Microsemi's (MSCC) Jim Peterson on Q2 2016 Results - Earnings Call Transcript

| About: Microsemi Corporation (MSCC)

Microsemi Corporation (NASDAQ:MSCC)

Q2 2016 Results Earnings Conference Call

April 28, 2016, 04:45 PM ET

Executives

Terri Donnelly - Executive Assistant Microsemi Corp.

John Hohener - EVP & CFO

Jim Peterson - Chairman & CEO

Paul Pickle - President and COO

Steve Litchfield - EVP & Chief Strategy Officer

Analysts

Quinn Bolton - Needham & Company

Doug Freedman - Sterne Agee

Erik Rasmussen - Stifel

Richard Sewell - Stephens

Mitch Steves - RBC

Vince Celentano - Raymond James

David Wong - Wells Fargo

Suji Desilva - Topeka

William Stein - SunTrust

Operator

Ladies and gentlemen, thank you for standing by and welcome to Microsemi's Fiscal Second Quarter Earnings Call. [Operator Instructions] Thank you.

I would now like to turn today's call over to Terri Donnelly, call coordinator. Please go ahead.

Terri Donnelly

Good afternoon and welcome to Microsemi's earnings conference call for the second quarter of fiscal-year 2016. 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 Chairman of the Board and Chief Executive Officer; Paul Pickle, our President and Chief Operating Officer; John Hohener, our Executive 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 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 current expectations and is continually subject to reassessment due to changing market conditions and other factors. Therefore it 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 the news release. We wish to caution you that all of our statements except the Company's past financial results are just our current opinions, predictions, and expectations. Actual future events or results may differ materially. For a review of risk factors, please refer to Microsemi's report on Form 10-K for the fiscal year ended September 27, 2015, and Form 10-Q for the quarter ended January 3, 2016.

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 Hohener

Thank you, Terri. In the second quarter, we reported record net sales of $444.3 million, up 50% from $296.2 million we reported a year ago and up 35% from the $329.2 million reported in the first quarter of 2016.

Revenue from our PMC acquisition was slightly ahead of the higher end of our guided range of $110 million to $120 million. GAAP gross margin for the second quarter of 2016 was 45.1%, inclusive of the effect of non-purchase accounting charges of $66.2 million and $4 million in inventory charges related to the closure of a wafer fab facility.

Reflecting the cost associated with the acquisition of PMC, we recorded a GAAP operating loss for the second quarter of 2016 of $97.9 million. In addition to the two items affecting cost of goods sold, we recorded $51.7 million in restructuring and facility consolidation charges and $22.3 million in transaction-related costs.

We also recorded $24.4 million in stock-based compensation, primarily reflective of the assumption of PMC awards. We expect stock-based compensation the third quarter of approximately $22 million. GAAP operating loss also includes amortization of intangible assets of $45.3 million, and we expect amortization expense of $43.9 million in the third quarter. We also recorded GAAP expenses of $73.6 million in OID and other financing-related charges and $3 million in other non-cash adjustments.

Non-GAAP gross margin was a record 61%, which was up 390 basis points both sequentially and from the year-ago second-quarter, attributed to continued facility consolidation as well as the contribution from the PMC acquisition. For the third quarter, we expect to benefit from incremental synergies and consolidation efforts and forecast gross margin to improve between 75 and 125 basis points.

During our second quarter, operating expense was $154.7 million, reflecting stringent cost controls as we absorbed the PMC acquisition. Non-GAAP, selling, general, and administrative expense was $66.9 million or 15.1% of net sales; and research and development expense was $87.8 million or 19.8% of net sales. Reflecting incremental cost synergies as well as divestitures, we expect overall operating expense for the third quarter to decrease between $9 million and $13 million.

Non-GAAP operating income for the second quarter was $116.2 million or 26.1% of sales, up from $75.8 million or 25.6% of sales in the second quarter of 2015 and up from $83.8 million or 25.5% for the first quarter of 2016.

For the second quarter, we recorded $34.5 million in non-GAAP interest and other expense compared to $8.1 million in the prior quarter, reflecting the new borrowing for PMC, which was effective for 11 out of 13 weeks of the quarter. We expect Q3 to be around $33 million, reflecting a full quarter of borrowing, offset by the proceeds from our divestitures and free cash flow.

In connection with the PMC acquisition and refinancing of the then-existing debt, we borrowed $2.925 billion on January 15 and, prior to the close of the quarter, reduced our borrowings by $280 million. We expect to further reduce the principal balance next week using proceeds from divestitures.

We ended the quarter with a principal balance of $2.645 billion. Our leverage ratio at the end of the quarter was 4.61, and our 18-month goal of 3.0 was ahead of plan. Our non-GAAP effective tax rate was 8.5% for the second quarter, and we expect the same rate for Q3.

Non-GAAP net income for the second quarter was $74.7 million or $0.67 per diluted share compared to the midpoint of our guide of $0.65. As forecasted, with the shares issued for the PMC acquisition, our diluted share count for the quarter increased over 15 million shares to 111.6 million and will increase to approximately 115 million when measuring for a full quarter in our fiscal Q3.

Capital spending was $12.5 million in the second quarter compared to $10.5 million in the prior quarter, and our annualized target including PMC is $60 million. With the announced divestiture of certain nonstrategic business components to Mercury Systems as well as a small sale to MaxLinear, the associated assets have been consolidated into assets held for sale, and liabilities have been consolidated into consolidated liabilities held for sale.

Our ending balance sheet, of course, also reflects the addition of PMC. As such, accounts receivable increased to $211.9 million from $176.2 million at the end of the prior quarter, with improving DSO from 50 days to 48 days. Similarly, inventories increased modestly to $235.1 million from $231.4 million, as PMC inventory balances approximated the balances of our divested assets.

However, days of inventory substantially improved to 137 days from 148 days. We paid cash of approximately $102.6 million related to the PMC acquisition for severance, transaction costs, and cash settlement of options and other taxes and fees. Adjusting for those payments, we had a record operating cash flow related to the business of $108 million. This also resulted in a record adjusted free cash flow for the quarter of $95.5 million. We ended the quarter with a strong cash balance of $153.1 million.

Depreciation and amortization expense was $59 million, reflecting the addition of PMC. Next quarter, we expect depreciation and amortization expense to be approximately $57 million. We ended the quarter with a book-to-bill greater than 1 to 1.

Moving on to the end-market breakout, we have adjusted our reporting to account for the acquisition of PMC. Our new breakout will be as follows: aerospace and defense, communications, data center, and industrial. Our previously reported numbers will be recast in our next 10-Q. Our best estimate about the end market percentage breakout of net sales for the second quarter was approximately aerospace and defense, 30%; communications, 36%; data center, 19%; and industrial, 15%.

We are suspending release of our customary product breakouts. Given the close of our most recent acquisition and pending the close of the recent divestitures, our product mix will be dramatically skewed towards mixed-signal RF product group, while discrete and other will be relatively insignificant.

Now for our business outlook: accounting for the divestitures to Mercury and MaxLinear, we expect revenue to be between $420 million and $440 million in the fiscal third quarter. We expect non-GAAP diluted earnings per share of between $0.69 and $0.75. We see the previously mentioned PMC $100 million of synergies as ahead of schedule, as we have taken actions to date addressing $80 million of it.

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

Jim Peterson

Okay, thanks, John. I would like to start off with three key takeaways for today. First, Microsemi is executing ahead of plan. The integration of PMC is off to a great start, as you can see, in profitability, cash flow, and other metrics. We are pleased to report initial engagements with customers have been exceedingly positive. We expect to gain traction and market share as we focus on key product roadmaps and Tier 1 customers while realizing operational efficiencies.

Second, Microsemi is gaining cash flow -- growing cash flow and reducing debt. Execution of the plan is resulting in record cash flows and profitability, and we're using those profits to pay down debt -- which, as you know, is our top use of cash currently. As earlier guided, we expect to be under 3 times debt to EBITDA over the 18 months following the transaction, and we'll be operating ahead of schedule once we apply the funds raised from divestitures of nonstrategic assets.

Third, we are strengthening Microsemi. Microsemi's core business and its value proposition to its customers is on the rise. Focused products such as FPGAs, timing, ethernet switching, and recently added storage products and differentiated software are increasingly strategic and of higher value to our customer base.

The completion of the PMC acquisition enabled us to streamline the portfolio by pruning lower value, nonstrategic businesses and enhance our profitability and long-term growth opportunities. We will remain laser-focused on driving our value proposition with customers through differentiated technology in growth areas of the market.

With that, let's get to the end-market commentary. Communications, our largest end market, accounted for 36% of our revenues and was up 69% year-over-year and 27% sequentially, totaling approximately $160 million aided by the contribution of PMC.

Turning to broadband gateways, we expect a resumption of growth in the gateway business after a seasonal March quarter, although at a more moderate pace than we saw in 2015. Ethernet switching is poised for a strong quarter in June. We see a massive opportunity here to grow a very meaningful business. With the demand for ethernet and the competitive dynamics, the customers continue to request more of Microsemi, and we see tremendous potential over the next 12 to 18 months.

We also continue to see strength from our timing products, driven by ongoing strength in the OTN markets, and the backlog is growing. OTN revenues from recently acquired PMC were also strong and drove upside to our initial revenue contribution forecasts. All in all, we are pleased with our communication results, especially considering revenues were negatively impacted by the state-ordered stop-ship to ZTE during the quarter.

Aerospace and defense was approximately $133 million, down about 1% sequentially and year-over-year. Both components of this end market are coming off a double-digit performance in 2015. Aerospace is off to a slow start, but our outlook for commercial air remains healthy, and we're patiently awaiting the second-half uptick in the satellite shipments, which contain a rich mix of PJ-boosted revenue performance profitability.

Defense to date remains in a growth mode, delivering sequential year-over-year growth for the March quarter. And we expect more of the same going forward. We believe we're in the early stages of a multiyear defense cycle, augmented by growth in electronic content of our richer mix in growing foreign markets for US defense products.

Data center. Our new end market was 19% of revenue in the March quarter or approximately $85 million. Initially revenue reported in this end market will consist of storage controllers, interconnect devices, and board-level products from the acquisition of PMC, along with various power management and ethernet switching products from Microsemi's existing portfolio, which have been selling to data center applications.

Over the longer term, expect to drive our ethernet switching, FPGA, and secure device into high-growth hyperscale applications as we execute on Microsemi's solution sales go-to-market strategy. As most of you know, the storage business typically experienced seasonality during the March quarter. We did see the seasonality in the business; however, we performed better than expected. We feel like we're uniquely positioned, with a strong product portfolio and great customer relationships to grow revenue and market share in high-growth data center markets.

Industrial was up 3% sequentially and 1% year-over-year for the March quarter, totaling $66 million and approximately 15% of revenues. Medical applications accounted for about half of the growth in the quarter, as well as broader more macroeconomic-exposed components of our industrial end markets also grew. The environment as a whole has been sluggish. However, we expect modest growth for our industrial end markets as we look to the June and second half.

In summary, we're extremely pleased with our progress integrating a transformative acquisition; raising the value of our Company by disposing of non-core, low value businesses; and using some of the growth in profitability and cash flow to reduce our debt, improve our capital structure, and ultimately benefit our shareholders.

So with that, I'd like to thank you for your interest and support. And we'll now take questions from our analysts. In the interest of time, please limit yourself to one well thought-out question; and, if necessary, a brief follow-up. Susan?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Quinn Bolton of Needham & Company.

Quinn Bolton

Nice execution on the synergies and the PMC share acquisition. Gee, I hate to kind of hit on a sour note, but can you talk to us about revs? It looks like you're guiding $420 million to $440 million; consensus up closer to $465 million. Obviously, you've divested a couple of businesses.

Can you give us some sense: what would revenue have been had you not had those divestitures, so we could try and figure out an apples-to-apples comparison relative to consensus? You know, it does feel like the core Microsemi was probably a little bit softer. Can you highlight any areas that you know you're seeing that softness?

Jim Peterson

Yes, I think if you look at the guide and the range we gave, it pretty -- comes in, you know, the sweet spot. You know, and I think you've got to look at the divestitures, right? We divested nice number through Mercury at about $100 million. MaxLinear -- they just came out with their press release. I think they're guiding to what the number there is. And then, look, we're looking -- in addition to these divestitures and these carveouts, we also have a keen eye on nonstrategic, lesser margin, lesser growth kind of products. So I think net-net, you know, we are pretty much within the sweet spot.

Quinn Bolton

Okay. So you're not seeing anything particularly slow or unexpected in the core business?

Jim Peterson

No, I think -- you know, let's address the market breakout areas that John just spoke to, right? You know, you look at the aerospace and the defense market, right? It was flattish, right? And I think you going to see -- next quarter you'll see that again. You know, the up-and-down there, and the flattish. If satellite would come in a little stronger early in the second half, that would take it to the higher end of the $440 million. But at this point, right, aerospace come up to a slower start than we expected.

So I think let's look at that one; let's just call that one flattish. Right? Because I think what you're really looking at -- looks like $3 million to $5 million. I think most of that is going to be covered by us walking away from the less margin strategic business.

Communications -- it's going to be up. And it's going to be up in the market areas where we see it as more formative, better contributing margin products than the divestiture products.

Data center is certainly up. You know, here we're doing extremely well. We are taking market share. And in data center I think we arguably have probably the most extensive product portfolio. We have the storage products, control, the flash, FPGA, and ethernet. So that is going to be up.

And then industrial, right, let's just call it -- I spoke to the word moderate growth. Let's call that flash. So I think when you look at the market space, and you look at the products that we are focusing on, we are a Company that's pretty much been transformed. So I don't see a lesser revenue number. I see it dead-on more profitable set of numbers from the street.

Quinn Bolton

Thank you. Okay, and second question, Jim, or maybe for John: obviously, you've had a lot of business transformation with the acquisition of PMC, and now the divestitures. It looks like that divestiture -- you're divesting a lot of the discretes that have some defense exposure. And I think that may change your seasonality, or I guess I'm wondering if that changes your seasonality. Historically, Micro has probably seen the greatest impact from seasonality in its December quarter.

Now that you have sort of shifted more to an IC-rich mix, do you think December is now, perhaps, a flat-to-up quarter? Or do you still think that you might see that December quarter being sort of a seasonally softer quarter?

Jim Peterson

This is Peterson. I'm going to speak a little bit, then turn it over to John. I think you're right. We are going to more of, what you call it, IC mix in the defense market space. We are not walking away from the defense market space. Defense is growing. What we're walking away from is the non-component level of defense and, again, the lesser margin, less strategic. John?

John Hohener

Yes, and I think to amplify that, the business that's being sold to Mercury is not the historical discrete that maybe you were thinking of. We're still very strong in that, and cash flow generation from that is still very key to the Company.

You know, Mercury does impact our -- the costs that we have related to Mercury for this quarter do hit us, because we are carrying about 30 days of expense and not getting much revenue from them. But that's built in to our guide of coming down from around $9 million to $13 million in OpEx. So we probably could actually come down a little bit more if not for that.

Jim Peterson

I just want to make a note. Mercury -- by the way, that is a business that is less attractive to Microsemi. But if you look at Mercury, right. They are exactly the right pair for that asset. They are exactly the right partner for Microsemi to work with on the divestiture of that asset, no different than MaxLinear is in the component they just acquired.

So we're not necessarily getting rid of what I'd call lesser businesses. But we're just looking at what -- who should have a better parent.

Quinn Bolton

Got it. Thank you.

Operator

Your next question comes from the line of Doug Freedman of Sterne Agee.

Doug Freedman

Hi guys, thanks for taking my question. Can you talk a little bit about the divestitures and the impact that they might have on your longer-term growth rate, if there is any?

Jim Peterson

I think it's going to be beneficial to our longer-term growth rate. The growth rate I'm going after is better margin, higher profitability businesses, focused on growing markets; focused on data centers; focused on communications; focused on the right area of aerospace/defense; and certainly focused on the right areas in industrial.

So I think what we're doing here is we're transforming a company. And I think this is a great leap towards it. You know, no different than what we did with Actel, with Zarlink, with Vitesse. PMC just added to it. We are a company that has transformed.

Doug Freedman

Can you give us a sense, looking at the debt leverage, what actions -- I know you talked about deploying the cash that's coming in. How quickly once that cash is deployed does it take down the interest rate? And how should we think about -- are there any triggers in the structure of your debt that would allow you to maybe restructure that debt to get a lower combined total interest cost?

Jim Peterson

That's a great question. By the way, the minute the monies hit our account, it goes down to paying down debt. John, do you want to jump on the rest?

John Hohener

Yes. And the good news is we had a nice check come in today for $21 million from one of those divestitures. So, yes, certainly we are taking down the debt with our free cash flow. That continues to be a number one use of our cash. As it comes in, we are addressing the one that we can affect the most economically. And right now that would be the term B.

We're continually looking to how do we address the marketplace, in terms of either refinancing or ways to take out the more expensive cost of the debt. But right now, the bond that we have is something that is trading meaningfully above par. So we're not going to be able to address that. However, we certainly have a number of other pieces of the debt that we're going to be paying off with our free cash flow.

Jim Peterson

And also, take note: we got $21 million today. May 2, next Tuesday, we get an additional $300 million on top of that. So we are doing exactly what we told you we were going to do. We're going to pay down debt aggressively.

John Hohener

And I'll amplify on that, too. I mean, with our run rate, we are going to exit; we haven't changed our model of exiting the year at an annualized run rate of free cash flow of $450 million. Feel very strongly about that.

And so -- you know, if we talk about the debt a little bit, we started off at $2.925 billion. We're at $2.645 billion. Again, we're going to take $350 million in the next couple of weeks or $321 million in the next couple of weeks, plus whatever free cash flow we generate. And then continuing our free cash flow throughout the quarter. So you're going to see this number come down significantly. And obviously that's going to have a meaningful impact on your interest expense calculation.

Doug Freedman

All right. If I could just move on and ask one about some of the fundamental underliers of your business --?

Jim Peterson

You know the rules, you're allowed to have one well thought-out one and a follow-up. Go ahead.

Doug Freedman

All right, I'll let it go. I'll circle back in. Thanks, guys.

Jim Peterson

No, I'm going to make a -- I'm going to give you a stay. What do you want?

Doug Freedman

I wanted to hear about the FPGA business, and if you could give us a sense of how that business is trending?

Jim Peterson

I'm going to cut you off a little bit. You know, we have a tremendous amount of design win activity. We're actually getting great footprint now in data center. And Paulie, let me throw that to you.

Paul Pickle

So we're making great progress. The design-ins -- we continue to pick up share there. For us, single [vin-ups] [ph] at community, and so that reliability play and the security play continue to be really strong. I guess I'd be happy to announce that we have shipped our early access software to Gen 5, and so our lead customer program is intact for Gen 5.

That is going to be really kind of transformative for our FPGA business, because it brings all the same value propositions, reduces power costs, and opens up a broader market. So we're pretty excited about that.

John Hohener

We're on our way but going well.

Jim Peterson

Yes. We are growing. We're taking market share in FPGAs.

Doug Freedman

Great. Thanks for taking my questions.

Operator

Your next question comes from the line of Erik Rasmussen of Stifel.

Erik Rasmussen

Hi guys. Thanks for taking the question. Just a clarification, and if I could ask my questions: the exiting the year at an annualized rate of $450 million. Is that your fiscal year or calendar year?

John Hohener

Fiscal year.

Erik Rasmussen

Okay, thanks. So circling back on, then, also the outlook. How much impact is still left coming from PMC, with the transition with their rev/rec? Was there a lot in the March quarter, and you're still expecting some in the June quarter? And is there also any spillover beyond that?

John Hohener

Quite frankly, it was nominal in the March quarter. We'll still have a little bit in the June quarter. But that's not a big piece of our overall business right now.

Erik Rasmussen

Okay. And then it looks like you're carving out some of these nonstrategic parts of the business. Two very quickly that you announced: what should we be expecting kind of going forward? Is there a lot of additional pruning to the model that you need to make? Or we have kind of seen you digest two of these right now, and then get through PMC, continue with the integration and everything else?

John Hohener

Look, that's a good question. You see the lion's share of it at this point. They were nonstrategic, as you mentioned. Don't forget the lesser margin, lesser growth business for Microsemi. I continue to look not -- you know, at line item to line item, to product to product going forward. But you see the lion's share of it.

Erik Rasmussen

Thank you.

John Hohener

You're welcome.

Operator

Your next question comes from the line of Harsh Kumar of Stephens.

Richard Sewell

Guys. Thanks for taking my question. Congratulations. This is Richard in for Harsh. Wanted to start on the aerospace business. I know you guys talked about some strength in second half is expected in the satellite business. What gives you confidence that that business is going to start coming back?

Jim Peterson

Let me speak to it. You know, as we mentioned, aerospace is soft to a slow start, but it's a long lead time product, long cycle time product for Microsemi. Second half of the year is going to be up.

You know, we're still looking at satellite as a second-half story. Again, we have good visibility. There's some politics involved in the satellite business. So -- and not just in the form of voting.

So we are looking at it coming back the second half. I don't want to call it a lumpy business, but I'm still waiting for delivery of something that gives me stronger confidence. But yet the signals and the signs we're getting from the right customers in that space are very, very positive.

Richard Sewell

That's very helpful. And then in terms --.

Jim Peterson

And in defense -- you know, it's growth mode. There's a lot going on in the defense market. And it's growth mode. And our focus is on the defense market. We haven't moved away from that an iota.

Richard Sewell

Got you. That's very helpful. And then in terms of the impact from ZTE, what was the impact in the March quarter? And then how should we think about that business coming back as we go through the year, if it is going to come back?

Jim Peterson

Well here's the deal. ZTE for us is about a 1% to 2% customer and growing. We have a good relationship with ZTE. You know, the revenues for the March quarter were affected. We know that they have an agreement with, let's just call it, the government for anything else. That stands until June 28.

So right now, we're just kind of waiting for the signal. We are still working with ZTE. Like I said, they are a key customer to us. And we'll know more as we approach the 28th of June.

Richard Sewell

Fair enough. Good job, guys.

Operator

Your next question comes from the line of Mitch Steves of RBC.

Mitch Steves

Hi, thanks for taking my question guys. So since you're reiterating the $450 million exiting rate in September, does that imply that your -- essentially your operating margins are going to be in the low 30s range?

John Hohener

Certainly, our operating margins are going to go up. I'm not going to guide to what they're going to be in September, but you'll see improvement.

Jim Peterson

But remember, we have always spoken to the fact that the second half of the year we'll be a 60/30 or stronger Company.

John Hohener

Right.

Jim Peterson

So the answer is yes.

Mitch Steves

Got it. And then, secondly, you mentioned in your prepared remarks that you are essentially walking away from some low margin business. Does that imply that your guidance suggests you may be shutting down pieces of the business as well, beyond the divestiture?

Jim Peterson

I think we've seen the lion's share with divestitures shut down everyone a block this year. But I think the message is -- and it's a great -- you know, when I speak here, it's not only to the street, but it's also to my business units and my employees. I'm having a keen eye on those products that are lesser margin, lesser growth opportunities, less strategic to Microsemi. That's the messaging there.

Mitch Steves

Got it, thank you.

Jim Peterson

You're welcome.

Operator

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

Vince Celentano

This is Vince Celentano on for Steve. So I thought we've been seeing mixed signals in terms of the health of the communications infrastructure market in China. Seems like a lot of the carriers are cutting CapEx. I guess, what's been your view is far as what you've seen? You know, a little more in the first quarter, and then how you see 2016 shaping up?

Jim Peterson

Thanks for the question. Here's the beauty of that question, right? Litchfield is begging to get involved in this conversation. Litch?

Steve Litchfield

No problem, Vince. So with regard to the communication infrastructure, I mean, it's been kind of up-and-down. We're actually encouraged with some of our timing businesses.

But frankly, this is where I think we kind of sit back and reflect on some of the overall technologies and the strengthening of those technologies between our ethernet business, FPGAs, timing -- and now we have a new OTN business. And really a security play across all of those products.

And so, yes, that market itself has been lumpy and has been lumpy for a few quarters. It does seem to be getting better, and we are seeing good signs of life there. Bookings have improved, no doubt. But I think where Microsemi really will excel here is getting now, with that new customer traction that we are getting -- this customer engagement that we have with the portfolio of products is really nothing that the Company has had over the last, say, 12 to 18 months.

And so with that change, we're starting to see customers really coming back to us, wanting to buckle together a lot of the technologies or parts of the portfolio that we have to leverage that and really play that against some of the other competitors in the space. And so we are encouraged. I think I'll look over the next 9 to 12 months is pretty good, and we're excited about it. Because as that market does come back with our renewed strength, we see a lot of upside.

Vince Celentano

Okay, great. And then just more generally on the FPGA market, what do you think your best position to take share away from Xilinx/Intel? And has there been any shift as Intel has been trying to digest the Altera acquisition?

Jim Peterson

Yes, we have a thing called Secure Boot. We have the most secure product out in the marketplace. We focus on profitability, reliability. What is the last one?

John Hohener

Security.

Steve Litchfield

Security, yes.

Jim Peterson

Yes. So you know, we have best-in-class, best-of-breed solution FPGA in town. And we are taking their market share.

Steve Litchfield

And the market dynamics are helpful.

Jim Peterson

Yes. We are in a good spot there.

Vince Celentano

Okay, great. Thank you.

Operator

Your next question comes from the line of Ambrish Srivastava of BMO Capital Markets.

Unidentified Analyst

This is Kul for Ambrish; thanks for taking my question. I had a question on the two carveouts, MaxLinear and Mercury Systems. Can you quantify kind of diluted impact initially? And when will that be accretive to your EPS?

Jim Peterson

Steve, you're the M&A guy.

Steve Litchfield

Well, I guess, so there is definitely a diluted impact initially, right. So if you look at the entire business, I think you've seen some of the other public statements. We're not going to break it out line item by line item, but it's on or about $120 million of 2016 revenues. And so there's naturally expenses that come along with that. And in the real short-term, just due to the linearity of the business, I mean, most of these businesses are more back-end loaded, so we've got a lot of expenses upfront.

So there definitely is dilutive impact. It is offset, so we're getting the debt down. And frankly, that's really the real importance here, is that 4.5 times levered, it was important to shareholders and the management team here to get that leverage down, right? So we've taken that down with just the $321 million. I mean, you've almost lessened the debt leverage almost 0.5 turn.

So this is something that was very important to the business. And at the same time it allowed us to really clean up several of the subscale product lines that we had in our portfolio and really allows the entire management team to focus on the strategic areas where we have a much higher level of value proposition to the customers.

Jim Peterson

Yes, so let me just give a little point on top of that. You know, what it does in the near term, we all understand, right? We are all businesspeople, right? For the longer-term, just jot down better profitability for Microsemi; higher growth potential in the product in the markets you want us to be in. And to Litch's point, right, we just de-derisked the balance sheet.

Unidentified Analyst

Great. Got it. Thanks, that's all. That's helpful.

Operator

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

David Wong

Thanks so much. It's sort of nested in your guidance, but can you give us some idea -- as you're currently having done one -- a couple of good divestitures -- nice divestitures. What will the total proceeds from divestitures be when you're all done? And roughly how much revenue will go with these divestitures?

Jim Peterson

Right now the income is going to be $321 million. We put a press release out this morning, a joint press release that says $300 million comes Tuesday. $21 million was received today. So $321 million. You know, as far as the revenue combined, a few thousand, $120 million. You'd be very close with a pen.

David Wong

No, no, sorry. Just to clarify, I mean for all the divestitures you're contemplating over the next couple of years to get your leverage down.

Jim Peterson

Let's be clear here. You've seen the lion's share of it. You're not going to see anything as large as Mercury; and the MaxLinear one was a modest one. We didn't even give it a separate press release out of Microsemi.

So going forward, David, you're going to see modest tweaks to this. But you're not going to see me looking to carve out a lot of businesses.

David Wong

Okay, great. Thanks. One well thought-out question is all I can manage, I think.

Jim Peterson

Thank you, David.

Operator

Your next question comes from the line of Suji Desilva of Topeka.

Suji Desilva

I thought I'd make mine well-thought out as well. So on the gross margin, is there a remaining facility consolidation tailwind for that number, or is that largely behind?

John Hohener

There certainly is a little bit left to go, but we did shut down the fab. That was an item that we talked about. We still have ramping going on, for instance, in our Philippine facility, which we've talked about the past. But certainly from the standpoint of synergy still to be had, that's why we are bullish in terms of our guide in the next quarter. You know, between 75 and 125 basis points.

Suji Desilva

Okay. And then for the inventory, a similar question. Is there is still elevated level there, because the PMC acquisition accounting? And what's the target level when that all washes out?

John Hohener

From an inventory standpoint, we are quite comfortable with the inventory levels. Are you talking about in the channel, or in our inventory?

Suji Desilva

No, on your books, yes. If it's already past --.

John Hohener

Our inventory is properly -- you know, there's no elevated levels there. Like we said, it was a modest amount that we had to take through in terms of the switch to the accounting revenue recognition.

Suji Desilva

That's what I was looking for. Thanks, guys.

Operator

[Operator Instructions] Your next question comes from the line of William Stein of SunTrust.

William Stein

Great. Thanks for taking my question. I want to hit on the FPGA topic again. It sounds like the Company expects to get some server acceleration spots, perhaps. And I'm wondering how sort of line of sight that sort of business is.

Jim Peterson

Good, good. Paul, jump on it.

Paul Pickle

I would not call it server as in storage. I don't know where you are putting server today. We've had some great success in comms. Given the fact that we do have the storage component, it is synergistic to having FPGA as a technology. We are getting a lot of interest there. We'll hopefully be talking about some design wins in that space as well. I'm fairly confident, especially with the new product offerings.

But in comm, especially control point applications, we've been doing quite nicely. And that's where the majority of the design-ins are today.

William Stein

I see; that's helpful. And then a follow-up: you -- about to touch on it previously, I think. Inventory distribution, and then maybe alongside that, sort of order of linearity as we went through the quarter and how that typically -- how that compares to a typical calendar quarter.

Jim Peterson

First and foremost, I think the channels are lean. I think we have been impressively pushing distribution, watching the market environment, and watching what the peers are saying.

Litch, do want to jump on and give more detail on that?

Steve Litchfield

No, I think that covers it. Yes.

William Stein

Thank you.

Operator

At this time there are no further questions. I would now like to turn the call back over to management for any closing remarks.

Jim Peterson

Thank you, Susan. To everybody, thanks for joining us today, and have a great day.

Operator

Thank you for participating in today's conference. You may now disconnect.

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