Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Microsemi Corporation (NASDAQ:MSCC)

F4Q2010 Earnings Call Transcript

November 11, 2010 4:45 pm ET

Executives

Terri Donnelly – IR

John Hohener – CFO, VP - Finance, CAO, Treasurer and Secretary

Jim Peterson – President and CEO

Analysts

Steve Smigie – Raymond James

Mike Pachter – Wedbush Securities

Quinn Bolton – Needham

Rick Schafer – Oppenheimer

Nicholas Aberle – Janney Capital Markets

David Wong – Wells Fargo

Harsh Kumar – Morgan Keegan

Christopher Longiaru – Sidoti & Company

Operator

Good afternoon. My name is Patrick and I will be your conference operator today. At this time, I would like to welcome everyone to the yearend and fourth 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. Ms. Donnelly, you may begin the conference.

Terri Donnelly

Good afternoon. And welcome to Microsemi's yearend and fourth quarter 2010 earnings conference call. 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.

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 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 November 11, 2010 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 future – for a review of risk factors, please refer to Microsemi's report on Form 10-K for the fiscal year ended September 27, 2009 and our Form 10-Q for the fiscal quarter ended June 27, 2010 which were filed with the SEC on November 24, 2009 and August 5, 2010 respectively.

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

John Hohener

Thank you, Terri. Net sales for the quarter ended October 3, 2010 were a record $151.2 million, up 11.2% from $136 million in the third quarter of 2010 and up 37.9% from the $109.7 million reported in the year ago fourth quarter. Net sales for the full fiscal year were $518.3 million, up 14.4% from sales for fiscal 2009 of $453 million.

Gross margin in the fourth quarter was 49.2%, up 80 basis points from the $48.4 in the third quarter of 2010 and up 410 basis points from the 45.1% gross margin we reported in the year ago fourth quarter. Approximately 40 basis points or $500,000 of the sequential improvement is related to cost savings associated with our Scottsdale transition.

In addition our White acquisition achieved our previously announced gross margin target of 50%, up from 39% at purchase. Moreover, they reached our corporate operating margin goals of 30%, up from 8% at purchase. Our gross margin forecast for the next quarter which includes Actel is expected to be in the range of 53% to 54%.

We are still on track to close the Scottsdale wafer fab operations at the end of November. We expect the complete closure of the facility, including the assembly and test operations to occur at the end of February 2011. Total annualized savings when complete will equate to $24 million at the high end of our original goal.

This quarter non-GAAP selling, general and administrative expenses were $24.2 million or 16% of sales, compared to $21.6 million or 15.9% of sales in the third quarter of 2010 and compared to $18.2 million or 16.6% of sales in the fourth quarter of last year. The increase was primarily associated with having White for a full quarter. In addition, we had 14 weeks of expenses in this quarter.

We expect SG&A to increase by $7 to $8 million next quarter, primarily due to the addition of Actel. Research and development costs were $16.7 million or 11% of sales compared to $14.8 million or 10.9% of sales in the third quarter of 2010 and compared to $10.4 million or 9.5% of sales in the year ago fourth quarter.

R&D costs trended higher due to increased new product development and having White for a full quarter. And also as a reminder, we had 14 weeks of expenses this quarter. We have spoken numerous times about the increased breath of products and expanded SAM through our acquisition strategy and new product development efforts. Next quarter we expect R&D costs to increase by $8 to $9 million including the addition of Actel.

Our non-GAAP operating income was $33.5 million or 22.1% compared to $29.4 million or 21.6% in the third quarter of 2010 and $20.8 million or 19% in the prior year fourth quarter. Non-GAAP net income was $28.8 million or $0.35 per diluted share, compared to $24.7 million or $0.30 per diluted share in the third quarter of 2010, a 16.7% increase and $16.2 million or $0.20 per diluted share in the year ago fourth quarter.

Our non-GAAP effective tax rate for the quarter was 13.7%. With the acquisition of Actel, we expect our blended rate to increase to 21% for our first quarter. We are already implementing operational strategies that will result in an improvement to Actel's historical tax rate. For the fiscal year 2010, our non-GAAP net income was $92.8 million, equating to $1.14 per diluted share. This compares to fiscal year 2009 non-GAAP net income and EPS of $61.7 million and $0.76 respectively.

Our 2010 net income and EPS improved 50% from 2009. For stock based compensation expense, we had non-cash charges of $6.3 million, which we expect to increase between $1.8 million and $2.2 million next quarter, primarily due to assumed Actel equity awards. Our fourth quarter operating results also included $3.9 million for restructuring, acquisitions and other charges. Also included were non-cash charges of $6.5 million and amortization of acquisition related intangibles.

Our GAAP operating income was $16.9 million, compared to $13.9 million in the third quarter of 2010, a 22% growth. And an operating loss of $11 million in the prior year fourth quarter. During the year – during fiscal year 2010, we evaluated our deferred tax assets and liabilities and reversed a portion of the non-cash valuation allowances related to our domestic operations. This evaluation resulted in an income tax benefit of $4 million or 7.3% of pretax income.

GAAP net income for fiscal 2010 was $59 million or $0.72 per diluted share, compared to a net loss for fiscal year 2009 of $26.8 million or $0.33 per diluted share. Capital spending was $6.9 million in the fourth quarter, compared to $3 million in the third quarter. The increase was primarily due to the start up of our Philippine operations.

Depreciation and amortization expense in the fourth quarter was $11.9 million, compared to $10.4 million in the third quarter with the increase primarily due to having White for a full quarter. Compared to the third quarter, accounts receivable increased $3.5 million with increase due primarily to higher sales levels.

Our DSO for the quarter was 51 days. Our inventories increased by $7.9 million compared to the third quarter, in support of business growth including growth in customized GPS modules for defense applications as well as preparing for our facility consolidations. On a GAAP basis, our days of inventory are 145 days.

Once again, cash generation continued to be very strong. For the quarter, our operations generated cash flow of $25.1 million. For the year our operating cash flow was $107.6 million and our free cash flow was $91.4 million. We ended the quarter with a cash balance of $200 million after paying cash for three acquisitions during the fiscal year.

Reflecting on a continued strong growth trend, our book-to-bill book to ratio was greater than one to one. For discussion purposes and as we prepared to integrate Actel's end markets we have consolidated our end markets. We have combined our medical and industrial semi-cap end markets and we have combined our LCD TV display and mobile connectivity end markets. No other changes have occurred.

Using our new end market descriptions, our best estimate of the end market percentage breakout of net sales for both the third and fourth quarter was approximately, defense and security third quarter 40%, fourth quarter, 43%. Aerospace, third quarter 20%, fourth quarter, 20%, enterprise and commercial third quarter, 23%, fourth quarter 21%, industrial and alternative energy, third quarter 17%, fourth quarter 16%.

Now for our business outlook. For the first quarter of fiscal year 2011, we expect our net sales will increase between a range of 19% and 23% sequentially. On a non-GAAP basis, we expect earnings for the first quarter of fiscal year 2011 to be $0.36 to $0.39 per diluted share. These estimates include approximately two months of Actel results. At the time of acquisition, Actel was on a sell-through basis and recognizing revenue to distributors. To align with our sales model, we have taken appropriate actions that will allow us to reconcile revenue on a sell-in basis.

We are not able to recognize any deferred revenue that they had, though at the time of acquisition. In addition, we will record the full two months of their expenses. The total value of the Actel transaction net of cash acquired from Actel was approximately $430 million. In addition to our own cash, this purchase was facilities by financing that consists of $375 million, seven year senior term loan facility and a $50 million revolving credit facility which replaced our previous revolver.

We have received a favorable market rate that should average in the near term between 5% and 5.25%. The service fee for this facility is included in our diluted earnings per share guidance just discussed and for this quarter will be between $3.6 and $3.7 million. At the conclusion of the acquisition and accounting for all associated costs of the transactions, we had a starting balance of approximately $160 million in cash.

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

Jim Peterson

Okay. Thank you, John. In recognition of Veteran's Day I just want to express our appreciation to our troops. That having been said, let's get to the end markets. Our defense and security end markets were clearly strong this quarter with revenues growing almost 20% sequentially. Our secure wave, millimeterwave scan subsystems, military and Diode Array applications drove significant strength along with our first full quarter contribution of white electronic design revenues.

As we look into our first quarter, full year 2011 and beyond, we continue to expand above margin growth for Microsemi, as a result of four significant drivers. First, the continued expansion of electronic content in the DoD budget including Homeland Security. Second, Microsemi's intense focus on high growth electronic component and subsystem opportunities such as whole body scanning, radar identification, military radios, IED detection and guided munitions. Third, continuing growth of foreign military sales enabled in part by our industry leading Anti Tampers process technology base and lastly Microsemi's continued trajectory of the value chain which drives higher dollar content.

Excuse me – our aerospace end markets also performed well in the quarter, growing almost 10% sequentially in dollar terms. And there's a tailwind. According to the report two weeks ago by the international air transport association, commercial air traffic is back above prerecession levels, with passenger traffic up over 10% year-over-year, while cargo traffic is up almost 15%. Global carrier capacity is also in the rise, up 7% year-over-year.

All this bodes well for Microsemi as we continue to benefit from the recovery and now expanding of the industry, as we continually drive more content into the marketplace. A good example of this being the new PLAD, PLAD devices we announced earlier this week, a breakthrough plastic technology for transient voltage suppression devices, which lowers cost and enables more fuel efficient carbon composite aircraft to meet increasingly stringent safety standards.

Satellite continues to be a focus sector and a strong market for Microsemi. Satellite is one of the least economically sensitive end markets and has perhaps the highest barriers to entry. While the satellite market has been part of Microsemi's heritage for several decades, in recent years we have aggressively ramped dollar content by acquisition and we’re getting product development.

Our success stories are numerous including our Rad Hard Moss fit product introductions, our internal development of power management ICs the growing merchant DC/DC converter solutions and most recently our acquisition of Actel's industry leading radiation tolerant and Rad Hard FPGA and SoC solution.

Now, let’s turn to enterprise and commercial end markets. The end market is largely comprised of our DC/DC, lighting PoE and RF power amplifiers in markets. Revenues were up slightly in dollar terms. In lighting, our share gains with newer Chinese manufacturers were offset by lower revenues from our Tier 1 customers.

And as in the case, elsewhere in the LCD TV supply chain, we expect this trend to continue in the near term. However, a notable positive trend in this end market is our PoE business, including our midspan systems which continued to grow nicely during the quarter. As we continue to benefit from unrivaled IP and broad products offering and critical mass adoption of the PoE standard.

We also continue to gain mindshare with our LED backlight solutions and have been also recently received our first Solid Lighting volume purchase order. As the near-term correction of lighting completes, its cycle returns to growth, we expect Microsemi to be a market leader.

Now let's turn to our industrial and alternative energy end markets which grew 8% sequentially in dollar terms. This end market breakout includes our semiconductor capital equipment, energy, medical and various industrial product offerings. It is one of our larger and most varied end markets and it contain substantial growth prospects, especially as we lay on Actel's significant expertise.

Solar and plasma generation target products were standout performance of the quarter and we expect a continuation of this trend in the near term. Our medical product shipments were down sequentially in the quarter as expected. ICD shipments are softening as our customers been chariot, come in line with moderating growth in the ICD space, while MRI revenues albeit much smaller doubled year-over-year.

Going forward, we expect the total dollar shipments into the medical end markets have bottomed and we expect to see nominal growth, as our key customers consume parts in line with demand in the ICD markets and the MRI markets continue to gain steam.

Finally, I would like to discuss briefly our acquisition of Actel, which we closed on 2 November. I would like to relate to you, again, our rational in acquiring Actel. Microsemi will capitalize on the tremendous synergies made possible by this acquisition. At the most fundamental level, Actel is a perfect accretive acquisition for Microsemi. Actel has a long and successful heritage in the aerospace and defense markets that we and Microsemi know so well.

In addition of this business is broadening our product offering, enriching the profitability of our product mix and creating a product portfolio that is unmatched in the industry. To be short, Actel is the perfect tuck-in opportunity for Microsemi. This acquisition extends our product reach and greatly increases our SAM in creating a semi company, which has the broadest technology portfolio in the market today and almost perfect balance of defense, aerospace, industrial and enterprise and commercial end markets.

We can now push far deeper into the system level solutions than we ever could before with Actel's SmartFusion products we can now provide complete systems-on-chips solutions, an area that previously was beyond our reach.

Before we turn to your questions, let's review the highlights from this quarter. The accretive acquisition of Actel increased our SAM to $4.1 billion, up from $2.3 billion. We had record revenue growth. We accelerated the Scottsdale closure timelines. We had margin expansion as planned and we continued success in our accretive M&A strategies.

I want to thank you for your interest and support and now take your questions from analysts.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steve Smigie from Raymond James.

Steve Smigie – Raymond James

Great. Thanks, guys. Congratulations on the really nice numbers and guidance. I was hoping you could talk a little bit about how much Actel is in the September quarter dollar-wise. I know you gave two quarters, but just trying to take a look at how much of it is organic growth versus acquisition growth? And then if you could just give some sense of how seasonality will look going forward with Actel added before you sort of pretty steady each quarter, not a lot of seasonality, does that continue? Thanks.

Jim Peterson

I think what you're trying to get at is, did Microsemi grow and is Microsemi going to grow next quarter, is that – probably, I think what you really want to ask.

Steve Smigie – Raymond James

Yeah. The first question was just – what was Microsemi's growth on its own in September and then going forward, typically every quarter you give some sort of 2% to 4% sequential growth. Will it be the same sort of pattern roughly going forward?

Jim Peterson

All right. Let John take it.

John Hohener

Let me take it. First of all I want to make sure your question; you're saying Actel in September. We didn’t have Actel in September. It doesn't hit until December.

James Peterson

Right.

Steve Smigie – Raymond James

Sorry, sorry. Yeah, sorry about that.

John Hohener

Okay. So you mean…

Jim Peterson

So, all in all, I think we grew 11.2, Actel contribution, which is…

John Hohener

Well, Actel contribution is very small.

Steve Smigie – Raymond James

Thank you.

Jim Peterson

It was a small – there was about six weeks of white that was an uptick this quarter, but we had a very strong quarter in revenues.

John Hohener

So white was on about 5%, the balance was Microsemi.

Jim Peterson

And as we go forward in the December quarter, remember, because we're transitioning over into a sell-in model from a sell-through, so it's going to be fairly light, so I think you would expect that kind of a typical number, kind of the 2% to 3% growth in the December quarter.

John Hohener

And seasonality, I don't see a big difference in seasonality. The mix of the product is almost identical for where Microsemi's end product was, so I don't think we're going to be introducing a lot of seasonality through the acquisition of Actel, strangely enough.

Steve Smigie – Raymond James

Okay. And just last question, as I'm looking, say, comparing December guidance to what I might think could be potentially in March, you had two months in March and if I had, say, 3% organic growth and then I also have to add in some sort of additional revenue for the third month, what could March potentially look like?

Jim Peterson

Steve, right now we only guide out to December.

John Hohener

One quarter, Steve, you know that.

Steve Smigie – Raymond James

Right. Okay.

John Hohener

I'll give you an A for trying, though.

Operator

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

Mike Pachter – Wedbush Securities

Hi, guys. This is actually Mike [ph] on for Patrick.

Jim Peterson

Okay. How you doing today?

Mike Pachter – Wedbush Securities

Pretty good. Just going back into Actel and I know you guys changed your end markets exposure for segments. Could you talk about what end markets, the Actel revenue is going to fall into, maybe a little more granular, like how much percent is going to defense, et cetera?

Jim Peterson

It's spread across obviously in defense and security. They fall in aerospace. They fall in the industrial. Strange enough, a little touch on the alternative energy and in the enterprise and commercial marketplace. That's the beauty of the acquisition. It falls in all of our end markets and is almost a glove fit for the end customers.

Mike Pachter – Wedbush Securities

Okay. I know it's in all of them. Can you break it down a little further, like half that goes into defense or you don't want to go that granular?

John Hohener

I don’t know if it was granular. But I'm pretty excited about the defense and the security portion of it as far as the strength of the contribution from a financial point of view. But the good thing to note is they're in all our markets and probably I think – what I should touch on right now is we intend to service all those markets. We're going to exit some lower margin business or operationally fixed lower margin business. We're not terminating any particular products and it's just a nice overlap of the Microsemi product portfolio.

Mike Pachter – Wedbush Securities

Definitely. If you look for first quarter revenue guidance and you exclude Actel revenue, could you rank order your end market expectations?

Jim Peterson

Yes. Defense – defense security, probably you rank number one, aerospace number two, industrial and alternative energy number three and then enterprise and commercial. We all know what the market conditions would come in number four out of four.

Mike Pachter – Wedbush Securities

Sure. That's definitely fair.

Jim Peterson

Thank you.

Mike Pachter – Wedbush Securities

Last question. Gross margins, can you give us the puts and takes on it from the aspect of Actel, Scottsdale closure and integration of White?

Jim Peterson

Yeah. First is strengthening and John, you want to touch it.

John Hohener

Let me hit a few things for you. This quarter, 49.2 up from 48.4. White did as I said in the prepared remarks hit their 50% target that we had for them. Scottsdale, a couple quarters ago we kind of rolled out how the savings was going to hit. Let me do that for you one more time to make sure everybody has the math right.

Between our Q3 and our Q4 and Q4 I just announced was 500K, so keeping those two quarters we're at about a million, two in terms of savings. What we said in Q1 we're going to have another $350,000, which gets us to accum of 1.55.

In Q2 of '11, we said we're going to have an incremental of $2 million. That gets us to an accum of $3.55 million. And in Q3, when we get the full effect of the closure we're going to have an incremental 2.5 which gets us to a 6 – little over $6 million accum number. You take that $6 million, multiply by four and that's how we get our $24 million annualized savings.

Mike Pachter – Wedbush Securities

Perfect. Thanks, guys.

Jim Peterson

Thank you.

Operator

Our next question comes from the line of Quinn Bolton from Needham.

Quinn Bolton – Needham

Just a clarification and then just a couple of questions. John, can you review the gross margin guidance for the fiscal first quarter, given the two months of Actel revenue?

John Hohener

Well, obviously Actel is helping us get to a 53% to 54% margin uplift. But that's all I'm going to say about that.

Quinn Bolton – Needham

Okay. Actel, I think was in the mid to high 60s as a standalone company. I think you guys would certainly be able to maintain if it’s not even expand on those margins, like you pulled the data. Is that a fair…?

Jim Peterson

That's a fair assessment, yes.

Quinn Bolton – Needham

Okay. So your 53, 54, you've got roughly $5 million a quarter of Scottsdale still ahead of you. You just completed the fiscal year. Is this the time to start talking to us about where you think that gross margin target can go? I know you've been in the 50 to 55, but it certainly looks like you should be bumping that up two or three quarters down the road, given the Scottsdale close and the Actel acquisition.

Jim Peterson

Yeah. That's true. There’s no doubt about it. I think like I said before, as soon as we touch the 55 and 30, we'll do a quick victory lap and then we'll modify guidance depending on business conditions and our desires. But you're absolutely correct.

Quinn Bolton – Needham

Okay. And then looks like Actel is not accretive in Q1. It sounds like you've got a few things going on. You've got two month’s worth of expenses, but with the transition to sell-in from sell-out and some accounting or purchase accounting issues that maybe you're not getting the full credit for revenue, so just kind of wanted to come back.

I think you guys at the time of the acquisition had talked about a $0.22 to $0.28 EPS accretion number for calendar 2011. Is that still on track?

John Hohener

Let me answer two things for you first. First, it is accretive this quarter.

Quinn Bolton – Needham

Right.

Jim Peterson

Look at our guidance. Secondly, the $0.22 to $0.28, as we talked on the conference call on the 4 October is absolutely still in play. And John, you want to give any color on that?

John Hohener

No. But the point just to reiterate, we are seeing accretion in the first quarter.

Quinn Bolton – Needham

Okay. But it's certainly not on the order of the $0.22 to $0.28, yet right? You did request at this quarter.

Jim Peterson

This is a transition quarter. I mean, we are switching from sell-through to a sell-in model. But we are going to be accretive.

Quinn Bolton – Needham

Would you think that most of these transition effects are done in the December quarter and not asking for specific quarter-to-quarter guidance, but do you think you can get much more into kind of that quarterly run rate of $0.22 to $0.28 beginning that March quarter?

Jim Peterson

Yes. But to answer your question, the transition from the sell-through to sell-in will be completed in Q1 and we will be into a full contribution of Actel in our March quarter.

Quinn Bolton – Needham

Great. Okay. That's what I wanted to know. Thank you, guys.

Jim Peterson

Thank you.

Operator

And our next question comes from Rick Schafer from Oppenheimer.

Rick Schafer – Oppenheimer

Hey, guys. Can you hear me?

Jim Peterson

Yes, sure. Go ahead.

Rick Schafer – Oppenheimer

Yeah. A couple of questions. I guess one on Actel. Everybody's asking about it, but how quickly I guess you are going to be able to integrate and sort of right-size that business. It seems like OpEx as a percent of sales is actually going higher in the near term anyway. I guess when do we start to see the leverage or the benefit on that operating expense line?

Jim Peterson

You know the way we operate here, right?

Rick Schafer – Oppenheimer

Yeah.

Jim Peterson

We start to focus on OpEx minute one. All right. So it integrates the OpEx portion, we do that immediately out of the gate. The minute we sign papers we start moving on that particular area and then over time we roughly – we sort of focus on the operational efficiencies and then we do the Supply Chain Management and everything else does feature company.

Let's flashback to what we've done before in White. We acquired White two quarters ago. They were up 38% gross margin, operating about 8. That certainly, we said we would get that to 50 plus and 30% operating and we have. It's beginning as we speak right now. John?

John Hohener

Yeah. I think the issue that you're talking about is because of the revenue issue we have on the transition for the quarter, Rick. But our expectation is certainly that we start to leverage our percentage of the OpEx against revenue, march moving forward.

Rick Schafer – Oppenheimer

Okay. Okay. Fair enough. And then a quick question on tax rate. I know its high sort of artificially now but I would assume you start moving a lot of Actel stuff, if not all of it, offshore, whether that's Philippines, Macao, Ireland. I mean, is that a fair assumption and how quickly can that happen? Is that sort of on Jim's timeline that usual 12 month kind of thing or?

Jim Peterson

Certainly, to answer your question, we've already addressed that. We're already putting processes in place. It does take a little bit of time but expect some improvement moving into next year, expect some improvement this fiscal year.

Rick Schafer – Oppenheimer

Is there any reason – I am not putting a time line on it, but is there any reason we can’t see what you just printed, roughly a 14% non-GAAP kind of effective tax rate, is there any reason we can’t get back to that even with Actel in the model?

Jim Peterson

In due course, we are not going to get to that point, next year.

Rick Schafer – Oppenheimer

Okay. Fair enough. I was just curious if there was anything structural that would prevent that. And then, I guess you talked about – I guess maybe on medical, if could you give any color on sort of what was – I guess what caused ICD to be so sluggish in the last few quarters and what’s – I guess what’s the change now? What’s the inflection, what’s driving that business?

Jim Peterson

ICDs, if you look at it, right, somewhere reading from the three largest customers, it looks like a 5% to 7% organic growth, that’s pretty much it. It’s a surgery which requires insurance. A lot of people are unemployed. So I think if you just dial the Microsemi, because you wanted for that kind of growth for organic growth that’s what you’re going to get. Offset that a bit. We’ve been investing in the MRI business; focus on new design-ins, new customers, new products, smaller part of the market but that’s doubling. And I think you could probably dial in for the next year or so, that medical is going to be slightly up and that’s about it.

Rick Schafer – Oppenheimer

Okay. And then just I guess one last question. It seems like I always ask about the scanner biz, but I know you guys are constrained. I know you’ve got an order on the books for about $10 million shippable this year. That sounds like you probably don’t fill the whole thing. If we look to calendar 2011, I guess what do you – do we just – is the supply issue solved? Is supply, demand going to kind of match up?

Jim Peterson

Supply issues, we’re about there now. We said we probably do on or about $10 million, we did. We see it growing next year, certainly by about 20%. It’s the SAM of a $120 million, millimeter wave only. If you combine that with the x-ray potential, that seems to be losing favor in the market space, it’s a $200 plus million dollar SAM for us. It’s a new business. It’s here. It’s tens of millions of dollars to it; we are taking advantage of it.

Rick Schafer – Oppenheimer

Okay. So, if we think of it next year as sort of a $10 to $15 million contributor to top line, that’s the right way to think of it?

Jim Peterson

That’s not a bad assessment. That’s a good number.

Rick Schafer – Oppenheimer

Okay. Well, great. Thanks, guys.

Jim Peterson

Thank you.

Operator

Our next question comes from the line of Nicholas Aberle from Janney Capital Markets.

Nicholas Aberle – Janney Capital Markets

Hey, guys. Thanks for taking my questions. Just looking at Actel from a revenue standpoint, you guys talked about optimizing mix, walking away from some business. You guys still thinking kind of $225 million is the annual run rate for Actel once you guys do some trimming there?

Jim Peterson

Take a hard look at it. For October we dialed in 225. That might be – a fair overstated, maybe walk a little bit away from some of the business. The way I am looking at it now for profitable business, exiting some lower margin kind of business, little more comfortable like good, hard solid 215ish. But yeah, we’re not too far off from what we were targeting.

Nicholas Aberle – Janney Capital Markets

Got you. So, I can assume that probably March quarter you guys are somewhere in the kind of $50 million to $55 million kind of run rate, quarterly run rate, with Actel?

Jim Peterson

Yeah. We don’t give guidance. But you wouldn’t be too far off. That’s exactly the math you should be using.

Nicholas Aberle – Janney Capital Markets

Okay. Perfect. And then looking at the OpEx as well, basically two months of contribution, it’s basically what another $8 million of OpEx coming online from Actel in the March quarter?

John Hohener

Yeah. Basically I said 7 to 8 for SG&A and 8 to 9 for R&D.

Nicholas Aberle – Janney Capital Markets

Okay. So just basically another month. And then do you guys – now that you guys have had it under your belt now, what are we looking at in terms of rationalizing OpEx and savings there on the OpEx front for next year?

Jim Peterson

Under the belt it’s nine days. That having been said, right, I mean, that’s always the first thing you work on. I can’t give you a percentage, but like I said, minute one we’re working on it.

John Hohener

We’ve certainly already made some changes there and we’ll continue as we move forward. But we’re certainly going to invest in the business as well in order to grow.

Nicholas Aberle – Janney Capital Markets

Got you. And then for the December quarter, you guys have included just the cost of goods associated with the revenues that you guys are recognizing or is there more COGS there than you guys are actually recognizing on a revenue basis?

Jim Peterson

Well, there’s certainly costs in their operation that may not be absorbed as we switch over, which does give us some drag a little bit, but for the most part it’s obviously we’re just recording what’s –

Nicholas Aberle – Janney Capital Markets

What’s recognized?

Jim Peterson

What’s recognized, yes.

Nicholas Aberle – Janney Capital Markets

Got you. From a foundry standpoint, can you kind of give us an update on where you guys are going to shake out post Actel in terms of internal and external manufacturing and are there new foundries now that you guys will be associating yourselves with that are associated with Actel?

Jim Peterson

The intent we are coming with our foundries, we’re comfortable. We just had a high level meeting with their foundries and I think that the – the plan is to strengthen the relationship with the foundries that we have going forward. But having said that, we always have to look for opportunity.

Nicholas Aberle – Janney Capital Markets

Got you. So they’re all external manufacturing, right? So your split of external to internal will kind of skew that way, once it’s completed?

Jim Peterson

Yeah. That’s fine. That’s exactly right.

Nicholas Aberle – Janney Capital Markets

But where is it at? Is it like 50/50 now or where we are at in terms of the fabless model?

Jim Peterson

Probably 50:50 wouldn’t be too far off, right?

Nicholas Aberle – Janney Capital Markets

Okay. And then just lastly, the Dreamliner’s have been getting a little bit of negative press here over the last couple of days. I am sure you guys have a little bit of exposure there. Is that something you guys are seeing in your near-term fundamentals?

Jim Peterson

Yeah. I think they have six airplanes built out there. Well, I do the catch flight, so I think plane number two had some problems. But well, let’s talk about the aerospace, right. Aerospace business is strong. There’s a tremendous amount of business for the 737, 777, the Airbus, refurbishing business is strong. Passenger traffic is up. Cargo traffic is up. Boeing is increasing production. The backlog has never been bigger and we have new products. I’m excited about that commercial space and the 787, you know, they built six to date.

Nicholas Aberle – Janney Capital Markets

Got you. (inaudible).

Jim Peterson

Oh, yeah.

Nicholas Aberle – Janney Capital Markets

Okay.

Jim Peterson

That’s the word I was looking for. Thank you.

Nicholas Aberle – Janney Capital Markets

Thank you very much, guys.

Jim Peterson

Thank you.

Operator

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

David Wong – Wells Fargo

Thank you very much. A few quick things. The first thing is with Actel and white electronics you had said you were going to discontinue some product lines. Could you quantify how much revenue you’re currently getting that you would expect will eventually go away and what timeframe this will happen?

Jim Peterson

I’m not going to terminate from any product lines, right. What I would like to walk away from – we should walk away from. Can operationally fix low margin business and impertinent product, that’s what we walk away from the focus for both white, Actel and Microsemi proper is certainly in our original markets which is defense and security, the aerospace market, the industrial and alternative energy market and the enterprise and commercial. We’re not walking away from markets. We’re just making sure we serve ourselves with the best margin available.

David Wong – Wells Fargo

So, I mean, if I rephrase that, there’s some business you plan to walk away from. How many million dollars of that type of business is in your current revenues and how quickly does that go away?

Jim Peterson

Well we’ve already guided to what we think the revenues are going to be, right? What we did is Actel, on 4th October we thought it could be 225, David, remember. Then we said maybe it’s more like 215. White, that’s already kind of built in the model, right. The white business model is pretty much right on track. There we picked up some new business. We picked up some GPS business, we picked up some next generation military aerospace defense business and we picked up anti-tamper business which we are investing in the future.

With Actel we’re going to support the business that makes sense, certainly in the area of defense and security, certainly in the area of satellite. We’ll probably be really cautious and under microscope, is going to be some of the consumer business. But that having been said, that’s pretty much according to plan.

David Wong – Wells Fargo

Okay. Great. Then you talked about the gross margin of 53% to 54%, that’s a GAAP number or a non-GAAP number?

John Hohener

Right now, our GAAP and our non-GAAP are the same. We had a slight 10 basis points difference due to some purchase accounting issues that we had or not issues, but that we had to account for, dealing with white, actually, which is why we were 10 basis points different this quarter, but they are one and the same to us.

David Wong – Wells Fargo

Okay. That’s great. And then your current – what’s your current headcount and how do you expect this to change over the next few quarters this year?

David Wong – Wells Fargo

We’ve got 2,200 on or about at Microsemi proper. Actel had on or about 540 and I’ll give you a nice crisp update as to the total headcount next quarter, that’s the important question.

David Wong – Wells Fargo

Great. Thanks very much.

Jim Peterson

Okay.

Operator

Your next question comes from the line of Harsh Kumar from Morgan Keegan.

Harsh Kumar – Morgan Keegan

Congratulations. Great numbers and also finishing the - or completing the Actel acquisition. I think in your previous call, Jim, you talked about potentially having $15 million of savings and I know you’ve had it only for nine days, but is that still a pretty workable number? And if you can give us some color on how much of it might be – I know it’s early, but the COGS versus OpEx?

Jim Peterson

Well, the thing is, $15 million I gave you, you can pretty much put that down in your book. John. You want to dial in?

John Hohener

Certainly early on, the savings are going to be more OpEx related and we talked about probably the COGS would take more like three to six months out to start to recognize some savings in terms of wafer costs and other things that we’re starting to look at in that regard.

Harsh Kumar – Morgan Keegan

Got it. And I know, John, you went pretty detailed into the Scottsdale benefits and what it will do in terms of cost savings. Can you tell us what else is on tap if there’s anything that you guys didn’t talk about in terms of OpEx obviously outside of what you might do with Actel or white? Is there anything that’s still left that you guys haven’t mentioned yet?

John Hohener

No, I mean, certainly we need to integrate Actel and complete that process that we just described. Scottsdale will be completed at the end of March. We’ll get the full benefit of that in our June quarter. Kind of following the numbers that I said in the prepared remarks and that’s the only open items that we had out there.

Harsh Kumar – Morgan Keegan

Got it. And just kind of housekeeping question, Scottsdale benefit, is that mostly COGS at this point in time or is it a mix between COGS and OpEx?

John Hohener

Mostly COGS. There’s going to be a little bit of OpEx as well. Probably when all said and done we’ll save $1 million a quarter on OpEx.

Harsh Kumar – Morgan Keegan

Got it. That’s it for me. Thanks, guys, congratulations.

John Hohener

Thank you, my friend.

Operator

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

Christopher Longiaru – Sidoti & Company

Hey, guys, congratulations on the quarter, the guidance and the acquisition.

John Hohener

Thank you, my friend.

Christopher Longiaru – Sidoti & Company

My question has to do with just the inventories, I know it jumped and I know a big chunk of that’s probably because of the transition and because of Actel. Can you give us a little read into the inventory, what you’re seeing in the channel and what you expect the inventory to look like going forward?

Jim Peterson

Yeah. I mean, we all know the commercial, let’s go to that first, (inaudible), we know there’s got to be some digestion going on maybe next quarter or two in the commercial business. However in our defense, our security, our aerospace, our larger businesses, we’re not running into, bumping into and/or sold into that problem.

Christopher Longiaru – Sidoti & Company

So then the major part is just commercial and it’s because the backlog is what it is?

Jim Peterson

Looks like that to me. John?

John Hohener

Yeah. In terms of our absolute inventory level, it did go up as we said, primarily due to support of increased business as well as positioning ourselves with the transition and the shutdown of Scottsdale. We do expect that piece of it to start to level off a little bit as we move forward.

Christopher Longiaru – Sidoti & Company

Got it. And the only other thing is just – you’ve had these price increases, any news on this year and possibly next year in terms of raising prices price?

Jim Peterson

The price positioning program, as I like to refer to it that was going back a while back when we had a speed [ph] only company. However, you always should look at your pricing because every once in a while your sales guys might misprice something. But there’s not a program of raising prices at Microsemi and hasn’t been probably for the last 18 months.

Christopher Longiaru – Sidoti & Company

Right. But there’s nothing there that you’re going to revisit at this point?

Jim Peterson

No, not really. I always question the sales guys, making sure they’re getting what the market shall bear. That’s about it.

Christopher Longiaru – Sidoti & Company

Okay. Great Thank you very much, guys.

Jim Peterson

Thank you.

John Hohener

Thank you.

Operator

(Operator Instructions) Your next question comes from Quinn Bolton from Needham.

Quinn Bolton – Needham

Hey, John, just two quick model follow-ups on the Actel, since you purchased inventory at the time – any inventory at the time of close, I think, has to be written up. How are you going to account for that? Is that included in the 53 or 54 – 53% to 54% guidance or are you going to have kind of purchase accounting charge for Actel in the December quarter that’s not included in that 53% to 54% range and then one other tax related follow-up?

John Hohener

Yeah. We have to go through our evaluation analysis for Actel and basically they become a starting balance sheet to us. So their inventory will be fairly valued moving forward as we go forward.

Quinn Bolton – Needham

But, I mean, any inventory on the books at the time of acquisition, doesn’t that typically get written up and effectively sold at a 0% gross margin?

John Hohener

Yes. We have to eliminate their profit in inventory and that will occur.

Quinn Bolton – Needham

Okay. And so that would be excluded then, or that’s not incorporated in the 53% to 54% gross margin guidance?

John Hohener

Right.

Quinn Bolton – Needham

Okay. Great. And then you mentioned, I think, a 21% tax rate in Q1. I think typically for modeling purposes aren’t we supposed to assume sort of an annual tax rate and take some – adjustments need to be made. They’re made through the year, but when you say 21% for Q1, should we use that for the entire fiscal year or do you think you will see that stepping down on a quarterly basis?

John Hohener

You should use that for your initial model and as we make progress we will report it to you.

Quinn Bolton – Needham

Got you. So we might be able to step that down, but for now, 21 is a good rate?

John Hohener

Yes.

Quinn Bolton – Needham

Great. Thank you.

John Hohener

Okay.

Operator

And presenters, at this time, I would like to turn it back over to you for any closing remarks.

Jim Peterson

Just thanks for joining us today. And have a great day, guys.

Operator

And this will conclude today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Microsemi CEO Discusses F4Q2010 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts