Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Microsemi Corporation (NASDAQ:MSCC)

Q2 2008 Earnings Call Transcript

April 24, 2008 4:45 pm ET

Executives

Terri Donnelly – IR

Jim Peterson – President & CEO

John Hohener – VP Finance, Treasurer and Chief Accounting Officer

Analysts

Rick Schafer – Oppenheimer

Erwin Wang [ph] – Thomas Weisel Partners

John Lau – Jefferies & Company

David Wong – Wachovia

Steve Smigie – Raymond James

Romit Shah – Lehman Brothers

Shawn Webster – JP Morgan

Nicholas Aberle – Caris & Company

Christopher Longiaru – Sidoti & Company

Patrick Wang – Wedbush Morgan

Andrew Huang – American Technology

Craig Berger – Friedman Billings Ramsey

Operator

Ladies and gentlemen thank you for standing by, and welcome to the Microsemi second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions)

I would now like to turn the conference over to Ms. Terri Donnelly. Please go ahead, ma'am.

Terri Donnelly

Good afternoon and welcome to Microsemi's second quarter fiscal year 2008 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 Vice President and Chief Financial Officer; of Steve Litchfield, our Executive Vice President and President of the Analog Mixed Signal Group; and of Rob Adams, our Vice President of Business Development.

A recording of this conference call will be available on the Microsemi Web site under the Investors section. Our Web site is located at www.microsemi.com. Let me remind you that during the course of this conference call, management will state beliefs and make projections or other forward-looking statements regarding future events and the future financial performance of the Company.

Due to the changes in public companies' abilities to communicate with analysts and investors brought about by SEC rules on fair disclosure, Microsemi issues guidance in the form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of April 24, 2008, and is continually subject to reassessment due to changing market conditions and other factors, and therefore must be considered only as management's present opinion and 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 opinions, predictions, and present expectations. Actual future events or results may differ materially.

I refer you for some of the risks to see Microsemi's report on Form 10-K for the fiscal year ended September 30, 2007, which was filed with the SEC on November 21, 2007, and Form 10-Q for the quarter ended December 31, 2007, which was filed with the SEC on February 8, 2008. Information about Microsemi filed with the SEC is available free of charge at www.sec.gov. These reports identify important factors that could cause actual results to differ materially from our projections.

That said, we can begin, here is Jim Peterson.

Jim Peterson

Thank you, Terri. I'd like to thank all of you for joining us this afternoon for Microsemi's second quarter fiscal year 2008 earnings call.

Net sales for Microsemi's second quarter were $126.7 million, up 2.6% from the $123.5 million reported in the first quarter of fiscal 2008, and up 18.7% to $106 million in the year-ago second quarter.

The second quarter of 2008 produced non-GAAP earnings of $0.32 per diluted share, up from $0.31 per diluted share reported in the prior quarter; and up $0.10 or 45% for the $0.22 reported in a year-ago second quarter. The non-GAAP gross margins were at 51.5%, up 110 basis points from the 50.4% reported a year ago second quarter. Non-GAAP operating margins were 26.1%, up 400 basis points from the 22.1% reported in the year-ago second quarter.

These results demonstrate Microsemi's ability to execute on its growth and margin improvement strategy despite the backdrop of uncertain economic conditions.

We saw excellent improvements to our business in the quarter and have laid the groundwork for significant improvements in future quarters. We continue to grow our revenue through the new product offerings, market share increases and market growth while also driving our profit metrics.

The market environment for Microsemi's high performance analog mixed signal business continues to show strength compared to our peers, and our high-reliability business shows vigorous demand.

We will continue to drive our strategic plan to grow in all of our markets with new product offerings and unique value propositions for our customers. As we execute on this plan, we expect to outpace our semiconductor industry peers.

Bookings are strong once again resulting in our book-to-bill ratio of 1.08 to 1. The areas of continued strength this quarter were the defense, satellite, commercial aerospace, and the backlighting markets.

The analog mixed signal group continues to distinguish itself yet again delivering record performance in revenue, while our competitors took a breather during the seasonal March quarter. The group continues to gain momentum with new product development efforts and remains on track to kick off our record number of differentiated products in 2008. That will drive significant growth in the coming years.

As I said last quarter, backlighting remains one of the strongest drivers of the analog mixed signal group delivering sequential growth in our display end market where we saw record shipments.

We continue to gain market share in our LCD TV business for CCFL with notable design wins strength with Tier 1 customers in Japan and Korea. We are very pleased on our progress in the growing notebook business where our inverter technology has made design within inroads at major OEMs and ODMs.

The process from the design win to volume to revenue takes a little bit of time. We are optimistic and expect to have more to report to you in the next coming quarters as the next generation platforms roll out in the second half of the calendar year.

The power over Ethernet business showed strong bookings this quarter and we expect to see continued growth over the course of the year. In particular, we have had several new integrated circuits and system level PoE products that will be released into production in the next two quarters that are already driving new design wins. Last year, we reported a greater than expected 50% growth rate in port shipments, and we are on track to meet that growth rate again this year driven by increased demand for client devices such as IP video cameras, phones, and wireless LAN access points.

We see this market growing with the PoE plus standard, the 8023AT, which enables higher power devices and expands our opportunities into the notebook markets.

We again saw strength this quarter with our wireless LAN power amplifier products. The development efforts show excellent results with multiple new products being released this quarter that address the 802.11N and WiMax markets. We will see continued proliferation with 11N product offerings throughout 2008, with WiMax establishing itself as a key of future market.

The demand for these higher bandwidth solutions drive a performance metric unseen by the wireless LAN market historically and the system performance benefits that Microsemi brings in these applications has added significant value to our customer solutions.

Shipments in the semiconductor market declined significantly on a sequential basis again this quarter. While we ultimately expect this business to rebound, the signs of a turnaround is still not evident. Our best evidence estimate suggests weakness again next quarter with a potential return to growth in our fourth quarter or beyond.

Despite this enduring weakness, our company-wide diversity and broad market stability have offset this weakness and still provide us with potential growth opportunities. The industrial piece of this market has continued to show strength. For example, emerging alternative energy applications show strong year-over-year growth trends, and we are aggressively targeting in this market new product definitions and introductions.

Our medical business continues to grow sequentially, primarily driven by our ICD business. We expect to see the revenues increase throughout the fiscal year as we ship more and more new higher ASP product mix, which in turn will drive a more significant growth rate than the high single-digit expectations of the industry.

The defense industry simply remains solid with ever increasing electronic content and the continual funding of new programs. Major areas of growth are expected for applications in military avionics, military ground transportation, surveillance equipment, joint service communications systems, naval vessel, radars, missiles, and advance combat unit electronics.

Our satellite and commercial aerospace markets are gaining momentum. Looking at recent earnings announcements from Boeing, Raytheon, Goodrich, and Rockwell, all top five customers of our defense, commercial air, and satellite markets show continued strength in sales and backlog. As a key supplier to these customers, Microsemi is a clear beneficiary.

Looking at our commercial air business revenues, we're up this quarter. Backlog is exceptional. We expect order rates to remain robust for the next several quarters.

Our satellite business remains at record levels driven by strength in both military and in commercial satellite platforms. This remains our most profitable product line and should drive improved gross margins as the business continues to grow.

Looking to operations, we are pleased to again report improved GAAP and non-GAAP gross margins by 100 basis points and 20 basis points, respectively. These improved margins helped drive our operating cash flow of $35.2 million in the second quarter. Last quarter I got into a disparity between the two would disappear over the course of the net six to eight quarters such that our GAAP gross margins would close upon those of the non-GAAP numbers.

We believe this will be accomplished by the ramp of our facility in Ireland, the closure of our Colorado facility, and the completion of other planned fab transitions. We made significant progress closing this disparity last quarter and are on track to reach the goal this time over the next five to seven quarters.

In summary, our second quarter clearly demonstrates our ability to outgrow our peers as a function of our reliability positioning and our selective approach to high performance analog mixed signal business markets. We executed our business plan this quarter and have positioned the company to deliver on its plans for the remainder what is anticipated to be a watershed year for Microsemi.

With that, let me turn the call over to John for the financial details of the second quarter fiscal 2008 and for our outlook for Microsemi's third quarter ending in June.

John Hohener

Thanks, Jim. As Jim previously mentioned, net sales for the quarter ended March 30, 2008 were $126.7 million, sequentially up 2.6% from $123.5 million, and up 18.7% from $106.7 million in the year-ago second quarter. The book-to-bill ratio for the quarter was 1.08 to 1.

Non-GAAP gross margins for the quarter were 51.5% compared to 51.3% in the first quarter and 50.4% in the second quarter of last year. This quarter, non-GAAP selling, general, and administrative expenses were $20.8 million or 16.4% of sales as compared to $19.8 million in the first quarter and $19 million in the second quarter of last year.

Research and development costs were $11.3 million or 8.9% of sales compared to $11.2 million or 9% of sales in the first quarter, and $11.1 million or 10.4% of sales in the year-ago second quarter.

Our non-GAAP operating margins were 26.1% compared to 26.2% in the first quarter and 22.1% in the prior-year second quarter. Measured on these comparable quarters, year-over-year, our operating margins have increased 400 basis points, well on our way to our corporate goal of 30%.

For the second quarter, non-GAAP net income was $25.3 million or $0.32 per diluted share. This compares to $0.31 in the prior quarter and $0.22 per diluted share in the year-ago second quarter, a 45% increase.

Our non-GAAP effective tax rate was 25% in the second quarter compared to 27% in the first quarter and 33.3% in the year-ago second quarter. Increased shipments out of Ireland generate income at lower tax rates. Once again, the operational improvements we get there also helped us lower our transitional idle capacity adjustment.

Our second quarter results include restructuring costs and other charges and credits. These include a charge of $10 million for transitional idle capacity, a decrease of $800,000 from the previous quarter, $2.8 million in amortization of acquisition-related intangibles, $5.2 million related to stock-based compensation charges, and $2.7 million in other charges -- almost $2.1 million relates to severance associated with the reduction of force at the end of the quarter and with the retirement of a former officer of the company.

Our GAAP gross margin was 43.6%, up 100 basis points from 42.6% in the first quarter and up 440 basis points from the 39.2% in the year-ago second quarter. Operational efficiencies previously discussed are contributing to this improvement. Our GAAP operating margins improved 90 basis points from our previous quarter.

For the second quarter, our GAAP net income was $9.8 million or $0.12 per diluted share as compared to GAAP net income of $8.6 million or $0.11 per diluted share in the first quarter, and a loss of $19.6 million or $0.26 per diluted share in the year-ago second quarter, which included a charge of $21.8 million related to in-process research and development associated with our PowerDsine acquisition.

Capital spending was $5.5 million this quarter compared to $5.2 million in the first quarter. Depreciation and amortization expense for the quarter was $6.9 million, the same amount as in the first quarter.

Accounts receivable were $90.1 million at the end of the second quarter compared to $87 million at the end of the first quarter due primarily to increased revenue. Our DSO was 64 days for the quarter compared to 63 days last quarter.

Inventories were down in both dollars and days this quarter. Inventory at the end of the second quarter was $116.8 million compared to first quarter levels of $118.2 million. This decrease resulted in our days of inventory dropping to 174 from the prior quarter of 177.

A significant point in the quarter was our cash generation. Our net cash and investment position increased $33.4 million during the quarter and our cash flow from operations was $35.2 million. We believe our operating cash flow this year will be between $70 million and $80 million.

Our best estimate of the end market percentage breakout of net sales for the second quarter was approximately; defense 33%, commercial air satellite 20%, medical 13%, notebooks, LCD TVs and displays 11%, mobile connectivity which includes our PoE 16%, and industrial and semicap 7%.

Now, for our business outlook, we expect that for the third quarter of fiscal year 2008, our sales will be up within a range of 0% to 4% sequentially. On a non-GAAP basis, we expect earnings for the third quarter of fiscal year 2008 to be in a range of $0.33 to $0.35 per diluted share, the midpoint of which is $0.01 higher than current consensus estimates.

With that, I'm going to turn it back over to Jim.

Jim Peterson

Okay. Thanks, John. With that, let's open the conference call to questions from analysts and institutional investors.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rick Schafer from Oppenheimer.

Rick SchaferOppenheimer

Hey, guys, nice quarter. I've got a couple of questions for you. Start with cash flows and John was just hitting that. The number obviously looked a lot bigger than what I was looking for. Can you highlight what's driving what seems to be acceleration there? And is there a reason -- I mean, it seems like you are almost on track to do something closer to $100 million in cash flow this year.

Jim Peterson

Just to the short, it's bottom line results, right, inventory control and most certainly operational efficiencies. I don't know if we're going to be that high. I think John is reporting somewhere between $170 million and $180 million in cash, but while we're on this subject, let's just kind of do a quick review, because we did here. So I'm going to share with you.

Last year, free cash flow at Microsemi generated on or about $4 million. This quarter, we showed free cash flow on or about $30 million, and if you dial that into FY08, about $70 million to $80 million, I think that's one of the metrics that needs to be measured when the rubber meets the road in the day cash is king. I'll take the Pepsi test against anybody in that area for improvement.

Rick SchaferOppenheimer

Okay, fair enough. The next question just, can you highlight the progress or I guess you guys did talk a little bit about the progress you're making in the shift to Ireland, can you quantify what maybe your expected revenues are this year coming out of -- or going through Ireland and maybe what it means or what you are on track to do thinking about for '09?

Jim Peterson

There's good and questionable with Ireland. The good news is we moved to Ireland for operational efficiencies and manufacturing strategy. The fact is we see 20% better efficiencies manufacturing in Ireland, we find a tremendously stable and educated workforce, nationalized medicine, and last but not least, a nice 10% tax rate.

So, we entered shipping product over there and transitioning manufacturing, we dialed in the beginning of the year on or about $50 million to $60 million for this fiscal year; good news. We've seen tremendous amount of success. So what we're doing is we're accelerating that transfer of back-end manufacturing equipment over to Ireland and now we're raising expectations because of the success we've had.

We think we can do up to $70 million to $75 million. The benefits there most certainly is you see me this next quarter raising the earnings by on our about $0.01 for midpoint. However, you also see me kind of stretching out or spreading the small gap in the expected revenue of 0% to 4%, because you have to take that equipment and there's transition time and shut-out time. That might have a slight impact to my revenue, although great contribution to earnings.

So, two things, earnings go up, the efficiencies go up, productivity goes up, 50 to 60 goes to 70 or 75, but it gives me a little risk that once you plug the product in and the long cycle time for the proprietary equipment begins, might I miss by $1 million or $2 million in revenue? That is the other end of the stick.

Rick SchaferOppenheimer

So, on that topic, just to be clear, it just seems like you are making the move more rapidly maybe than you originally thought you could. So does that -- let's say you are more toward the flattish end of your guidance for the second quarter. It doesn't seem like it's a demand issue at all. It seems like it's a simple supply issue. Does it -- in other words, do we have more of a tailwind as we go into the calendar third and fourth quarter this year, the back half of this year?

Jim Peterson

Let me be clear. What I do is, I widened the spread from 0% to 4%. That doesn't mean that I tell all my sales guys, right, or my manufacturing guys that we are not going to shoot for the high end, okay? All I'm doing is put a little edge in there for the fact that I know we are transferring the equipment over there. And so to that point, right, it's strategically intact, but (inaudible) for the next quarter and the next year.

So, in here 0% to 4%, you've never seen -- we don't hibernate this company, right? We take it straight on. I'm shooting for the 4% plus.

Rick SchaferOppenheimer

I'm just saying, Jim, just to be clear, but if you were closer to the 0% than the 4%, those revenues don't go away. You're pushing them forward into the following or the back half of the year, would that be the right way to think of it?

Jim Peterson

Yes, actually, I'm kind of glad you drilled me on that. The fact of the matter is, I only guide one quarter, but if I were to guide for a year, I would probably tell you not to change your model.

Rick SchaferOppenheimer

On the top line, you're saying?

Jim Peterson

That's exactly correct.

Rick SchaferOppenheimer

Okay, and then just the last question, just on Ireland, John, could you give us an idea, your tax rate was lower than I'd been planning in this current quarter or any of the quarters we've had, can you talk about what tax rates should look like in calendar -- the June quarter, calendar 2Q and what it means for us a year?

John Hohener

Yes, you can expect to see the same 25% balance associated with these improvements from our worldwide operations, and of course, as we continue that improvement as Jim articulated into 2009, you'll continue to see it go down.

Rick SchaferOppenheimer

But, for the current quarter in right now, it should be roughly the same as it was last quarter.

John Hohener

Yes.

Rick SchaferOppenheimer

Okay. And then Macau is not going to help you this year, it's more of in '09, is that right?

John Hohener

Macau certainly helps us in '09. We're getting a little bit this year.

Rick SchaferOppenheimer

Okay, all right, thanks a lot.

Operator

Your next question comes from the line of Tore Svanberg from Thomas Weisel Partners.

Erwin Wang – Thomas Weisel Partners

Erwin Wang [ph] calling in for Tore. Thank you for taking my call. I have a couple of questions. One is I was wondering if you could remind us of your price positioning program that's supposed to go into effect in later part of 2008. How should we look at this as we approach the middle of the calendar year?

Jim Peterson

I look at it positive. I mean, the fact of the matter of the price positioning program is we increase pricing predominantly to the military aerospace, commercial aerospace defense market. And here is how it works. We look at the market, we look at our cost of goods, and we do price positioning with the new price book on or about the 1st of October we introduce it. That having been said, it's all the cycle time products, so we start to see those benefits usually the third or fourth quarter into that next fiscal year in those particular market spaces. So, as we're rolling into the back end of the year and certainly into the first quarter of next year, expect strengthening in our earnings.

Erwin Wang – Thomas Weisel Partners

And also, switching to products, in regards to your new WiMax products, could you give us a sense of where the industry is right now and your assessment of the opportunity for Microsemi?

Jim Peterson

Yes. I think wireless LAN and WiMax's time is here. 802.11N is certainly making inroads. I think you'll -- you just test flight the entire planet on streaming video, right, media and I think 802.11N is here and I think you're going to see robust strength over the next -- certainly over the next two or three years going into three years. In our products, we believe and our customers believe by the design wins we have that I think we outperform most of our competitors.

Erwin Wang – Thomas Weisel Partners

Okay, great. Thank you very much.

Operator

Your next question comes from the line of John Lau with Jefferies & Company.

John LauJefferies & Company

Great, Jim, I wanted to go back to a topic that you haven't spoken about and that is your burn in capacity. You've spoken about how constrained you were in the past. Can you give us an update on that situation right now?

Jim Peterson

Yes, we're still constrained. I mean, this is very high-end proprietary manufacturing equipment. So, we are doing two things. We're certainly trying to turning the equipment from the domestic United States to Ireland and taking the benefits of the on or about 20% better efficiencies, and we are building and putting some capital into additional burn in boards that have very long lead time to build and then be installed and then start the cycle. So, we're trying to like really be cautious on our capital spend while catching up on the customer demand. That having been said, when you ship 2.6% and you book 1.08 for the last few quarters, the demand is very, very strong. But, the other important part is nobody is lying down. So, we are going in a positive direction, we're gaining, and it gives us potential growth for the next year or two.

John LauJefferies & Company

And in the constraints, I think that point was brought up before. It's not going away. It's still shipping on to that client and they are still in that queue along your revised schedule now, right?

Jim Peterson

Absolutely, I mean, we work with them hand-in-hand, week-to-week. I mean, just look at the recent announcements for the commercial aerospace market, say, all by themselves, Goodrich, Boeing, Lockheed, Raytheon, and the like, they're showing increased demand. Certainly, we guide a quarter, they guide a year, and they're guiding up dramatically strong over the next year. Take that with the backlog that we have, and I'm pretty confident that we're in a sweet spot.

John LauJefferies & Company

Great, thank you very much.

Operator

Your next question comes from the line of David Wong from Wachovia.

David WongWachovia

Thank you very much. A couple of things, the first thing is your overall guidance for June, flat to sequential growth, does this assume flat to sequential growth in all segments or are there any segments that you think might decline sequentially?

Jim Peterson

The only one that's going to decline sequentially, which I pretty much had dialed in, but still concerns me, is the semicap. I'll be honest, I've go that going down maybe another $1 million or $2 million. That having been said, the spread is just pretty more – the caution on moving the back-end operations over to Ireland for the strength of the balance of the year in 2009, has nothing to do with macro concerns, it has nothing to do with any customers, and certainly it has nothing to do with book-to-bill and/or our back end customers. It is pretty much a shift to Ireland and the weakness of semicap.

David WongWachovia

Great, and could you give us any idea of what your total backlog is at the moment?

Jim Peterson

I'm going -- I don't give that number out because what you'll do is, you'll write it down and remind me every quarter. So, what I'm going to tell you that can choke a horse, it's huge, and leave it at that.

David WongWachovia

Great, thanks.

Operator

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

Steve SmigieRaymond James

Could you comment a little bit on what the gross margin might look like next quarter?

Jim Peterson

Yes, it's going up. I mean, at the end of the day, all the business fundamentals that we have at Microsemi lead to strengthening, and more importantly, the closing of the GAAP to non-GAAP over the next several quarters. I mean, I think we're in good times. This is not a glass that's half full, this is a glass that's full, and we're showing an optimistic correction where this company is going.

Steve SmigieRaymond James

Okay. And then just interest income, obviously the rates have fallen, I'm just wondering if you'd talk a little bit about what that might look like next quarter?

John Hohener

Well, I think you hit it on the head. I mean, with the recent action by the Fed, we are earning less on our investable funds, and it's going to be a number in line with what we've talked about today or what you've seen in the announcement today.

Steve SmigieRaymond James

Okay. All right, congratulations on a solid quarter.

Jim Peterson

Thank you very much, my friend.

Operator

(Operator Instructions) Your next question comes from the line of Romit Shah from Lehman Brothers.

Romit ShahLehman Brothers

Thanks a lot and great job on the cash flow.

Jim Peterson

Romit, how have you been?

Romit ShahLehman Brothers

Good, thank you. Jim, just on the guide, if we assume the midpoint of your guidance this quarter, what does that mean in terms of the turns requirement and how does that compare to the March quarter?

Jim Peterson

Yes, check it out. Turns last quarter were on or about 33%, and we are looking at it right now at midpoint, we don't see any change, maybe even slightly down. So, I think -- on or about the same turns for midpoint, that's how I've dialed in.

Romit ShahLehman Brothers

Okay, well, I guess you guys are -- I'm just trying to understand the guidance then because you're assuming slightly lower growth in the June quarter. It appears to be supply driven, yet your turns requirement isn't changing. I would have thought that your turns requirement would be going down.

Jim Peterson

Yes, 33 is slightly down. This is -- I think we have -- we're diverse enough where we can usually balance out where our revenue trend is going to be. The $2 to $4, that's scary too much. Like I said, all I'm doing is giving a small spread just for the fact that I am transitioning a lot of back-end equipment and burn-in equipment over to the Ireland facility, okay? And what I'm doing is just hedging a bet. My guys don't like the expression, but if FedEx loses or drops a box, I might lose $1 million. So I'm just trying to be conservative for you and let you know, I'm focused on the midpoint or better, you know that, I always do.

Romit ShahLehman Brothers

Okay, just then on the analog side, could you guys show us some figures on new product growth for the overall analog business, maybe what your expectations are this year, what was the new product growth last year?

Jim Peterson

Yes, overall growth for the analog mix signal, I think Steve had it dialed in somewhere like 15% to 18%, and I would give him the evil eye and say it should be 20%, and I think Steve is pretty much on track and still dialing in about 15%, 18% growth. The percentage of new product on that, I'm going to guess that new product introduced over the last year, maybe 15% to 20% and gaining. Steve is very aggressive on next-generation products.

Romit ShahLehman Brothers

Okay, great. Thanks a lot.

Operator

Your next question comes from the line of Shawn Webster from JP Morgan.

Shawn WebsterJP Morgan

Good afternoon. Thanks for taking my question. Can you tell us what the lead times were for your two main product segments last quarter? I think, for the high rel, you were talking about like 22 to 30 weeks and analog would be 12. What are they sitting at today?

Jim Peterson

Well, analog mixed signal is on or about 12 to 14 weeks, which actually -- some of the price areas have actually extended, which is a good sign for us. High reliability, 20 to 30 weeks -- 22 to 30, pretty much on track. Then we also talked about the satellite business and the satellite business is breathing 36 weeks as we speak.

Shawn WebsterJP Morgan

Okay. And then on the utilization rates for your front end, were they flat, up, down in the quarter?

Jim Peterson

You know what, the Litchfield stuff is outside their fab, so they have a hard time calculating, but our utilization in house, about 100%. We're pushing this thing as hard as we possibly can.

Shawn WebsterJP Morgan

100%, okay.

Jim Peterson

The back end of it.

Shawn WebsterJP Morgan

The back end is 100%?

Jim Peterson

Yes. So the front end, we're doing 80% or 90%. I'm still a little boxed in with the back end.

Shawn WebsterJP Morgan

Okay. On the segments going into June, I understand that you're trying to think about how you might be supply constrained as you do your factory consolidation, but do you see particular order strength or maybe you could rank some of your key segments in terms of relative order strength. You've talked about the industrial semicap being weak. What are going to be the stronger ones for Q3?

Jim Peterson

Most certainly satellite commercial air is going to be very, very strong. I think backlighting business and analog mixed signal is going to be robust. I agree that 802.11N is going to increase with the -- it's time for the Far East to wake up, stop hibernating. So, I expect that to strengthen. Medical -- implantable medical, no one's touched on yet. The implantable medical business, I'm bowing to our three end customers. I've been pretty strict in saying -- they're saying 7% to 9% organic growth and we're seeing 3% to 5%. I've now changed our stance. We now believe that the organic growth in the implantable medical is now going to be 7% to 9%, not 3% to 5%. And of course, we'll outpace that with the dollar content of our product. So it's pretty much most all markets. And let's get back on semicap, I can't tell you how ugly it is and I don't expect that to change until the fat man comes down the chimney in the December quarter. I see no signs of that strengthening.

Shawn WebsterJP Morgan

Okay. And then final question on the gross margin, the sequential change in the -- let's take the GAAP gross margin as 100 basis points. Can you parse out the improvement between I guess unit cost reduction mix and any price increases?

Jim Peterson

I probably could have had the data with me. All I've got here right now is 120. So, I'm going to stick with what I'm telling everybody else is 120 basis points, collectively.

Shawn WebsterJP Morgan

Okay.

Jim Peterson

All right, but I'll dig into that.

Operator

Your next question comes from the line of Nicholas Aberle from Caris & Company.

Nick AberleCaris & Company

How's it going guys?

Jim Peterson

Hi Nick, how are you doing?

Nick AberleCaris & Company

Good. So, looking at the industrial bucket, obviously semicap hurting you guys there, where are we at? I mean is semicap equipment close to zero at this point or how big is it?

Jim Peterson

Unfortunately, there is still more pain to come. I mean, as a total bucket with the semicap in the industrial, three quarters ago it was 11% then down to 9%. Now it went from 9% down to about 7%, and I think we might still have another $1 or $2 million downtick next quarter, and then I think we're pretty much near the trough.

Nick AberleCaris & Company

Got you. And then Seagate, I believe, is also in that bucket as well. They kind of reported some soft guidance (inaudible).

Jim Peterson

They're not in that bucket. They're actually in one of the odd mixed signals buckets, and we saw their forecast and we said, "Boy, that's concerning." However, we just finished negotiation with them for next quarter's demand and a little peek at the next. I think next quarter looks flattish with strengthening in the following quarter is how I understand the report that I read for the analog mixed signal group. So, we're okay. We're comfortable where they're at and where we're at with them.

Nick AberleCaris & Company

Perfect. You guys – what's the status of the two most recent acquisitions? Are those fully integrated and what's in line coming up here over the next year or two? Are you guys still looking to add more?

Jim Peterson

Yes, I mean, let's go over that we did. They were small just strategic acquisitions -- vertically integrating upwards into military aerospace defense. Give us some new markets but vertically. Strangely enough, I think their bookings are up nicely. The plan was to take them into additional markets that they couldn't get into before, but when -- to get there collectively, they were less than $10 million, so not going to have a tremendous amount of impact on us. Speaking on acquisitions, as we always do, we look towards the opportunities for us but nothing to announce that's identified today.

Nick AberleCaris & Company

Got you, so mobile connectivity bucket looked pretty strong during the quarter, is that more PoE driven or more wireless LAN driven?

Jim Peterson

That was more wireless LAN driven. PoE was kind of -- was not a strong quarter last quarter, strong in bookings, not strong in shipments, which we found out that we don't have a lot of seasonality, but we do in that particular spot. This quarter, it looks like shipments up. We are back on track and that's how we had it dialed in, and so it's looking really good. I'm really, really happy that we're involved in the PoE business. I think there's a lot of strength for Microsemi.

Nick AberleCaris & Company

And the wireless LAN strength, is that end-driven or is the legacy stuff still holding up pretty well?

Jim Peterson

I'll taper down to end-driven. The legacy stuff is there from time to time, but -- and if the future ends where we're going, ends while we're supporting.

Nick AberleCaris & Company

Last question, just SG&A ticked up a little higher than I had modeled. Is that still going to trend higher over the balance of the year or is that going to come back down?

John Hohener

Well, it's trended up a little bit this quarter. We have some residual legal in there and we have some one-time expenses dealing with our proxy and so forth. We do expect that it will slightly trend down both in dollars and as a percentage of revenue throughout the balance of the year.

Nick AberleCaris & Company

Good luck guys, thanks.

Operator

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

Christopher LongiaruSidoti & Company

Hi Gentlemen.

Jim Peterson

Hello, how are you doing?

Christopher LongiaruSidoti & Company

I'm doing well. How are you? So, what I wanted to talk about was, I wanted to get a little bit of an update on what's going on in Bend with the silicon carbide product line. We just haven't heard about that for a while and I wanted to see how that was going?

Jim Peterson

I was going to bring that up whether you asked it or not. It's doing good. They're transferring their original stuff overseas to China very successfully and they're selling carbide. We're getting a lot of play on it. We had that one license agreement with Northrop Grumman, we are making great progress. It's certainly a driving force for what we're doing in the military and the commercial applications. Just for those that don't know, in application military is focused aggressively on radar and hybrid power systems and electronic control systems, and let's not forget what we need more than anything is electronic jamming systems. And then in the non-military, hybrid vehicles and electric power and the whole entire alternative energy market space is just working with us aggressively to support future generation products. So it's on track, and thanks for asking.

Christopher LongiaruSidoti & Company

Okay, that's really all I needed. Thank you.

Operator

Your next question comes from the line of Patrick Wang with Wedbush Morgan.

Jim Peterson

Patrick?

Patrick WangWedbush Morgan

Hello, can you hear me? Sorry about that. Thanks for taking my question. I just wanted to talk about inventories for you guys. It looks like you guys managed inventories very well over the course of the quarter. Can you …

Jim Peterson

Patrick, you cut out, but I'm going to answer anyhow. We put a lot of focus on inventories and I want to congratulate the team at Microsemi for identifying it and focusing on it, and the fact of the matter is, to the point, we're down in days, we're down in dollars, and we expect that trend to continue. Patrick?

Operator

There is no response from Mr. Wang's line.

Jim Peterson

He could be on his cell phone. Sometimes that happens, we'll just go to the next.

Operator

Your next question comes form the line of Andrew Huang from American Technology.

Jim Peterson

Okay. Well, (inaudible) phone system.

John Hohener

Andrew?

Operator

Mr. Huang, your line is open.

Jim Peterson

Maybe Patrick Wang is with Andrew Huang somewhere. Okay, I guess we'll go to the next.

Operator

All right sir. Your next question comes from the line of Craig Berger.

Jim Peterson

Craig, my man. Obviously, we're having a tough time getting these questions across.

Operator

Mr. Berger, your line is open.

Craig BergerFriedman Billings Ramsey

Okay, can you guys hear me?

Jim Peterson

(inaudible) a couple of calls, sorry about that.

Craig BergerFriedman Billings Ramsey

Okay. Good to hear from you guys. I wanted to quickly ask, just on the guidance, just to clarify, we are basically supposed to be holding off X dollars roughly flat in June and a little bit uptick on the gross margins. Is there any acceleration in the gross margins or is it kind of like we've seen it over the last quarter or two?

John Hohener

On a non-GAAP basis, it's like we seen it over the last quarter or two.

Craig BergerFriedman Billings Ramsey

Okay, and OpEx dollar is flat?

John Hohener

Yes.

Craig BergerFriedman Billings Ramsey

Okay. Real quickly, on the book-to-bill, continues to build -- does that ever catch up?

Jim Peterson

Yes, it does catch up, right? I mean, I am comfortable with 1.05 to 1.08 book to bill and not lose end customers' faith in Microsemi's ability to deliver product, and it's not where I really get defensive against a lot of competitors coming in because of the difficulty in reproducing my product. That having been said, customers are on allocation, they're not lying down, so I think 1.08 right now helps us guide to strength going forward for not only the next quarter but certainly into 2009, and I don't see it as a jeopardy, I see it as a strength point.

Craig BergerFriedman Billings Ramsey

Okay, and with respect to your constraints, how do you decide how many testers to buy, what the right balance is on that front, it's probably a pretty good time to be buying semicap equipment, isn't it?

Jim Peterson

Yes, but you know what, this is pretty proprietary equipment. This is -- we probably get better yield as we are doing, taking our equipment that's domestically here in the United States and shipping that over to Ireland just because, like I said, of the efficiencies that we get. And then, quite honestly, I watch the capital spending quite closely and we are building enough burn-in equipment to keep the customers from being lying down, meeting for the most part their demand and not spending a bunch of money building $50 million, $60 million to have this thing solved in two to three years and then have $50 million to $60 million of capital equipment sitting around. So, we are working closely with our customers and my operations team I think is doing a great job at it.

Craig BergerFriedman Billings Ramsey

One last question, how is kind of the network communication demand these days? It seems like things have been picking up there. I don't know maybe Asia has been deploying more aggressively. What are you guys seeing on that front via your PoE stuff or other exposure?

Jim Peterson

Yes, we see an uptick next quarter and going into the summer quarters. So, I think if that's the sign you're getting, I think you can stick with that.

Craig BergerFriedman Billings Ramsey

Thanks guys.

Operator

Your next question comes from the line of Patrick Wang.

Jim Peterson

Hey Patrick, how are you doing?

Patrick WangWedbush Morgan

Can you guys hear me now?

Jim Peterson

I can hear you now. Did you hear my answer?

Patrick WangWedbush Morgan

I heard your answer. It's just you couldn't hear me. I'm on voice over -- I guess we have Voice-over-IP phones over here.

Jim Peterson

Okay, well, make sure there's good PoE product behind it like ours.

Patrick WangWedbush Morgan

I know. I was about to say, we should definitely talk to our IT people.

Jim Peterson

That's it and make sure it says Microsemi inside.

Patrick WangWedbush Morgan

Exactly. So, thanks for the answer on inventories. I just had a question on the mix of inventories. I know that with longer lead times in the high rel stuff, you've got to carry a larger portion of that, but on the high performance analog portion of that inventory, how has that trended I guess quarter-to-quarter?

Jim Peterson

It's trending up. We watch that closely. We can't let Litchfield get away with anything. Last quarter, we looked at it, it was trending down, and that's a good sign for us. So that's a good question, thank you.

Patrick WangWedbush Morgan

Okay, and then I guess -- I don't know if you answered this while I was redialing in, but on the idle capacity, transitional idle capacity charges, you guys did a great job I guess getting that lower and lower. I understand over the next five to seven quarters, you guys are working to get as close to zero as you can. Can you just remind us, just all the moving parts here, what's going to be done in the next five to seven quarters? How it's going to benefit and how we are going to get GAAP to non-GAAP to be …

Jim Peterson

No problem. We have a real firm plan. It's pretty much a three-point plan and there's not a person in the company that doesn't understand it. One is, we're certainly ramping Ireland, and we know that right now because we're putting a lot of back end equipment really from $50 million to $60 million this year, trying to raise that to $70 million to $75 million. So, we're on track there. We're closing Colorado. We have a site in Colorado. We said we're going to decommission that, staring 1 October, count on that, that's on track, that's on plan. We've talked to our one strategic customer, they understand it. Last but not least, we have a lot of other fab transitions going domestically to overseas. They're on track and identified, and you're right, the last time I told you six quarters, certainly no more than eight, and now I'm telling you five quarters certainly no more than seven, and next quarter we're going to advance as well.

Patrick WangWedbush Morgan

Okay, great. And just to be clear, you said that the Colorado fab is commissioned to be closed on October 1st?

Jim Peterson

On October 1st, the decommissioning is in play.

Patrick WangWedbush Morgan

Got you. Great, thanks very much guys.

Operator

Your next question comes from the line of Andrew Huang.

Andrew HuangAmerican Technology

Hey, guys, can you hear me okay?

Jim Peterson

Yes, Andrew, how are you doing? We lost you before. Sorry about that.

Andrew HuangAmerican Technology

Yes, that's okay. I got bumped off somehow. I was just wondering, I think my sense is that the defense business, you've got pretty good visibility there, and I guess there is a potential for some price increases down the road. But I was just wondering if you'd talk a little bit more big picture about where the opportunities are, like is it new planes or is it still upgrades or a little bit on that?

Jim Peterson

I think what everybody is really missing here is instead of worrying if what politician is going to come in, we've got a couple of major crisis here in the defense market space. One in this platform, I guess we are the platform, our military aircraft, right, they're in a shambles. I mean, the fact of the matter is, we have more planes grounded than we have in the air for the fact that the metal itself is deteriorating, right? We've got to do something in the United States to strength our military aircraft, and I think you're going to see a lot of press, if you haven't seen it yet, certainly over the next two to three quarters going into next year that we are so far behind on our military ability with our military aircraft that there is going to be some supplemental special funding in the aircraft as a whole.

I don't know if they're going to be X35 or refurbish what we've got but, my gosh, we're in a terrible state right there. That having been said, another thing in defense market you've got to focus on is the international defense market, no one's got real good hard data on it. But I'm here to tell you, our order rate for defense outside the United States is probably three times stronger this year than it was two years ago. So, you look at the defense budget and defense spending, let's just try to get off on what's going on domestic and let's look at the financial spending, because I think that's a hot spot. And then for Microsemi, new markets is red hot products, more expense, and strangely enough I keep pushing Litchfield to look at PoE for the defense market space.

Andrew HuangAmerican Technology

Another question -- normally, you guys are kind of in the habit of guiding like in the range of 2% to 4%, and I'm sorry if you addressed this earlier, but 0% to 4% is a little bit unusual for you guys. So, aside from macro stuff that everyone is talking about, is there anything else that's kind of getting you to that 0% that we usually don't see?

Jim Peterson

Well, I almost regret doing it now. I was trying to be a cautious CEO, with that little bunch of back-end equipment from the United States to Ireland. So I'm just going to tell you again, nothing to do with macro, nothing to do with customers, you see my bookings, 1.08. You know my backlog is, as I mentioned, large as it has ever been. This is nothing more than me being cautious as I shift from United States to Ireland, and I think you want me to be cautious in that area. That's all it is, my friend. That having been said, I'm driving towards the higher end of that guidance and follow my team, but thanks for asking me again.

Andrew HuangAmerican Technology

Okay. And then just one last housekeeping item, I think for the March quarter, your tax rate on the non-adjusted net income is about 25%, and I thought you had guided to 27%, so what should we use going forward?

John Hohener

Going forward, the balance of the year, you use 25%.

Andrew HuangAmerican Technology

Okay, thanks.

Operator

Your final question comes from the line of Shawn Webster from JP Morgan.

Shawn WebsterJP Morgan

Yes, thanks, just a quick follow-up. Do you have GAAP and EPS guidance for your June quarter? And also can you explain why -- or what was going on with the current liabilities and your payable increase sequentially? Thanks a bunch.

Jim Peterson

Sure, John?

John Hohener

Yes, we don't provide guidance on GAAP earnings, to answer your first question. And I'm sorry, what was your second question?

Shawn WebsterJP Morgan

It was related to the liability increase, what was driving the payables up in the quarter?

John Hohener

It was just timing. I mean, certainly, we had some things that helped us from that standpoint and we have timing of issues both in terms of collections and payments, and it was just timing, nothing else.

Shawn WebsterJP Morgan

Okay, thanks a bunch.

Jim Peterson

Okay, thank you my friend. Okay, if that was the last question, I want to thank everyone for joining us today and for your questions. By way of review, here's the main points we've covered. We made significant progress in closing our GAAP to non-GAAP adjustments with more to come. Cash increase -- $31.7 million to $138.6 million. And last but not least, the high performance analog mixed signal business showed impressive results this quarter. This group is driving strong new product development efforts with a record product release planned for 2008.

For a list of our financial conferences, please refer to our Web site. We encourage you to attend one or all of these conferences. If you are not able to attend, we encourage you to listen to our presentation via the webcast. Thanks again for being with us and have a great day.

Operator

This concludes today's Microsemi's second quarter earnings conference call. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Microsemi Corporation Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts