wells Fargo.

Amit Chanda - Wells Fargo Securities, LLC, Research Division

This is Amit dialing in for David. Jim, how do you see the 802.11ac product cycle playing out this year for Microsemi? Will the volume growth be more back-end loaded in 2013?

James J. Peterson

I assure you it should be back-end loaded. I think I get to come up and say things you do. We're talking to our L-3 customers, they've been talking to CES. They've been laying out their plan, and I think it's about time to get launched. I think we start seeing some of the benefits in June, and I think to this fourth quarter thereafter, it will be the talk of the town.

Amit Chanda - Wells Fargo Securities, LLC, Research Division

Okay, thank you. And then as a follow-up, I guess in light of the recent privacy issues that have triggered the TSA to decide to replace many backscatter x-ray security scanners in airports with new Millimeterwave machines, can you just remind us what Microsemi's dollar content currently is for those type of machines and your expectations for the business over the near to intermediate term?

James J. Peterson

Of course, I'm going to do some bragging rights. We invested heavily in Millimeterwave technology. We told the world two things: Well, x-ray is not good for you. And oh by the way, x-ray is not good for you. I got Litchfield here before us to help. Litch, will you give a little bit of color?

Steven G. Litchfield

No, well, I realize that -- this is good news. I think we're very pleased about it. I think -- I mean, our end customer, in this case, L-3, is pleased about it. And I mean, they're going to see a nice benefit in the next few quarters from this change. The dollar content itself is -- we've talked about this before, it's in the $20,000 per unit.

Operator

Your next question comes from the line of Patrick Wang with Evercore Partners.

Patrick Wang - Evercore Partners Inc., Research Division

Just 2 quick questions. First, Jim, can you help us rank order your end markets in terms of magnitude or growth of decline in your March quarter?

James J. Peterson

March quarter, you're going to see the top staff ranking -- it's going to be shocking. The best of Security will be up. Aerospace will be flat to slightly down the March quarter. Communications will continue to be down the March quarter. And Industrial will be down in the March quarter. I'm going to give you a peek to the June quarter. June quarter, I think, each month will be slightly up.

Patrick Wang - Evercore Partners Inc., Research Division

Got you. That's helpful. And just in the March quarter, where you get more visibility here, you'll see the most decline in Enterprise Communications?

James J. Peterson

So, I'll see -- yes, Industrial. I see the most decline in Industrial. Second most decline is Communications, third most decline, Aerospace. And the last, Defense and Security.

Patrick Wang - Evercore Partners Inc., Research Division

Got you. And you know that, what do think of my second question. There's a lot of talk on fiscal cliff and I know that's been a key investor concern for some time now. It doesn't seem like it's really impacted you guys at all. In fact, you're talking about growth. You showed growth last quarter, you talked about growth here and you see an uptick in the June quarter. Is that just all talk, or is there actually something kind of down the pipeline there?

James J. Peterson

Well, based at this cliff? We have budgeting problems within Washington, the administration. There's no doubt about it. It's on the fiscal cliff. I think we're just going to act like, continue to chisel it down. I don't think there's a great cliff. I think it's a more of a fiscal bump. And then another fiscal bump and then another fiscal bump. And I think the administration is acting more like Wall Street, where they want to move it off and moderate it on a quarter-by-quarter basis, when they should just push it off for an annual basis. But I showed you, there's budgeting issues out there. And there's going to be some adjustments and we've seen a piece of it, I assure you. But as a micro team, we've done the right things here.

John W. Hohener

I would just follow up on that, Patrick. I mean, I think specifically to us, and we've talked a lot about this, this is where the electronic content is really key. It's also talk a lot to what we're doing on a total solution. We gave some color on this on the Analyst Day, talking about how we're bringing a lot of new competencies to the table. We're engaging with our customers at an entirely new level. And so now we're actually -- we're able to grow our share at some of these defense suppliers. And so in the end, even if -- whatever happens with the DoD budget and the fiscal cliff, et cetera, I mean, we've got huge opportunity in this market to really grow our revenue dollars.

James J. Peterson

Now they told me when I get on to be cautious with my enthusiasm. Thank you much.

Operator

[Operator Instructions] Your next question comes from the line of Andrew Huang with Sterne Agee.

Andrew Huang - Sterne Agee & Leach Inc., Research Division

All of my questions have been addressed.

James J. Peterson

Okay. Susan, that's about it?

Operator

You do you have another question from the line of Craig Berger with FBR.

Christopher Rolland - FBR Capital Markets & Co., Research Division

This is Chris in for Craig. You guys have talked a little bit about lead times in the past per end market. I wonder if there's any sort of change there at all? Any meaningful contractions or anything?

James J. Peterson

Check it out, right? Pretty much the same as last quarter, right? Just the big markets, commercial. Ours are a little bit [indiscernible] 8 to 12 weeks, pretty much with our -- as before, the Defense business, 20 to 30 weeks, satellite brands, 36 weeks. That's pretty consistent and pretty steady.

Craig Berger - FBR Capital Markets & Co., Research Division

Okay. On the Defense side of things, you guys have sort of talked a little bit about the split between domestic and foreign there. Any progress on, I guess, DoD approvals there for foreign export? How is that sort of split shaking out now?

James J. Peterson

Yes, there was a great progress in the satellite components. Litch, you want to talk about results?

Steven G. Litchfield

Yes. Well, I mean, I would just highlight that, that is a really -- it's a great thing that we're finally seeing some movement here and it really does open up some additional dollars for us and we're very excited and pleased that the administration is actually working on this thing.

James J. Peterson

Yes. I think quite honestly, as far as military sales, I think we made great investments in not just hardware but the software solutions in the Security. So I think we had fiscal cliff, we had sequestration, but look at my numbers, right? 9% plus year-over-year and we'll call the strength to this market. So you want to read Wall Street Page #3, or you want to believe us?

Operator

Your next question comes from the line of Harsh Kumar with Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

Two questions. John, if I was to ask you what's more important to you, to hit the 16% gross margin mark or to try to get closer to the 30% off margin mark, if you had to pick one or the other?

James J. Peterson

Let me answer it. I'm measuring it 50%, 50%. John, what do you think?

John W. Hohener

I think it's 50%, 50%.

Harsh N. Kumar - Stephens Inc., Research Division

That's fair. And then how much of that kind of go as -- I know there's always an element of market coming back. I know you guys have cut costs and are maintaining to be actionable there, but is there a large part of it that this is dependent upon the market coming back in the second half, Jim?

James J. Peterson

Yes. Look, you're a numbers guy, right? You're one of the best numbers guys out there, right? If you dial in Microsemi's $280 million in revenue, and then dial in 60/30 accomplished, you'll have it down nicely.

Operator

And there are no further questions at this time. I would now like to turn the floor back over to management for any closing remarks.

James J. Peterson

Yes, real quick. Thanks for joining and have a great day.

Operator

Thank you for participating in today's conference. You may now disconnect.

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