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Microsemi Corporation (NASDAQ:MSCC)

February 13, 2013 1:20 pm ET

Executives

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

Robert C. Adams - Vice President of Corporate Development

Analysts

Mark Delaney - Goldman Sachs Group Inc., Research Division

Mark Delaney - Goldman Sachs Group Inc., Research Division

Great. Well, thanks for coming, everybody. My name is Mark Delaney. I'm a member of the semiconductor team here Goldman Sachs, and it's my pleasure to be hosting Microsemi. We have Steven Litchfield, the Chief Strategy Officer; and Rob Adams, Vice President of Business Development, with us today.

So as many of you know, Microsemi designs and manufactures analog, mixed signal and discrete semiconductors with a focus on power management and high-reliability products. End markets are broad including communications, aerospace and defense and industrial. The company has undergone a pretty sizable transition over the last 10 years. Microsemi has grown revenue from around $200 million per year in 2003 to over $1 billion in fiscal 2012. Gross margins have gone from the 30% range in 2003 to more than 57% last quarter.

Question-and-Answer Session

Mark Delaney - Goldman Sachs Group Inc., Research Division

Steve, I was hoping you could provide us with a little bit of perspective of some of the things that have evolved over time that's allowed you to grow so significantly.

Steven G. Litchfield

Sure, sure. Well, yes, I mean, so the company set out kind of early 2000s to really transform the company. The company really started out as kind of a discrete diode company that was really -- wanted to be the last man standing in the military world. And so we've really set out to change that pretty dramatically. And I think we've been fairly successful thus far. Over probably the last 5 years, we really saw a nice path to get into $1 billion, diversifying, going after some more markets. We were doing very well in the military and aerospace market. We wanted to continue to expand that, but we also wanted to look at some other markets as well, and so putting more of an emphasis on organic as well as acquisition growth in the communications area and the industrial area. I mean, we're doing some things in the medical arena as well. So those are some areas that we've wanted to expand our product offering and our footprint in. And we've done that over the last 5 years. I think over the last 3 years, we really saw a fairly straightforward path to $1 billion. And so over the last 2 years, I mean, not to focus too much on the historical aspect here, I mean, where we sit today, I think we're more inclined and we're spending all of our time going, "Okay, well, how do I get to $2 billion and $3 billion and $4 billion, right?" And I think the important part or the important takeaway there is that we're investing in technologies and going after markets that enable us to get to those levels, right?

Mark Delaney - Goldman Sachs Group Inc., Research Division

A couple of philosophies in the semiconductor world is selling the board, where we have a big, vast suite of products. And Microsemi has a very broad portfolio versus, "We're going to be the best power management company in select markets." So how do you try and balance that as you [indiscernible]?

Steven G. Litchfield

So you're right. That's a big part of our strategy is to really grow the content on those boards, right? And so whether it be in industrial or aerospace, I mean, we want to grow that content. And we've got the largest breadth of technology that we believe in the industry right now. And so we're engaged with our customers. We've been able -- with this suite of technology, now we're enabled to sit down with system architects and really talk at a whole new level and take more silicon off of that board and bring a more powerful solution and better value proposition ultimately to the customer. I wouldn't say -- I mean, you always have to have good products. It's not just kind of filling the board with whatever is left over, right? I mean, at the end of the day, we always want to have good capabilities, good technologies and the best technology, right? Now we're not -- in a lot of cases, we're not leading edge. We're not at 10, 40 nanometers on some of our processes. A lot of that is driven by the fact that either analog or mixed signal or even some of the FPGA product that we have today is not that demanding, right? But there's a big, big market opportunity and there's a big opportunity for us to sell into the customer base that, quite frankly, no one else has. I mean, we differentiate on reliability, performance in areas that a lot of the other guys aren't willing to go. And those are the type of problems that we're solving today for the customers.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Maybe we can dig into some of the end markets. So the communications and enterprise segment, that's now your largest business segment. The Zarlink acquisition in 2011 or a part of that, and that took the comms revenue from 15% to 20% or so of total company revenue to around 30% of your revenue today. And some new products, clock and timing products, voice-over-IP, please elaborate a little bit on what the portfolio is there and some of the...

Steven G. Litchfield

Yes. So I mean, with the Zarlink acquisition, our timing and sync business is a big portion of that. There's a lot of big growth opportunities in that area. So as this 1588 protocol gets kind of proliferated across all the base station, whether it be micro down to even potentially small cells, we've got a content play where we are the market leader. And so that's something that we want to exploit, we want to grow. We've been very successful over the last kind of, say, 12 to 15 months in really getting more traction there. And from here, I mean, obviously, we would love to see communications industry take off more than it has thus far. We'd like to see more capital spending there, and -- but as that does roll out, I mean, you're going to see our revenues grow nicely, and it's a very strong, profitable business. Our customers are -- were very engaged. The design-in process, I mean, it's a sticky business. It's not something that they're going to be able to flip tomorrow. But that's the type of businesses that we like to play in, right? I mean, we prefer to be in those applications where they have long product cycles, long design-in times. We're willing to sit down and solve tough problems with our customers. And the timing and synchronization business is a perfect example of that. Where we see the ability to expand that business is more onto the synthesis side of the business. It's a bigger market. It's probably not as a niche market, but it's got a few more players, a little broader. But our expertise, I mean, coming from the top down, I mean, we're able to take a big chunk of that market. And we rolled out our first products in the September timeframe. We're starting to get design wins today. And so I'm very optimistic as we look out in the second half of this year. That stuff is actually on the synchronization business. The design-in time -- or time to revenue is a lot longer. And so we're starting to see -- we'll see that traction, but the synthesis side is a lot shorter. We can actually get design-ins and we can see impact potentially even in the second half of this calendar year on design wins that we're winning today.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. So between the process [ph] we just talked about, also Power over Ethernet, you have a broad portfolio. There's some end market drivers, I think, that get a lot of attention in the investment community. AT&T potentially increasing CapEx, maybe China doing some LTE deployments, so there's some wireless things. You also have some of your business tied to maybe enterprise spending. Can you just talk about what you need in the other market? Yes, and just in general, what may drive your business to...

Steven G. Litchfield

Yes. I mean, so there are a couple of the other areas. Wireless LAN has been something that we've invested heavily in and we see a lot of potential. We have a silicon germanium solution that is the best and smallest monolithic solution in the business. And we're very excited as 802.11ac rolls out that, that can be a sizable piece of revenue for Microsemi. We'll continue to grow it. We've got customer traction there. We've got good relationships at your top Wi-Fi suppliers, the Broadcoms and Qualcomms. And we're very pleased and very optimistic about even the second half of this year, starting to see that starting to ramp. On PoE front, I mean, another big portion of our communications business, it's going exceptionally well. We're seeing more traction. Some of the dynamics have changed a little bit, but it is more enterprise-driven. Some of the applications you don't hear as much about. But as the power levels go up a little bit, it does expand the market opportunity. And we're really getting pushed into areas that we haven't traditionally gone. The switch side is what we know well. That's the biggest portion. And a reasonably good traction with the #2 player in that market. And we'll see nice growth in this calendar year from that business. And that's the new market share gain that we want.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Rob, I know as we talked on your Analyst Day, you guys did some work on just the growth potential in this business segment. Maybe longer term, can you just help us think about what the other revenue opportunity is?

Robert C. Adams

Sure. Well, I think in aggregate, we talked about comms being a teen-level, teens-level target for us in terms of a growth market. I think you'd find the PoE market right in that range, somewhere right in the mid-teens kind of a level. It's an emerging market. It's subject to fits and starts that you're going to find in these types of spaces. But again as Steve said, we've got more and more power coming through these devices that expands the market opportunity. We're doing better with the top-tier customers. So you put it all together and we're pretty hopeful.

Mark Delaney - Goldman Sachs Group Inc., Research Division

So last quarter, transitioning to another segment, defense and security was 28% of revenue. Can you describe the breadth of the product portfolio there, some of the unique capabilities that you have and then what some of the end applications are in defense that you sell into?

Steven G. Litchfield

Yes. I mean, as far as the breadth of the product offering, I mean, every technology that we have sells into the defense space today. I mean, whether that'd be at the highest technology level, an FPGA or an SoC, all the way down to the kind of Schottkys and rectifiers and just discrete components. I mean, we do a fair amount of RF product into that market as well. That business continues to do well. I mean, kind of describing this earlier to someone, what we've seen in this market, I mean, we kind of anticipated some of the slowdown and really redirected a lot of our efforts, I mean, in building up communications, et cetera. But we've also expanded our footprint within defense, okay? I mean, we brought on some of, I mean, the FPGA capability, the SoC capability that we have, the RF capability. I mean. We've really broadened that effort there, and we continue to do that. And so as I look at it, I mean, electronics is going to continue to grow in the defense industry. I mean, I think we all understand that and know that's going to happen. It's a little bit a lot like the automotive industry a few years ago, right, where you see electrification of automobiles. That same thing is happening in defense. Quite frankly, it's happening in aerospace. And so whatever happens with that top line, the defense market declines by 2% or 3% a year, at the end of the day, Microsemi continue to well out, I mean, grow -- see significant growth beyond that just because of the content. Some of that is within our control, where we're taking more market share or offering new products to our existing customer base. And then some others, just because the electronic content, so the market within defense is going to continue to grow. So I'm pretty optimistic about our ability to grow our defense business. What happens with sequestration is kind of a natural follow-on there.

Mark Delaney - Goldman Sachs Group Inc., Research Division

That was my next question.

Steven G. Litchfield

So look, it's a little tough to call. I mean, they continue to kind of kick the can down the road. And I'm not so sure that they won't continue to do that for a while. And while I think we would love to see some of that uncertainty go away, which has been somewhat problematic, I'm very optimistic with some of the -- just the opportunities that we have within our own control. Kind of regardless of what they decide to do, I'm very confident we'll continue to grow this business. Even in the worst-case scenario, I mean, I see us growing right through it. I'd love to see that moderated a bit, and hopefully Congress will come up with some good solutions.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Some of the defense companies have been saying that procurement is already being treated as if sequestration occurred. I think Harris said that. And I'm just curious, I know your defense and security segment grew 5% quarter-on-quarter in the December quarter, which was very strong despite some of these headwinds. I mean, do you think you've already seen the impact of sequestration? Or could there be downside and...

Steven G. Litchfield

So I do think. I mean, over last 2 years, we've definitely seen a slowdown in decision-making and procurement. I mean, all of that as I would agree, we have seen that. At the same time -- I mean, so I don't see any like big cliffs out there that even if the worst-case scenario happened, I still don't see that there'll be a dramatic impact on us. I mean, one of the other dynamics that I think we're benefiting from is that as budgets kind of move around a little bit, you're seeing some of the top-tier guys, whether it be the DoD itself or Tier 1 suppliers, a lot of opportunities are kicked down to the merchant market, right? So these guys are saying, "Hey, Microsemi, I mean, you guys have been our supplier for this power supply for years and years and years. Could you go up and do this entire module?" And we're absolutely capable of doing that. It fits within our business. And so we're seeing more of those opportunities where the customer is saying, "Hey, I need you to do more." So they're laying off 50 people at their facility and we're adding 25 and growing our revenue pretty dramatically in that particular product line. So we're seeing more of those opportunities today. And I'm very optimistic that we're going to continue to see that happen over next couple of years.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. How much of your defense business is international? Because I mean, that would be another area where maybe...

Steven G. Litchfield

Yes, it's still small. I mean, I think it's probably reflective of what the overall markets, like, I mean, it's still kind of 80% domestic and 20% international. We're seeing more -- and this is where it gets a little fuzzy, right? There's a lot of opportunities where we're shipping into a U.S. customer that's shipping the product overseas, right? So it's really driven directly by -- pick your friendly nation, whatever that one is. I mean, South Korea, Israel, you name it, whereas -- and this is something that we have a big opportunity on, where we can provide security-based solutions, whether that be encryption or a particular secure FPGA that can be deployed on to those system for a foreign military stale. And that's a big uptick in our business. We've talked about it. We think that's going to continue where these guys are buying directly. But when we book it, it ends up being booked in the U.S., right? But it is truly an international business.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Rob, one of the things we've talked about, so defense and security, mostly defense. And it's certainly what people kind of think about. But you do have a security business. One of the things that came up on the last quarter was the decision by the TSA in the airports to shift entirely to the Millimeterwave scanners, where you guys have content. Can you describe the opportunity there?

Robert C. Adams

Sure. We're certainly pleased to see the evolution of the mindset in terms of differentiating between Millimeterwave and the X-ray backscatter solutions. I mean, we back the right technology. It's the clear choice for not only our security but our nation's safety. So we're certainly proud to see that happen and happy to see that happen. I think in terms of the revenue, it's certainly an opportunity for us, right? We're a sole source supplier to the main manufacturer in the space. We continue to proliferate that product offering. And over time, we see that offering taking shape in many different forms. What you see with the L-3 system is an active solution, an active portal that you walk through. As security grows, you're going to see more and more passive Millimeterwave solutions in the market around you. Security is a growth business for us. And we have the largest merchant offering in security today. And we think that benefits not just our defense and security end market, as we report it, but really every market we serve. So order rates have certainly picked up in that space. We're looking for a growth here in security. And we think it's -- we're still in the very early innings of that ramp.

Mark Delaney - Goldman Sachs Group Inc., Research Division

I think you guys have said before, $20,000 of content per body scanner that we all see in the airports. Is that a constant type of content? Or are these going to become more sophisticated machines in 2 to 3 years and that could drive further growth?

Steven G. Litchfield

I mean, just to jump in, I would say I don't know that the content there increases. I think our profitability will continue to increase as we -- as the volumes grow naturally. But I would see it broadening out. So I mean, Rob mentioned a couple of the areas. But moving into the small portals, moving into manufacturing-type security, moving into a warehouse at Best Buy, where these guys are scanning employees coming and going, moving into rail application, sea application. So there's a lot of kind of broader markets that, I think, are looking to adopt Millimeterwave technology. And that's where we've seen a bigger uptick in interest. And just talking about Millimeterwave, I mean, that's an area of growth for the company. And keep in mind, all this came about because of a technology capability in Millimeterwave, right? So I mean, we're very focused on the RF segment in microwave and Millimeterwave. And we're seeing big opportunities with that technology and to leverage that further beyond just the security scanner market into some other markets as well.

Mark Delaney - Goldman Sachs Group Inc., Research Division

So maybe we can talk about the aerospace business. We touched a little bit on it on some of the longer-term drivers. But there's different pieces between big business, commercial avionics. Can you just help us understand what the split there is?

Steven G. Litchfield

Yes, sure. So look, it varies a little bit. Satellite business tends to be a little lumpier. We get some bigger orders. And that can sway it up to maybe 60% of the number, and -- but then when things decline a little bit, you might see it down to 40%. So it ebbs and flows a little bit, more dictated by satellite than necessarily the aerospace business. Commercial aerospace is a little more consistent. And so some of the ebbs and flows end up coming from the other direction. Things are going well. The last couple of quarters have been rougher, primarily driven by satellite stales and more revenue kind of just declining, lumpiness of the business. Bookings have been exceptionally good. In fact, we had a record quarter last quarter on the satellite side. And so we're very pleased about that. But this longer lead time products, so it takes a little longer. But it does give us confidence to say -- in this environment, everyone's asking, "Well, what do you think about June? What do you think about September?" I mean, the good thing about our business, we do have longer lead times, and so we do have that visibility. And so when those bookings come in, in November, December, I mean, we're confident that we're going to be shipping that product in our June quarter. So I think satellite, in general, that's another area where we're taking a lot of content and we're taking a lot of the solution. We've expanded our product offering. And so the dollar content per satellite has continued to go up. It's happened over last 2 to 3 years. We're continuing to take opportunities on ASIC that the company has been -- I mean, we've been talking about for some time. We're executing on that. We're seeing revenue increases come from that. On the commercial aero side, I mean, commercial aero, the market in general seems to be good. The overall trend over the next couple of 3 years, I think, continues to be good from a standpoint of our content for this electrification of the airplanes, as I mentioned earlier, about automotive and defense. But that's absolutely happening in the aerospace arena. And so our engagements with our customers right now are very, very strong and wanting us to kind of take on more of the application. And so we're doing that. We're developing a lot of new products. We see a lot of growth opportunities from that market over the next couple of years.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Yes. There's been some very public discussion about delays and program ramps. And have you seen any impact?

Steven G. Litchfield

Yes. I mean, we haven't seen like any immediate -- orders kind of move around a little bit but nothing dramatic at this point, nothing that makes us hugely concerned. We'll see how it plays out. I mean, hopefully, they solve the problem and things get resolved pretty quick.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. Your industrial business, the last market we haven't talked about, about 20% of revenue on average. Again a whole bunch of different things that you do into that market. So maybe just describe it for us.

Steven G. Litchfield

Yes. Well, like you said, it is a lot of different things. I mean, we do a fair amount in SEMI Cap Equipment. We do some product in motor controls. We do some product in medical. I mean, medical is probably one area that we do talk a little bit about within our industrial segment that we don't highlight too much. But that's a business -- that's probably as our industrial business has declined last quarter, one of the highlights is our medical business is improving a bit, and so encouraged on that front. Our business in the implantable medical arena, specifically with St. Jude and Medtronic, seems to be improving. That's something that we've invested in going back a couple of years. The fruits of that labor are really paying off now. The good thing -- the good and the bad is those things don't ramp super quick like a consumer device. They take 4 to 6 quarters to kind of roll out. And that's what we see happening, so I'm encouraged to see that over the next several quarters. On the industrial front -- I mean, if you look at some of the other areas that we participate, I mean, industrial lasers and welders, I mean, some of the what I call real hard-core industrial products -- look, I mean, I think we've seen this from a lot of our peers, and you guys have seen it as well, has been a tougher market. And we're encouraged. I mean, booking seemed to be recovering. We're seeing some signs of life out there. And I'm optimistic that the macro piece recovers. We also have some dynamics internally, where we've got some decent-sized programs that will start to ramp in the June quarter specifically. And so between kind of the macro improving and industrial as a whole, along with a couple of those bigger drivers, gives us confidence to say that, that's why we think that we'd come out of this thing more in the June timeframe.

Mark Delaney - Goldman Sachs Group Inc., Research Division

When you look at past cycles, how concurrent was your industrial revenue with potential changes in GDPs? So if China GDP and the U.S. GDP starts to pick up, I mean, do you guys see that some time? Or is it going to be a lag?

Steven G. Litchfield

I don't know. It's not -- it's 20% of our business. It's grown over the last several years. I don't know that I can correlate that exactly. Some of these bigger programs, we always want to outpace that with some bigger programs with some bigger wins. So I don't know that I can really draw that comparison.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. You mentioned automotive becoming a bigger part of the overall semi market. Some analog companies now have that 15% to 20% of revenue or more in some cases. It's been a smaller part of your revenue from what I know. So can you talk about the opportunity in the...

Steven G. Litchfield

Yes. I mean, look, this is an area that we play a little bit in but not too much. It's something that we've explored quite a bit. But the challenge with automotive is always gross margins. I mean, gross margins, they do a great job of kind of managing to keep that supplier base running at fairly low margins. So you really have to pick your points of entry well and make sure that you can drive the profitability levels that we're looking for. You've got to be careful about that, and we have been. And so I wouldn't -- I'm not here today pounding the table, saying we're going to grow automotive. We do think it fits well. I mean, we like to participate in markets where they demand the level of performance, the level of reliability and quality that is the highest of levels. But we think it fits really well with our business, and it takes a long time to get designed in, there's longer product cycles. We like those aspects of the business, but it's a little more about the profitability on a product that gives us some reservations, I guess.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. So maybe we could just turn to overall company right now. And so the March quarter guidance revenue, down 48% sequentially. We talked a little bit about this in some of the near-term trends that you've been seeing. But for next quarter, you guys have said industrial and communications, probably the weakest end markets. You talked about industrial maybe seeing some signs of life there in terms of orders now. How about in communications?

Steven G. Litchfield

Yes. I would say that we've seen improvements in communications as well. We're not quite to the point where we're seeing here, it's not just off to the races. But things -- there's definitely signs of life, things are improving, and that gives us confidence we'd continue to win share. So those are the 2 that are good. Still little uncertainty around defense, but, quite honestly, with some of the programs that we've been working on, feels very good. And I think we even highlighted this in the call that, that's probably the one that we feel more confident. And then aerospace, I think, does start to improve. I mean, bookings has been good. We talked about that in our earnings call in January. Reasonably confident that you're going to see that improve pretty dramatically in the second half of the year.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. And when we think about the slope of how the recovery could be for the industry overall, inventory is always a big dynamic of that. So when you look at where inventory levels are at your customers, how is that? And how does that compare to historical levels?

Steven G. Litchfield

So this is something -- it's a tougher question to ask, right? Everyone always wants to talk about inventory levels, but demand never recovers. I mean, inventory levels are never low enough. So I think they're improving. And I think that's clear. I mean, we've all been through these cycles, and we're going through one right now. You're going to see things pick up. People are going to panic. You're going to see people jump in and say, "Hey, I don't have enough product." I mean, we're getting to that point. I mean, you just see it coming. I mean, you just heard it from the likes of you, I think that's going to continue. So I mean, look, the inventory levels that we see in industrial and communications don't seem that big, right? And for sure, in our aerospace and military, they're, I mean, almost negligent, so...

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. On the margin side, Microsemi's had a 60% gross margin target, 30% operating margin target. You guys took some cost actions last quarter that will bring down the revenue a little bit that you need in order to hit those. So can you describe what you did and then the timing for that?

Steven G. Litchfield

Sure. So I highlighted some of this on the call. But essentially, we kind of got midway through last quarter and we saw that the bookings rate weren't at the pace that we had anticipated and ultimately ended up coming in at lower end of the guidance. But we saw this, we got ahead of it and said, "Hey, we need to take some actions." So we went back and we had a number of things in the pipeline, some of which, Mark, we highlighted at our Analyst Day, some consolidation efforts, some offshoring of product that were already in the pipeline. So we worked diligently to accelerate those. We did do some kind of across-the-board cuts across the company. Of course, always prioritize and make sure that things where we're getting good returns or things that have big growth potential, that we're not going to slow any of that growth. But we did do some cuts across the company. And then we have a number of things. I mean, offshoring, I'll highlight, is something that's been pretty meaningful. We finally got a lot of our customer base, a little slower than the whole commercial world that's been comfortable at this for years. But some of the older guys, whether it be an aerospace guy or a space guy, defense, in some cases, and then medical guys even that would love to have manufacturing in the U.S. But just costs have continued to go up. And so we finally got them convinced that a good alternative is moving this stuff overseas. So we've been -- we had an effort going for a couple years now. We've really pushed that hard. That's showing some improvements. And so into that end, I mean, we talked about hitting the 60-30, 60% gross margin, 30% operating margin at the -- I mean, to hit those targets, originally we had highlighted about $290 million per quarter run rate. We said that we kind of brought that down to about $280 million of a quarterly run rate in order to hit that. You're going to see -- OpEx, for example, I mean, we've been able to accelerate a lot of these activities, but I think you're going to -- it's going to actually play out over the next kind of 6 months. I mean, if you look at when we started, it's kind of October, November, and you're going to see kind of costs come down through the June quarter. So we believe that you're going to see operating expenses come down in the June quarter. Again we've guided them down for the March quarter, but you're going to see them probably come down again in June.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. Mix is always an impact on the gross margins. One of the first things when you acquired Zarlink, you had some program in place to bring some of the communications segment products of it. As you guys think of the different growth rates of the different end markets, what kind of impact is that going to have on gross margin? Are some lower-margin segments are going faster or not?

Steven G. Litchfield

Yes. So in kind of giving my best estimate, it still doesn't always play out perfectly. But I think, in general, I mean, mix, we feel pretty good about. I mean, at the end of the day, we've been investing in higher-margin businesses, right? And so that's where we naturally see the most growth coming from. So some of the aerospace businesses that we see growth coming. Space business is a very high-margin product line of ours, and we see growth over the next kind of 12 to 18 months, for sure. The other big drivers on the mix side, I mean, our timing business. And you speak of Zarlink, I mean, I think that's been slower to take off than what we anticipated. But on the other side of it, I think we've continued to take share in the market. And so I think as capital starts to roll out, I mean, you're going to see our growth in that segment grow. And it's one of our higher-margin product areas. So in general, I feel pretty good. One of the questions that often comes up is on defense. It's like, "Well, is your defense business high or low?" I mean, our defense business isn't -- it's kind of -- it's near our corporate targets. And so defense business, either going way up or way down, whatever, you want to assume, I mean, we're very optimistic and see a lot of growth in it. But it doesn't sway that gross margin dramatically in one way or the other. Some of the other businesses I highlighted, like a satellite business, for example, would.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. Maybe we can talk about a balance sheet. You reduced total debt from $800 million a few quarters ago, it was down to $750 million when you reported. And you announced you'd paid down an additional $25 million post quarter. So that leaves [indiscernible] net debt around $550 million, which is a little less than 2.5x leverage on forward EBITDA. Where do you want the balance sheet to get to? I mean, how comfortable are you at that...

Steven G. Litchfield

So we're been pretty clear about this. I mean, we want to see debt to EBITDA at around the 2x level, right? I mean, it's not a perfect number. But in our business, we're generating good cash flows. We're very confident in our ability to continue to do that. And so that level seems very reasonable to us, and we've been clear about it for a while now. We've been prudent about the kind of the pain -- we're very cognizant of the debt. We've paid down -- we've committed to paying down $100 million this year kind of ahead of schedule. And I don't know that we're necessarily looking to accelerate that. Quite frankly, as we look at opportunities out there, I mean, we've talked a little bit about M&A. That's something that we -- is absolutely part of the strategy, part of the growth strategy we're going to continue to do. And so we're looking to do more of that. And so we're going to balance those to where we see the right opportunity. I mean, if I go back a year ago, we said we're going to give this some time, give it 2 or 3 quarters. But we're kind of past that. And so from an integration standpoint, I mean, we're more than capable of taking on an acquisition if we choose to do so. But of course, we want to make a good strategic decision and a good financial decision with the right asset. So we're going to weigh that while probably paying a little bit ahead on the debt.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. Are there any questions in the audience? Maybe just for me. As you guys think about managing your own factory footprint, you're, I think, maybe 75% to 80% now outsourced in terms of fabless, and then the rest, internal manufacturing. What kind of mix do you want have with that going forward?

Steven G. Litchfield

I mean, most all of our product today is fabless, right? I mean, there's a handful of areas that we still have our own fabs and we'll continue to keep those. It is the differentiator. But they're mostly depreciated fabs, so there's not a huge CapEx need there. So I don't know that there's a perfect mix per se. But as our business grows, it's naturally going to -- the percentage is going to go up of foundry business versus in-house. I might just use that opportunity to come back to something you asked about earlier about the mix of the business. I mean, the mix of the business -- on the gross margin, since we're kind of talking about cost. The mix of the business definitely weighs on that. But the other piece that I think we're confident in getting to that 60% number on is the fact some of these cost-cutting measures, the -- our shutdown of our -- we've got a Folsom facility that we've highlighted that we're shutting down, will be closed kind of in the April, May timeframe. So that helps, offshoring helps. So I think we feel pretty confident with the mix, of course. But a lot of that is within our own control of just cutting cost to get to that 60% number.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Last one for me really quickly. As you think about sourcing from foundries with your own capacity and inventory you have on hand, has there been any changes in your lead times to your customers?

Steven G. Litchfield

I wouldn't say a dramatic change. We're somewhat unique from the standpoint we've got longer lead times, ultimately longer cycle times as well. And so our customer base is more -- I mean, they're kind of used to they order a little bit ahead of time, which is one of the benefits for our business. I mean, we do have better visibility. So I wouldn't say things have changed dramatically there.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. So we're out of time. I want to thank Microsemi for participating.

Steven G. Litchfield

Sure. Thank you for having us.

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Source: Microsemi Corporation Presents at Goldman Sachs Technology & Internet Conference 2013, Feb-13-2013 10:20 AM

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