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Microsemi Corporation (NASDAQ:MSCC)

F1Q10 (Qtr End 12/27/09) Earnings Call Transcript

January 21, 2009 4:45 pm ET

Executives

Terri Donnelly – IR

John Hohener – VP, CFO, Secretary & Treasurer

Jim Peterson – President & CEO

Analysts

Rick Schafer – Oppenheimer

Robert Pikover – FBR Capital Markets

Steve Smigie – Raymond James

Quinn Bolton – Needham & Co.

Patrick Wang – Wedbush Morgan

Tore Svanberg – Thomas Weisel Partners

Andrew Huang – GC Research

Romit Shah – Barclays Capital

Christopher Longiaru – Sidoti & Company

Nicholas Aberle – Caris & Company

Operator

Good afternoon. My name is Lynn and I will be your conference operator today. At this time, I would like to welcome to the Microsemi’s first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I would now like to turn the call over to Terri Donnelly to begin. Please go ahead.

Terri Donnelly

Good afternoon and welcome to Microsemi’s first quarter 2010 earnings conference call. I’m 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; and of John Hohener, our Vice President and Chief Financial Officer.

A recording of this conference call will be available on the Microsemi website under the Investor section. Our website is located at www.microsemi.com. Microsemi issued 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 21, 2010 and is continually subject to reassessment due to changing market conditions and other factors and therefore must be considered only as management’s present opinion, and 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 27, 2009, which was filed with the SEC on November 24, 2009.

That said, I’m 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 Hohener

Hey, thank you, Terri. Net sales for the quarter ended December 27, 2009 were $112.8 million, down 13.6% from the $130.6 million reported in the year-ago first quarter, but up 2.8% from $109.7 million in the fourth quarter of 2009. As a reminder, this quarter revenue does not include any contribution from SEMICOA, which was recently sold.

Non-GAAP gross margin for the quarter was 49.6% compared to 51.8% in the year-ago first quarter and up from 48.6% in the fourth quarter of 2009, an increase of 100 basis points. Our improvement in gross margin was primarily attributable to more shipments originating from our high reliability facility in Ireland as well as strong increases in our analog mixed signal markets. This quarter, non-GAAP selling, general and administrative expenses were $18.2 million or 16.2% of sales compared to $21.7 million or 16.6% of sales in the first quarter of last year and $18.1 million or 16.5% of sales in the prior year fourth quarter.

Research and development costs were $11.8 million or 10.5% of sales for the quarter compared to $10.8 million or 8.2% of sales in the year-ago first quarter and $10.4 million or 9.5% of sales in the fourth quarter of 2009. The sequential increase in R&D was primarily due to purchases of masks and other supplies related to new product development for both high reliability and analog mixed signal products. We expected our operating expenses will be relatively flat next quarter.

Our non-GAAP operating margin was 23% for the quarter compared to 26.9% in the prior year first quarter and compared to 22.6% in the fourth quarter. Non-GAAP net income for the quarter was $21.1 million or $0.26 per diluted share compared to $28.7 million and $0.35 per diluted share in the year-ago first quarter and up $1.8 million and $0.02 from the $19.3 million and $0.24 per diluted share reported in the fourth quarter.

Our non-GAAP effective tax rate was 18.2% in the first quarter. Our GAAP gross margin was 46.3%, the same as the year-ago first quarter and compared to 38.4% in the fourth quarter, an increase of 790 basis points. We expect our GAAP gross margin to improve 100 to 200 basis points in our second quarter. As a reminder, this will be the only gross margin number we will present in the future.

Our first quarter operating results included $3.7 million for transitional idle capacity and $1.1 million in restructuring, exceptional legal matters and other charges. Also included were non-cash charges of $6.7 million related to stock-based compensation and $3.9 million in amortization of acquisition-related intangibles.

Our GAAP operating and net incomes were $10.5 million and $8 million respectively. Our GAAP earnings per share were $0.10 compared to $0.16 in the year-ago first quarter and a loss per diluted share of $0.39 in the fourth quarter.

Capital spending was $3.2 million this quarter compared to $2.5 million in the fourth quarter. We expect capital spending to remain in this range next quarter to accommodate expansion at facilities supporting radar, satellite and Microsemi’s SecureWave millimeter-wave security products. Depreciation and amortization expense for the quarter was $8.5 million compared to $8.3 million in the fourth quarter.

Accounts receivable increased $9.2 million, primarily resulting in increased shipments, and our DSO went from 57 to 58 days. Inventories decreased by $4.3 million from last quarter, as we continue to closely control our spending while growing our revenue. Our days of inventory improved five days to 163 days. While this trend should continue in the long-term, the next few quarters may show modest increases as we build products and support of our Scottsdale closure and other facility consolidations.

Once again, cash generation was strong. For the quarter, our operating cash flow was $20.1 million, resulting in a new cash record of $234.9 million. And our book-to-bill ratio was greater than 1:1. Our best estimate of end market percentage breakout of net sales for the first quarter was approximately, defense and security 39%; commercial air and satellite 23%; medical 9%; notebooks, LCD TVs and displays 8%; mobile connectivity, including PoE, 14%; and industrial/semicap 7%.

Now for our business outlook. For the second quarter of fiscal year 2010, we expect our net sales will increase between a range of 2% and 4% sequentially. On a non-GAAP basis, we expect earnings for the second quarter of fiscal year 2010 to be $0.26 to $0.27 per diluted share. And as a reminder, we will cease reporting transitional idle capacity effects on our gross margin.

With that, I’m going to turn the call over to Jim Peterson.

Jim Peterson

Thank you, John, for detailing our first quarter results and our continuing profitability improvement initiatives. As I do every quarter, I’d like you all use some detail on each of our reported end markets with some color as to the view of the current climate as well as longer term objectives and opportunities. Microsemi has focused greatly on optimizing a business model and cost structure as designed for growth and improving profitability.

We expect to generate our growth through continuing contribution of our core end markets and share gains as we entered new and adjacent markets via organic product introduction and selective accretive acquisitions. We expect to enhance profitability by continuing to execute on our growth plan, on our proven success into creating accretive acquisitions and our focus on cost control.

Because of the strength of our operating agility, we have increased efficiencies by consolidating operations. A perfect example is our current initiative to close our Scottsdale facility or simultaneously ramping our Philippine facility. As previously discussed, this transition is estimated to result in annual savings of $20 million to $25 million, along with a significant improvement in gross, operating and margins.

Now let’s go right to the results of the quarter, starting with our commercial markets. We recorded another excellent quarter in our notebook, TV and display end markets, with dollars up over 18% sequentially, and this on top of a strong September quarter. In this market, CCFL backlight sales are driven by LCD TV market share gains, some normalization of the automotive display revenue, and growing shipments of our LED backlight solutions, which are now ramping at three major customers.

We are excited about the prospects of LED TV over the next several years, but also remember that CCFL is expected to be a growth market in 2010 and beyond for Microsemi. CCFL will remain dominant large-screen tier one brand. We expect strong revenue growth in 2010 to come from market share gains on the Chinese mainland with customers such as Changhong, Skyworth and TCL, with over 25 major program engagements awarded just this quarter – last quarter.

As we guided, our mobile connectivity end markets continue to pick up stream in the December quarter, with total dollar growing over 50% sequentially. Enterprise-driven PoE revenues are flowing through the channels, as a result of strong demand in the quarter for both our midspan solutions and our IC products. We expect continued strength in this business.

Further, high performance wireless LAN power amplifier applications continued to drive demand for our products and we are growing for record design wins for wireless access points, netbooks and growing consumer applications. Our industrial at semicap market are strengthening. Semicap promises revenue growth and increasing visibility currently, as now bolstered by our growing customer base. We are looking for a notable sequential performance from these customers as well as continued strength from the solar and other energy applications.

Moving on to higher liability markets, medical was down in the quarter as forecasted. We continue to see lower ICD revenue due to the fact that our largest customer continued to burn off front end loaded product. However, we are pleased that our customer launches were very successful and shipments are expected to resume their growth path in the March quarter. As always, we are aggressively engaging with other customers to drive more Microsemi content into their applications.

Although much smaller piece of the market, our MRI products have stabilized and we look for a resumption of growth and increasing dollar content in 2010. Our commercial aerospace end markets were down slightly in this quarter, as a function of full [ph] quarter loss of SEMICOA related revenue. And it’s slow although we’re improving market environment. IATA passenger and cargo data shows a consistent trend of improvement. Planes are still being manufactured. Part inventories are low to the fact that the airlines were cannibalizing planes to cut costs. Now with the travel demand, other airlines supply on the uptick, we are as confident as ever in the improving end market for 2010.

Satellite is an application, which Microsemi is laser focused, and we expect along with their space level product successes over the next several years. Satellite continues to grow for Microsemi as a result of our organic plus acquisition formula for increasing our footprint. Our new radar and MOSFET devices generated substantial interest. We have recently booked orders for this product shortly after its launch.

Our defense and Homeland Security end markets continued their steady contribution again last quarter. We are benefiting from our growing footprint, a stable environment for our customers, now that the 2010 budget has passed through the appropriations. And our focus on the change in natural electronic warfare, which we are exporting for organic product development and again our selective accretive acquisitions.

An excellent example of this is our millimeter-wave’s gaining offering Microsemi SecureWave. This RF subsystem enables next generation body scanners and standup detection systems as a result of our industry-leading high reliability RF product offering. Even the US administration’s focus on Homeland Security as well as from around the world, we are excited about the prospects after having booked our first volume orders earlier this year.

We are now working diligently with the suppliers to expedite the manufacture and delivery of products, and we will keep you updated on the progress in the coming months. To be short, our balance growth model has served us well, delivering balanced diversified growth.

Before we turn to your questions, let’s just review the highlights from last quarter. Revenue was up. Received the first significant orders for SecureWave products for our body scanners. Gross operating and net margins continued strengthening, both GAAP and non-GAAP. Our inventory levels continued to drop and a positive book-to-bill. We generated $20 million in operating cash flow bringing our cash balance to a new record of $234.9 million.

Okay. Thank you for your interest and support. We’ll now take questions from our analysts. Lynn?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Rick Schafer with Oppenheimer.

Rick Schafer – Oppenheimer

Hey, guys. Nice quarter. I have a couple questions. Just on the idle capacity thing, if you can give us some, John, just a little more clarity on what’s going on. I guess, are you guys still carrying some of those duplicate costs associated with the Scottsdale consolidation? If so, what’s sort of the gross margin impact there? Can you kind of walk us through gross margin just real quick?

John Hohener

Sure. Thanks for bringing that up, giving me a chance to explain it further. In December, as you know, we reported both GAAP and non-GAAP gross margin components. The difference being what we have traditionally called transitional idle capacity this quarter roughly $3.7 million. What we’ve said for the last several quarters though is that next quarter, our March quarter, we are only going to report GAAP gross margin in our overall non-GAAP reporting.

As we shut down facilities, consolidate acquisitions and so forth, we will have a line every once in a while called restructuring. An example of that being severance that we pay people who would be leaving the company. But that’s going to be a separate line item that is different than the transitional idle capacity. So going forward, we should just think about GAAP gross margin and the starting point being the margin that we just reported, 46.3%. But I also said in my prepared remarks that we will improve on that number by about 100 to 200 basis points.

Jim Peterson

In short, Rick, what it looks like for Microsemi, we look at our guidance. I mean, we guided strong revenue. We – probably the strongest we’ve guided in certainly over the last year, the 2% to 4% in revenue increase and the earnings of $0.26 to $0.27. When you look at it apples-to-apples, kind of a true-up. If we check out of capacity in place, which would promise the plan that we wouldn’t do, it would look more like 2% to 4% revenue and $0.29 to $0.31. So true it up, we are still at $0.26, $0.27.

Rick Schafer – Oppenheimer

Okay. Okay, got it. Just a couple other things. I know you talked about com air. It looks like it was down a little bit in the quarter actually. I know you talked about stabilization and growth there. I mean, is that a real apples-to-apples number or is there still some SEMICOA in there kind of skewing that or –?

John Hohener

Yes. Well, it was down slightly in absolute and it was because of SEMICOA a full quarter embedded in there. Going forward, it’s up. I mean, it strengths it up in absolute dollars and percentage-wise. And the real uptick is the refurbishment market. I mean, we are back to where we were years ago where we were going down in cannibalization, where they were taking planes that they had been just sitting on the ground and they were starting to refurbish those airplanes. So that and then the slowly and financial rebuild for Boeing and Airbus, commercial air, I think, is in the bottom and it’s certainly strengthening going forward.

Rick Schafer – Oppenheimer

Okay. And then just one last question. I’ll let somebody else I guess ask the scanner question that I think (inaudible). But just real quick on auction rates, John, could you explain what’s going on there? Is that auction rate – I guess we are back ended and we are considering it as cash even though you’ve got that credit facility I guess in place now?

John Hohener

Well, actually we monetized, if you remember, three quarters ago now our auction rates. And we did that by entering an agreement where we are actually using our auction rates as collateral. We did a simultaneous borrowing. So we have an obligation and we also have an asset. Those two will go away in June when we actually put those securities back to the maker for us. Now the reason it has dropped from quarter-to-quarter is we’ve actually had some of the people who placed those instruments redeem them early. So we could actually see that drop again before these instruments come complete in June.

Rick Schafer – Oppenheimer

Got it. Okay. Thanks, guys.

Operator

Your next question comes from the line of Craig Berger with FBR Capital Markets.

Robert Pikover – FBR Capital Markets

This is Robert stepping in for Craig. Thanks for taking the question, and good quarter.

Jim Peterson

Hi, Rob.

Robert Pikover – FBR Capital Markets

Do you guys mind talking about what’s going on channel inventory? In other words, do you still see things continuing to be lean especially in high rel? Thank you

Jim Peterson

Yes. Inventory is extremely lean, certainly in high rel. But if you look at our mobile connectivity, we are supply limited in power amplifiers for wireless LAN. I think in PoE, our PoE products for the analog mixed signal extremely lean inventory. I think as advertised for those that are calling it the fact that the inventory is lean, count on it.

Robert Pikover – FBR Capital Markets

Talk about what lead-times have down in the quarter.

Jim Peterson

While strengthening up our lead-times, we reported last quarter, they would be very similar to last quarter. Last quarter for the analog mixed signal we said are about six-day weeks and honor six-day weeks. High rel we reported last quarter are about 15, 26 weeks and 16 to 26 weeks. And as a reminder, satellite. Our satellite lead-time and cycle time is 36 weeks and it stays at 36 weeks. We see it pretty constant.

Robert Pikover – FBR Capital Markets

Okay. And last question from me. Looks like medical revenues are down about 50% year-on-year. Can you talk about what happened in the quarter and what are some of the initiatives to get that back up to kind of prior peak revenues?

Jim Peterson

Yes. I think first of all, let’s – it's down. We forecasted it down. We did a large build for – for scientific, we did a press release on it. They were launching the new frontier program. If you remember, we were closing our Colorado facility. And couple quarters ago we did an agreement with Boston Scientific that we’d ship them ahead to their frontier platform and we did. We mentioned in the prepared statement that that had normalized down and now we expect the March quarter to strengthen. I don’t know exactly what percentage, but as absolute dollars, it goes up next quarter. And probably as a percentage of sales, then therefore slightly up next quarter in the medical business. A lot of the MRI business, we were talking about the downtick in MRI business because of the availability for large companies to get capital. That seems to be turning as well, the MRI market. At least our forecasts are strengthening going forward.

Robert Pikover – FBR Capital Markets

Thanks, guys.

Operator

Your next question comes from the line of Steve Smigie with Raymond James.

Steve Smigie – Raymond James

Great, thanks. I will go ahead and ask that scanner question. Talk a little bit about what scanner revenue you guys got in the quarter, what it might look like in the subsequent quarter, and just the general opportunity there.

Jim Peterson

Sure. Last quarter, nothing obviously, minimal. This coming March quarter, minimal as well. Let’s start the potential first. Potential that we see for the scanner business since the failed attempt on the 20th of December for Microsemi should play out to be tens of millions of dollars of shipments over the next 18 to 24 months. At Microsemi, we expect to start seeing that revenue cycle time for this products about 16 weeks. We are working with our suppliers to get our supplies, expect to see some revenue recorded in the June quarter and certainly in the September quarter. That’s when it begins. June and September quarter would be a nice uptick.

Steve Smigie – Raymond James

And what has happened for I guess the more larger adoption? Is there any other big customers that you got wins with, indicated to you when they would see potential bigger spends as it USBs? Are you seeing internationally even pickup in the market as well?

Jim Peterson

No, they are not extremely specific on where did they got their orders from, but they are placing their bookings. We have a customer that was a top-ten customer, that is now in the top-three with backlog. So it’s begun. I think the numbers that we are seeing out there in the market that we are expanding to is certainly the market expansion is airports. We are seeing some of the – we believe there would be domestic releases. We know that the international markets are considering adopting the standard for next generation as body scanners. And then beyond that, our customers telling us there is opportunity in applications, most certainly in military basis, both domestic and international. Government buildings, strangely enough; sports venues. And one of our customers is actually making a commercial product for electronic manufacturers for theft of electronic products. So I think there are lots of expansion applications, and that is all just based on this terrorist threat.

Steve Smigie – Raymond James

Okay, great. I’d like to squeeze one more in. Could you just give an update on acquisition strategy, anything near-term? Any thoughts and changes in how big of a deal you are willing to do at this point or not big? Thanks.

Jim Peterson

That is still strong. Our bull’s eye and target list is very strongly identified. And I still stick with the fact that we have multiple opportunities both in the high performance analog mixed signal space and most certainly in the high rel space. And as we roll it out, you’ll read it.

Steve Smigie – Raymond James

Okay. Thank you.

Operator

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

Quinn Bolton – Needham & Co.

Just wanted to follow up on the sort of the gross margin question. I know you’re not going to be reporting the transitional idle capacity charges going forward beyond March, but I’m assuming that you will still have some – especially as you shut down Scottsdale. And so I guess my question is, as you look to begin transferring a production from Scottsdale to other facilities, do you intend to – will you have to set up additional lines that could cause a drag on gross margin – GAAP gross margin through the March 2011 quarter? Or is there really no new capacity that needs to be put in place such that the transitional idle capacity that you had to date around the Colorado facility, that kind of goes away and there is not significant charges going forward associated with Scottsdale?

John Hohener

Yes, that’s true. There are not significant charges going forward with Scottsdale. In fact, as we go through the transition, we will absorb those costs as we build the inventory that I talked about earlier in order to transfer to other facilities. There is a number of ways that we are working on improving our margins. And the Scottsdale one is the most obvious, which we’ve talked about and which is now 12 months from – last quarter we reported 15 months and this quarter it’s 12. We will be upwards of 400 to 500 basis point improvement from that point in time. So, no drag on the margins as we move forward.

Jim Peterson

Quinn, we continue to restructure here. We just refrain from the word idle capacity.

Quinn Bolton – Needham & Co.

No. That’s what I was just trying to make – I just wanted to see – I mean, obviously you guys are absorbing almost $4 million of idle capacity into your kind of GAAP gross margins going forward and just wanted to see which way that was trended. Sounds like it’s trending lower even with Scottsdale, and that’s what I was trying to get to.

Jim Peterson

Yes, strengthening from here, my friend.

Quinn Bolton – Needham & Co.

Perfect. And second quarter, Jim, it sounds like a lot of the end markets, especially in the high rel, you’ve got some favorable outlooks for the March quarter. Just wondering, are there any areas where you see some softening due to seasonality perhaps in the analog mixed signal? Do you think you see strength across the board into the March quarter?

Jim Peterson

Check this out, right? I’ve run this company almost ten years. And this might be one of the first times we identified six diverse end markets. This might be the first time that everyone has the potential in absolute dollars for strengthening.

Quinn Bolton – Needham & Co.

Perfect. Great. Thank you.

Operator

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

Patrick Wang – Wedbush Morgan

Great, thanks. And nice job on the quarter, guys.

Jim Peterson

Thanks.

Patrick Wang – Wedbush Morgan

Just a couple things. First, I guess to ask another way on the gross margin question, Jim, you said that if you excluded – if you guys did actually back out the idle charges, the $0.26, $0.27 numbers you posted it $0.29, $0.30 or $0.31 or so. I’m just kind of curious, as you guys – are you going to be absorbing a lot of that over the next couple quarters? But at what rate – can you give us a sense of what rate that you’re going to be absorbing that in the next couple quarters and how that – when that potentially goes away to the $0.03, $0.04 impact?

Jim Peterson

That’s a great question. CFO?

John Hohener

Well, I guess the way that I would answer it is, talking about the fact that we are going to improve our gross margins 100 to 200 basis points in the next quarter. And it’s not really a number that we’re going to track any further. We are just going to consider the cost of doing the business. And right now, we have a number of initiatives to control our cost, as we also said in the prepared remarks. So we’re feeling good about the go-forward.

Patrick Wang – Wedbush Morgan

Okay. So on a GAAP basis, we see couple hundred basis points of improvement and then through the Scottsdale closure we’ll see another couple hundred basis points as well on the –?

John Hohener

Yes. But just to clarify, it was 100 to 200. You went to the high end.

Patrick Wang – Wedbush Morgan

All right, okay. Great. And then second question, Jim, if you could just help us rank the strength of the end markets you see in (inaudible) in the quarter?

Jim Peterson

Well, I’ll take a swag at it.

Patrick Wang – Wedbush Morgan

That would be great.

Jim Peterson

Let’s go over the diverse end markets from our presentation. We have more connectivity. Notebooks, LCD TVs, displays, industrial semicap pretty much under the analog mixed signal box. High rel box, we have defense and we have commercial air and satellite and medical. So let’s go this way. In absolute dollars, not necessarily percentage, I think the strongest right now would have to be the mobile connectivity. Second, in percentage absolute dollar growth, strangely enough, let’s go with semicap and industrial. Third, defense, security and then gaining. Fourth, kind of a tie, commercial air and satellite and notebook display and TV. Let’s give it a tie. And then coming in last but up at absolute dollars, we’ve already addressed it, would be the medical market space. So to recap, mobile connectivity, industrial/semicap followed by defense security, a tie with commercial and satellite and notebook displays, while last but not least, but up in absolute dollars, medical.

Patrick Wang – Wedbush Morgan

That was very helpful. Okay. And then last question, opportunity on LED TV. I mean, clearly you guys have some good traction there with some of the biggest guys out there, plus you talked about the design win (inaudible). But what’s the opportunity of the course of the year? What kind of growth can we expect, because I mean, you got guys like Samsung and such, talking big expectations?

Jim Peterson

Well, it’s not a big portion of the TV market today. That’s why we play with no bet. That having been said, little bit of commercial, I think Microsemi has the broadest range of supply to that market. We serve CCFL, we serve (inaudible), and we certainly serve the best-in-class in direct and backlight LED going forward. So it’s the commercial. I think this thing is going to ramp and close the second half of 2010, looking forward to a strong 2011 and beyond. As was mentioned, we’re getting design win that we are shipping now in volume and the ramp has begun.

Patrick Wang – Wedbush Morgan

Okay. All right. Thanks so much guys and good luck.

Operator

Your next question comes from the line of Tore Svanberg with Thomas Weisel Partners.

Tore Svanberg – Thomas Weisel Partners

Yes, thanks. So just going back to the gross margin, and I don’t want to make too big a deal of this, but the $0.26 to $0.27 [ph] guidance you are giving is short of a mix between a GAAP or non-GAAP number, because I assume the OpEx there is still non-GAAP, right?

John Hohener

Yes, we will still have stock-based compensation, any other items other than the transitional idle capacity.

Tore Svanberg – Thomas Weisel Partners

Okay. So that does mean that going forward, meaning in the June quarter, you are still going to tell us what the apples-to-apples EPS would be?

Jim Peterson

That’s me just looking for you guys to give me a little bit of liberty. John?

John Hohener

Yes. We’re going to – and it’s little complicated. As it relates to gross margin only, we are talking GAAP. But you have to call it non-GAAP guidance because we do back out the stock-based compensation et cetera.

Tore Svanberg – Thomas Weisel Partners

Yes. Yes, I’m just sort of thinking how first quarter could achieve this, but anyway – let me move on to the business. So if you look at the high rel business, I think it was down slightly sequentially. If you take up SEMICOA, do you think the high rel business would actually be flat or up sequentially in the last quarter?

Jim Peterson

Yes, sure. In absolute dollars and percentage, yes, sure.

Tore Svanberg – Thomas Weisel Partners

Okay. And Jim, you mentioned that you expect maybe all of your businesses to be up sequentially in the March quarter. So why are they only up 2% to 4%?

Jim Peterson

You know what? I moved heavily from 1% to 4% to a strong 2% to 4%.

Tore Svanberg – Thomas Weisel Partners

Okay. Any other – I mean, is there some conservatism there? Maybe you could talk a bit about what your backlog is looking like.

Jim Peterson

Backlog is robust and very strong. Backlog probably reflects strength in absolute dollars in all markets, and I’d rather go 2% to 4% and be very strong, because I’m going to be on the phone with you in 12 weeks, am I not?

Tore Svanberg – Thomas Weisel Partners

Sounds good. And then lastly, you said the lead-times were fairly stable from last quarter to – I mean, from September to December. But are you expecting lead-times to remain that way in the March quarter?

Jim Peterson

Yes, yes. I do hope to. I mean, the high rel easily normalizes at 20 to 30 weeks, but we’ve really done a lot of work on our lean manufacturing and our cycle time ability as we move stuff over to Ireland. Some it’s a little confusing, because we are getting better efficiencies within the source of Microsemi. But yes, I think that to be the case.

Tore Svanberg – Thomas Weisel Partners

Sounds good. Great job. Thank you.

Jim Peterson

Okay, thank you.

Operator

Your next question comes from the line of Andrew Huang with GC Research.

Andrew Huang – GC Research

Hey, guys. How are you?

Jim Peterson

Hi, we’re fine. How are you doing?

Andrew Huang – GC Research

Just a couple questions. First, on the SecureWave business, I guess my understanding is that it’s kind of a subsystem. So given that you normally do chips, what can you tell us about the margins for this business relative to the corporate average?

Jim Peterson

Yes, good question. This is a subsystem, but everything in that subsystem we make, that we manufacture, most all of that content. Gross margins are equal to or higher than corporate expectations, which is good news.

Andrew Huang – GC Research

Yes. Okay. And then the second question is, historically you’ve had some legacy business with Seagate in your notebook LCD TV display segment. And I’m just wondering is that meaningful or has that basically gone now?

Jim Peterson

Fairly enough, we still have some, yes. And I did notice the strength of their market. I just don’t want to dial in how large that will be because I’m not sure how long that lasts.

Andrew Huang – GC Research

Okay.

Jim Peterson

As I feel more comfortable, I’ll let you know.

Andrew Huang – GC Research

Okay. And then the last question is, I was just wondering if you could begin just given the sense of – if you look at your backlighting revenue, can you give us a sense of like how much of it is CCFL inverter versus LED driver?

Jim Peterson

Sure, no problem. Lion’s share is CCFL. LED just starting to ship, real minor, with great expectations for the second half and beyond for LED. Just pretty much on the TV market lays out chip, it’s going to grow and some.

Andrew Huang – GC Research

Okay. Thanks a lot, guys.

Jim Peterson

Sure.

Operator

Your next question comes from the line of Romit Shah with Barclays Capital.

Romit Shah – Barclays Capital

Thanks for taking my question. John, just on OpEx, you got it at flat as that’s a non-GAAP number?

John Hohener

Yes.

Romit Shah – Barclays Capital

And can you tell us what you expect stock option expense to be in the March period?

John Hohener

Yes. It should go down by a couple hundred K. So this quarter was $6.7 million. So take it down a couple hundred K.

Romit Shah – Barclays Capital

Okay, great. Thank you.

Operator

Your next question comes from the line of Adam Benjamin with Jefferies.

Jim Peterson

Adam? Adam? Don’t leave now, Adam. Next.

Operator

Your next question comes from the line of Christopher Longiaru with Sidoti & Company.

Christopher Longiaru – Sidoti & Company

Yes. Can you hear me?

Jim Peterson

Yes. This is Adam or Christopher?

Christopher Longiaru – Sidoti & Company

This is Christopher. How are you guys?

Jim Peterson

Christopher, how are you doing? Good.

Christopher Longiaru – Sidoti & Company

Good. Congratulations on the quarter. I guess my biggest question is, it’s just – in aerospace, it’s just been a weaker area recently, but going forward it should be a pretty big growth area for you guys. Can you elaborate a little bit on what you’re seeing from a backlog standpoint and what your customers are telling you in the aerospace arena?

Jim Peterson

Yes. Like I said, I think the strong news today in at least commercial aerospace is the demand for our customers in the area of refurbishment. I think refurbishment is up. The system integrators are strong. The backlog is up in absolute dollars. And the large – the large manufacturers are testifying the fact that they expect the international market to lead the resurgence in new airplanes, and I think that’s the trend going forward. The industry data for passengers that like it [ph] are all showing to be strong. So we have a bottom to it a quarter ago, we think it is. It’s poised for growth in 2010. And I think we’ll see upwards and onwards from here.

Christopher Longiaru – Sidoti & Company

And so you expect that next quarter will be relatively better than this quarter for that piece of your business?

Jim Peterson

Yes, I think in absolute dollars, certainly up.

Christopher Longiaru – Sidoti & Company

Great. Thanks, guys.

Jim Peterson

Thank you.

Operator

Your next question comes from the line of Nicholas Aberle with Caris & Company.

Jim Peterson

Nick.

Nicholas Aberle – Caris & Company

Hey, what’s going on guys?

Jim Peterson

My man, what you got?

Nicholas Aberle – Caris & Company

Supply constraints and analog, did you guys see any? Did that constrain upside in analog during the quarter and do you guys see any of that going in the March quarter?

Jim Peterson

Certainly – certainly supply limited. Let me touch one. I hear rumor out there that Microsemi does not have a robust demand for our RF power amplifiers. Nothing could be further from the truth. So let’s put that in the interesting and true box. Our (inaudible) up 55% quarter-over-quarter and we are supply limited. Same thing with the PoE. Supply limited in PoE. So I think – I think there is certainly strength going forward too. Did it limit last quarter? Perhaps so. Does it give us stronger up as we’re going forward? Most certainly.

Nicholas Aberle – Caris & Company

So when do you predict we’ll get back into supply-demand equilibrium on the analog side?

Jim Peterson

You know what? I don’t know. I mean, I (inaudible) how great everything is. They all say when it would hit that wall. Maybe next quarter, the quarter after, maybe through September. It certainly shows what we are anticipating. I like it.

Nicholas Aberle – Caris & Company

Got you. I think you guys – last time you guys talked about long-term gross margin targets of 50% to 55%, given that word kind of pulling out or not including the idle capacity charge anymore, does it make it more difficult to get to the high end of that long-term range?

Jim Peterson

Difficult or not, that’s where we’re going. The high end, 50% to 55%.

Nicholas Aberle – Caris & Company

Okay. So that’s still your long-term gross margin target?

Jim Peterson

Absolutely. Why take the guys off that task now?

Nicholas Aberle – Caris & Company

Got you. And then last question, just looking at the model, just – I'm just kind of running a base or a bear case scenario, if you guys do the bottom end of your revenue guide and the bottom end of your gross margin guide actually fall down to $0.25. Is there some other line items that would make up for that in case you guys do hit the low end?

Jim Peterson

We're about the most diverse guy you know out there in the market. There's multiple levers. We're okay.

Nicholas Aberle – Caris & Company

Okay. I mean, what would those levers be?

Jim Peterson

Operational levers. Certainly the high rel. We don’t have to aggressively push. We’re predominantly having strong market share position in those markets. There’s multiple levers, my friend. I feel comfortable with our guidance.

Nicholas Aberle – Caris & Company

Perfect. Thank you. Good luck.

Jim Peterson

Thank you.

Operator

You have a follow-up question from the line of Quinn Bolton with Needham.

Jim Peterson

Sure.

Quinn Bolton – Needham & Co.

Jim, just wanted to ask and sort of follow up on the last question about gross margin. Did you guys see any benefit from the Scottsdale in the December quarter?

Jim Peterson

No, not really. Again, Scottsdale is in the early part of the transition. And I want to correct something I said earlier. I think I said 12 months. Right now it’s 12 to 15 months before we get the final closure date. But the benefit will come more as we move probably in the neighborhood of nine to 12 months from now.

Quinn Bolton – Needham & Co.

Okay. So I guess what I was trying to get to is, you did 49.6% gross margins in December. You guys have talked about 400 to 500 basis points of improvement from Scottsdale. So I know that the current transitional idle is I think still associated more with the Colorado facility, but correct me if I’m wrong on that. I mean, can you get to kind of 54% to 55% non-GAAP gross margins, once that Scottsdale facility shut down?

Jim Peterson

That’s the plan.

John Hohener

That is the plan.

Quinn Bolton – Needham & Co.

Okay. Great. Just wanted to clarify that.

Jim Peterson

Okay. Thank you, Quinn.

Operator

You have a follow-up question from the line of Steve Smigie with Raymond James.

Steve Smigie – Raymond James

Great, thanks. I was hoping you could talk a little bit more about the MOSFET wins you had there, how quickly that can ramp, and what the overall opportunity is for that?

Jim Peterson

Yes. We started ramping it last quarter and multiple millions of dollars without question.

Steve Smigie – Raymond James

Okay. And then I was hoping you could talk a little bit about capacity for high rel parts in general. I know you're probably in pretty decent shape now, but ran into some capacity constraints last cycle. Assuming the economy continues to tick back up here, how do you, say, prepare for potentially reaching new constraints there? Will that not be an issue? Have you found ways to bring in the ovens with less cost or anything like that?

Jim Peterson

Everything is in place. I’m pretty comfortable that if we get upticks in orders, which we are expecting, we are going to have no problem meeting the demand. One more question and then I think everybody wants to get on with their lives.

Operator

(Operator instructions) And your final question comes from the line of Tore Svanberg with Thomas Weisel Partners.

Tore Svanberg – Thomas Weisel Partners

Yes. I just have few more follow-ups. So again looking at gross margin for the March quarter, when I do the math based on your non-GAAP EPS guidance, gross margin would be north of 50%, correct?

John Hohener

No. Your starting point is 46.3% and I’m telling you, you can model between 100 and 200 basis points higher.

Tore Svanberg – Thomas Weisel Partners

No, no, no, that’s not my question. My question is, if we’re assuming that we didn’t add the idle capacity into the gross margin and your EPS will be $0.29 to $0.31, wouldn’t then gross margin be above 50%?

John Hohener

That’s assuming that we have the same level of transitional idle capacity in the next quarter as we had this quarter.

Tore Svanberg – Thomas Weisel Partners

Got it. And then can you also tell – talk a little bit more about your tax rate for the two fiscal years?

John Hohener

Yes, we recorded 18.2% this quarter – somewhere around 18% is where it will stay or where you should be in your model going forward for this year. And certainly we can approve on that as we move out in the out-years.

Tore Svanberg – Thomas Weisel Partners

Great, thank you.

Jim Peterson

Thank you. Okay. I want to thank you for joining us today and for your questions. And have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Microsemi Corporation F1Q10 (Qtr End 12/27/09) Earnings Call Transcript
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