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Microsemi (NASDAQ:MSCC)

Q3 2012 Earnings Call

July 26, 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

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

Analysts

Jason Rechel - Oppenheimer & Co. Inc., Research Division

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

Harsh N. Kumar - Stephens Inc., Research Division

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

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

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Patrick Wang - Evercore Partners Inc., Research Division

Christopher J. Longiaru - Sidoti & Company, LLC

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

Operator

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

Terri Donnelly

Good afternoon, and welcome to Microsemi's Third 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; of John Hohener, our Executive Vice President and Chief Financial Officer; and of Steve Litchfield, our Executive Vice President and Chief Strategy Officer.

A recording of this conference call will be available on the Microsemi website under the Investors section. Our website is located at www.microsemi.com. Microsemi issued guidance in the form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of July 26, 2012 and is continually subject to reassessment due to our changing market conditions and other factors, therefore, must be considered only as management's present opinion.

Actual results may be materially different. However, management undertakes no obligation to update these or any forward-looking statements, whether as a result of new information, future events or otherwise. If an update to our business outlook is provided, the information will be in the form of a news release.

We wish to caution you that all of our statements, except the company's past financial results, are just our current opinions, predictions and expectations. Actual future events or results may differ materially. For a review of risk factors, please refer to Microsemi's report on form 10-K for the fiscal year ended October 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 May 8, 2012.

With that said, I'm going to turn the call over to John to discuss our financial results, and then Jim will address our end markets and overall business strategy. Here is John Hohener.

John W. Hohener

Thank you, Terri. Net sales for the quarter ended July 1, 2012, were a record $259.2 million, up 4% sequentially from the $249.3 million and up 20% from the year-ago quarter of $216.7 million. Our non-GAAP gross margin was 56.2%, a sequential increase of 120 basis points and at the top of our guidance. This was driven by increased revenue, focused on new high-margin products and realization of operational synergies. We expect our non-GAAP gross margin to increase between 30 and 70 basis points next quarter, driven by continued improvement in manufacturing efficiencies and product absorption.

Our GAAP gross margin, which incorporates only noncash purchase accounting adjustments from our recent acquisitions, was 55.8%, a sequential increase of 290 basis points. In Q4, we don't expect any further noncash purchase accounting adjustments. This quarter, non-GAAP selling, general and administrative expenses were $41 million or 15.8% of sales compared to $40 million or 16% of sales in the prior quarter and compared to $37.3 million or 17.2% of sales reported a year ago. For the next quarter, we expect total SG&A to decrease slightly as a percentage of revenue.

Research and development costs were $44 million or 17% of sales compared to $42.2 million or 16.9% of sales in the prior quarter and compared to $29.6 million or 13.6% of sales reported a year ago. The increase compared to prior year was due primarily in our investment of new product development. For the next quarter, we expect total R&D to decrease slightly as a percentage of revenue.

Our non-GAAP operating income was $60.7 million or 23.4% of sales compared to $54.9 million or 22% of sales in the second quarter and $56.8 million or 26.2% recorded last year. We recorded $8.8 million in non-GAAP interest and other expense compared to $10.1 million last quarter, reflecting a full quarter's impact from the refinancing we completed last quarter. In addition, subsequent to our quarter end, we paid down $30 million of our term debt. This pay-down will allow us to see a decrease in interest and other expense of approximately $200,000 next quarter.

Non-GAAP net income was $48.3 million or $0.55 per diluted share compared to $40.3 million or $0.46 per diluted share last quarter, an increase of 20%, and $42 million or $0.49 per diluted share reported a year ago. Our non-GAAP effective tax rate for the quarter was 7%, reflecting ongoing improvements in our tax structure. We expect this tax rate will continue next quarter.

For the third quarter, we recorded GAAP operating income of $21.3 million compared to $11.1 million last quarter and $28.3 million reported a year ago. We recorded GAAP net income of $8.1 million compared to a net loss of $4.8 million last quarter and net income of $32.8 million reported a year ago. Our GAAP results also included $2.8 million restructuring, acquisition-related and other charges as well as noncash expenses of $26 million in amortization, $9.4 million of stock-based compensation or 3.6% of sales, $1 million of purchase accounting entries and $200,000 in other expense. We estimate that fourth quarter stock-based compensation will remain in line at $9.4 million.

Capital spending was $13.1 million compared to $14.2 million in the prior quarter, primarily associated with the consolidation of our facilities both in Northern and Southern California. Next quarter, we expect capital spending to return to our more normal spending rate of approximately $7 million. This consolidation is a contributing factor in our overall gross margin and operating expense improvement.

Depreciation and amortization expense was $33.2 million compared to $35 million in the prior quarter. Accounts receivable was $153.7 million compared to $144.4 million at the end of the second quarter, primarily due to increased sales. Inventories were $155.5 million compared to $156.3 million in the second quarter. DSO was 53 days compared to 52 days last quarter, while days of inventory were 125 days, an improvement of 2 days from the end of last quarter.

We ended the quarter with a cash balance of $167.1 million, and our GAAP operating cash flow was $54.7 million. As I mentioned earlier, subsequent to the end of the quarter, we prepaid $30 million in principal on our term loan. Our best estimate of the end market percentage breakout of net sales for the third quarter was approximately: communications was 31%; defense and security, 28%; aerospace, 21%; and industrial, 20%. We also recorded a book-to-bill ratio greater than 1:1.

For our business outlook, Microsemi expects to record net sales in the fourth quarter of fiscal year 2012 of between $262 million and $268 million. The company expects fourth quarter non-GAAP earnings per diluted share will increase to between $0.57 and $0.60.

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

James J. Peterson

Okay. Thank you, John. We'll start with communications, our largest end market, at 31% of our total business this quarter. Total revenues here were approximately 3% sequentially. Notable performance in the June quarter include our power management products, PoE, timing and synchronization and voice circuits.

As I've mentioned in the past, power management and conversion solutions represent one of the number of new growth opportunities for Microsemi. We are seeing success in a number of communications applications. Our strategy is simple. We intend to leverage our market-leading positions in timing, PoE and voice circuits into peripheral, silicon opportunities. While power management is growing off a small base, it was up over 60% sequentially, and we expect to continue strength in the coming quarter.

After a seasonal pause in the March quarter, PoE resumed a growth trend in the June quarter. We're excited about this technology's growth prospects. And as I said last quarter, despite market conditions and caution, we continue to expect a solid double-digit growth year from PoE. PoE is entering a secular growth phase, one that will drive an inflection in revenues driven by the increased port penetration, a growing high-power market opportunity and our rising penetration of the Tier 1 customers in the industry.

I am pleased to report that the timing and synchronization bookings and billings improved sequentially in the June quarter. While customers remained cautious, Microsemi has continued to grow its design and market share, especially in the core of the network. We are now moving to the next phase of our strategy, which is to move our industry-leading product technology into higher volume areas of the infrastructure.

The OTN transport, carrier Ethernet switch, IP edge router and wireless backhaul markets, all are forecasted by Infonetics to grow at double-digit rates into 2015, and we have the industry's most complete product offering serving these markets. Our product offering further differentiates from the competition with Synchronous Ethernet and IEEE 1588 packet timing solutions, and as a key enabler to industry-wide 4G LTE deployment. With these products, we expect to outgrow the market and increase market share.

Moving onto aerospace. The rally continues. Revenues in this end market were up over 5% sequentially, accounting for 21% of our total third quarter revenue. Satellite continues to perform, and we are benefiting from our focus on large constellations, high-value government programs and penetration of payload electronics and opportunities within our rad hard FPGA solutions.

Commercial air and avionics end markets remain strong, as you may have seen from the airshow at Farnborough recently or from the airlines' constant marketing of newer, more advanced, more efficient airplanes in their fleets. This is an industry in build mode. We are capitalizing on this opportunity with our broad and comprehensive high-reliability product offering.

Defense and security accounted for 28% of total revenue last quarter, growing close to 2% sequentially in dollar terms. You may remember our guide in January of this year that our defense and security business would grow at a 8% to 12% clip year-over-year off the December low. We acknowledged the uncertainty in this market, however, now halfway through the calendar year, Microsemi is on track to deliver just that.

Outperformance here is driven by recent scanner revenues, share gains in SoC products and discrete offerings and program growth in areas such as C41SR, airborne systems, security and UAVs. Budget uncertainty will continue for some time, but with this market, as illustrated by our performance, Microsemi is increasing its dollar content, its value to our customers and its market share by bringing the total solution to our customers that no company in the industry can match.

Our industrial end markets pleasantly surprised us this quarter. Revenues are up over 8% sequentially and accounted for approximately 20% of our revenues, up from 19% of the mix in the March quarter. As Microsemi has evolved over the last few years, our footprint in the industrial market has grown dramatically and is now one of our most varied end markets.

In the past, semi cap end markets accounted for as much as half of our industrial market revenues. In recent years, solar applications have also been a strong percentage of the mix. The story is quite different today.

While we do see some bright spots in each of these markets, they both remain at low levels relative to their historical peaks. But this exposure is balanced by the steady billings of our medical group, as well as stronger-than-expected performance for more grassroots industrial applications such as weldings, CO2 lasers, industrial printing, precision GPS for surveying and real transport applications. These results in June demonstrate the strength of a more diversified industrial revenue base.

I would like to reiterate what I said to you in January of this year. We believe that 2012 will be a great year for Microsemi. Since that time, it is clear that the macroeconomic headwinds have intensified, and our customers are certainly exercising caution. But in this environment, and over the last number of quarters, we have executed by increasing product development efforts, driving new product proliferation and enabling organic share gains in communications, satellites, commercial air. Our total solution focus has driven us and will continue to drive across product design and leverage in our highest growth applications in Tier 1 accounts.

So at this point, I'd like to announce that Microsemi is planning to host an analyst day in Boston on September 13. We look forward to discussing our overall strategy and the transformation of our business with the investment community and how we intend to continue to leverage our capabilities in the growing company. Please save this date, more details will be forthcoming.

With that, I'd like to thank you for your interest and support and take questions from our analysts. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Rick Schafer.

Jason Rechel - Oppenheimer & Co. Inc., Research Division

This is Jason Rechel calling in for Rick today. I guess my first question is on the uses of cash going forward. You guys put up a really solid cash flow number in the June quarter. So I guess, could you kind of rank order the priority of cash uses going forward? And then maybe as a follow-on to that, do you have a target debt ratio that you'd like to achieve at some point? And what would the process be in terms of getting to that debt ratio?

John W. Hohener

Yes. Sure. We did generate a decent amount of cash this quarter, and we expect to see that continue moving forward in the fourth quarter. In fact we should have a little bit more in the fourth quarter than what we generated this quarter. Also, from a free cash flow, our CapEx will be down next quarter, too. So it will be up higher significantly than what it was this quarter, although it was strong this quarter as well. What we're doing is, looking at our overall debt levels, we're assessing it each quarter. As I mentioned in the prepared remarks, we weren't obligated to make a payment this quarter -- in our fourth fiscal quarter, I should say, but we went ahead and paid down $30 million because we felt it was the right thing to do. We'll assess it again next quarter. I think you hit it on the head. What we're going to do is look at it in terms of our debt-to-EBITDA ratio. Right now it's hovering around 3. Our hope is -- our expectation is to drive that down in the low 2s, and we think we can get there inside of about 4 quarters. And that's really the way we're going to measure the use of our cash.

Jason Rechel - Oppenheimer & Co. Inc., Research Division

Okay. Great. And then secondly, could you maybe talk specifically about how the order patterns have trended in defense and what the backlog coverage looks like there into September? I mean, I know things in defense can get a little squirrely around the end of the government year. So just some color there would be great.

James J. Peterson

Yes, defense, just a reminder, it was up 2% sequentially. We're guiding defense and security to be up in organic dollars, in absolute dollars next quarter. And we're seeing some strength in scanner. We're seeing strength in the FPGAs, the rad hard and SoC products, actually seeing some gains in our discretes. What we've been able to do right is capture some bigger customer engagements and bring forth kind of a total solution into that market space. That said, we know there's some uncertainty in the market space, but Microsemi's trajectory here is to grow in defense and security.

Operator

Your next question comes from Andrew Huang.

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

I guess the first question is in the communications segment. Should we expect a little bit of a pickup in the September quarter?

James J. Peterson

Yes. We have, once again, in all our markets, communications, aerospace, defense and industrial, they're going to be up in absolute dollars. And as a percentage increase, probably for everybody it's going to be kind of a footrace, which one is going to gain more than the other. What we saw in our communications last quarter, we saw in the residential gateway a little bit of headwind, particularly in China. But these platforms that we're investing in, the timing and the sync and the like, we're introducing our product, more product, and we see strength in the core networks. And we're actually beginning to leverage a bit on the 4G LTE capital deployment program that's going on. So it looks solid and strong.

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

Okay. And then for John, maybe a question on working capital. As TAM [ph] increases as a percentage of revenue, should we expect the balance sheet metrics to kind of improve a little bit?

John W. Hohener

Yes, certainly, I think in general that business, since it's a foundry-related business and more of our revenue shifts to being a fabless kind of environment, we will see our inventory trend down and that is something that we're driving internally.

Operator

Your next question comes from Harsh Kumar.

Harsh N. Kumar - Stephens Inc., Research Division

So when we listen to some of the other calls, Jim, we're hearing that fiber optics and even base stations appear to be picking up. I'm curious if you would be able to quantify how much or what percentage of your company is directly exposed to that areas, and then I had a follow-up.

James J. Peterson

I don't have that hard breakout in front of me, and I'm looking around the room and I see people kind of like squinting. Litch, do you want to take a poke at it, the percentage?

Steven G. Litchfield

Yes. Well, so that base station business is primarily driven through our timing and synchronization business, which is fairly small today. It's growing at well over 20% a year right now with some great gross margins, and it's really early. I mean, I think we're very confident that we're continuing to -- our share gains are solid, our position in the market is clearly one of leadership. In fact, we're intending to kind of leverage that and broaden that portfolio and go after some bigger markets as Jim stated in the prepared remarks. So that's -- so it's fairly small today, but we really do expect that to ramp over the next, say, 12 to 18 months.

Harsh N. Kumar - Stephens Inc., Research Division

Great. And then Jim, I'm curious. I mean, you had a very good OpEx quarter. You guided for both SG&A and R&D to be down slightly as a percentage of sales. How should I think of that metric going forward? Would you continue to apply leverage from here on? Or just any thoughts. Do you manage as a percentage of revenues or half the revenue growth? Or how should we think of it?

James J. Peterson

Yes. John, do you want to take this?

John W. Hohener

Yes, certainly, we expect to see improvement on that moving forward. Certainly, we're going to get leverage with the top line. And of course, we have a stated goal in the second half of '13 to be at a 60%, 30%, 30% operating margin target. So that said, as a percentage of revenue, we have to get our -- both our SG&A and our R&D down. Stated goals, I think we have mentioned in the past kind of a long-term goal SG&A around 14%, R&D around 16%. And so that would say that we've got to continue to drive that down and we do focus on that in the company.

Operator

Your next question comes from Steve Smigie.

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

I guess my first question is, referring to your 60%-30% target. So it sounds like you're still on track then to hit the 60% exiting fiscal '13. How should we think about the ramp of that gross margin percentage as it goes to the quarter? Do you think it will be mostly backloaded so it's more likely, say, March and June of next year is really where we would see the big step-up?

John W. Hohener

Well, we only guide one quarter out and I wouldn't -- and I would say we made a significant step this quarter, so that certainly isn't back-end loaded. We were up 120. We've guided 30 to 70. A lot of it depends on our mix and certainly, we're going to get the pickup from -- leverage from the top line growth. But I can't tell you exactly how it's going to shape each quarter. We just feel very comfortable that we're going to continue to have improvements each quarter and getting to the 60% as we move forward.

James J. Peterson

Yes. And note, the intent is the second half, and that's how we're driving the ship.

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

And again, just putting out the fact that you guys, particularly talking about industrial, up 8% sequential. I think that's a lot better than other folks are seeing out there. I didn't hear you mention any sort of word of caution there. You mentioned a whole bunch of product areas so maybe there's no good answer to this, but what is it that you guys are doing different from anybody else that's allowing you guys to capture shares? Just getting more dollar content, pushing stuff through?

James J. Peterson

Industrial GPS right, downhole drilling is up. Welding is up. The medical, medical has been a real steady contributor into this marketplace. I think across-the-board, if you look at the market and say what's different? A lot of new products. We put our R&D. We put a lot of focus on it. We had a wonderful time in showing the industry what we can do in hard organic growth, in taking focused R&D dollars into our market spaces. The product road maps are strong and getting stronger, and we're getting a lot of visibility from Tier 1 customers that perhaps a year ago, we weren't big enough for them to open the doors to and opportunities. So across-the-board, we're hitting on most all cylinders, and we're servicing the customer well.

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

Okay. If I could just sneak one more in -- with regards to the military, U.S. DoD sequestration or potential big cuts in the budget, how do you manage around that? Again, realized electronics, probably a lot less effective than other stuff, stuff like UAV is probably actually going to grow for the whole period. In the event that the worst-case happens and it's not stopped and there is like $50 billion plus budget cut, how do you manage around that?

James J. Peterson

Look, I'm a firm believer that if you're going to build a house down in Florida, hurricanes are going to come. You better have your house ready for Category 5, and that's how we're driving the business. Okay? We certainly are working with the customers. We're focused on security. We're focused on electronic content. Washington has been closemouthed on a lot of these issues. That brings uncertainty into it. It's uncomfortable, we know it. But we're growing the market. We're growing our market share. In the last quarter, it went from $20 million [ph] in our business, down to $28 million, but it was up in absolute dollars. But we're finding out once again, if you sit down with the customers, we're getting access to larger contracts, and we have a cross-selling exposure that we never had before into these spaces. So although the DoD in its worst case, Steve, you know and you're right in the heart of that where, I think, where your headquarters is, the worst it can be would be down percent in total dollars and maybe it's only about $20 million total. So it would be a $2 million haircut if the Category 5 came.

John W. Hohener

2%.

James J. Peterson

2%, yes. So -- and I can handle that, I assure you.

Operator

Your next question comes from Tore Svanberg.

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

This is Erik calling for Tore. Can you just comment on visibility so far in the quarter? Obviously, there's a lot of moving parts. The macro continues to do what it's doing, weakening. But what are you seeing so far?

James J. Peterson

We're well aware of the macro concerns out there. Bookings quarter, this quarter versus last quarter at this time are actually up slightly. The big question with -- that everybody asks on the road is, "Hey, what's going on in Europe?" In Europe, we know there's macro concerns there. But our customer base even in Europe is heavily concentrated on aerospace and satellites. So we're going to weather this storm just fine, at least for the next quarter and actually with the glass looking into next year.

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

Okay. All right, maybe I'll just get back to something that's you've talked about in the past, that's the opportunities in 11. -- .11ac. This market obviously shows good potential based on -- you've talked about you have some good technology there. But can you give us an update on what kind of dynamics are there?

James J. Peterson

We're big believers in Wi-Fi and certainly in our products. I think right now, I think last quarter, for the Wi-Fi I would just say the word steady is a good word for it. I think 2012 is going to be a good year for Microsemi, and we're well positioned for the upsurge in 802.11ac. Early stages, and everybody knows that. However, I think we're getting a lot of design traction and a lot of looking traction to our solutions.

Operator

Your next question comes from Dale Pfau.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Could you expand a little bit on your timing business? Could you give me an idea what the size of that business is? And you mentioned some growth areas, but it seems like it was pretty good in the quarter. Could you just talk about the trends specifically in your existing business there in the timing business?

James J. Peterson

Yes. I think Steve addressed a little bit of it. Maybe Steve, do a little more color on it.

Steven G. Litchfield

Yes. Well, I mean, so we don't break this out specifically. But I mean, it's probably in the $50-ish million dollar range, growing at well over 20% a year, as I mentioned a little bit earlier, at very good margins. I think -- keep in mind, we work -- we really participate more on the network synchronization side. And so this is where 1588 comes into play. This really is in line with this 4G LTE rollout. So we are the market leader in that space today, and this is something that is often confused in the market. I would argue we are the leader. There's plenty of -- a handful of other guys that are in the space. But they're in the more of the general timing markets, and this is kind of the what I call the higher end, pretty -- today, what I'd call more of a niche area. But it is really, really expanding pretty dramatically with this rollout. And thus why we're pretty excited about it in the short term. But really as the hard business broadens into more general timing markets, we think we're very well entrenched. We've got the technology and the capability to really take this to a new level for us.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

And so could you give me an idea of your TAM? Do you have an idea of the total TAM you've addressed right now and the TAM that you think you could address?

Steven G. Litchfield

Well, so I don't want to get into the specifics here. But I mean, there's a $300 million to $400 million opportunity I think, I mean, if you want to talk about the TAM that we feel that we can address over the next 3 to 5 years.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

And then a follow-up kind of on the defense business. Historically, the satellite piece of that business has remained relatively stable. How are you seeing that business for you?

James J. Peterson

The satellite business is doing well. We're focused on -- we historically did a tremendous job in the bus component of the satellite. And with the acquisition of what we call Actel, we call it SoC internally, we're now starting to gain nicely in the payload area. I see strong bookings and just a lot of traction and next-generation design-in and next-generation designs. Things look really well in visibility for satellite.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

Follow-up, after that acquisition, do you think that opened more doors to you than previously?

James J. Peterson

Most certainly. I think the ability to walk in with FPGA and the SoC and the rad hard component that they had with the other Microsemi product, it just opened tremendous doors to cross-selling at even the largest customers in that space as well.

Dale Pfau - Cantor Fitzgerald & Co., Research Division

And can I presume that particular segment has margins better than the corporate average?

James J. Peterson

We don't break it out, but that would be a great assumption.

Operator

Your next question comes from Patrick Wang.

Patrick Wang - Evercore Partners Inc., Research Division

I want to ask you first off, could you talk a little bit about how you expect each of your 4 segments to perform next quarter? I don't think I -- I may have missed it, but I don't remember hearing just color in terms of how each segment grows, or if you could just rank order that for us for the year, fourth quarter?

James J. Peterson

I see Steve smiling at me. Go ahead.

Steven G. Litchfield

Well, Jim did speak to this a little bit earlier and basically, we're pretty excited about all 4 end markets. I mean, industrial was particularly strong this past quarter. But as we look into our Q4, we're seeing good strength out of communications. I mean, aerospace continues to be nice and steady. I mean, it was good this quarter. We're expecting that to continue for the next several. Defense is still holding strong. I mean, a lot of people are concerned around Q4 being the end of the government year, but we really don't see that as having a huge impact in a super positive or super negative. So I think kind of the standard 2%, 3% is probably reasonable for next quarter. And then industrial, while we saw a big win -- a big improvement this past quarter, I mean, I think we still expect that to come up this quarter.

James J. Peterson

I think you're going to find out in all the areas, everyone should be up again in absolute dollars.

Patrick Wang - Evercore Partners Inc., Research Division

Okay. But there's not one segment that's going to perform particular stronger than the others. It's all about 2% to 3% across the board.

James J. Peterson

We would try to do it by stack ranking in the preparation part of this. So we look at it, and it kind of look like a footrace for a percentage of each one. So I'm just going to go up in absolute dollars and a footrace from a percentage increase in each.

Patrick Wang - Evercore Partners Inc., Research Division

So no -- are we seeing both out here?

James J. Peterson

I'm just saying we're in a good spot.

Patrick Wang - Evercore Partners Inc., Research Division

Okay. Good. And then that's actually a good problem to have. And then the other question I had was on linearity. I was taking a look at your receivables, and they're a little bit higher this quarter. So I'm just curious if it was back-end loaded, or if you could kind of talk about that.

John W. Hohener

Well, certainly, we had increased revenue. That was the main contributor to the increased receivables. We're -- our DSO did creep up 1 day. That's kind of how we measure linearity. We do expect to see that trend down this next quarter. I don't think it was anything material.

Patrick Wang - Evercore Partners Inc., Research Division

Okay. Got you. And then just last one here. A lot of your competitors out there have talked about softening in June and kind of the depressed July. I'm not hearing that same kind of color or body language from you guys. So I mean, what was your...

James J. Peterson

Well, don't look at the body language, look at the hard numbers. If we're telling you it's going to go from $259-ish million, and with the range we're giving you, the $262 million to $268 million, and we're guiding up $0.57 to $0.60. So that's the fact.

Patrick Wang - Evercore Partners Inc., Research Division

No, that's great. I'm just kind of curious, so you're not seeing that. Is this just a period of time where you're going out there and just taking share, or...

James J. Peterson

Yes, rest assured, we see some of the macro, but it is. It's taking share. I mean, I don't want to scare any of the competitors out there, but the fact of the matter is in some areas we're taking market share. But the new product offering and the strength of our product offering is far superior than we've ever had. So if we understand the macro concerns, we're in the same market, right? We open the window, we feel the same temperature. We just found way in our markets by using -- actually, it might have been the focus on organic. Everyone wants to focus on organic, and I guess I should thank you guys because we're focused on the organic and I'm liking what I'm seeing.

Operator

Your next question comes from Christopher Longiaru.

Christopher J. Longiaru - Sidoti & Company, LLC

Just a quick housekeeping question because my phone went in and out for a minute. Could you just go over just the OpEx guidance that you gave and the gross margin guidance?

John W. Hohener

Yes. We'll take it from the top. The gross margin, we guided 30 to 70 basis points for next quarter. SG&A and R&D, we said they would both trend down slightly as a percentage of revenue.

Christopher J. Longiaru - Sidoti & Company, LLC

The other question I had was, you talked about strength in industrial, and everybody else is talking about weakness in industrial. I want to know where that was and how it played out for you, and what you expect going forward in that segment.

James J. Peterson

Yes. I think, again, in the prepared statements we talked to you historically, you thought of Microsemi, you would hear semi cap in solar. That's changed. We have a tremendous amount of diversity, in part with some of the organic growth, in part with some of the -- new families that we have acquired over the last year or so. The areas that we mentioned, there's some strength in industrial, industrial GPS. I think the area of welding, downhole drilling. Once again, medical is a steady contributor. I think the real differentiation in Microsemi is the diversity and the strength of our model.

Christopher J. Longiaru - Sidoti & Company, LLC

Just checking out [ph] and in terms of your visibility in your book-to-bill, how is that trending into this quarter? And can you comment on that relatively?

James J. Peterson

Last quarter, we have real strong couple of months, and then it tapered off a little bit, not much as in [ph] anybody else out there. And then going through this quarter right now, there's strength in the bookings, and I think I mentioned previously on the call, slightly stronger than last quarter at this time. So I'm confident.

Operator

Your next question comes from Craig Berger.

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

It's Chris in for Craig. Okay. So gross margins were great, a little bit above guidance here. Maybe you guys can talk a little bit more about that, maybe talk about your fab split, utilizations and which exact products have sort of been driving that mix?

James J. Peterson

I think the ballpark [ph] is the products have been -- a lot of the new products, I mentioned that many times. John, you want to touch a little bit?

John W. Hohener

Yes, certainly. I think the -- overall, our margins are up for a number of reasons, and I would just call it overall efficiency within our operational machine, if you will. We're focusing on newer higher-margin products, and we're seeing the operation synergies that we started, quite frankly, a number of years ago. I mean, if you go back a couple of years, our gross margins were in the 40s and now we're at the top end of the 50s. So we're feeling quite comfortable there. And we do see continued improvements as we've talked about some consolidations we're going through, and so those things are all contributing to the gross margin improvement.

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

Okay. Great. What about utilizations there?

James J. Peterson

Well, remember the lion share of our business is that remains [ph]. So utilization does really impact. In the high reliability where we control our destiny, probably a good 70% would be my guess.

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

Okay. And how about lead times by end market, anything there at all, any takeup at all?

James J. Peterson

That's a good question. We haven't broken that out in a while. Commercial, we certainly, 6 to 14 weeks. That seems pretty much the same. Defense, 15 to 26 weeks, that hasn't changed much. Satellite business, which is a business a company like us we love, that's greater than 36 weeks and that's just pretty much [indiscernible] cycle time in that business. That hasn't modified much at all either. So pretty steady over the last couple of quarters and I expect that next quarter will be about the same.

Operator

Your next question is a follow-up question from Harsh Kumar.

Harsh N. Kumar - Stephens Inc., Research Division

Couple of questions. Jim, I'm curious if you can talk about -- forgetting about the DoD budget for a second. Let's talk about electronic content growth or electronic growth within the defense market. And I'm also curious if you still get any SP [ph] increase every year.

James J. Peterson

Okay. Good questions. Electronic growth, electronic content is in defense business, is U.S., on or about 4% growth; international, on or about 7% growth, and not a lot of price increase going on these days. That was pretty much a discrete play years back, and we pretty much had to pay for the supply of the components at that time. So things are modified. Now it's focused on new products and better dollar content of product. And quite honestly, going up the value chain substantially from where we were a year ago.

Harsh N. Kumar - Stephens Inc., Research Division

And so when you were growing 2-something percent or your expectation of 2% growth in defense, I'm curious how you get to that number. Are you taking share from somebody, or just kind of adding value in other ways to the defense?

James J. Peterson

No. I think the stack rank, it's certainly share gains, and adding value to it. I think probably if I would stack rank and I would say probably value first; share gains, second. And then the one good thing that, I think, we touched on the last conference call a little bit is we add a lot of what you call paper tigers, a lot of people are going to enter the space. And I think they read the first couple of pages of Wall Street Journal and they since backed out, and that's a benefit to us. And don't forget the strength of Actel, right? And so [indiscernible] brought to us to that particular space, it helps.

Harsh N. Kumar - Stephens Inc., Research Division

Great. And then one more for you. The $30 million debt payback, pretty significant deal to us because that's what we hear from investors, wanting that kind of a move. Is this strategic in nature? In other words, is this the direction that you're thinking of going, going forward, payoff a little bit every quarter? Or how should we think about that? I mean, also your thoughts on acquisitions going forward from here.

James J. Peterson

Okay. Well, the message is we're aware of our financial obligations and that $30 million terminal payment should let you know that we're taking serious, and we understand our obligations. As far as cash goes, we'll see where it's best served quarter-by-quarter, seems to be a place to best service the market. And M&A right now, I'll be honest with you, right, like I said a few minutes ago, right. I almost got to thank you guys for telling me to focus on this organic growth thing because right now, the hat trick of Microsemi is the strength of the organic growth. So that should tell you where my head is on that.

Operator

Your next question is a follow-up question from Tore Svanberg.

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

Just getting back, not to beat the defense, some quick questions there. But a lot of the earnings from defense contractors, they reported obviously solid results and several of them have raised full year earnings and guidance. Can you talk a little bit about that? Do you have a sense of what's going on there? Do you think that might be some filling of some orders ahead of maybe a cliff starting next year?

James J. Peterson

You know what -- I'm not surprised in the strength of some of their orders, strength of some of their numbers. I think there's been a lot of programs that have been held back. The one thing we do get out of Washington, it's going to affect the Army and the Marines more so than those that have electronic content. So it's uncomfortable in the uncertainty of it, but I think for Microsemi, rest assured, I think we just -- up off December quarter, we said we're growing 8% to 12%. We're about strong at the midpoint on that. You just got to take us for our word. I don't think there's this tremendous cliff. I think the worst case in sequestration will be a 10% degradation next year, and I'm pretty sure we have our bases fairly well-covered.

Operator

Your next question is a follow-up question from Andrew Huang.

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

I just wanted to ask you, could you repeat the tax rate guidance for the September quarter and then on tax rate to use for fiscal '13?

James J. Peterson

John?

John W. Hohener

Yes. 7% and for '13, I would use 7%. But rest assured, we're continuing to work on even -- on beating that.

Operator

Your next question is a follow-up question from Steve Smigie.

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

A couple of people have sort of touched on some comm opportunities. In particular, I'm talking about over in China, it looks like there's going to be a pretty meaningful reacceleration of the, like, fiber-to-the-home or Fiber-to-the-Premise-type rollouts on GPON and EPON. My understanding is with some of the Zarlink products you have, you may be attached to that, that maybe reinvigorating some growth opportunity there. I'm just curious if that's still something you're thinking about as an opportunity. And what's your best opportunity over there? Are we looking at X dollar content on ONU or something like that? And so what's the opportunity there, and how should we think about sizing that market? Is it a few dollars per box? Or how can we think about that?

Steven G. Litchfield

Yes, I'll take that. So Jim commented a little bit. We actually think them slowing as of late, but we are very excited and have taken some nice market share in that market and we expect it to grow. And so as things do recover, I think we're in a very strong position. I mean, as far as dollar content, I mean it's probably around $1 today, but we actually see that growing to probably $2 to $3 over the next -- I'm not sure of the time frame. It's probably the 12 to 18-month time frame.

Operator

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

James J. Peterson

Okay. Just dial in the 13th of September, and thanks for joining and have a great day.

Operator

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

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