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Microsemi Corporation (NASDAQ:MSCC)

F1Q2011 (Qtr End 01/02/2011) Earnings Call

January 27, 2011 04:45 pm ET

Executives

Jim Peterson - President and CEO

John Hohener - VP and CFO

Steve Litchfield - EVP and CSO

Analysts

Quinn Bolton - Needham & Company

Patrick Wang - Wedbush Securities

Craig Berger - FBR Capital Markets

Andrew Huang - American Technology Research

Rick Schafer - Oppenheimer & Company

Steve Smigie - Raymond James

Harsh Kumar - Morgan, Keegan & Company

David Wong - Wells Fargo

Nicholas Aberle - Janney Capital Markets

Tore Svanberg - Stifel Nicolaus

Operator

At this time, I would like to welcome everyone to Microsemi's first quarter earnings call. (Operator Instructions) Ms. Terri Donnelly, Coordinator, please go ahead.

Terri Donnelly

Good afternoon and welcome to Microsemi's first quarter 2011 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 Vice President and Chief Financial Officer, and 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 January 27, 2011 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. 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 October 03, 2010, which was filed with the SEC on November 23, 2010.

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

Thank you, Terri. Net sales for the quarter ending January 2, 201 were a record $184.4 million, up 21.9% from the $151.2 million in the fourth quarter of 2010, and up 63.4% from the $112.8 million reported in the year-ago first quarter.

GAAP gross margin in the first quarter was a record 51.5%, and despite including the negative impact of non-cash purchase accounting adjustments related to acquired profit and inventory from our Actel acquisition, it increased 240 basis points from the 49.1 in the fourth quarter of 2010, and 520 basis points from the 46.3% in the year-ago first quarter.

Excluding this non-cash item, our non-GAAP gross margin for the first quarter was 53.6%, up 440 basis points from 49.2% in the fourth quarter of 2010 and up 730 basis points from the 46.3% gross margin we reported in the year-ago first quarter. Approximately 90 basis points or $1.1 million of the sequential improvement is related to cost savings associated with our Scottsdale transition.

Our non-GAAP gross margin forecast for next quarter is expected to be in the range of 56% to 58%. We are still on track to cease operations of our Scottsdale facility by the end of February. Total annualized savings, when complete will equal $24 million, which is at the high end of our original goal.

This quarter, non-GAAP selling, general and administrative expenses were $32.5 million or 17.6% of sales compared to $24.2 million or 16% of sales in the fourth quarter of 2010, and compared to $18.2 million or 16.2% of sales in the first quarter of last year. The increase is primarily due to the acquisition of Actel.

SG&A will be up next quarter $3.5 million to $4.5 million primarily due to the addition of Actel for the third month in the quarter, as well as some additional cost to support our continued growth prospects for the coming year.

Research and development costs were $24 million or 13% of sales compared to $16.7 million or 11% of sales in the fourth quarter of 2010, and compared to $11.8 million or 10.5% of sales in the year-ago first quarter. This increase was again due primarily to the acquisition of Actel.

R&D will be up in the next quarter $3.5 million to $4.5 million, primarily due to the addition of Actel along with some additional costs, our product development efforts as we intend to continue to make prudent investments that will deliver continued organic growth.

Our non-GAAP operating income was $42.4 million or 23% compared to $33.5 million or 22.1% in the fourth quarter of 2010, and $22.2 million or 19.7% in the prior year first quarter.

We recorded $3.2 million in non-GAAP interest and other expense, primarily due to the interest expense on our term loan. This is for two months. We expect this expense to increase to approximately $5 million next quarter.

We account for our term loan under the fair value option and record charges to the fair value through other income or expense. Changes in the fair value of term loan balances outstanding did not result in a change to the principal we owe and our non-cash amounts that we exclude from internal measurements and from forecasting future non-GAAP results.

We recorded a charge of $4.4 million for the fair value adjustment in our GAAP results. Non-GAAP net income was $31.1 million or $0.37 per diluted share compared to $28.8 million or $0.35 per diluted share in the fourth quarter of 2010, an 8% increase, and $18 million or $0.22 per diluted share in the year-ago first quarter, a 73% increase. Our non-GAAP effective tax rate for the quarter and the year is 20.5%.

For stock based compensation expense, we had non-cash charges of $7.3 million which we expect to increase by quarter $400,000 to $600,000 million next quarter, primarily due to having assumed Actel equity awards for a full quarter.

Our first quarter operating results also include $26.4 million for Actel restructuring, acquisition costs and other charges. Also included were non-cash charges of $14 million and amortization of acquisitions-related intangibles. We expect this to increase to $18.5 million next quarter, as we have a full quarter of amortization for Actel.

As a reminder, accounting standard ASC 805 now dictates that acquisition cost be expensed in the period incurred and not carried as part of the overall cost of a purchase. Because of these acquisition costs, we have GAAP operating income of $4.4 million compared to GAAP operating income of $16.9 million in the fourth quarter of 2010, a GAAP operating income of $10.5 million in the prior year first quarter.

Capital spending was $5.7 million in the first quarter compared to $6.9 million in the fourth quarter.

Depreciation and amortization expense in the first quarter was $21.9 million compared to $11.9 million in the fourth quarter, with the increase primarily due to the Actel acquisition. Compared to the fourth quarter, accounts receivable increased to $35.9 million with the increase again due primarily to the addition of Actel's opening balance sheet and activity for the quarter.

Our DSO for the quarter was 47 days, an improvement of four days from last quarter. Our inventories increased by $34.2 million compared to the fourth quarter, the increase due primarily to the addition of Actel's opening balance sheet and activity for the quarter.

On a GAAP basis, our days of inventory are 143 days, again an improvement of two days from last quarter. We ended the quarter with a cash balance of $203.4 million. Our cash disbursements included $20.3 million in transaction-related cost and $13.4 million in upfront debt issuance cost. Excluding these two amounts, we generated operating cash-flows of $30 million. Reflecting a continued strong growing trend, our book-to-bill ratio was greater than 1:1.

Using end market descriptions we updated and described last quarter, our best estimate of the end market percentage breakout of net sales for the first quarter, including two months contribution from Actel was approximately: Defense & Security 38%, Aerospace 25%, Enterprise & Commercial 18%, Industrial & Alternative Energy 19%.

Now for our business outlook. The second quarter of fiscal year 2011 we expect our net sales will increase between a range of 10% and 13% sequentially. On a non-GAAP basis, we expect earnings for the second quarter of fiscal year 2011 to be $0.44 to $0.46 per diluted shares. These estimates include a full quarter's contribution from Actel.

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

Jim Peterson

We are excited about our prospects in the Defense & Security markets, where revenue grew almost 7% sequentially. We benefit from a growing product offering and are continuing to push up the value chain in delivering merchant systems and subsystems, revenues with increasing Microsemi content within.

As these efforts succeed, we expect to capture increasing dollar content that will accelerate our revenue growth opportunity.

Our footprint today is five times larger than it was just three years ago, and we aren't done yet. Our future rests in our own hands. We expect strong continued growth in applications such as radar jamming, missile defense, GPS surveillance and homeland security.

We remain optimistic about the U.S. defense market, as we're seeing overall DoD budget with slated growth through 2012, (inaudible) budget poised for growth through 2016 and a defense department that is focused on force modernization. And here at Microsemi that means electronic content growth.

Finally, let us not forget the growth of foreign military sales and the upside opportunity increase for Microsemi. To be short, foreign military sales are on the rise. We believe 2010 U.S. foreign arms sales totaled approximately $38.1 billion, and the market is growing, driven by the U.S. need for greater security co-operation around the world.

And sources believe this market could total $50 billion in 2011, and we believe the long term opportunities to grow as illustrated by the recent $60 billion arms deal reached with Saudi Arabia.

Aerospace delivered a very strong quarter for Microsemi, growing 52% sequentially in dollar terms. And as you know, the said market includes our satellite, commercial aerospace, and radar and avionics infrastructure products.

We're most optimistic about this end market for a number of reasons, but here are just a few. Commercial Air is on the rebound with Boeing Airbus reporting record aircraft bookings, growing backlogs and multi-production numbers are on the rise. We expect a multi-year recovery in this marketplace.

Our satellite markets remain white hot and show no sign of cooling off. According to third party estimates or market analysts such as The Teal Group in the satellite market will continue into 2017 driven by communications, defense and commercial applications here in the U.S and abroad.

Our dollar content opportunity is rapidly growing in the satellite market, which with the addition of the SOC Group now approaches $3 million per satellite. As we expect to drive our system level power management solutions, red hot power products and new SOC solutions into the marketplace for Microsemi to expand on already solid market growth opportunity.

Now let's turn to our enterprise and commercial end markets. This end market largely consists of our dc-dc lighting, PoE and our amplifier end markets and will now be joined with the SOC Group's communications and consumer end market solutions. With SOC on board, revenues here grew over 7% sequentially in dollar terms.

As seen throughout the industry, we did see some challenge in rebalancing in the December quarter, primarily in our Wireless LAN and PoE business, but are pleased to report that we are poised for continued growth in March, driven predominantly by our dc-dc, lighting and our amplifier products.

Now let's review our industrial and alternative energy end markets, which grew over 43% sequentially in dollar terms. This end market break-out includes our semiconductor capital equipment, energy, medical and various other industrial product offerings. It is one of our largest and most varied end markets, and it contains substantial growth prospects as we layer in SOC's significant expertise in sensing, control and industrial automation, semicap, solar, plasma generation, down-hole drilling-targeted products with a standout performance for the quarter, and we expect continuation of this trend in the near term.

Finally, I would like to update you on our integration with the SOC Group, formerly known as Actel. To-date, the integration has gone exceeding well. We continue to bring the expenses in line, and see all our expected savings or our third fiscal quarter meeting or exceeding our corporate operating margin of 30% at this Group.

Plans to drive revenue synergy and more effective tax strategies are already underway. And I'm impressed with the team effort I've seen to-date. Our groups have come together quickly, with a unified focus on our core markets.

As I've said previously, the addition of the SOC Group is designed to establish an unrivalled space level product portfolio that enables substantial increases in our dollar content, opportunity and profitability. We are successfully integrating this group as we speak, and I'm extremely confident in our ability to execute in 2011 and beyond

This concludes my prepared remarks. But before we turn to questions, let's just review the highlights for the quarter. The acquisition of Actel increased our (NYSE:SEM) to $4.1 billion, up from $2.3 billion. Record revenue, margin expansion; GAAP gross margin is at 51.5%, and a successful M&A strategy.

So at this time, thank you for your interest, and now we will take questions from our analysts.

Question-and-Answer Session

Operator

The next question comes from the line of Quinn Bolton.

Quinn Bolton - Needham & Company

Can you sort of talk about, in the enterprise business I think some inventory build in PoE and Wireless LAN and wasn't sure if that was something that hit the December quarter or whether it was something that might be a drag on March quarter results.

So I was just wondering if you could give us a little bit more color on that segment of the business.

Jim Peterson

I think predominantly December quarter. And as I mentioned in my prepared comments, as we are strengthening in that segment, based on some dc-dc products and probably amplifiers. So I think we are just a little bit in, adjusting the inventory and I think we are beyond that.

Quinn Bolton - Needham & Company

Okay, if orders come in back. And looks like you are back to a more normal order flow for March and beyond.

Jim Peterson

Absolutely. Yes.

Quinn Bolton - Needham & Company

Second question, just kind of looking forward to March, can you give us some sense which of the four segments you think will be strong, and any kind of rank or order you could provide?

Jim Peterson

We worked through it, between John and I, but aerospace was up 52% last quarter. I expect that could be the leader again next quarter. Our industrial market space was up about 43% last quarter. I think that will come in second with strong performance, followed by defense and security and enterprise. I think every one will be up in actually dollars.

Quinn Bolton - Needham & Company

Okay, and then lastly, Jim you talked about the satellite content, I think that will be in $3 million. Is that varies with Actel or is there further opportunity, especially as you get into the payload side of satellites for you to drive that content even higher than $3 million?

Jim Peterson

The sure contributor is certainly Actel, Not too long ago, we acquired Babcock. And then we had our Microsemi proper position. So it's extremely with the Actel in there, and you're right. The plan is to keep the Actel and the other components of Microsemi and start to focus on a very strong and three times larger than bus system cables opportunity.

Operator

Your next question comes from the line of Patrick Wang.

Patrick Wang - Wedbush Securities

So congrats on the great quarter and the progress of Actel. I want to get a better sense of the moving products in terms of gross margin from the December quarter to the March quarter. I mean, you guys are guiding some pretty strong margin expansion here. So just the moving pieces there and then what can you expect over the next couple of quarters here in terms of markdowns?

John Hohener

As I think we've said in our prepared remarks, our guidance for gross margin is going to go to 56% to 58%. Certainly, we do have an extra month of Actel in there. We have converted Actel to our selling model from a sell-through model. They did contribute two months worth of revenue in the first quarter.

Patrick Wang - Wedbush Securities

I mean, just outside of the Actel impact, was there anything else that helped move margins higher?

John Hohener

Yes, I mentioned in the prepared remarks also, Scottsdale, we picked up approximately $1.1 million of contribution. We didn't close the fab in the November timeframe. The whole facility is in schedule because in February, I will pick up another $1 million in the March quarter and then of course we won't have any Scottsdale cost in the June quarter, which will help us in that quarter as well a little over $2 million.

When you annualize all of that we are on a $6 million per quarter run rate that we have improved since we started the process for an annualized basis of 24.

Jim Peterson

And don't discount the fact that we have some new product that has been introduced in the product mix going forward. Lot of it still is from the R&D component that we put into the company as well.

Patrick Wang - Wedbush Securities

And then I guess if you think about the next year or two here with your current product mix, then where do you think margins can go? I mean, where do you feel like is the comfortable level that we should be thinking about just over time?

Jim Peterson

I'm real comfortable with guiding 56 to 58 next quarter. And I think what we should do, as we always do here at Microsemi, my team is going to get together, we're going to look at different opportunities, growth opportunities, investment opportunities. And I think once we get through this magical 55 that we've laid out there, we'll re-address that. And let's just wait until next quarter there to walk you through that.

Patrick Wang - Wedbush Securities

And then you were talking about a couple of areas. I think Quinn asked about it earlier. Is there anything else outside of a little hick-up there that you could see?

Jim Peterson

Not really. We touched on a little bit of what this inventory adjustment, I think the whole (plan at MSC). And we saw a little bit our dc-dc, just a little bit of the PoE. I think everything else is just going as planned or slightly above.

Patrick Wang - Wedbush Securities

And then just lastly, I have to ask a question on body scanners because I keep on getting (stopped) by the DSA. How is that ramp coming for you guys?

Jim Peterson

Let's go with the important part. One, let's not forget it's a presidential order. Let's not forget there are 400,000 million detectors out there that don't work. We have been pretty consistent in failures worth tens of millions of dollars. We think it's going to grow on or about 20% year-over-year. And that all looks on track.

Operator

Your next question comes from the line of Craig Berger.

Craig Berger - FBR Capital Markets

Just wanted to ask on the revenues. As you guys guide for March, how much of that is Actel, because I am just running the math on 3% sequential growth in December and March. Organic, that's $10 million, and it looks like only about $45 million of Actel's making it forward. Is that the right way to think about that?

Jim Peterson

I don't have the hard number for you, but last quarter we spoke to the fact that Actel was going to be on or about $215 million for the whole year, for the calendar year. So we have dug all that in and what we are seeing from the opportunities.

We are head-to-head somewhere between, I don't know, 49 to 55'ish depending on what we take in a given quarter. That wouldn't be a better way to look at it for the next quarter.

Craig Berger - FBR Capital Markets

So basically, you are telling me the organic business hasn't grown for the last two quarters.

Jim Peterson

The organic business? What you mean, organic business?

Craig Berger - FBR Capital Markets

I mean Microsemi (Alt), because the math isn't working.

Jim Peterson

I think Microsemi, what you say proper certainly has grown a bit. Yes. If you dial-in somewhere between 49 and 55, you won't be too far off. And Microsemi organic, let's call it that way proper has certainly grown a bit.

Craig Berger - FBR Capital Markets

Regarding the operating expenses, what's the reason for such a big step-up in the first quarter? I understand you're still having to stub on Actel. Is there something beyond that because I am always saying, about a third of that fell down to the operating income line. I was expecting a little more.

John Hohener

No, certainly it's not primarily that the increase is due to having a third month of Actel. And then of course we have variable expenses, commissions, etcetera go up as we sell more. But for the most part, it is, we had Actel for two months of expenses in the December quarter, we'll have them for three in the March quarter.

Craig Berger - FBR Capital Markets

Can you just refresh us on how much cost savings are left on the Scottsdale fab closure going forward?

John Hohener

We just finished this quarter with $1.1 million and forecasting $1 million in the next quarter. And then of course you see the full effect of that in Q3.

Craig Berger - FBR Capital Markets

And what's the full effect?

John Hohener

The full effect is now at $6 million a quarter from we started this. But Q3 itself, about $2 million to $2.50 million.

Craig Berger - FBR Capital Markets

So $1 million of benefit in March and $2.50 million in June?

John Hohener

You could think of it that way, sure.

Craig Berger - FBR Capital Markets

Okay, what about the acquisition is going well and what are you finding to be challenging?

Jim Peterson

Again, across the board the first thing and most important thing is that we hold the product roadmap, right? I am extremely comfortable with our team and their team which is now one team going forward. I think on the highlights, which is I think the (space) product, the (space) roadmap is much stronger than anticipated into it.

I think looking at the commercial market, we are not walking away from any markets but identifying where we should participate going forward. It has not been a challenge, but it's certainly been a good subject and good discussions.

I'll be quite honest here; this is going better than I had planned across the board. This is a very, very enjoyable acquisition.

Craig Berger - FBR Capital Markets

So there are no challenges?

Jim Peterson

There are always challenges, the day-to-day challenges right? But I think there is nothing that would tell me that I would diminish my expectations for revenue or profitability going into this; there is nothing that would tell me that the $15 million plus synergies that we expect going into it are not there.

There is nothing that would concern my shareholders at this point.

Craig Berger - FBR Capital Markets

Housekeeping, did you guys give us a tax rate for the year?

Jim Peterson

Yes, we did. John.

John Hohener

Yes, 20.5% would use up for the year.

Craig Berger - FBR Capital Markets

20.5%. And what was the stock comp guidance?

John Hohener

Stock comp, it went from 6.3 to 7.3, and we're guiding it up $400,000 to $600,000. So that primarily is dealing with, assuming Actel award for a full quarter again versus a partial quarter in December.

Operator

You next question comes from the line of Andrew Huang.

Andrew Huang - American Technology Research

So it seems pretty clear that the margin improvement part of the story is working pretty well as Actel. And I know this is a little bit longer term, but can you give us a little more color on maybe the revenue synergy opportunity that you have there?

Jim Peterson

Yes, the revenue synergy with Actel, I think Microsemi, we are going through this initial integration of their revenue and our revenue. Our plan is, we have historically grown at 15% to 20% year-over-year as a company. I don't think you should expect much difference going forward in the years to come.

Andrew Huang - American Technology Research

And then can you give us a sense of total headcount today, and then how much of that can be attributed to Actel?

Jim Peterson

I don't have the hard number with me, but if you (inaudible) 2,500 you might not be off like 50 employees either way. You know in Actel, we all know they are a public company. Whatever their headcount was, you probably take that down by about 15%, 20%, since we did the acquisition.

Operator

Your next question comes from the line of Rick Schafer.

Rick Schafer - Oppenheimer & Company

I have just a couple of quick questions; one, you mentioned the International Defense business opportunity. I am kind of curious what the net effect is to Microsemi of some of the legacy programs being cut? I guess you're having some of those cuts as new smarter weapon programs ramp.

Can you give us an idea of the exposure you guys have, the new versus old programs? I mean, what does a let's say a 5% or 10% DoD budget cut really mean to you guys at the end of the day?

Jim Peterson

Again, let's talk about this budget cut. First of all, defense budget is not cut, is increasing. Electronic content is up higher, is not decreasing. And foreign military sales are going from about $30 billion to certainly around $50 billion, maybe $70 billion in the next couple of years.

Now, so what have we got for Microsemi right? We are in about every program that's out there. But in the last three years, we've been focusing on programs that have electronic content more so than not. So let's just look at the figures, right? Content's increasing, your military business, the GPS receiver business, small diameter bombs are increasing, radar detection is to our favor, Predator and UAV is in our favor, forced modernization which is up, more electronic contact from ground to satellite, satellite to ground, system growth and predominantly market share.

And we have gone up from over $100 million in this space to over $300 million in the last two years. I think we are in pretty good shape.

Rick Schafer - Oppenheimer & Company

Then a question is for John. You guys move more and more production and packaging test, everything offshore. Obviously your tax rate continues to drop. I guess, what happens to all the cash generated? I guess I'd be curious what your percent of cash flow is now that's being generated offshore and what if any plans do you guys have to repatriate it, or I guess where is it sitting?

John Hohener

Right now we've been fortunate that we've had an opportunity to bring it primarily all back to the US without any kind of tax or dividend. As we move forward, and certainly as we generate more profit offshore, it will be challenging to bring it all back.

But we're estimating that probably about 40%.will be generated offshore from this point forward.

Rick Schafer - Oppenheimer & Company

And of that 40% there John, going forward do you think you're bringing half of them back or any idea?

John Hohener

We forecast that we don't really have to bring it back from an operational perspective, but we can use it overseas, we will in terms of running our operations for future acquisitions etcetera. So at this point in time we don't need to bring that back or we don't anticipate needing to bring that back.

Jim Peterson

Can you speak to what percentage today's cash is domestic US?

John Hohener

Right now we only have about 20 million of our cash that's located offshore for operational purposes.

Operator

Your next question comes from the line of Steve Smigie.

Steve Smigie - Raymond James

You usually give some sort of color on the top-line with regard to looking out over the next quarters of growth. Are you feeling sort of three to four, three to five-type combined sequential growth at this point? Any color you can give there?

Jim Peterson

I'll give you a lot of color. I feel next quarter is certainly going to be 10% to 13%.

Steve Smigie - Raymond James

After that quarter, I mean subsequent quarters you bought a bunch of nice business here that's sort of like the higher end of your range or a renormalized path to Actel.

Jim Peterson

The game plan was to get away from the 1% to 3%, try to get more to the 3% to 5%, the 3% to 6% kind of stable grower. And I think with the acquisitions and the markets that we are in, what we are seeing and the platforms that we are working, the new products coming out. I think that's very, very possible.

Steve Smigie - Raymond James

And then with regard to operating expenses that you all set up now due to the acquisition of Actel, should we sort of look at that going forward for models as those are the right percentages to be thinking about for operating expense or is there still more operating expense synergy to come in over the next several quarters?

John Hohener

There's always synergy, and certainly we are going to see with the acquisition, you know we have a little slight uptick as it relates to percentages against revenue. After next quarter, we will see that decreasing again. We will not need to add meaningful OpEx in terms of supporting our growth, except for I should say SG&A.

And we will invest in R&D, but that will be modest in terms of the overall impact to a given quarter.

Steve Smigie - Raymond James

Right. But other than the usual you guys (inaudible) OpEx while revenue grows, is there still more just taking stuff off Actel to come?

Jim Peterson

So much is Actel. I mean the name of the game to run an efficient company is to look not only on what you acquire and what you have at home base or at Microsemi proper. You know the way we operate, right? We (draw).

John Hohener

Just to Jim's point, that's not a one-time activity. We are continually looking at that.

Steve Smigie - Raymond James

Last question is just if you could comment a little bit on, you've obviously picked up a lot of the satellite business through a bunch of different acquisitions. Can you talk a little bit about the opportunity to turn some of those products to other areas or is that mostly just going to remain focused on satellite?

Jim Peterson

I think there's satellite, but within the satellite market I think there is a compelling reason to look at what we have done, in particular at Actel for the satellite market and maybe then go on to the Commercial Air market and then take some of the stuff in our Commercial Air market and bring it to the satellite market.

I think it is such great market; I think there is great growth from now through 2017 with our cut there going from three, four years ago under a $100 million dollars and $3 million for satellite. There is just a lot of opportunity across the board. And there are other spaces, other things that we have acquired and other things we are looking at, but I think we're going to increase our dollar contact and certainly our margin contribution to satellite market space.

Operator

Your next question comes from line of Harsh Kumar.

Harsh Kumar - Morgan, Keegan & Company

Congratulations on a very good quarter. Good guidance. A couple of kind of housekeeping questions. I believe you said, if I missed it that the Actel sell-through to sell-in process is now complete.

Does that not create a bump for you in terms of revenue recognition, or am I thinking about it wrong?

John Hohener

The answer is yes, it is complete. Technically, on day one we converted that to a sell-in versus a sell-through. Actually it hurts us a little bit in the initial quarter as we are not able to recognize any of the revenue sitting at the distributors'.

Having said that we are able to collect on those receivables and give the cash. So you should look at it as, we had approximately two months worth of normal activity in December and will have a full four quarter for them in March.

Harsh Kumar - Morgan, Keegan & Company

Got it. That's helpful, thank you. And then, Jim, in terms of Actel, I believe some of the stuff you have done, what are some of the major things that are left for you to do in terms of cost synergies?

Jim Peterson

Well, cost synergies, certainly we moved on the OpEx out of the gate. We are looking at operational expenses, we are looking at wafer cost, we are looking at engineering. We are doing the natural things we do after you just do the OpEx.

But more importantly, what I'm hoping to get out of Actel, which we really haven't gone into hard detail, is, hey, what have you guys done in the medical business that we can latch on to, and certainly in the automotive business. Because I think Microsemi proper, we've not done a great job in the medical business; we have not done a great job in the automotive business.

And I think Actel and their team have reached into those areas. So it might be part of any additional efficiencies by using some of their knowledge that we haven't had before.

Harsh Kumar - Morgan, Keegan & Company

Got it, that's very helpful. And then also, in terms of (white), I think you had a 50/30 model last quarter, which was kind of your goal. Is that fully optimized, or is there some leftover there for you to take out?

Jim Peterson

We said we'd do that by the September quarter; we did, and there might be a bit there to take out. We are working on it. I don't want to reset their goal, but then I'd like to take the different divisions and break them up one by one, but I think there is bit more there, yes.

Operator

Your next question comes from the line of David Wong.

David Wong - Wells Fargo

A couple of things. The first thing is, does your March quarter guidance include any significant revenues from segments of businesses you acquired that you expect to exit?

Jim Peterson

No.

David Wong - Wells Fargo

Okay, great. And in the past, your mix of business has sort of seemed to all balance out, so there wasn't any real seasonality through the year. Is that still true with all the new stuff you've got?

Jim Peterson

You know what? Check it out. It still stands that we are probably at this point not going to be affected by what would be considered seasonality. We might have another year or so of really not been affected too much by seasonality.

David Wong - Wells Fargo

Great, on restructuring charges, do you expect to have any more restructuring charges in March or future quarters?

John Hohener

Certainly, some of the charges do carry forward as it relates to Actel. We've talked about closing Scottsdale down, so there will be some incremental charges there. Whenever you close an activity down or acquire a company, there are going to be some of those charges.

David Wong - Wells Fargo

But these will be largely done by March, John, or there are still significant amounts in June and beyond?

John Hohener

My expectation is, largely done by March.

David Wong - Wells Fargo

And my final one. The Actel inventory that you've written up, did it move off your balance sheet fairly quickly or stay on for a while? Is it FIFO or LIFO accounting you're doing with Actel?

John Hohener

It's based on the standards that's based on FIFO I don't think about it that way, but it's basically an Actel that (rolls) under your standard.

Operator

Your next question comes from the line of Nicholas Aberle.

Nicholas Aberle - Janney Capital Markets

Just on the subject of seasonality, Jim, you talked about everything being up in the March quarter. So that would include commercial. And you guys still got a decent chunk of consumer stuff in there.

Is consumer up? Is that a function of the market, or are you guys gaining share there, and that's helping you to feel a little better?

John Hohener

I think we are gaining share there strangely enough, because I got to look at it two or three times when I saw the data that came in. I think it's going to have to be attributed to some ARPU gains.

Nicholas Aberle - Janney Capital Markets

Got you. So the underlying market is probably still seasonal, but you guys outperform a little bit.

John Hohener

In that particular bucket, yes.

Nicholas Aberle - Janney Capital Markets

Okay, got you. And then on the defense side, it only grew 7% sequentially in the December quarter. Is that just a function of not a lot of Actel business actually got characterized as being true defense business?

Jim Peterson

Yes, you hit it right on the head.

Nicholas Aberle - Janney Capital Markets

Okay, got you. I was listening to the Altera call earlier this week. They talked about a little bit of lumpiness in the defense markets and some softness there. Just was wondering if you guys actually have seen any of that?

Jim Peterson

The word is not lumpy, for defense goes kind of hand-in-hand with like seasonality and consumer. I think the scale in demands that we have got of $300 million plus and the strength and the diversity of our programs and what we are design into whatever be lumpy for a guy that's kind of (inaudible) into it or just has a small portion of it.

We see this lumpiness kind of being as a scalable market. I can't call it lumpy for us. It just continues to roll.

Nicholas Aberle - Janney Capital Markets

Got you. I think you've briefly touched on automotive. Other companies are talking about automotive end markets coming back here a little bit. I don't know how big of a piece of your overall business it is today, and you guys used to talk about it a lot more.

Is that a growth opportunity for you guys going forward?

Jim Peterson

Check it out. It is, right? We don't do a lot automotive, right? I didn't drive it hard enough. But what I saw looking at market space is that we have a product portfolio, especially in higher reliability and the like. We should have a stronger footprint in automotive and are hoping to use the SoC Group in order that Microsemi can make that a growth opportunity for us and the company.

Nicholas Aberle - Janney Capital Markets

And then do you have an update on LED and DAZL! and how that's playing out, what your expectations are for that product line this year?

Jim Peterson

But in fact, I talked to Litchfield about that and he happens to be in the room. Litch?

Steve Litchfield

I'm sure you attended CES as many others did. I mean, clearly LEDs are getting a lot of attraction out there. I guess, one of the things that we excited about, when the leaders such as Vizio are adopting D2 solutions kind of shows where the market's going. That's where we've said its going; that's where we kind of focused our effort. We've got a much broader product offering as we are sitting here today, which we're pretty excited about.

I think the other thing that you are starting to hear a lot more about is the energy usage as being a big driver for these next generation systems. And I think that's where you are going to see some lags with all of our future products. But then even some of our historic products such as even a CCFL solution where they can't meet those standards.

So that power efficiency is going to be a huge, huge driver, and I think that's where we see a real advantage for Microsemi.

Nicholas Aberle - Janney Capital Markets

I mean as the knee in the curve, is it next year for you guys and what's the timeframe there?

John Hohener

We're seeing revenues. I think we expect that to continue to increase throughout the year. We're pretty excited about this business right now.

Nicholas Aberle - Janney Capital Markets

And then just lastly, Jim, you've given hammering on this idea about value chain expansion strategy. Is there a specific example you could provide to encapsulate that strategy and how you plan to drive it on?

Jim Peterson

I just think more of organic growth or more of M&A. That's where we're focused on.

Operator

(Operator Instructions) Your next question comes from the line of Tore Svanberg.

Tore Svanberg - Stifel Nicolaus

Great quarter, especially on the gross margin. First of all, can you just talk a little bit more about your visibility, especially so far this quarter? I mean know you tend to be fairly well booked. But just looking at that 10% to 13% and especially now with Actel, what's your qualitative visibility on that?

Jim Peterson

I think there is strength. I think we're not really too sure (inaudible) there. But I think continued strength going forward in absolute dollars and growth in our four segments.

Steve Litchfield

The turns business is pretty much in line with what we typically see in a quarter. Specifically with regard to Actel, I think the backlog is actually a little bit stronger than when we spoke to you guys in November. So I think we feel very positive about where we're sitting here today going into this quarter.

Jim Peterson

The lead times have much been unchanged. I think things are going good, Tore.

Tore Svanberg - Stifel Nicolaus

And now with the combined entity, how much of your business is going to go through distribution?

Jim Peterson

Well, right now we are probably 55% to 65% in distribution. That might trend down. I mean distribution is a real important component of our business, but every once in a while, I think it makes common sense to check the box for what can we deliver for Microsemi Direct, especially with the positions we have in our market space.

So I don't expect to trim it much. But I continue to look at it. But clearly, you've seen us do this historically where we've kind of trimmed that back in certain segments. Actel, as you're well aware, had a big position going to disti. And so we are assessing that to make sure that it fits our Microsemi model.

Tore Svanberg - Stifel Nicolaus

On your M&A strategy, you seem to be doing a few bigger ones every two to three years. Then you do smaller ones throughout the year. So if we look at calendar '11, is it safe to assume that now you're going to do this one and maybe you will make a few smaller ones?

Jim Peterson

I think one thing you can pretty much expect is if I do an M&A, the keyword is going to be accretive. And then we'll just what rolls.

Tore Svanberg - Stifel Nicolaus

Last question. John, can you just repeat the cash flow numbers for the quarter please?

John Hohener

Yes, we had about $30 million in operating cash flow. Now unfortunately, you have to expand some of the cost of acquisitions and so forth. So our cash was basically leveled with what it was last quarter. But when you add back those one-time costs, it was a $30 million operating cash flow.

Operator

We have a follow-up question from the line of Craig Berger.

Craig Berger - FBR Capital Markets

I just wanted to dig into some of your products a little bit. Maybe we can start with Power over Ethernet. How is the licensing and/or Cisco engagement going?

Jim Peterson

We announced that engagement with Cisco. And so that point, we have an engagement with Cisco. PoE was slightly down last quarter, I think because of the inventory imbalances that were out there. I think that's behind us, strength going forward.

Craig Berger - FBR Capital Markets

What's the growth outlook for that business? Is that a growing business or declining business?

Jim Peterson

I think that's a 20% grower over the next four quarters.

Craig Berger - FBR Capital Markets

How much of that business is chips versus boxes?

John Hohener

Well, well north of 50% is chips.

Craig Berger - FBR Capital Markets

On revenues?

John Hohener

On revenues, yes. Just to clarify the question, even though the percentage of business is our box business, it's exceptionally good gross margin. That's typically associated with your question is the box business lower margin. I will say to date that that box business probably runs north as our chip business does in PoE.

Jim Peterson

Which is a lot different than when we first got involved in that.

Craig Berger - FBR Capital Markets

When am I going to able to power my laptop on that?

Jim Peterson

You can do it right now. All you got to do is to be keen enough to get out to the store and buy the product.

Craig Berger - FBR Capital Markets

Moving over to LED, are you guys focusing on LED outside of DAZL! or is DAZL! pretty much it?

Jim Peterson

No, we've gone beyond DAZL! in the spirit of energy. Litch, you want to touch on that?

Steve Litchfield

DAZL! is kind of a product family and we'd definitely expand it. As I mentioned a little bit earlier, you've seen some product releases from this and you'll continue to see more. There is some pretty tight things going on. I mentioned the new energy standards that are coming. I think you'll see a lot of benefit of using Microsemi products moving forward.

Jim Peterson

And in the spirit of just one-on-one with you and I, we'll give you one more question.

Craig Berger - FBR Capital Markets

Are you guys going to be participating in next generation power amps, i.e., LTE, WiMAX?

Jim Peterson

We count on it. I did a little bit investment not too long ago, VT Silicon. And going forward, you'll see us laying out next generation product with the leaders in that market space.

Craig Berger - FBR Capital Markets

I am going to sneak one more in. Stock comps, you're still excluding it. Any plans to not exclude it anymore?

Jim Peterson

You know what? It comes up, it comes up, and we review it. And it is certainly a subject between myself and my CFO.

John Hohener

What we're trying to do, Craig, is just provide more visibility to it. That' why we guided to it now for those that are track it in their models.

Craig Berger - FBR Capital Markets

I am going to keep asking you about it. When are you guys going to start putting cash flows into your earning releases?

Jim Peterson

I don't think you've ever asked me that question before, Craig. I haven't even considered it, but I will.

Operator

Our last question comes is from the line of Harsh Kumar.

Harsh Kumar - Morgan, Keegan & Company

How should we think of margins going forward in general terms? Does it go up from here, does it kind of stabilize, any kind of color?

Jim Peterson

The real thing is I guide one quarter of gross margins. We all see where this is going with this rate the Microsemi. So let's just take it. We're guiding up next quarter 56 to 58. Let me look at some of my growth objectives. Let me look at a full quarter of Actel. And next quarter, I'll really give you color, where we're going and why we're going in the right directions.

Harsh Kumar - Morgan, Keegan & Company

Jim, in the past, Microsemi has done a very good job of controlling costs, OpEx. I know you're working on a sizable acquisition. $64.5 million is what it's shaking out for the March quarter. Would we still think that you want to keep that OpEx at $64.5 million or maybe even bring it down in absolute dollars, or you're going to try to manage it as a percentage of sales?

Jim Peterson

There is nothing more important than a senior management team to focus on OpEx and make sure it falls in line with where the company should be. And I think we've done it in past. I think you're just going to have to work for this and track us in the OpEx area. But that's a key focus for me.

Operator

At this time, there are no further questions.

Jim Peterson

We'd like to thank you for your interest and support. Have a great day.

Operator

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

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Source: Microsemi CEO Discusses F1Q2011 (Qtr End 01/02/2011) Results - Earnings Call Transcript

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