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Executives

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

Terri Donnelly - IR

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

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

Analysts

Harsh N. Kumar - Morgan Keegan & Company, Inc., Research Division

Andrew Huang - Sterne Agee & Leach Inc., Research Division

Quinn Bolton - Needham & Company, LLC, Research Division

Christopher J. Longiaru - Sidoti & Company, LLC

Christopher Rolland - FBR Capital Markets & Co., Research Division

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Daniel M. Gelbtuch - Phoenix Partners Group, LP, Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Microsemi (MSCC) Q4 2011 Earnings Call November 10, 2011 4:45 PM ET

Operator

Good afternoon. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the the Microsemi's Fourth Quarter Earnings and Fiscal Year 2011 Conference Call. [Operator Instructions] Thank you. Ms. Terri Donnelly, you may begin your conference.

Terri Donnelly

Good afternoon, and welcome to Microsemi's year-end fourth 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; of 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 Investors 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 10, 2011, 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 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 third quarter fiscal year of 2011 that was filed with the SEC on August 5, 2011.

With 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's John Hohener.

John W. Hohener

Thank you, Terri. Net sales for the quarter ended October 2, 2011, were a record $227.3 million, up 4.9% from $216.7 million in the third quarter of 2011 and up 50.3% from the $151.2 million reported in the year-ago fourth quarter. Net sales for the full fiscal year were a record $835.9 million, up 61.3% from sales for the fiscal year of 2010, up $518.3 million. Just to be clear, results from this quarter do not include any contribution related to the acquisition of Zarlink that closed in our December quarter. References to our core business refer to Microsemi prior to the Zarlink acquisition.

Our non-GAAP gross margin was 57.3%, up 20 basis points from our third quarter of 2011 and up 810 basis points from the 49.2% recorded in the year-ago fourth quarter. Our GAAP gross margin was 57.1%, which differs to non-GAAP due only to noncash purchase accounting adjustments and was up 10 basis points from the 57% in our third quarter of 2011 and up 800 basis points from the 49.1% in our prior year fourth quarter.

This quarter, non-GAAP selling, general and administrative expenses were $38.1 million or 16.7% of sales compared to $37.3 million or 17.2% of sales in the third quarter and compared to $24.2 million or 16% of sales in the fourth quarter of last year. SG&A in our core business will be down next quarter, driven by cost controls inherent with the current market environment. However, we expect total SG&A to be up next quarter between $2.6 million and $3 million, primarily due to having Zarlink for a portion of the quarter. Research and development costs were $32.4 million or 14.3% of sales compared to $29.6 million or 13.6% of sales in the third quarter, and compared to $16.7 million or 11% of sales in the year-ago fourth quarter.

R&D in our core business will also be down next quarter, driven by cost controls throughout the company. However, with Zarlink being present for a portion of the quarter if our -- and our continuing investment in the latest generation of our product roadmap, we expect total R&D spending to increase between $5.8 million and $6.3 million next quarter.

Our non-GAAP operating income was $59.7 million or 26.3% of sales compared with $56.8 million or 26.2% of sales in the third quarter of 2011 and $33.5 million or 22.1% in the prior year fourth quarter. The continuing increase in operating income and margin highlights our strategic success in integrating acquisitions, driving organic growth and delivering improved profitability to our shareholders. We recorded $4.5 million in non-GAAP interest and other expense in the quarter compared to $4.6 million in the third quarter. With the successful acquisition of Zarlink, we refinanced our existing term loan, which increased it by $425 million. This will result in an increase in our interest and other expense moving forward. We expect the total amount to be approximately $12.4 million in our first quarter and approximately $13.2 million in each successive quarter.

Non-GAAP net income was $45.6 million or $0.53 per diluted share compared to $42 million or $0.49 per diluted share in the third quarter of 2011 and $28.8 million or $0.35 per share in the year-ago fourth quarter. Our non-GAAP effective tax rate for the quarter was 17.5%. Coupled with ongoing improvements in our cash structure and an integration of Zarlink's operation in our existing structure, we see our non-GAAP tax rate trending down to approximately 16% next quarter and trending favorably as we implement further changes in our operations.

For the fiscal year 2011, our non-GAAP net income was $157.1 million, equating to $1.83 per diluted share. This compares to fiscal 2010 non-GAAP income and earnings per share of $92.8 million and $1.14, respectively. Our 2011 net income improved 69% and EPS improved 61% from 2010. Our GAAP results for the quarter included $5.2 million in severance, acquisition and other charges. Also included were noncash expenses of $17.6 million for amortization, $7.3 million for stock-based compensation and $2.1 million related to our debt and derivative instruments. We estimate stock-based compensation expense to be $6.5 million to $7 million next quarter, trending down as a percentage of revenue.

Our GAAP operating income was $28.8 million for the quarter. On a GAAP basis, we booked an income tax benefit of $19.9 million, due primarily to the reversal of valuation allowances on deferred tax assets. GAAP net income was $42.1 million for the quarter compared to $30.6 million in the third quarter and $6.6 million in the year-ago fourth quarter. GAAP diluted earnings per share for the quarter was $0.49 compared to $0.35 in the third quarter and $0.80 in the year-ago fourth quarter.

Capital spending was $6.5 million in the fourth quarter compared to $7.1 million in the third quarter. Depreciation and amortization expense in the fourth quarter was $24.3 million compared to $23.2 million in the third quarter. Accounts receivable was $110.9 million compared to $98.1 million at the end of the third quarter. DSO remains strong at 42 days. We have improved our DSO by 9 days from the end of last year. Also as forecasted, our inventories decreased $4.5 million to $140.8 million when compared to the third quarter. Days of inventory were 134 days, a decrease of 6 days from last quarter and 11 days from the end of last year. We entered the quarter with a cash balance of $266.6 million. Our GAAP operating cash flow, which included the impact of $2.3 million in transaction costs, was $52.2 million and free cash flow was $45.8 million. Our free cash flow will trend down slightly in December due to year-end payments and expenses associated with the Zarlink acquisition. We do expect our cash flow will resume its upward trend in our March quarter.

We recorded a book-to-bill ratio of greater than 1:1. This reflects the visibility that we have for long lead time products that are unique to Microsemi's markets. Our best estimate of end market percentage breakdown of net sales for the fourth quarter was approximately debts and securities, 35%; aerospace, 26%; enterprise and communication, 19%; and industrial and alternative energy, 20%.

Now for our business outlook. For the first quarter of fiscal 2012, and into December we expect our net sales will increase to between $238 million and $246 million, up approximately 5% to 8% sequentially. On a non-GAAP basis, we expect earnings for the first quarter of fiscal year 2012 to be $0.38 to $0.42 per diluted share. We will have a partial quarter of revenue from Zarlink given the timing of its closure. We currently estimate a total revenue contribution to be in the range of $32 million to $36 million. We estimate our core revenue in a range of $206 million to $210 million and the midpoint that splits core revenue down approximately 8% sequentially. As we have previously stated, we experienced the effects of the national disaster of the Thailand flooding as well as the slowing macroeconomic environment. As it relates to the ongoing national disaster in Thailand, our guidance includes our best estimate of the revenue effect in the December quarter. Our guidance does not include any, as of yet, unforeseen impact to our customers, suppliers or subcontractors, which could further affect revenue. Going forward, we expect a continued but declining headwind due to the ongoing flooding in Thailand for the ensuing 2 or 3 quarters.

We estimate that Microsemi's gross margin in the December quarter to be between 54% and 55.5% of sales, down from the September quarter as a function of these factors: number one, additional cost dealing with relocation from Thailand and new sites; number two, lower sales, which will result in some under absorption of cost; three, product mix; and four, the inclusion of Zarlink revenues and the initial gross margin lower than that of our core businesses.

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

James J. Peterson

Okay. Thank you, John. Let me start by relating how excited we are to have completed the acquisition of Zarlink. So at the closing of the transaction on October 25, we've been working diligently to integrate the team. We're feeling excited about the new product offering, their growth prospects and the synergies we believe we can realize. We have moved quickly and aggressively to pull out cost in order to hit our financial targets by the March quarter. The team has really stepped up and is 100% focused on dominating the space and taking market share from our competitors. With that, let's get right to the end markets and their performance for the fourth quarter.

Let's start with enterprise and communications, our strongest end market in the fourth quarter. Revenue was up 21.5% sequentially, driven by a record quarter for our Wireless LAN power amplifier products, as well as increased growth in our Power over Ethernet business. In wireless, we continue to penetrate the referent designs of our baseband counterparts and are benefiting from the decoupling with the power amplifier from the baseband with high performance wireless applications.

In PoE, we're taking market share, but more broadly penetrating our customer base with what is the industry's largest and most advanced product offering. In total, enterprise and communications accounted for 19% of revenue in the September quarter, and we expect it to be the largest end market going forward.

The business acquired from Zarlink will be a significant contributor of this as approximately 80% of its revenues will fall into the enterprise and communications end market here at Microsemi. Zarlink's timing, synchronization and voice products complement our existing communications product offering and will add strong, steady growth element to this end market, but that's not all that'll drive the future growth. Other enterprise communication products, we expect to breakout in 2012 include our DC-to-DC products for communications and storage applications as well as LED drivers for solid-state lighting and TV backlighting.

To be short, 2012 will be a transformational year for Microsemi as we add the growth communications business of Zarlink to our model. Complemented by our own internal organic design efforts, we have begun to generate design wins and revenue momentum. The results will be a Microsemi model that still leverages the revenue, stability, scale and profitability of our aerospace and defense end markets, but with a larger continued defensible growth business than ever before in the company's history.

Aerospace delivered again. Revenue from the end market was up almost 5% sequentially from Microsemi in the September quarter and accounted for 26% of total revenue. Both components of this end market, commercial air and satellite, grew in the quarter and bookings came in nicely. We expect continued strength from our commercial air business in the December quarter, although we expect satellite to moderate somewhat.

As our space portfolio has grown and as we provide a growing number of high ESP, long cycle times system-level products to this market, we are mindful that billings can differ from quarter-to-quarter. Nevertheless, base bookings were solid in September, and we expect growth from this end market in the March quarter and over the course of the next several years.

Our Defense & Security market, as we have forecasted, grew again this quarter, up over 4% sequentially. We saw good bookings and billings opportunity in missile defense, RF systems and Millimeterwave solutions, in fact, we booked our largest at Millimeterwave order to date in the September quarter and we believe that we are still in the early innings for this advanced scanner ramp.

We recognize the difficulties that face us in this end market as it relates to the U.S. federal budget. However, we continue to execute our strategic plan as a company by building new product, taking market share and growing presence in new applications. The fact is our defense business has grown 22% year-over-year and will support everything we have said of our defense opportunities all year. Again, electronic content is growing. International markets, including foreign military sales, are for high-growth opportunities. Microsemi continues to feature rapidly expanding product portfolio.

Like our other end markets, we expect some revenue volatility in this quarter as a function of some more to pushout due to the macroeconomic environment. However, we do have solid long-term visibility on a number of these programs, and we expect to return to growth in March. Overall, we continue to expect impressive growth for Microsemi from this end market given our new product offering and growing list of product technologies and capabilities.

Now let's turn to the Industrial & Alternative Energy markets. As guided on our last earnings call, this end market was more challenged for Microsemi in the September quarter. Revenues were down 6% sequentially, as steady medical contributions and growth in [indiscernible] and other industrials applications partly offset the slowdown in our solar and semi-markets, we expect similar performance from this end market in December quarter. We are pleased with our positioning for the future. As we look into 2012, we expect Medical to emerge as an important driver of growth as we integrate Zarlink's exciting ultralow power wireless products and prepare for increased content opportunity in the ICD and other wireless Medical markets.

To be clear, Microsemi delivered another record revenue quarter with improved profitability in Q4. But with the course of our fiscal 2011, we grow our business, we successfully integrated our acquisitions and we improved profitability. As we look to December, we expect the business we feel the effects of the devastating flood in Thailand and with the uncertain macroeconomic conditions worldwide, but we're excited about what we have accomplished and where we are going.

In 2012, we look forward to a resumption of growth in the March quarter, driving profitability of Zarlink in line with our long-term targets and surpassing the $1 billion sales mark, all while delivering strong cash flow and bottom line results. Okay, with that, I'd like to thank you for your interest and support. We'll take questions from the analysts. [Operator Instructions] Susan?

Question-and-Answer Session

Operator

[Operator Instructions] You have a question from the line of Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company, LLC, Research Division

I just wanted to ask about the core business. Obviously, Thailand is having a big impact. How much of the down 8% do you think really reflects the product flowing through Thailand and how much of it is just overall macro uncertainty? Do you have any sense of the split between those 2?

James J. Peterson

Okay. Let's look at the core business down by 8%. We're upfront and working -- also what's going on in Thailand I think, Thailand can be down as much as 5%. We get the balance in the core business down a little what you say, let's go 4% to 5% Thailand. And on or about 3% to 4% of core business, it wouldn't be too far off down on that end.

Quinn Bolton - Needham & Company, LLC, Research Division

And then just look into the March quarter, Jim, you mentioned the I think defense security business as well as satellite aero will rebound. Do you expect industrial and enterprise also to rebound? Or is it growth from the core business and much are really being driven by the more defensive end markets?

James J. Peterson

Okay, well, let's just go over again. The satellite business and the commercial air business were up 4%, okay, last quarter and defense business was up 5%. Going forward, we see strength in the defense. We see strength in the satellite market. The satellite is showing something where it hasn't before. I don't want to use the word lumpy, but we're using the rate that's kind of moderating itself. Commercial air business, expect strength. I think we're working on a number of airports internationally and perhaps some upgrading domestic airports, and we know from Boeing and Airbus' backlog, right, because all they have is to replace the older aging aircraft with more fuel-efficient aircraft. Industrial & Alternative Energy was down 6%. We guided that; we saw it coming. Going forward, right, we'll get a little bit of Zarlink business contribution as well as strengthening of what I call the Medical market for Microsemi proper, which is the MRI. The solar business in the industrial and alternative market, I think everybody knows what's going on there. Residential solar week might be weak for the next -- I don't want to put a timeframe on it but let's say, that's a year plus, and the institutional I think is strengthening for solar.

Quinn Bolton - Needham & Company, LLC, Research Division

Jim, sorry, one last quick one. Zarlink, you got only $32 million to $36 million partial for the December quarter. I'm assuming that, that Zarlink you should get an additional amount, get a full quarter effect. The Zarlink revenue should grow March versus December, correct?

James J. Peterson

We get dialed in this quarter. We don't get a full quarter. We closed it 2 short weeks ago. I kind of dialed in really comfortable $32 million to $36 million while we're on it, it's just as we thought. It's accretive out of the gate. It's going to bring us -- we guided, with accretiveness $0.24 to $0.26. That all still looks good. We had margin targets in the March quarter of getting from a 52% gross margin, 11% operating and we're working aggressively to fulfill our promise of a 60-30; 60% gross margin, 30% operating. It's all on track. We told you we're going to try to take out $18 million to $20 million of synergies, we're on track with that. I'm extremely comfortable with Zarlink and Microsemi.

Operator

Your next question comes from the line of Rick Schafer with Oppenheimer.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

A couple of quick cleanup questions and I guess a follow up on Quinn's real quick. So basically, the assumption I guess on a go-forward basis for Zarlink is sort of a 20% haircut or so on the revenue that they were running prior to you guys buying them. So is this just sort of like a roughly a $40 million, $45 million a quarter type contributor?

James J. Peterson

Yes, our odd number. When we buy companies, let's go back to the last 3. Let's look at White, let's look at Actel and Zarlink, which you're right. We trim you right. We'll 18% to 20% on revenue this might -- just take the $32 million to $36 million, add a few weeks on to it, so you're not too far off.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Okay. And then talking about Zarlink, since we're on the subject, the -- what is your expectation for the growth rate in your comps business? I suppose more specifically there are slicks and slacks, how do you grow that mature business?

James J. Peterson

Check it out, right? That's an older business, right? But it's a business that we're not going away from, right? It's a nice steady business. Last year, I believe we took market share, right? The game here is real plain and simple. We're going to leverage Microsemi's scale, we're going to increase the content, right? It goes in nicely with my power management. It -- hold it nicely with the PoE synergies, so I'm not going away, right? My intent is to invest in it, take market share and be sure to follow up with a follow-on question in March.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Okay. I just thought of my other cleanup question. On the gross margin side, can you remind me, John, what'd you say gross margins are going to do in the fourth quarter?

John W. Hohener

Yes, they're going to be in the range of 54% to 54.5%, Rich.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

So when do we get back minus this current quarter with obviously, with Thailand with the onetime events here? Do we get back on track in March or is it going to be more like June quarter before we start getting above 55.5% again, like above 56%?

John W. Hohener

Well, I certainly think that the range is that the low point is December. So it does start to trend up from there, getting back to the 57% and then trending ultimately to our ultimate goal of 60%. We're saying the 60% will probably happen second half of next year. So the midpoint is somewhere in between.

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Got it. That's perfect. And then just on the defense side, you guys -- Jimmy mentioned defense slowdown. Can you just parse out maybe how much of it is related to all this budget delays versus what's really macro? I mean is it -- I mean, how do you think the budget approval? How does this process ultimately play out?

James J. Peterson

Yes, well, whenever there's uncertainty in anything, you're going to get delays, right? And right now the U.S. has budget uncertainty where everybody's expecting it to clear on 23 of November. I'm not such a big proponent of that. I know the government moves in a different inertia that people would like. So expect delays. However, let's get Microsemi. Let's separate us from that, right. We grew this last quarter 5% strong. We grew it 22% year-over-year. So let's get beyond Page 1, Page 2 of any Wall Street Journal and realize that this market, pretty much that fate's in Microsemi's hand. Let me just go over some of the strong points of it, right? It's -- the content is increasing whether people like or not, electronic content and defense business is increasing. We're taking advantage of it. In that box is the scanner business, right? We know, we just picked up our largest purchase order from L-3. Millimeterwave technology is certainly surpassing x-ray technology and scanners. We have these receivers radar detection, printer and UAV whether we like it or not, we need eyes in the sky. Let's get these kids out of war, right? But we're not going to pull them out until we have better eyes in the sky in UAV. There's a force modernization program going out throughout the United States and it darn well should, and Microsemi get market share. I'm up 22% year-over-year independent what the Wall Street Journal says.

Operator

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

Harsh N. Kumar - Morgan Keegan & Company, Inc., Research Division

Just want to understand a little bit more about the gross margin. Jim, I know you've had a couple of things going on. I'm wondering if you would help us out by kind of giving us an idea of what range Darling's gross margins are at today? And how much, if any, was the impact from Thailand just trying to understand the 200 or so basis points decline in margins.

James J. Peterson

Let me help you. Zarlink does have some impact on the gross margin. But for the fact, nothing to do with the natural disaster, right, for the fact of the matter is we acquired Zarlink, their gross margin were 52% and their operating was about 11%. So we do what Microsemi does, right? Let me just finish answering if you can hear me, okay? So Zarlink proper was 52% gross margin. And what we told the Street is that we would get that up to 60% by exiting the March quarter, and we will, okay? But the gross margin as a total company, Thailand certainly has an effect on this, all right? The Zarlink being overall gross margin down. And because of the Thailand stop, we have less absorption.

Harsh N. Kumar - Morgan Keegan & Company, Inc., Research Division

Got it. You're very helpful actually. So that helps us get things in better perspective. And then would you be going after the COGS or the gross margin of Zarlink first? Would you be going after OpEx simultaneously?

James J. Peterson

The answer is yes. I go after everything I have to go after, right? We're going to take this thing from $52.11 to $60.30 exiting March quarter as a team. The Zarlink, which is now Microsemi, by the way, and Microsemi product.

Harsh N. Kumar - Morgan Keegan & Company, Inc., Research Division

Perfect, and then one last one for John. John, any -- you kind of mentioned what you're expecting in cash flow once you have Zarlink normalized and absorbed into your business on a go-forward basis for the long haul?

John W. Hohener

Yes, certainly, with Zarlink, before Zarlink even came about, we were saying we'll be north of $200 million. With Zarlink, we're certainly in the $250 million range when we get them fully baked in.

Operator

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

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

I know a bunch a questions were asked. So hopefully, this isn't a repeat, but how much of the cost-cutting that you intend to do was actually just done already in December and how immediate was some of that stuff?

John W. Hohener

Well, yes. Look, as you know, right, taking a company like Zarlink from 11% operating income exiting March at 30%, right. You have to have PD bridging. So Steve, it's pretty much across the board, right? There is a lot that goes on, but you can imagine, right? There was [indiscernible], the headcount reductions, right? We look at their spend. We look at their operation business. We look at where we can operationally we can do pool negotiations and then we roll those. We focus on OpEx in the front end. The longer term operational, the wafer cost and the like, that's a longer process that's going to be built into it. But important thing to the document is we said this is going to be $0.24 to $0.26 accretive and it is. It's accretive out of the date because we act quickly. I'm 11 days into it, but I'm telling it's going to be 60-30 ending the March quarter. That's the important part. While we're supporting their timing business, investing in the timing business, investing in the medical business and taking market share from the voice business.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay, great. Just one quick question on the satellite business. You mentioned that was moderating a little bit. Have you guys started to make progress on the payload portion of it? So if you start to get wins there, could you start moving that back up?

James J. Peterson

Yes. I mean, that's a good point. As many of you know, we put -- we have a lot of dollar content in the bus. We went after Actel, we put a prior roadmap going after the payload. It doesn't turn that fast, okay? There's a long cycle -- the cycle time alone for building the products is 36 weeks. But I'm here tell you, we'll put a lot of effort to it. The next 1, 2, 3, 4, 5 years, we're going to gain a tremendous amount of high margin, high ASP high system-level payload business. That's exactly where we're focused.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay. And if I could sneak in one more. Just on the tax rate, just to clarify, so I think you said it's going to go down to 16% and improve going forward. Seems like a pretty meaningful drop there, so I just want to make sure I understood that properly.

John W. Hohener

Yes, it is, Steve. I mean remember Zarlink comes to us with a lot of [indiscernible] that we're going to be able to use as well as some other operational improvements that we're incorporated, so you heard it correctly.

Operator

Your next question comes from the line of Daniel Gelbtuch with Cantor Fitzgerald.

Daniel M. Gelbtuch - Phoenix Partners Group, LP, Research Division

Just I'd like to where things are in the PoE space, in terms of how far up the curve you are in terms of wattage and when you guys -- when we're going to start seeing applications in I guess in the computer space, that's number one. Number two, a little more color about where Millimeterwave is standing at this point in terms of numbers, I mean any data you can give us will be great.

James J. Peterson

Sure. Let me tell you about the body scanner, the TSA Millimeterwave to date, okay. We continue it Microsemi to invest aggressively in Millimeterwave or some of you might understand that as a passive technology, and so is the TSA. It's a big debate on scanners and body and security going through, well, it's privacy, right? That was answered most recently. The TSA has redone and approved the next generation privacy concern issue for scanners. And to date, they've approved the -- which is for the sake of argument called the L-3 solution, which is a millimeter solution, which is a technology which is based on our Microsemi technology. We at Microsemi, we just landed the largest purchase order ever. I think we're in early innings. So Millimeterwave technology I think we talk back, we can be at a $20 million-plus run rate, I think that's still true. Okay? PoE business, I got Litchfield here, maybe Litchfield can give a quick update on PoE.

Steven G. Litchfield

Yes, absolutely. We're getting taking a lot of share. We talked about that in the prepared remarks as far as what type of shares that we are taking. We're taking that share on the IC component as well as the mid-spend side. And we're actually very excited some of the higher power devices, as you mentioned, that are coming. That market opportunity really opens up an incredible new area for us. And we believe that we're the leader there. So I think over the next couple of years, you're going to see us expand that product line aggressively.

Operator

Your next question comes from the line of Tore Svanberg with Stifel, Nicolaus.

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

It's Erik calling in for Tore. I wanted to just follow-up I know we've kind of talk a lot about the defense business, but if -- you gave us a lot of color there, but if it looks to be flat -- the DoD budget looks to be flat year-over-year, which at this point, I think people are calling for. And you've put up a 22% year-over-year growth. What are your expectations for next year? I know you talked about content growth and everything else, but can you just help us out understand that?

James J. Peterson

Yes. Let me give you all [indiscernible] things on where we're focused. First and foremost, we're not focused on any of the defense business that is connected with individual soldiers, except the only thing I want to invest in is electronic radios so they can call their parents or friends say that are coming home. Our focus is electronic content eyes in the sky. To a certain degree, if you want to get bolt-on electronic warfare, as far as military sales in the international market defense is growing. Our product development, our market share gain is growing. And all those point back to our history we've done. Last quarter, we grew at 5%; year-over-year, again 22%. We read what's going on. We understand what's happening with Microsemi business plan strategic plan execution, this has proven to be a very secure business in the history and going forward. The defense business for us is strong.

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Got you. Given the current environment, could you just kind of talk about your visibility at this point and any sort of comment that you're hearing from your key customers that would have kind of driven you to your guidance this quarter?

James J. Peterson

Yes. I mean questions, right. What do you call a bottom to this, right? And for Microsemi, if this is as bad as it gets, that's great. I think the worst is behind us. I think there's the macroeconomic concern and most certainly with Microsemi. We run into this natural disaster in Thailand. It's pretty much epic proportions. It was a 5% revenue impact on us in this current quarter. But I think all in all from a microeconomic and semiconductors, I read my peers, these guys are guiding down revenue by 50% midpoint, earnings 30%. And got news for you, if this isn't the bottom where they're guiding to, they should break out a bunch of resumes.

Erik Rasmussen - Stifel, Nicolaus & Co., Inc., Research Division

Okay. If I could squeeze in one more, Jim. If you said this was the worst behind you, you think. And obviously, a lot of moving parts for Thailand, is this the worst quarter you think for you guys for the December quarter for the impact from Thailand?

James J. Peterson

Yes, I mean, company don't have backup redundancies, you're not putting money in the right companies, so that's what we're doing, right? We're looking for other manufacturing locations. I mean quite honestly, there's no electricity in the sites where we are in Thailand and will not be for a long time. So we're looking right. Let's be honest. First and foremost, we look in the United States right. We always do we always should. Then we're looking at the redundancies in Malaysia, the Philippines, et cetera. But we're working comfortably with our contract manufacturers. My operational team, I'm going to give them an A++ of the efforts. And as far as the impact on about 5%, that will lessen going forward. That's what you want from companies that to invest in.

Operator

Your next question comes from the line of Chris Rolland with FBR.

Christopher Rolland - FBR Capital Markets & Co., Research Division

This is Chris Rolland for Craig Berger. Are there any areas where you guys suspect customers might have higher inventories than they would like right now?

James J. Peterson

Yes. I'm willing to bet a year's worth of salary in residential solar. I'll bet you they might in a 1 year to 1.5. Of course, the board, we look at it. I, obviously, get right to this call, right. I think we're lean in almost all our channels, and that -- so I think with the inventory and we don't know what happened there, and that's worldwide, not just Microsemi. We have less impact. But I'm just going to boldly tell you that our channels were lean.

Christopher Rolland - FBR Capital Markets & Co., Research Division

Great. Linearity last quarter, what did it they sort of look like and what are you guys seeing so far in October and November even?

James J. Peterson

Let me jump in your question and give 2 answers, because nobody's asked about bookings yet. Last quarter, we had a positive book-to-bill. And from a booking linearity, we're -- it's stronger right now quarter-over-quarter in this same exact period of time. Linearity, right, we have a couple of linearity going forward. We're -- I don't know 30, 30, 40, linearity 25, 35, 45. So our linearity state remember we've got sticky businesses. We have long lead time business. We have a long cycle time business, so I don't think my linearity changed much less last quarter nor will it the next.

Christopher Rolland - FBR Capital Markets & Co., Research Division

And what about lead times? Did they come down a little bit in the quarter or where are they?

James J. Peterson

My lead times, 3 buckets right, the commercial business, my consumer stuff. For Microsemi, it weigns [ph] 16 to 14 weeks. I think you'd find that constant. Take a hard look at our defense business, lead times, 15 weeks to 26 weeks. The longer end of it, right, based on cycle time. And satellite business, satellite business we've got 36 weeks worth of lead time and cycle time there plus. And I say plus because we're all from IC to the system-level. The system-level business in the satellite business might be 36 and slightly higher. Therefore, the collections tend to extend 36 and higher as we convert that business.

Operator

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

Christopher J. Longiaru - Sidoti & Company, LLC

First housekeeping question for John. You said that you expect a $2 million the $3 million hike on the SG&A and $5.8 million to $6.3 million on the R&D?

John W. Hohener

Correct.

Christopher J. Longiaru - Sidoti & Company, LLC

And what would that be if you couple of more weeks of Zarlink? We see that kind of a starting point for where cost reductions come on the OpEx side?

John W. Hohener

Zarlink, you can take a proportion of the quarter that we had then and they would be proportionally higher. But we're also taking cost out in Zarlink as well as cost cutting in our own operations pre-Zarlink.

Christopher J. Longiaru - Sidoti & Company, LLC

So to look at this, basically, it looks like maybe a full quarter would be about a $10 million to $11 million number. And in order to get this down by March, you're going to end up having to strip probably about $4 million or $5 million off that number. Does that sound right?

John W. Hohener

March is going to have an incremental...

Christopher J. Longiaru - Sidoti & Company, LLC

What was that?

John W. Hohener

March will have an incremental uptick as it relates to expenses for Zarlink.

Christopher J. Longiaru - Sidoti & Company, LLC

Okay, in terms of cost control, by exiting March with a 30% operating margin, what do you have to strip out of those cost to get there?

John W. Hohener

We're not exiting March with a 30% operating margin -- on Zarlink, with top line.

Christopher J. Longiaru - Sidoti & Company, LLC

Say it again.

John W. Hohener

It's both from a gross margin perspective and from a top line perspective, we're going to have of full quarters' worth of revenue and we are improving the gross margin in 2012 to 30%.

James J. Peterson

As a reminder, this is Jimmy. I don't like to surgically take group by group or division by division as the gross margins and where we think moves around. You probably know that, right?

Christopher J. Longiaru - Sidoti & Company, LLC

The other question I have is just in terms of what was your utilization internally in the quarter?

John W. Hohener

You know what, probably in the [indiscernible] control realize all the high [indiscernible] analog mixed sales stuff including Zarlink going forward is boundary. So it's giving utilization numbers, not just look at industry utilization. And Chris, kind of dial that in. With the stuff, you have to know the internal, the aero, the stuff that we control. If I told you 70%, I'm particularly close to accurate.

Christopher J. Longiaru - Sidoti & Company, LLC

Okay, and what is that -- typically, it runs above 80%, am I correct?

James J. Peterson

65% to 80% is not a bad number, depending on the quarter, but I like to keep it around 70% to 80% so that I get 20% upside when needed. And if I need more than that with the cycle time, I have the operation guy to figure out for me.

Christopher J. Longiaru - Sidoti & Company, LLC

What's the sensitivity of the gross margin side of that business between 70% and 80% in terms of a percentage of utilization versus percentage of gross margin?

James J. Peterson

I know that's the sensitivity, but I tell you whatever it is, it should be stronger.

Operator

And your final question comes from the line of Andrew Huang with Sterne Agee.

Andrew Huang - Sterne Agee & Leach Inc., Research Division

So with Zarlink, you're basically at $1 billion run rate. So if you look out a little bit, can you give us a sense of maybe what end markets you might want to go after next?

James J. Peterson

Yes. I mean with the Zarlink, we've got some great end markets, right. It's the timing business, that's fun; communications, that's fun. I like that we have a strong footprint now in the medical market I'll be looking for additional medical content. I don't do a lot in the automotive. Automotive is nice, good margin business, key long lead time. Look a little bit at the Medical, a little bit at the automotive. But now the plan is hey, let's make this -- let's straighten the company as a whole. We've had a lot of revenue. We strengthen the revenue. If you went from 2009 to 2011, we 2x-ed the revenue, and what we did there is we actually strengthened the infrastructure of the company. Now we should focus on how to pull to profit to the bottom line to my shareholders. That's more important.

Andrew Huang - Sterne Agee & Leach Inc., Research Division

And then I know it's a small as a percentage of sales now, but can you give us a sense of what you're seeing in the TV business?

James J. Peterson

Yes, I'm glad you mentioned that. Litch, you want to talk a little bit about the TV and maybe some LED stuff that's happening.

Steven G. Litchfield

Actually, we had a nice development in the quarter. I don't think we've talked about them in the prepared remarks today, but we did get our largest order from the largest TV manufacturer in the world this quarter. So that's something that I know internally we're very excited about and it's a nice start to 2012 where we expect to see more of this.

Andrew Huang - Sterne Agee & Leach Inc., Research Division

Since that largest order, is that for LED TV or a CCFL TV?

James J. Peterson

Certainly LED. The CCFL one, by the way, we're still gaining market share and enjoying profitability in the CCFL. But what Litch is hitting towards, I'll certainly Korean company, LED.

Okay. I want to thank you for joining us today, and good morning, everybody. Have a great day.

Operator

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

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