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Microsemi (NASDAQ:MSCC)

Q2 2012 Earnings Call

April 25, 2012 4:45 pm ET

Executives

Terri Donnelly -

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

James J. Peterson - Ceo, President, Director, Chairman of Executive Committee and Member of Special Committee

Analysts

Quinn Bolton - Needham & Company, LLC, Research Division

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

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

Patrick Wang - Evercore Partners Inc., Research Division

Daniel M. Gelbtuch - Cantor Fitzgerald & Co., Research Division

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

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Mark Delaney - Goldman Sachs Group Inc., Research Division

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 Microsemi's Fiscal Second Quarter Earnings Call. [Operator Instructions] Thank you. Ms. Terri Donnelly, conference call coordinator, you may begin your conference.

Terri Donnelly

Good afternoon, and welcome to Microsemi's Second Fiscal Quarter 2012 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 Investors section. Our website is located at www.microsemi.com.

Microsemi issued guidance in a form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of April 25, 2012, 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 be -- differ materially.

For a review of risk factors, please refer to Microsemi's report on Form 10-K for the fiscal year ended October 2, 2011, which was filed with the SEC on November 23, 2011, and our latest Form 10-Q, which was filed with the SEC on February 8, 2012.

With that said, I'm looking 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 April 1, 2012, were a record $249.3 million, up 3.5% from $240.9 million in the first quarter of 2012 and up 20.2% from the $207.5 million reported in the year-ago second quarter.

Our non-GAAP gross margin came in at the high end of our guidance at 55%, an increase of 30 basis points from our prior quarter. During the quarter, we completed the relocation of production previously located in Thailand. We expect our non-GAAP gross margin to increase between 80 and 120 basis points next quarter, driven by improved manufacturing efficiencies and product absorption.

Our GAAP gross margin was 52.9%, which differed from non-GAAP due to noncash purchase accounting adjustments related to our acquisitions of Zarlink and Maxim's timing, synchronization and synthesis businesses, as well as Thailand-related, noncash inventory charges net of insurance proceeds. Our GAAP gross margin was up 70 basis points from the 52.2% in our first quarter of 2012 and up 830 basis points from the 44.6% in our prior year second quarter.

This quarter, non-GAAP selling, general and administrative expenses were $40 million or 16% of sales compared to $40.5 million or 16.8% of sales in the first quarter and compared to $35.3 million or 17% of sales in the second quarter of last year. For the third quarter, we expect total SG&A to end [ph] at 15% of sales. Compared to the first quarter, the SG&A change included the addition of incremental expense from Zarlink for a full quarter. It was offset by savings from cost control and spending efficiencies within the company.

Research and development costs were $42.2 million or 16.9% of sales compared to $39.6 million or 16.4% of sales in the first quarter and compared to $28.2 million or 13.6% of sales in the year-ago second quarter with the increase in dollars, due primarily to incremental expense at Zarlink for a full quarter and the incremental Maxim's timing, synchronization and synthesis businesses. For the third quarter, we expect total R&D to stay at roughly 16.9% of sales, representing our continued commitment to our product roadmap.

Our non-GAAP operating income was $54.9 million or 22% of sales, compared to $51.8 million or 21.5% of sales in the first quarter of 2012 and $53 million or 25.6% in the prior year second quarter. We recorded 10.1 million in non-GAAP interest and other expense in the second quarter compared to $11.8 million in the first quarter, reflecting the refinancing during the second quarter of our term loan to a rate of 4% from 5.75%. We expect the total amount of interest and other expense to be approximately $9 billion in the third quarter.

Non-GAAP net income was $40.3 million or $0.46 per diluted share compared to $33.6 million or $0.39 per diluted share in the first quarter of 2012 and $38.4 million or $0.45 per diluted share in the year-ago second quarter.

Our non-GAAP effective tax rate for the quarter was 10%, reflecting ongoing improvements in our tax structure. We are expecting our non-GAAP tax rate will trend down more favorably to approximately 8% next quarter, as we implement further changes in our worldwide strategy, including the continued integration of Zarlink's operations into our existing structure.

For the second quarter, we recorded GAAP operating income of $11.1 million compared to GAAP operating loss of $700,000 in the first quarter of 2012 and a GAAP operating loss of $8.4 million in the year-ago second quarter. We recorded a GAAP net loss of $4.8 million for the second quarter compared to GAAP net loss of $44.6 million in the first quarter of 2012 and a GAAP net loss of $19.1 million in the year-ago second quarter.

Our GAAP results for the second quarter included $1.5 million in refinancing expenses. We have deferred approximately $7.6 million in fees in accordance with GAAP that will be amortized over the life of the loan. This will roughly impact our GAAP results by $300,000 each quarter moving forward. On a cash basis, the payback on the fees associated with our refinancing is approximately 8 months. Our GAAP results also included $2.1 million in restructuring, acquisition-related and other charges, as well as noncash expenses of $26.5 million in amortization, $10 million in stock-based compensations and $2 million in inventory purchase accounting entries. We also recorded Thailand-related flood charges of $3.8 million and received $1 million in insurance proceeds. We estimate stock-based compensation expense to come down from $10 million [ph] to $9.4 million to $9.8 million next quarter or approximately 3.2% to 4% of revenue.

GAAP diluted loss per share for the quarter was $0.06 compared to a loss of $0.52 in the first quarter and a loss of $0.23 in the year-ago second quarter.

Capital spending was $14.2 million in the second quarter compared to $12.4 million in the first quarter, primarily associated with the consolidation of facilities both in Northern and Southern California. We expect capital spending to be approximately $15 million next quarter as we finish these projects and then return to our more normal spending rate of approximately $7 million per quarter.

Depreciation and amortization expense in the second quarter was $35 million compared to $33.3 million in the first quarter.

Accounts receivable was $144.4 million compared to $139.3 million at the end of the first quarter, and inventories decreased $8.5 million to $156.3 million.

Our DSOs -- our DSO was 52 days, up from 47 days last quarter, due primarily to timing of shipments as we recovered from Thailand production ships. And our days of inventory remain unchanged at 127 days.

We ended the quarter with a cash balance of $121.4 million, and our GAAP operating cash flow was $41.4 million. And we expect to get over $55-plus million quarterly run rate by the end of the year.

We recorded a book-to-bill ratio greater than 1:1. Our best estimate of end market percentage breakout of net sales for the second quarter was approximately: enterprise and communication, 31%; defense and security, 29%; aerospace, 21%; industrial, medical and alternative energy, 19%.

Now for our business outlook. Microsemi expects that for the third quarter of fiscal year 2012, net sales will increase between 3% and 5% sequentially. On a non-GAAP basis, the company expects earnings per diluted share for the third quarter of fiscal year 2012 will increase between 11% and 19% or to between $0.51 and $0.55.

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

James J. Peterson

Okay. Thank you, John. We'll start with communications. Our largest growth end market at 31% of total sales. Total revenue here grew approximately 3% sequentially to just over $77 million. Notable performance in the March quarter, including our wireless LAN products, which bounced nicely off the December quarter, strong voice circuits demand, a bit of a seasonal contribution for our PoE products and the emergence of power conversion products, which grew in the quarter due to new products ramping aggressively in communications. We also resumed supply in a number products, which had been affected by the flooding in Thailand.

PoE paused in the March quarter, but less than we had expected. We're excited about the technology's growth prospects, and we expect a solid double digit growth year-over-year for our PoE products due to new customer penetrations and production ramps in the next quarter. Going forward, we are focused on growing our share with the market's top players, expanding our power device market share and driving the emerging HD-based key technology into the marketplace.

2012 will present a breakout year for our growing power conversion product family due to new customer wins expected to ramp in the coming quarter. Multiple high-performance power management solutions are required in every application we serve here at Microsemi. And we are leveraging our broad technology base and strong customer relationships to capture for silicon content in our designs. We're excited about the long-term revenue growth opportunities that our power conversion product families will offer and expect to deliver on more fronts in the near future.

Briefly onto Zarlink. The group is fully integrated, and we are leveraging our market-leading position in our high-growth markets while driving results for our shareholders. We continue to gain market share in our voice circuit business, capitalizing on strong demand from gateway applications in the Asian markets. The voice market is a key opportunity for us here at Microsemi. As we focus on driving more peripheral content by leveraging our leading technology and market share position.

Turning to our timing and synchronization business. Last quarter, we noted that March quarter revenues would be tempered by continued sluggishness in the backhaul in the infrastructure markets. Since February, we have seen a steady improvement in our timing and sync bookings. We are well positioned for improvement in the June quarter and beyond.

Our defense & security markets accounted for 29% of total revenue last quarter, growing over 3% sequentially in dollar terms. We are encouraged by the continued market stabilization. And as I said last quarter, Microsemi continues to expect to expand its defense & security revenues at an 8% to 12% yearly rate up the bottom through market share gains and new product introductions. We expect budget discussions to persist, but the demonstrated growth of electronic content in defense & security applications drives a solid opportunity for Microsemi. In fact, market research firm, Databeans, recently forecasted that U.S. military electronic market will grow at 4% CAGR over the period from 2012 to 2017, while foreign military sales will grow at a 7% compounded rate. To the short, this electronic content growth opportunity, coupled with our growing product portfolio and steady move up to value chain, makes us confident about our ongoing prospects.

Our aerospace product portfolio benefits from the reemergence of our satellite business and continued strength in the commercial air markets. Revenues in this end market were up almost 8% sequentially, accounting for 21% of total revenues. We expect standout performance for this market in the near term, giving strong satellite visibility continuous strength of our commercial air markets.

Our longer-term prospects are even brighter, as Microsemi will benefit from the continued ramp of new power products, such as our second generation Rad Hard MOSFETs, diode nitrate [ph] devices, as well as the continued penetration of ASIC sockets, where they're customizable SoC solutions.

Our industrial end markets were flattish, accounting for about approximately 19% of total revenues. Industrial in terms of application of products is one of the more varied end markets.

Looking at some of the larger contributions. Medical remained a stable growth contributor in the March quarter, and we expect increased momentum going forward as we ramp longtime customer Medtronic, with the addition of our monolithic, ultra-low-power radio solution.

To reiterate what I said on Microsemi's earnings call in January, we believe that 2012 will be a great year for Microsemi. Now just 3 short months later, you can see why we are confident. We have leading market share positions in a number of high-growth communication applications, destruction caused by the flooding in Thailand is now a memory, and we are ramping production. Our defense & security revenues had resumed their historic growth trajectory, thanks to the stabilization in ordering patterns and the constant growth in electronic content opportunity both here and abroad. Aerospace is benefiting from a strong cycle in commercial air and satellite revenues, and our industrial markets are stable and poised to show growth.

So in short, Microsemi has overcome recent macro challenges, and it is better positioned for organic growth than any other time in its history. Our accelerating trends in bookings, design activity and operational efficiency, lead me to believe our strategy is on track, and we'll continue to improve profitability for the benefit of Microsemi's shareholders.

With that, I thank you for your interest and support, and we'll now take questions from our analysts. [Operator Instructions] Susan?

Question-and-Answer Session

Operator

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

Quinn Bolton - Needham & Company, LLC, Research Division

Hey, Jim, just wanted to touch on the power conversion. You called out a couple of areas where you're going to have breakout years in 2012 in power conversion, both in the communications business, but also in some of the aerospace or satellite businesses. Can you talk about specific opportunities or what types of applications you're seeing that power conversion really start to take off for Microsemi?

James J. Peterson

I think we're calling for a double in growth, although a low platform. Certainly, 802.11ac, is -- looks like it's going to be a strong bright future for Microsemi. We have some technologies that we believe that the market needs and the competitors don't have. But I think you're right. I think if you look at the power conversion strength of Microsemi is to be able to launch it across markets, in the communications field, somewhat into the military field, the defense and the like, so I think you just going to have to -- going forward, I think that's going to become a main play for Microsemi. It's going to be power conversion. And some can flash back a little bit, you remember the word DC-DC.

Quinn Bolton - Needham & Company, LLC, Research Division

It's mostly DC to DC, Jim?

James J. Peterson

Yes, yes.

Operator

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

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

Yes, I guess, just a couple of questions. First, so just if you kind of look at your top line and break it out, it sounds like industrial is kind of have been a little bit slower to rebound. I mean, can you talk about what -- whether it's for the year or whether you're just talking about the June quarter, kind of what the puts and takes are? Your top 2 or 3 growth verticals versus your -- maybe your laggards like solar?

James J. Peterson

Okay. Yes, I think the word we used was flattish shape, because it was flattish. I think it's poised for a really a slight uptick to strengthening. The good news is the medical market is nice. We have -- especially with the addition of Zarlink, with the -- our radio communication products. We spoke long and hard about Medtronics becoming an aggressive customer. We actually received a nice purchase order from them and got that on and moving. Solar -- I mean solar is going to be where solar is. Alternative energy, there's still some congestion in the channel. So I think of all our markets, we break out, we have in 4 markets, it's probably the 4 out of 4 going forward, but we do expect to grow next quarter and beyond.

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

Do you feel like ranking, maybe ranking those a little bit, Jim?

James J. Peterson

Yes, sure, no problem for you. Going forward, 31% of our business is probably enterprise and slowly the communications market, about 30% of our business, that will be the strongest next quarter. I lied about the communications market. Second, it's almost a dead heat run for percentage appreciation, but I have to say, second, I'm going to call the aerospace because of the strength in satellite, and there's no doubt of the resurgence of the commercial air market space. Just look at Boeing's results, how they took today. Third, I'll put defense and the security market, although we dialed it in. We approached 3% last quarter, and we expect earning to 12% year-over-year. And then last but not least, the industrial. So once again, enterprise and communications, followed by aerospace, followed by defense and security, followed by the industrial market space. But the highlight shape is all are going to grow.

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

Okay. And just one quick question, given now that you're -- either for you or John, but the cash flows now I mean, you're getting to a point where you're close to that sort of 225-a-year kind of run rate or maybe better, can you talk -- can you maybe call out what -- or rank the uses of cash? I mean, is the top priority to pay down debt, or are you guys closer to paying a dividend, or what else would you -- I mean, other than acquisition, kind of can you rank out what you might do with that cash?

James J. Peterson

Yes, I think paying that debt is a good #1 priority. Second is what we're doing. We continue to invest in technology and strategic additions and acquisitions to the company. John?

John W. Hohener

Yes, no, I was going to add to what Jim just said. Certainly, our cash, we've used it strategically and done well with our acquisition front. We have obligations as it relates to our -- to the leverage that we've taken out, although the amortization in the early part of the loan is quite low. We can prepay that at any time with no penalty, and so we do assess that as we move each quarter out.

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

Okay. So if you were to guess right now, I know that the opportunities present themselves, but your debt levels probably go down from here. You don't anticipate taking any more on? You're probably paying it off?

John W. Hohener

Yes. Right now, there's nothing in the mix that would save we would increase those levels, and the amortization that we have to pay makes it go down, and then we will assess whether we want to pay any more incremental to that.

James J. Peterson

Let me be clear on that too. Well, our shareholders want to see a couple of clean quarters. They want to see us digest on the acquisitions that we have. I think last quarter we demonstrated 3% growth, and that's organic, with earnings up about 18%. Next quarter, we're showing a 3% to 5% growth, with earnings up between 11% and 19%. So I think right now, it's Microsemi, in our life cycle, I think it's time for us to demonstrate what we're doing in the area of organic growth.

Operator

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

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

I hope you could talk a little bit about communications revenue and gross margin. I think in -- maybe a couple of months ago, you've been thinking, when you had full quarter of Zarlink, that you might have the enterprise and communications be a little bit higher percentage. I do know that last quarter, you indicated there was some softness there, and maybe tracking a little bit behind also because of that in terms of getting to 60% gross margin with that communications business. You said that it seems to be re-accelerating now into June quarter. So are you now, in June, going to be getting the gross margin and revenue growth you had initially sort of anticipated it might have been in March?

James J. Peterson

Have it, John.

John W. Hohener

Yes. I think what we have said last quarter is -- well, it was March originally. We did push that out and said June or September. We definitely see that ramping, as indicated partially in our guide, certainly, that we put out for next quarter. And we expect that the previous targets that we had talked about for that business will be achieved in the time frame that I just mentioned.

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

Okay. And with regard to gross margin, as I look going forward, so I should see sort of relatively steady expansion over the next several quarters then in gross margin sequentially?

John W. Hohener

Yes. Certainly, this quarter is a nice step-up, and we still feel strongly about hitting our 60%, 30% in the second half of 2013. I don't know whether you want to just put it linearly from here out. Certainly, there's a number of things that are happening, from a manufacturing perspective, that are helping us improve that. But yes, we get to the -- we're comfortable with the 60% gross, 30% up exiting 2013.

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

Okay. Great. If I can just slip one more, just in terms of your satellite business, I think June of 2011, I think you probably had a pretty strong quarter there based on the way I calculated it. I know it's a little bit soft here in December but seems to be ramping back up. You think you can at least get back to sort of your June '11 quarter or maybe even better sometime this year?

John W. Hohener

June quarter...

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

That's based on my calculation. Maybe just a little bit...

James J. Peterson

Yes, you're probably right -- I think maybe a bit stronger.

Operator

Your next question comes from the line of Patrick Wang with Evercore Partners.

Patrick Wang - Evercore Partners Inc., Research Division

First question, how much incremental contribution did you get from, I guess, Zarlink in the March quarter?

James J. Peterson

John, you take that one [ph]?

John W. Hohener

Yes. One thing to remember is that we integrated our acquisitions kind of on day 1, and we really don't like to breakout or take a guess at it, but since we did guide it last quarter, I would say that we certainly were in the mid-to high-$40 millions as it relates to Zarlink.

James J. Peterson

And the area of ranges for those that are keeping score, I'd probably throw out a range somewhere between, say, 47.5 to 50.5.

Patrick Wang - Evercore Partners Inc., Research Division

Okay. That's fair. I appreciate that. And I know that you don't want to break it out going forward, but that's helpful. And then, hey, Jim, can you talk about some of the near-term tailwinds giving you confidence that you're seeing an inflection in enterprise and comms? Because -- I mean, we're not hearing that same type of confidence from some of your peers out there, but you guys seems to be in pretty good shape.

James J. Peterson

Yes, hoping you only put your thoughts out on some of the areas that maybe some competitors aren't and then talk about where they are. PoE, right? Seasonal, but I think it's going to be better than expected, and I think I'm going to get double-digit year-over-year gains in the PoE, and that's in the communications bucket. Voice products, slicks and slacks don't want to hear about it. If somebody else wants to exit that business, please do so because we're taking market shares as we speak. Okay? We're actually leveraging a lot more silicon royalty. We're doing good with power conversion, just particularly in the RF area. And let's talk Wi-Fi, having a strong quarter. And I think 2012 is going to be a great year, and that falls in the communication TARP [ph] component of it as well. So a lot of it is -- we're actually taking market share, but more importantly, right, we have a lot of new product growth. We've made some good smart acquisitions. We've done some great integrations. I have great confidence in my engineering teams, and you're going to see a tremendous amount of new products getting rolled out by Microsemi in this space. So we're here. To those who are wondering what we're going to do with that business, we're here, we're taking market share, and we're enjoying it.

Patrick Wang - Evercore Partners Inc., Research Division

Got it. And then on -- great job on improving the cash flow. It sounds like you guys are maybe shying away from acquisitions over the next couple of quarters. Did I get that right?

James J. Peterson

Yes, you know what, shying away is not a good word. There's 2 things I want to do. One is my shareholders, like I'd mentioned, they wanted to see some clean quarters. They want to see us digest. I'm not shying away from things that make sense for the shareholders. I am looking more at technical, strategic acquisitions. Quite honestly, I'm looking at some carve outs, some large companies, that would make sense. So not shying away from it, but I do think I owe my shareholders a couple of good quarters of, “Hey, what do you guys look like organic standalone?” And then make the right decisions going forward. That's kind of where I'm playing, okay?

Patrick Wang - Evercore Partners Inc., Research Division

Okay. All right. That makes a lot of sense. And then just last quick question for John. I think I missed your guidance on gross margin and SG&A for next quarter, please.

John W. Hohener

Sure. The guide on gross margins is between 80 and 120 basis points, and from an SG&A standpoint, about 16% of revenues.

Operator

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

Daniel M. Gelbtuch - Cantor Fitzgerald & Co., Research Division

Just wanted to get a little more color in terms of timing, when you think the wireless medical device products are going to be ramping, both in the ICD market and also on the given imaging or the, I guess, colonoscopy type of market.

James J. Peterson

Okay. Actually, I'm going to be bold on the -- a tough [ph] couple of -- now the second half, certainly, is going to be strained. I think the colonoscopy one might be a little further off, maybe towards the tail end of second half going into 2013, but it's a strong market where we have great technologies, and we're getting ready to participate in those areas.

Daniel M. Gelbtuch - Cantor Fitzgerald & Co., Research Division

Great. And just wondering if there are any other new developments on the security front, on the scanner front, or is that just solid?

James J. Peterson

Check it out. That's a nice business. I mean, it's -- in a way, it's in its infancy [ph], right? Early innings of a ramp, there's not airports I got [ph] we're seeing [ph] where I don't see these large L-3 machines in place. Again, we talked about last quarter, X-rays are pretty much been banned in the European marketplace. We know X-ray is not good for you. Millimeter wave technology is the better one. It's a large PO. It's a Presidential Order to grow those. And I think we're going to start seeing in all the airports, the train stations to places where people congregate. So it's a good solid steady business for Microsemi.

Daniel M. Gelbtuch - Cantor Fitzgerald & Co., Research Division

Again, and then finally, just want to get some -- I guess, some color on the timing of 802.11ac. When do you think that that's going to be a big play?

James J. Peterson

You know what, some of the larger players in the field would like it to be in this quarter I think marching into maybe Q4 calendar. I think we'll start seeing some people actually nailing this market, and I think, as what you read out there, I think 2013, 2014, I'll even go use the word explosive growth.

Daniel M. Gelbtuch - Cantor Fitzgerald & Co., Research Division

All right. So it sounds like you guys are teed up for some very good second half in 2013, growth factors on multiple fronts.

James J. Peterson

Yes, I think so. I think for a new product introduction and entering some solid markets, better positioned than we've ever been. I think the engineers in Microsemi have done fabulous job, and I thank them publicly.

Operator

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

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

This is actually Chris Rolland in for Craig. As you look over the last year or so, you guys have kept the SG&A line in check. R&D has gone up. Obviously, these acquisitions have contributed. It seems like it's been up quite a bit here over the past year, and I just wanted to sort of know where that's going to be for the rest of the year, and also what your R&D initiatives, where your sort of focus points are for the next year.

James J. Peterson

John, you want to take it?

John W. Hohener

Yes, I'll take the -- well, certainly, you're right. I mean, the last 2 major acquisitions that we've done -- have done are our engineering-focused companies, and we're leveraging off of that, and we're investing in that, as well as the core business prior to those acquisitions as it relates to R&D. I think we said our near-term guide is 16.9% of revenue. Certainly, as we move forward and as revenue grows, we should see that line start to trend down as a percentage of revenue.

James J. Peterson

And then as far investment in R&D, I assure you we're going to be investing heavily in the communications market. That's the good news for us, and I think that's a good news for everybody else. I'm going to continue to invest in the medical. I think the medical has got a good future for Microsemi. And for those that wonder and scratch their head about defense and security, I assure sure you, I'm going to be invest to a large degree, but certainly, R&D in those market spaces. And the -– but the security offer, commercial air and the satellite market, we're going to continue to invest in those as well. So I think the markets that we're in, we're comfortable, we're confident, and we're going to continue to put our R&D point of view to invest.

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

What do you guys -- how do you guys view that? As all these play out, how do you view that R&D as a percentage of revenue on a long-term basis?

James J. Peterson

Slightly up, percentage of revenue, and taken down by SG&A. John?

John W. Hohener

Yes. Well, I mean, certainly, both SG&A and R&D, as the revenue grows, we'd like to see those numbers trend down, but we are going to invest in order to support our growth.

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

Okay, great. Just one quick one. In terms of defense, has anything changed there in terms of programs, in terms of the pipeline, in terms of the mix between foreign and domestic, or is it pretty much as you saw it last quarter?

James J. Peterson

In fact, in the prepared comments, we mentioned the deviance, right? And quite frankly, I've never heard of my guys are big fans of. They had this 4% growth, cover our growth year-over-year. With the 7% for our military sales was not too far off of what we thought. I think what you're going to find out here is Microsemi, we're launching a lot of new products. We have a lot of new product growth initiatives in this particular space. So sometimes, it can get clouded by the growth in these market space. But when you lay on the new product opportunity, and we know this market. It's a good solid market. It's a sticky market, it's a long lead time, it's profitable, and I think those that have doubt of that market, you might have doubt across the board on it, but don't have any doubt of our ability to succeed and to grow in that area.

Operator

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

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

A couple of questions on the followed quarter. Jimmy, I know you don't like to give specifics on this, but I always ask the question. Can you just talk a little bit about your visibility in terms of backlog and bookings and maybe what you've seen so far this quarter?

James J. Peterson

I don't like it, but I'll brag a bit about it. I think backlog has never been stronger. Bookings for the last 3 quarters and before that, we had positive book-to-bills. I think the big question is how the bookings lay in, right? They were average strengthening as the quarter went on, and to this conference call right here, book-ins are very, very strong this quarter.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good. And you also talked about the communications business, especially timing, you're starting to see telecom coming back. Help us understand a little bit more the extent of that. I mean if you're starting to see some bookings, but is it still from a low level? Or are you actually starting to see your customers committing more with some real backlog?

James J. Peterson

I think customers are starting to commit. Strangely enough, it almost happened after we hang up on the last conference call. We're looking for words as the market, and quite honestly, I borrowed a phrase from a company I admire out there, you might know. They use the word "snapback." And low and behold they were right." And we've seen nice snapbacks since last time we spoke. So I feel much comfortable in that market, and I think so is our shareholders.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Okay, very good. As a question for John. John, you had 30-basis-point [ph] gross margin from this quarter. You're guiding for obviously more than that next quarter. Beyond the June quarter, if you continue to see sort of 30 to 50, or 50 to 70?

John W. Hohener

We certainly only guide one quarter out, but what I did say earlier is that we're comfortable getting to the 60% by the second half of '13.

Operator

[Operator Instructions] Your next question comes from the line of Mark Delaney with Goldman Sachs.

James J. Peterson

Are you going to talk about defense?

Mark Delaney - Goldman Sachs Group Inc., Research Division

Well, actually, I was hoping you could talk about your revenue guidance. Typically, somewhere around 50% to 60% of your revenues goes into distribution and recognition on sell-in. So just wondering, do you think that your revenue, is any of that for inventory restocking, or is that kind of to match demand?

James J. Peterson

John, [indiscernible].

John W. Hohener

Yes. Certainly, I think that there's nothing different this quarter than what we've had in previous quarters. And I think our mix is actually around 50% disti, 50% OEM at this point in time.

James J. Peterson

That's correct.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay, great. And then kind of following up on that. Do you think you're recovered at this point in terms of -- is there any extra revenue growth in the June quarter in order to make up for the prior tallying constraints?

James J. Peterson

Mark, it's just starting to trickle in right now. You realize it was late into the quarter, so I think 0.5%, 1% is -- just started trickling.

Mark Delaney - Goldman Sachs Group Inc., Research Division

Okay. And then we talked a little bit about pricing assumptions, ASPs [ph] on the last call, and I know you guys are trying to position yourselves in much more defensible areas. Just kind of maybe coming at it in a different way, when you think about getting to 60% gross margins in 2013 second half, what sort of assumptions are you making an ASPs [ph] when you come to that calculation?

James J. Peterson

Yes, well, part of calculation, quite honestly, is the strength of the margins and the contribution of our new products that we are introducing. Certainly, operational efficiencies, which I think everybody should keeping an eye on. I don't think we -- our product portfolio and our mix of product, we don't see a great degradation to ASPs. So we took it into the consumer guides of a lot of our peers out there. So I think a better thing to look at is just to watch what's the next generation, the strength of our mix going out there. That might be the better indicator to our -- the conviction of our confidence here.

Operator

And your next question is a follow-up question from the line of Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company, LLC, Research Division

Just wanted to ask on the main factory. Jim, you said that you had moved the production from the flooded facility in Thailand. Did you bring that back in-house, or is that moved to other contract assemblers, or can you just talk about a little bit where is that production went?

James J. Peterson

Those are outside contractors, Quinn, and we moved those to other outside contractors in different locations but as cost-effective and as reliable. And that -- like you said, the beauty of Thailand is -- it's behind us.

Quinn Bolton - Needham & Company, LLC, Research Division

It seems to see that having gone through that experience with Thailand, have you looked at sort of increasing your use of multi-sourced production? I don't know what percent of your products today are sourced in just one facility. Maybe that's a figure you could give us, but are there any sort of big sweeping changes you made on the manufacturing as a result of Thailand?

James J. Peterson

Not a lot of sweeping changes, but I'm telling you what. Make sure the company you invest in, make sure they have the redundancies in place, and the recovery plans, that's the most important thing. So if nothing else, we get to review those again, and I think that's the key right there. Make sure we have redundancies place for situations like this. And we did. I think we did a fabulous job, if you look at it.

Operator

Your next question is a follow-up question from the line of Patrick Wang with Evercore Partners.

Patrick Wang - Evercore Partners Inc., Research Division

Just 2 follow-ups. One for John and one for Jim. Hey, John, you talked about -- you sound pretty confident on getting 60% margins in the second half of next year. Can you talk about some of the kind of bigger moving pieces that get us there? And then for Jim, I know you wanted to talk a little bit about defense. I was hoping you could elaborate on some of the trends you're seeing there.

John W. Hohener

Okay. Yes, certainly, in terms of the moving pieces, as we shift more revenue, we do get greater efficiencies on things like foundry purchases. And quite frankly, the integration, although it's going smooth, there's still more to go from a cost of sales standpoint, specifically as it relates to Zarlink.

James J. Peterson

I missed that last part. What do you want me to touch on?

Patrick Wang - Evercore Partners Inc., Research Division

I just wanted you to touch on some of the near-term trends you're seeing in defense, and I mean, it's one that's been pretty controversial in the past. But outside of kind of what we've heard from the government in all those report agencies, I mean, what have you seen from a orders and bookings and kind of longer-term standpoint there?

James J. Peterson

Like I said, I've seen tremendous strength in UAVs. I've seen strengthening in communications from ground to here and here to ground. I've seen strengthening in the GPS and GPS receivers. I think the important thing, from a whole -- the sentiment is that perhaps, like a customer sentiment started at the bottom, but I assure you electronic content in the defense and the security space is growing. And from Microsemi, we're actually taking some market shares. We're moving up the ladder. We're going from discretes to ICs to modules to full solutions. We're working with our end customers. And then just a whole, I mean, just look at the strength of the company like Honeywell and Lockheed and Rockwell and Goodrich, ITT and Raytheon, these guys have put out some substantial numbers, and they're showing great growth going forward over the next year. So I think there's a lot going on behind Page 1, 2 and 3 of the Wall Street Journal. Although I read it, I respect the point of view, but those that are in the business respect it, understand it. For us, it's a great -- like I said, it's a very sticky, very solid margin business for Microsemi. We know it, and we understand it. So we just feel comfortable with our position there.

Patrick Wang - Evercore Partners Inc., Research Division

Okay, that's helpful. And just a quick last one. OpEx as a percentage of sales has gone up to, I guess, 33% this past quarter on a non-GAAP basis. As we kind of go forward into 2013 and such, I mean, what's your philosophy there? Is that a good level of spend? I hear you guys want to invest more in R&D and shy away from SG&A, but -- I mean, net-net, is that something that's going to decline over the next couple of quarters here, or is that kind of hold steady there?

John W. Hohener

Well, one thing that we've said, coupled maybe of focusing more on the -- on the gross margin piece of 60%, but at the end of 2013, our goal is also 30% operating margin, which means that we need to have these other components of operating expense trend down, and so that is our philosophy. We do support growth of the business, obviously, or else we can't grow. But we do intend to invest wisely and continue to see a drop as a percentage of revenue.

James J. Peterson

Okay. I want to thank you 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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