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Executives

Terri Donnelly - IR

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

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

Analysts

David Wong - Wells Fargo Securities, LLC

Craig Berger - FBR Capital Markets & Co.

Richard Schafer - Oppenheimer & Co. Inc.

Andrew Huang - Sterne Agee & Leach Inc.

Erik Rasmussen - Pacific Growth Equities

Jonathan Smigie - Raymond James & Associates, Inc.

Harsh Kumar - Morgan Keegan & Company, Inc.

Microsemi (MSCC) Q2 2011 Earnings Call April 28, 2011 4:45 PM ET

Operator

Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Microsemi Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Terri Donnelly. Please go ahead.

Terri Donnelly

Good afternoon, and welcome to Microsemi's Second 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 Executive Vice President and Chief Financial Officer; and of 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 April 28, 2011, and is continually subject to reassessment due to changing market conditions and other factors, therefore must be considered only as management's present opinions. 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 3, 2010, which was filed with the SEC on November 23, 2010 and our Form 10-Q for our first fiscal quarter of 2011 that was filed with the SEC on February 10, 2011.

That said, I am going to turn the call over to John to discuss our financial results and then Jim will address our end markets and overall business strategies. Here's John Hohener.

John Hohener

Thank you, Terri. Net sales for the quarter ending April 3, 2011, were a record $207.5 million, up 12.6% from the $184.4 million in the first quarter of 2011 and up 75.5% from the $118.2 million recorded in the year-ago second quarter. On a non-GAAP basis, gross margin was 56.2%, up 260 basis points from the 53.6% in our first quarter of 2011, and up 880 basis points from the 47.4% reported in the year-ago second quarter. This growth was driven by increased revenue and operational efficiency improvements. Approximately 107 basis points or $2.2 million of the sequential improvement is related to cost savings associated with the final quarter of our Scottsdale transition.

Our non-GAAP gross margin forecast for the next quarter is expected to improve by 20 to 80 basis points from this quarter. This quarter, non-GAAP selling, general and administrative expenses were $35.3 million or 17% of sales compared with $32.5 million or 17.6% of sales in the first quarter and compared to 18.2% or 15.4% of sales in the second quarter of last year. The increase was primarily due to having Actel for three full months for the quarter versus two months last quarter when the acquisition occurred.

SG&A will be up next quarter between $500,000 and $1 million in support of the growth of the business. Research and development costs were $28.2 million or 13.6% of sales compared to $24 million or 13% of sales in the first quarter and compared to $12.1 million or 10.2% of sales in the year-ago second quarter. The increase is primarily due to having Actel for three full months for the quarter versus two months last quarter when the acquisition occurred. We are continuing to benefit in the latest generation of our product roadmap, which will increase our R&D investments between $1 million and $1.5 million next quarter. Our non-GAAP operating income was $53 million or 25.6% of sales compared to $42.4 million or 23% in the first quarter of 2011 and $25.8 million or 21.8% in the prior-year second quarter. The 25.6% level highlights our strategic success in the integrating acquisitions and expanding organic profitability in driving returns to our shareholders.

We recorded $5.1 million in non-GAAP interest and other expense, primarily due to the interest expense on our term loan. This is a for a full quarter compared to the $3.2 million recorded last quarter for the two months our term loan was outstanding. During the quarter, we successfully refinanced our term loan, reducing our borrowing rate by 100 basis points. Interest and other expense is estimated to be approximately $4.6 million next quarter.

Non-GAAP net income was $38.4 million or $0.45 per diluted share compared to $31.1 million or $0.37 per diluted share in the first quarter of 2011, a 22% increase and $21.4 million or $0.26 cents per diluted share in the year-ago second quarter, a 73% increase. Our non-GAAP effective tax rate for the quarter is 19.9%. We expect the rate to remain approximately the same for the balance of the year.

Our GAAP gross margin this quarter was down to 44.6%. This compares to 51.5% in the first quarter of 2011 and 47.4% in the year-ago second quarter. This was affected by our Scottsdale closure and other charges. We closed our Scottsdale facility ahead of schedule. As detailed in our press release today, in conjunction with this closure, we wrote off $16.6 million in inventories and recorded $5.6 million related to remediation and write-down of fixed assets. Our GAAP gross margin was also affected by a non-cash purchase accounting charge of $1.7 million related to acquired profit in inventory from our Actel acquisition.

Our GAAP results for the quarter also include $8.1 million related to estimated lease termination costs of Scottsdale, $3.8 million in retention bonuses included in the Actel acquisition agreement, $2.2 million in severance and other charges and $0.3 million in transaction costs and non-cash expenses. And we also had non-cash expenses of $15.9 million and amortization expense and $7.1 million in stock-based compensation or 3.4% of revenue, down from the $7.3 million in the prior quarter. We expect a similar expense for next quarter.

Our GAAP operating loss was $8.4 million for the quarter. On a GAAP basis, we booked an income tax expense of $2.8 million due primarily to the evaluation of deferred tax balances. Our GAAP net loss was $16.9 million for the quarter compared to a GAAP loss of $1.3 million in Q1 of 2011 and GAAP income of $11.5 million in the year-ago second quarter.

Capital spending was $6.5 million in the second quarter compared to $5.7 million in the first quarter. Depreciation and amortization expense in the second quarter was $24 million compared to $19.9 million in the first quarter. These increases were due primarily to three months of Actel results in the second quarter versus two months in the first quarter.

Compared to the first quarter, accounts receivable decreased $16.8 million to $97.8 million at the end of the second quarter from $114.6 million at the end of the first quarter. Our DSO for the quarter was 47 days. Our inventories decreased by $20.2 million compared to the first quarter and on a GAAP basis, our days of inventory are 123 days, down from 143 days last quarter.

We ended the quarter with a cash balance of $217.3 million. For the quarter, our cash disbursements included $30.2 million in acquisition-related items, the majority of which were for credits issued to distributors that facilitated the alignment of Actel's revenue recognition to a sell-in methodology. Excluding this, operating cash flow would have been a record $48.3 million. We do not expect any Actel transaction items to materially impact our future operating cash flows. With these transaction costs behind us, going forward, we are targeting an annual operating cash flow of approximately $200 million.

We have completed the integration of Actel on schedule, having achieved our expected revenues and margin targets. As we look at bookings for our SoC division, including longer lead-time space level products, we remain comfortable with our calendar year 2011 estimated revenues of approximately $215 million.

Based on the outlook of our overall business, our new long-term target model is revenue growth of 15% to 20%, gross margins of 60% and operating margins of 30%. Reflecting a continued strong growth trend, our book-to-bill ratio was greater than 1:1. In absolute dollars, net sales in all of our end markets increased in Q2 compared to the prior quarter. Remembering that we had Actel results in for the full quarter, our best estimate of the end-market percentage breakdown of net sales for the second quarter was approximately: Defense and Security, 35%; Aerospace, 26%; Enterprise and Commercial 18%; and Industrial and Alternative Energy, 21%.

Now for our business outlook. For the third quarter of fiscal year 2011, we expect our net sales will increase between a range of 3% and 5% sequentially. On a non-GAAP basis, we expect earnings for the third quarter of fiscal year 2011 to be $0.47 to $0.49 per diluted share.

After Jim's discussion, we will have a Q&A session. Again, in the interest of time, please limit yourself to one question and if necessary, a brief follow-up. With that, I will now turn the call over to Jim.

James Peterson

Thank you, John. Let's jump right into our Defense and Security markets.

In the March quarter, we're pleased with our Defense and Security markets where revenue grew 5% sequentially. And as we have stated many times before, we're starting benefits from a rapidly growing product offering and are continuing to push up the value chain in delivering merchant system and subsystem revenues with increasing Microsemi content within. While it's fair to say that the continuing resolution held up appropriation of the 2011 budget and created some order pattern hesitancies on newer programs, Microsemi's day-to-day business is solid and as a result of our strengthening footprint and long lead times. With the 2011 budget now behind us, we have since seen some level of return to normalcy.

While longer-term macro questions may linger, I expect Microsemi Defense and Security Business to grow in line with our internal organic growth targets of 10% to 12% annually, and this is why. Electronic content is growing in defense applications' budget projections. Microsemi's product portfolio is growing and attacking dollar opportunities we have never seen previously. Microsemi dollar content is growing as we continue to move up the value chain, providing more value to our customers. In fact, we firmly believe that the current environment actually helps drive our increased value solutions into the marketplace as customers focus more than ever on cost-effective solutions and on-time delivery. This is what the merchant solution provides. And here in Microsemi, we intend to deliver merchant solutions to this marketplace, just as you see it every day in the commercial markets.

Some examples of our system-level products include, radar solutions for identification of friend or foe, power convergence solutions for satellite and other air and spacecraft, secure storage memory solutions for defense, IT and surveillance, GPS receiver modules, detection log, video amplifiers for guided systems. Complementing this partial list is a host of new devices targeted at controlling ever more silicon content within these systems.

Lastly, let me remind our investors that the growth of our military sales holds upside opportunity for Microsemi and is offset to perceive uncertainty of defense slowdown in the U.S. Foreign sales are growing and after totaling approximately $38.1 billion in 2010, and to guide estimates, have this growing to $50 billion in 2011, an increase of greater than 30%.

Now let's turn to our Industrial and Alternative Energy markets. As guided, this was the strongest end-market performer in the March quarter, growing 24% sequentially. Performance were driven by growing in energy target solutions including solar, smart grid, wind and downhold oil drilling, with expectations for continuation of the trend. Semicon spending is also a driver of this end market. We are seeing signs of true industrial recovery and applications such as plasma cutting and welding, where a high-powered proficiency differentiates our product.

Aerospace delivered another strong quarter for Microsemi, growing 19% sequentially in dollar terms. This end market includes our satellite, commercial aerospace and radar and avionics infrastructure products.

To focus on Commercial Air last quarter. I referenced strong bookings and production from a number of our primes, Airbus and Boeing. This quarter, we have seen recent strong quarterly reports on the market from our customers and their prime suppliers such as Honeywell, GE Aviation and Rockwell Collins.

Satellite remains -- were the most exciting markets, and end markets for Microsemi. We're growing our footprint and market-share opportunity aggressively to capitalize on one of the strongest, least economically sensitive, higher-barrier to entry markets in the world today. We see strength here, in the near-term and over the longer term, with growth drivers in the U.S. and abroad.

Now let's turn to our Enterprise and Commercial End Markets, which are up almost 9% sequentially. Our goal is a consistent one. We're focused on commercial market opportunities where we can differentiate our technology and value and command a premium for doing it. In the March quarter, PoE remained steady for Microsemi, while our RF Power Amplifier business improved and is poised for a stronger June quarter. Our splay bins[ph] are showing good promise for the second half and into 2012, as we expect increasing support for differentiated backlight solutions. Also, DC:DC design win activity is on the rise. And we expect noteworthy revenue performance from this product offering in the second half of the calendar year.

I would now like to highlight some of the growth programs at Microsemi. As you know, Microsemi has demonstrated track records of success at acquisitions, which have consistently extended our product capability, strengthened our end-market leadership and accelerated our growth. And our guidance for the Street has been clear: 15% to 20% annual growth, with 10% to 12% organically driven and the balance in the acquisition. We have delivered in what we have said. A few examples of our growth drivers going forward are: ASIC replacement and satellite applications, solar inverter growth, smart grid PMU products, hard disk drive power management, security anti-tamper-enabled products, homeland security scanner subsystems, miniaturized solid-state disk drives, GPS receiver modules, PoE, radar subsystems, smart Fusion SoC. That having been said, Microsemi delivered a record-quarter solid bookings and improved profitability. In the March quarter, we completed the closure of our Scottsdale facility and finalized the integration of Actel. With these tasks now complete, we'll continue to drive new product revenues while focusing on improved profitability and cash flow generation throughout the upcoming year.

We thank you for the interest and support. We'll now take the questions to our analysts. Ashley?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Tore Svanberg with Stifel, Nicholas.

Erik Rasmussen - Pacific Growth Equities

This is Erik calling in for Tore. I just wanted to get a little more color on Actel. You said integration is complete. So where do you see it? Obviously, you gave some guidance and margins as well, but where do you see margins settling now as the deal's complete? It sounds like you're on target for annual revenue of $215 million from Actel. Are there any other drivers from recent acquisitions, AML, that's driving some of that guidance?

James Peterson

Let's start on Actel, with those good points. I think you're actually right. The revenue target of about $215 million is right in control. I see a couple of other things, one is they're meeting corporate margin targets, which we said that they would upon announcing the acquisition. The other thing you might want to note on them is the accretion targets. When we first got into the acquisition, we guided somewhere between $0.22 and $0.28 and quite honestly, I think they're slightly exceeding the accretion targets. Just a note to how that happened. We closed two operating facilities, reduced headcount about 100% and by the way, it's about as good a match as we would have thought. Nothing else is built we are AML, we don't close that until near the end of this quarter that we're in right now. And we don't have anything piped in there for our guidance or anything.

Erik Rasmussen - Pacific Growth Equities

So Commercial Air seems like it's continuing to perform really well. Obviously, solid reports that we're seeing as well from Boeing and Airbus suggest healthy backlogs and good build rates for the next few years, but it appears that some passenger traffic seems to be returning to a more normalized rate from strong second half. Are you seeing any of that, particularly in the Asia Pac market? I know you guided to continued strength in that business, but are you seeing any sort of dip that you can note?

James Peterson

There might be a little sliding in the United States. I think worldwide, though, I think it may be up a touch. When you look at it, I mean, and look at globally what's going on here, right, you're absolutely right, Boeing and Airbus, big numbers, right, and other subcontractors are coming in with just blowout numbers. And a lot of things happened. I mean, China alone, they're building 96 new airports by 2020. And that's not going to be supported by train and air. There's a lot of good things happening in Commercial Air. We caught a bottom in it in a couple, two quarters. And I think you're right, you get two-plus solid years of growth in that space.

Erik Rasmussen - Pacific Growth Equities

Great. And just some follow-up on Defense. We get a lot of questions on that and obviously, talks on the budget this year seem like there's a budget compromise for '11 and 2012. It's, you know, Congress seems like they're going to make a cut. And I know the story's been for you guys increase content in the electronic, the weaponry budget's not getting cut. But can you just kind of update us on your thoughts on that again?

James Peterson

I think you're right. I mean, what we don't want to do is read the first page of The Wall Street Journal and confuse what's going on the DoD budget and the strength in programs of Microsemi and Microsemi proper. So you can't confuse the DoD with Microsemi. Electronic content going up, our footprint's going up, we're moving up the value chain and we're gaining market share. We're predicting growth, for Microsemi as a whole, between 3% and 5%, and you know that's a big component of our growth.

Operator

And your next question comes from the line of Harsh Kumar [Morgan Keegan].

Harsh Kumar - Morgan Keegan & Company, Inc.

I felt like your commentary was very strong. A Couple of questions. Jim, maybe the first one for you, you talked about long-term growth in maybe 10%, 10% to 12%. It seems like Defense alone is growing at 10% to 12%, seems like a lot of your businesses could grow faster than that. Should we not think of your organic business maybe growing a little bit faster than that or maybe you can provide some color?

James Peterson

Yes. I found out in the past that conservative is good with you guys. I just want to put in fact that annually, right, 10% to 15% growth, that the organic of down in 10% to 12%. But when we're talking growth, let's look over what we did over the past. Over the last five years, we grew this in revenue, 124%, the last three years, 62%, the last year, 60%. So we're not a stranger to growth, and we're looking forward to it.

Harsh Kumar - Morgan Keegan & Company, Inc.

Now that's very fair. And then my follow-up clarification question. Industrial was stunning, up 24%. I'm wondering if you would quantify if a lot of that was Actel or you're actually seeing something in your organic business.

James Peterson

Check it out, organic not bad, Actel did help. I mean, If you look at Actel, right, there are two big strong integration markets for us, surely, the Aerospace and the Industrial and Alternative Energy. So it certainly helped it. That's one of the main reasons why they joined the Microsemi family, and we sought them out rather than others.

Operator

And your next question comes from the line of Rick Schaefer with Oppenheimer.

Richard Schafer - Oppenheimer & Co. Inc.

A couple of questions, I will keep it to two. First one is just you talked about generating about $200 million or more in cash this year. What are your plans for cash? I mean, is it more strategic tuck in kind of M&A type of stuff that you're going to direct it toward? Or are you going to pay down debt early? Or what do you do with the cash?

James Peterson

So with the price of cash, right, paying down debt will probably come when it should come down. We've been a solid and a pretty good acquirer of companies. And even the largest ones we've done in Microsemi, they're pretty much perceived as tuck ins, or as Steve would let me know, they complement and they overlap our businesses.

John Hohener

And as you know, we just improved the cost of that by 100 basis points. So it's a very easy pill for us to swallow and right now, we kind of like it.

Richard Schafer - Oppenheimer & Co. Inc.

Okay, that's it. And then second question was just, I know you mentioned PoE kind of stayed -- I think you said, Jim, stabilized or something like that in the first quarter or March quarter. Can you give any kind of -- it seems like you just had some mix data points, I guess, on what Enterprise's spending has looked like here in the last quarter or so. What do you see there if we look into the June quarter? Is it more of a back-half ramp? Is there any progress being made with Cisco proper in that business or anywhere else?

James Peterson

Look, let me just tell you, as a whole, the Enterprise and the commercial space for Micro is about 18%. PoE, a couple of things we know is fact: One fact, early adopters are already in, right; Second fact is it's growing, right. Maybe not to the 20% that we want. Cisco property, yes. We're always in there working with Cisco. As far as dollar sets programs, projects, we're keeping that between us and Cisco.

Operator

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

Craig Berger - FBR Capital Markets & Co.

I guess the first question is on the impact of Actel and sort of your organic business. If I look at September 10, you guys did $151 million. If I add in $54 million a quarter for Actel or $215 million a year, that gets me to $205 million, you're just at $207 million. So I guess my question is, has your organic business grown 1% over the last two quarters?

James Peterson

Yes. The organic business has grown this year 1%. And let me give color on the Actel, the contribution, just to give you a feel. Their contribution last quarter as a total, right, about 40% or 47% of the contribution was in Aerospace; 20% to 25% was Industrial and Alternative Energy; Defense Security, if you worked it out, about 20%, it's a contributor; and Enterprise and Commercial, about 10% to 15%. And so we've grown our organic business, but have no doubt, Actel certainly has added to the growth of this company and certainly has added to the profitability. And again, that's why I use my cash to acquire Actel. In June quarter, [indiscernible] dialed it up, without Actel, we're going to increase the good guide 3% to 5% organically. So I think we're doing okay in the organic area versus the integration of Actel and the like.

Craig Berger - FBR Capital Markets & Co.

So do I view that two quarters, where your organic business grew 1%, do I view that as a time when you took the opportunity to build backlog and increase the forward pipeline visibility or what's going on?

James Peterson

That's certainly one way to look at it and I think a good way to look at it.

Craig Berger - FBR Capital Markets & Co.

My second question is on the gross margins. I guess, I was expecting a little more impact from Scottsdale in the second quarter. Can you talk to the gross margin guidance? And as part of that, maybe what are the levers or knobs you need to twist and turn in order to work towards your new 60, 25 mark...

John Hohener

Sure, and let me just talk about -- let me talk about Scottsdale a little bit first. We actually had greater contribution from Scottsdale this quarter than what I had forecast. And let me just take you through the math, which I've done the last couple of times. Generating our $24 million in annual savings, that equaled out to about $6 million a quarter. Our cum [cumulative] savings through Q1 of 2011 was $2.3 million. This quarter, as I've just said, it was $2.2 million. So now we're up to $4.5 million. We're going to see another incremental $1.5 million next quarter, the June quarter, where we have no costs for Scottsdale in there. You add all that up, you get your $6 million therefore, you see your $24 million annually. That gets us exactly what we said in terms of back when we announced 18 quarters ago, excuse me, 18 months ago, we said, we'd be about 400 or 500 basis points improvement due to Scottsdale, we've seen that. We've already seen the incremental $0.20 of EPS accretion that we had talked about at that time. This quarter went up 260 basis points. We guided 20 to 80 bps up. Again, Scottsdale is going to contribute to that, but also general business improvement. We're going to have a strong Aerospace as we've articulated. We're going to get SoC contribution, operational efficiencies, our scale's going up, volume, our efficiencies. There's a lot of things we're doing to move the gross margin up towards that 60%.

James Peterson

I just want to throw a little note on gross margin. In the form of not advertisement, but a check this out. We grew year-over-year 880 basis points from 47.4% to 56.2%, and we're guiding up again next quarter.

Operator

Your next question comes from Steve Smigie with Raymond James.

Jonathan Smigie - Raymond James & Associates, Inc.

I did want to follow up a little bit more on the gross margin. You talked about the 60% target. What sort of timeframe you think you guys can get there?

James Peterson

To be at target to target, and we guided two things, right, we guided gross margins, now it went up to a target of 60% and the operating is about 30%. So let's just focus on the really important one, right, one where the cash comes in. The 30% -- the analysts had us dialed in or the models have us dialed in, of hitting that, what, John, mid-2012?

John Hohener

Mid to end of 2012, and we're comfortable with that.

James Peterson

Yes. And I don't have a real answer for the target on the 60%, but we'll guide you quarter by quarter until I get there.

Jonathan Smigie - Raymond James & Associates, Inc.

And then on the Defense stuff, you'd mentioned there was, obviously, the slowdown -- as they were trying to figure out 2011, seems like it's starting to come back in. Is there a quarter where that kind of pops back up as you sort of -- all the delay comes back in or does it not really work like that? It's more for more of an incremental return from...

James Peterson

That's my question. What I am noticing, right, our end customers are breathing more easily, and the big ball of uncertainty is gone. But as long as we execute on, like I said, our content and our footprint, and go up the value chain and really focus on foreign military sales growth, which has grown over 30%, we're going to do just fine.

Operator

Your next question comes from David Wong with Wells Fargo.

David Wong - Wells Fargo Securities, LLC

So just following up from the earlier question. 3% to 5% sequential growth guided organic for June, it sounds like your organic growth is picking up. Is this a broad-based economic pickup or there's some Microsemi-specific things happening here?

James Peterson

Yes. I'm going to say Microsemi, and get a pat on the back for that because I firmly believe it's Microsemi.

David Wong - Wells Fargo Securities, LLC

But across all segments or are there some specific divisions that are doing well?

James Peterson

Good question, right? In all our markets, and we have four market segments, right: We have the Aerospace, the Industrial and Alternative Energy, Defense Security, Enterprise Commercial, everyone of those markets were all up in absolute dollars last quarter, right. And we have it forecasted to go up again in absolute dollars next quarter. So I think that's a pretty good trend, and that's what we see going on.

David Wong - Wells Fargo Securities, LLC

Right, thanks. Now that's Scottsdale's shutdown, do you expect any significant restructuring charges in the June quarter?

John Hohener

No. I think Scottsdale is totally behind us.

David Wong - Wells Fargo Securities, LLC

But are there any restructuring charges from other things, Actel or any of the other...

John Hohener

Majority of Actel, as I said, in my prepared remarks is behind us as well.

Operator

Your next question comes from Andrew Huang with Sterne Agee.

Andrew Huang - Sterne Agee & Leach Inc.

So first question. Can you give us a quick update on the Airport Security business? And maybe give us a sense of that kind of dollar contribution in the March quarter?

James Peterson

We expected to grow, like we said like last quarter, on or about 20% of growth for us. Dollar contribution, I think we dialed in 10-plus million, 10 million to 15 million in dollars. The highlight of this is, one is the privacy concern address, has been addressed with the new software. I think as you work airports, you'll start to see more of these devices there. The bigger picture, there's a Presidential Order, that sounds are about $120 million and upward and onward.

Andrew Huang - Sterne Agee & Leach Inc.

Okay, great. And then second question is now that Actel is pretty much done, can we expect to see some improvement in inventory management?

John Hohener

Certainly. I mean, I'd like to think that we improved pretty well this quarter, albeit we did have some contributions from Scottsdale. But we did go to 123 days from 143. Certainly, inventory is a focus for us. Our operational guidance are all over that, and we expect more to come.

Operator

And you do have a follow-up question from Harsh Kumar with Morgan Keegan.

Harsh Kumar - Morgan Keegan & Company, Inc.

A couple of other questions. You talked about a 30% operating margin goal, Jim. Would you like to put a timeframe on that or is that -- how should we think about that? I've got one more after that.

James Peterson

I think the models you see out there have us hitting it somewhere mid-2012, and I think that's a good thing for me to and my team to go after.

Harsh Kumar - Morgan Keegan & Company, Inc.

Okay, fair enough. And then, AML, you just acquired, small acquisition, margins of below -- I mean classic Microsemi acquisition margins of below your corporate margins. Is there room for you to bring that up and if so, how long do you think that will take?

James Peterson

Again, this is exactly what we like to go after when we're looking. It's an overlapping technology, right. It certainly streams to our standard product offering. We're just going to do what we always do. We're going to pull out cost, scale the business, profitability and make them part of the Microsemi family.

John Hohener

And just one clarification. We have not yet acquired them, so I just want to make sure that we're in the process of acquiring them.

Operator

[Operator Instructions] Your next question is a follow-up question from the line of Craig Berger with FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co.

Can you update us on some of the specific growth drivers you've highlighted in the past, things like GPS precision?

James Peterson

Yes. Certainly, a lot of new product offerings for Microsemi, without a doubt, we took out the -- we have some solar inverter growth, that's looking pretty good. We're doing some stuff that we've never done before, the smart grid PMUs. The scanner business is relatively new to us and going to the right and the upside. We have some radar stuff, there's some [indiscernible] SiC stuff. And then without a doubt, the customers of Actel SmartFusion looks like it's going to be a nice home run. So it's kind of across the board, it's diverse and it's what we've done, and where we intend to go forward, looks good.

Craig Berger - FBR Capital Markets & Co.

Can you comment on any supply chain impacts from the Japanese earthquake situation?

James Peterson

The only corner that might touch, we did this one thing with Sony in Japan, and I think their factory is in Northern Japan. Other than that, you know as well as I do, right, I think there was a lot of inventory in the pipeline. So I think if anybody's going to see any hesitancy, at least at our particular space, you might not see that until the June quarter and that's just a bold assumption on my part.

Craig Berger - FBR Capital Markets & Co.

Regarding your new model, does that include stock comp or exclude stock comp?

John Hohener

Excludes stock comp.

Operator

And there are no further questions at this time.

James Peterson

Okay. I want to thank everybody for joining us today and to everybody, have a great day.

Operator

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

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