Microsemi Corporation - Analyst/Investor Day

Sep.14.12 | About: Microsemi Corporation (MSCC)

Microsemi Corporation (NASDAQ:MSCC)

September 13, 2012 9:00 am ET


Robert C. Adams - Vice President of Corporate Development

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

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

Paul Pickle - Former Senior Vice President of Integrated Circuit Group

Russell R. Garcia - Executive Vice President of World Wide Marketing

Jim Aralis - Former Chief Technology Officer

Amir Asvadi

Siobhan Dolan

Esam Elashmawi

Charles C. Leader - Vice President and General Manager of APT RF Military Avionics & Radar

Steve Swift

Kelly Jones

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

Robert C. Adams

Let's go and get started here. Thanks for coming, everybody. It looks like a pretty full room. Thanks for your attendance. Thanks for those of you who have dialed into the webcast. Welcome to Microsemi Corporation's Analyst Day 2012. I'm Rob Adams, you know me, Vice President of Corporate Development.

We have 14 speakers today, so we're going to move pretty quickly over the course of the next few hours. You're fortunate that you don't have to hear much from me. You do have to regard this page of disclaimers as written by our lawyers. They are people too, please take just a moment.

Let's go briefly to the agenda and the format for today. Like I said, we have about 14 speakers today. So you could tell from the agenda we're going to go pretty quickly, small segments, very focused segments on growth initiatives here in Microsemi, profitability initiatives, et cetera.

What we're going to do to keep questions from piling up at that end is after each segment, we're going to try and allow a couple of minutes for a couple of questions. At that point, we'll move on, try to stay in schedule as much as we can. And after, there's going to be a luncheon where you could be more informal, where you can corner those people that you really need to talk to. And hopefully, we'll get you out about 1:00.

So with that, let me turn the podium over to Jim Peterson, our President and CEO, and we'll get going. Thanks.

James J. Peterson

Will you hit my first slide, Rob? Okay, I might take a moment to welcome everybody that are here in attendance and those that are on the webcast. And I'd like to thank Robin Lich [ph] for writing the pages and pages of my speech. So let me file that appropriately.

We're in an interesting time in our industry, but we're always in an interesting time in our industry. The message we want to get across today have 3 main points. One is our commitment to growth at Microsemi. I know a lot of companies out there that are trying to grow and some that are growing quite well. But I'm here to tell you that you will not only see our commitment to it, you're going to see the path and direction of the growth of Microsemi.

We're taking it from historically back to when we were kind of a military/discreet company. And when you look at the company today and you see the cross-selling across technology, what you're going to find is Microsemi is a leader, not only in private technology but in product and roadmap. And there's a tremendous unity, right, with the acquisition and consolidations of Microsemi. I think you'll be very well pleased.

You're going to see we'll take this technology and just kind of enforce a total solution. The cross-selling within our present customers is quite amazing in volume and in dollars. But more importantly, doors that historically have not been opened for Microsemi, those doors are now open. So you'll start seeing additional releases of product roadmap, product technologies with higher margins at those customers that historically we did not penetrate.

And then one what everybody wants is focus on profit. Microsemi, if you haven't noticed, right, we generate a lot of cash. At the end of the day, right, name of the game, Irish rule number one is cash. Cash is king. So you watch our operating income and you watch our free cash flow, I think you'd be quite impressed.

One thing I want to get across to you is probably the most important question when we go on the road is, Jim, how you feel about the valuation? And I'm here to tell you, I am not happy with Microsemi's valuation today. And I'm uncomfortable with that valuation. And even if it was double, I'd probably tell you the same message, right? I'm not happy, I'm not comfortable with it. But by the end of today, I think you'll see a new shout of, Okay, let's get this. This is how we get the valuation up. It's by sweat and tears, is how it works.

The other question you get is, when you're on the street, is what keeps you up at night. And I'm here to tell you, every CEO chuckles, and they go, Oh, coffee. And so, okay, so what is the real question? And the real question that anyone should ask a CEO when they get in your circle, whether it be in a one-or-one or out on a street corner, is what is it about your company that The Street doesn't get? And that's probably the most important question.

And I think as you walk through the presentations and you listen and you absorb what we're pitching, I think you'll find out exactly what The Street doesn't get. I'm an active CEO. I go around office-to-office, door-to-door, I pretty much stay attuned to what my team is doing. Watching the presentation, and I want to thank Litch and Rob Adams and the entire team for putting it together, I probably learned 20% or 30% more about the company I wasn't even aware of, as far as the strength of the technology and where it crosses over. So that's the self-serving Jim Peterson's point of view of 30% more. I'll tell you, Litch, yes, let's get it going.

Again, the questions, one well-thought-out question or 2 is great. If you want to just start doing check back questions, there's a time to do that.

Now let me touch the one thing, right, we spent, I don't know, I can't even count the hours, look at the size of the book. And 25 people come up to me and go, So you're raising guidance? Okay, so thanks for the big book together, and we all flew in. I would have put a press release out and you could have saved a lot of time. But I do want to remind people, my CFO will give an update on that. But before he does, why don't I?

The fact of the matter is we gave guidance 4 or 5 short weeks ago, and we came up with a nice, strong beating raise versus the industry. Since then, others have mid point going to the left because they didn't see the macro concerns, and others flat-out are missing. So at this time, 5 weeks later, I think we reaffirm guidance and remind you that it was beating raise guidance. So there you ago, there's your gift. Now let's get into the meat and potatoes of why you're here and what you want to tell the investors. Thank you.

Steven G. Litchfield

All right. Thanks, Jim. So I'm just going to walk you through a little bit of history who Microsemi was and really who they are today. We thought that was important for you to recognize, where we've come from. The last Analyst Day we had was 3 years ago. A lot has changed in the last 3 years, and I'm going to walk you through some of that.

So first of all, who is Microsemi? So clearly, we're no longer a only -- a defense-only focused company. We're not a discrete product company. We're not this $50 million venture-backed startup with the latest and greatest technology or the cellphone-focused or consumer-focused company that's looking to get in the latest cellphone or audio product. But yet, we're also not a volatile semiconductor company that has a poor track record of delivering results.

So what we are, though, and what we believe and we're very proud of this, that we're very much an integrated circuit company focused on Analog Mixed Signal technology. We're a communications-focused company, something that's really changed over the last few years. We have an unmatched breadth of RF, analog and mixed-signal technologies. We're a very stable semiconductor supplier, with an excellent track record of results. We're also an industry leader with regard to profitability. We have a very diverse tool set. You're going to hear a lot about this tool set today and how that tool set allows us to grow revenues and profits for our shareholders.

We have a tremendous amount of content growth. This is something else that we're going to talk a lot about today is the content and how we're growing silicon on a board.

So just a little bit of kind of the then and now, thought it might be appropriate. In 2006, we really looked like a different company, and it wasn't that long ago. Much more discrete-focused, defense/aerospace-focused. Really today, about 70% of our product is coming from ICs versus 6 years ago, 70% was really more discrete-focused technology. And now, clearly, we're much more communications-based. We've talked a lot about our communications focus. It is our largest end market. It's something that's gone up pretty dramatically in the last couple of years. But that said, I mean, we've been doing communication-based products for a long time within Microsemi.

So new products per year. Six years ago, we're doing about 40 products a year. Today, we're doing over 150 new products a year.

So revenue, we're doing about $370 million worth of revenue with a gross margin of 44%. Today, we're on a run rate to do about $1 billion in revenue. And our gross margin, GAAP gross margin, 56.1%.

So cash flow from operations, we're doing about $50 million today. Really, we'll exit run rate this year north of $200 million of cash flow from operations.

SAM, servable market. I've got a slide on this going forward, but it was about $850 million market opportunity we addressed before. Today, we're addressing about a $5.2 billion market.

Then lastly, foundry versus in-house. I mean, most of the product that we've created back in 2006, about 25% of it went to foundry and everything else was done in-house. This has also changed pretty dramatically. It's kind of changed the structure of who we are.

So here's a slide that gives you a little bit -- I know many of you have seen this slide, but it really kind of gives you an indication of the SAM that we're addressing and how it's grown over the last 10 years. So again, something that we're very proud of, our track record, all right? I mean, we're very proud of our execution, how we've grown our revenues. And quite frankly, more importantly, how we've grown our profits. And you can see a nice slide here going from 2004 to 2012, and we're very optimistic about 2013.

So let me just address a little bit, some of you may have seen this slide. We don't always talk through this, but this is something in a few years ago really changed within the company and really who we are and how we use to present ourselves as kind of 2 independent companies. Today, we really look at ourselves as one independent company, very much focused on where performance matters, where security and reliability are vital to a consumer -- I mean, our consumers' application, right? So we can walk in, we can work side-by-side with engineering teams and solve tough problems. We're not that guy that's going to go out and compete head-to-head against 10 guys in Taiwan for a socket that's going to flip over in 6 months. That's not who we want to be, that's not what we're interested in doing.

And that's really been quite a change. And I think you're going to see today, we're going to demonstrate to you what we are focused on in some of the focus applications and where those growth drivers are.

So I'm not going to walk through the management team one by one. You know several of us. Not everyone on this slide is in the room today. But what I want to point out is that over the last 6 years, you've seen us more than double in revenue. I think something that's very important is from a management team perspective, driving a $200 million company versus driving a $1 billion company really targeting $3 billion really takes a different type of management team, and really need a much higher level of -- or a different level of expertise.

And so I think what I would add here is that we've been very intent on bringing on new management. You actually are going to see a lot of that management today, who's going to be up here representing a lot of these markets bases in detail that many of you have not seen from us before.

So where are we going? So 4 years ago, we targeted to be a $1 billion revenue company. We're on track to hit that. Two years ago, we kind of recognized that we were on track. We knew exactly what that path was and kind of sat down and said, Hey, we want to be a $3 billion revenue company.

And what does it take to get there, right? One of the things that was important, we recognized that the servable market that we had at that time, we are really hitting -- we were seeing this 30%, 35% market share. So in order to look out over the long term and see how to get to that $3 billion number is that we had to -- we really had to look at some new markets, right? We had to broaden ourselves, our technologies, our capabilities, our application focus, right? And so we recognized that communication is something that really fit who we were and the core competencies that we had, and solving tough problems where performance really matters, high barriers-to-entry. This all really made a lot of sense. And so we've really kind of doubled down on those efforts to grow that particular business.

So where we are focusing? I mean, we're often asked these questions like, Well, what markets are you focused on? And it's always this kind of insinuating that we need to go off and do something else. Quite frankly, we're doing a lot of things. We actually focus on the same exact markets that we're in today. We're not looking to expand that, we're actually looking to grow within that. And you're going to hear a lot about that, how we intend to grow the silicon on that board.

What technologies are we focused on? I mean, we are an RF Analog Mixed Signal company. We look to -- we're not looking to change that dramatically. And again, you're going to hear more about this. Now absolutely, are we going to extend these technologies? Are we going to get better? Are we going to recommit? Are we going to integrate more? Are we going to add some compound semiconductor technologies? Absolutely. We're going to do all of that.

So how do we accelerate growth? So I'm going to have Paul Pickle -- Paul is a superstar within our organization, he actually has a responsibility for all of our IC divisions. So our Analog Mixed Signal Group, our SoC or FPGA group. And he also has responsibility for timing, voice and medical products for Microsemi. As you can tell, very broad shareholders. We keep piling more and more on him, and he keeps taking it and executing, I mean, just flawlessly. So Paul will walk you through the details on how we're going to drive this growth,

Paul Pickle

So next time, I get to do your intro. Okay. So as Steve mentioned, 2 years ago, we reset the bar, set our sights on $3 billion. Up until that point, our efforts were largely centered on developing the scale that was necessary to give us the leverage that we needed in the marketplace, as well as developing strong operating models. So going forward, the real question becomes how do we accelerate growth, keeping our sights on that $3 billion revenue while strengthening the operator model as well.

So this one seems like a no-brainer, but we're going to address larger markets. And what this really means internally, if you knew who Microsemi was, we're going to shift our focus internally. It's an organic effort where we shift those focus -- that focus on those targeted applications from boutique applications to address larger markets, but larger markets, larger pieces of the pie where differentiation still matters. And that's important. They also have to be growing end markets.

Now some of our buckets, our end markets that we play in, you might see single-digit CAGR from a macro standpoint. But what's important is the semiconductor growth within that space. And those, certainly in the areas where we play, we're seeing double-digit growth there.

A perfect example of targeting bigger pieces of the pie, Amir Asvadi is going to talk about our wireless LAN RFPA market. This was an area where we were traditionally known as a premium performance supplier. As a result, we typically focused on enterprise applications. As we made a transition, and we're still doing our gallium arsenide efforts, as we added silicon germanium technology to the fold, we found in our platform, we were able to increase digital content. A level of integration that's been -- hasn't been seen in the industry. And all of those give us a cost position to allow us to compete in a mobile wireless LAN market as well. So we're still offering a differentiated solution, much broader piece of the pie.

The other one that I'd point out is our PLD platforms. We took our gen 2 and our gen 3 PLD platforms, looked at the value proposition that customers appreciated and said, Hey, why don't we go ahead and open up this space a little bit. Let's put a little emphasis on density and speed. Coupled with the value propositions, that's given us the business where we have today, that opens up a $1.5 billion SAM in our industrial market. And actually, Esam is going to talk a little about our industrial efforts as well.

Another way to accelerate growth, leverage the existing core competencies and technological capabilities that we have inside. Jim Aralis, our CTO, he's going to talk to you guys today a little bit about Microsemi's technological capabilities. I think we've taken a novel approach, and I'm not going to steal Jim's thunder, I really appreciate the way we kind of approached the solution. We look at what we have and we look at where we can expand, expanding capabilities without getting too divergent from who we are. This is going to allow us to integrate additional content on the target applications.

Integration is something that I think you guys have all heard about in the semiconductor space. The real difference from Microsemi is we're not just eating up additional digital content. We're actually taking digital, mixing it with high-voltage, mixing it with an application need like single -- immunity on single event upset, and really offering a solution. And I'll pick one example there. Amir is going to talk on this one as well.

Our sixth gen PoE platform actually takes a 32-bit microcontroller, plops it on a high-voltage analog design with analog circuitry. What we deliver to the customer then becomes a software/firmware, actually high-density digital control, high-voltage design. That -- and we took a little bit of the variability and the design and the future specifications, put that in software. What we deliver is a faster -- fast prototyping, lower cost. We certainly see less expense as a result and a lower overall ownership cost to our customers.

We're also going to leverage our existing end markets, customers and applications. Steve talked about this. This is important. The value of that customer relationship, we recognize, is second to none. And if you look at Microsemi, we'd never been a catalog product company. We don't develop a part, stick it out there and hope that it gets sold. Every single product development effort that we make needs to have a targeted end application, a targeted customer and target market space attached to it. Something that certainly the scale that we have and the customer relationship that we now have will allow us to get additional growth or accelerate that growth certainly through share gain.

There's a lot of customers that we go to and the component engineers is meeting us after the negotiations and say, Hey, you guys buy this list of 15 devices. I have 5 more that I'd really like you to think about offering to us. And so that feeds back into the product development funnel. And it's really no secret. I mean, supplier consolidation is just a fact of the industry. And it really makes it difficult for smaller companies to compete, but Microsemi's got a heritage. We have size and we have scale at this point to become a value-added supplier.

If you're close to your customers, you can grow the amount of silicon in the application as well. Not just -- and I talked a little bit about it, not just in getting additional opportunities, but it allows us to pull closer to the definition of that solution. It allows us to kind of think about what the total architecture is, what the ecosystem is of that particular end application. And we can cater our development efforts to best capture that.

One perfect example is satellite bus. I think we are the undisputed supplier of choice when it comes to mission-critical applications in space. And we're used very heavily on the bus side. A big part of the sand that hasn't been available to us now is on payload where selection criteria edges slightly towards performance density. And probably our largest competition there is an ASIC. So our fourth generation platform, and you'll see the go-to-market name pop up in a few of the presentations and it's called SmartFusion 2. That's going to allow us to play in that payload space. It instantly opens up a rather large SAM to us with existing customers and existing applications where we're known.

This one I hold very dear and this is a real principle inside. I mentioned that we're not a standard catalog product company. What we are is an application-specific standard solutions product company. And we really feel strongly about this. There's an industry trend, we've always recognized it, it's a shifting burden of R&D. OEMs, they develop large R&D departments. Gradually, they need to streamline. They start outsourcing some of those R&D requirement to subcons, ODMs, subassembly suppliers. Eventually, they need to streamline and it all comes back to the component supplier, which is something that we really -- we encourage. It makes us valuable to our customers. If we can be involved in the system's architecture, then we're earlier on in the definition process. Our attachment rate goes up, our design spends go down, so our R&D cost goes down. Everything -- and in fact, we actually have an opportunity to bring better innovation to the solution, lowering the cost to the end customer as well.

Siobhan is going to talk about aerospace. And this is an interesting end market because with the electrification of aircraft, it touches on just about every technology bucket that Microsemi has. And you should see that from the high-density programmable logic controllers with our FPGAs to the to high-voltage, high reliability ASICs, to our high-power discretes, high-temperature discretes, even to the subassemblies or avionic systems, power supplies that we're being asked to do. So it kind of touches everything, and we're involved in the very beginning of this process. It's pretty exciting.

So we obviously need to continue our execution in our product development areas. In 2006, we released about 40 products. In 2012, we released over 150. So it goes without saying, we need to continue to focus on that execution.

And the other thing that's going to accelerate this growth is really the convergence of application requirements with some longer-term initiatives that we've had inside. And I'll pick one example. You always try to time these things, right? Here is one that is really kind of perfect, Charlie is going to talk about it today, is security.

We -- a few weeks back, we attended a security conference in Europe. And it was actually demonstrated. And this is something that I would not have believed if I didn't see it for myself, but what was demonstrated is that with a modified song on a CD playing in a particular model year car radio, they could unlock the doors, really bizarre. And you've seen other exploits on vulnerabilities like going in through the cellular connection on a car, disabling the brakes, applying the brakes. And if you think in a car, everything is connected via the cam network, so if there's vulnerabilities there, you can exploit them.

Our industry is in its infancy in realizing the need for more secure and anti-tamper mitigation techniques. The good news is, is with our working -- our background in the military applications, this is something that we've been working on for quite some time. These tools are actually already existing in our fourth generation PLD platform, so we have the cryptography and the software expertise necessary. We have the assembly anti-tamper mitigation techniques necessary, and we have the component anti-tamper techniques necessary. I'm pretty excited about this area, and it's only going to become more prevalent in the future.

So today, you're going to see 8 presentations. They're specifically separated in product line, and we've traditionally shown product line presentations. But we are a systems engineering company. It's not just something that we say, and so we're going to spend a little bit more time on the applications. But there's a couple of product development areas that I think are important.

In the solutions presentations, you should see the cross pollination of the various product technologies, you should see that. And I think after today, you'll see the credibility of the Microsemi strategy. And for us inside, credibility equals intentional actions with intended results. So after each one of these presentations, the 3 things that you should walk away with, what is the opportunity, the size of the opportunity, why Microsemi is uniquely positioned to capture that opportunity, and what we expect the results to be.

I hope, and hopefully you'll catch it, but each one of us is pretty excited about Microsemi, both where we are today and where we're going in the future.

So next, I'm going to bring up Russ Garcia. He is our Executive Vice President in charge of corporate marketing. He's going to give you a little bit on our go-to-market strategy.

Russell R. Garcia

All right. Thanks, Paul. Good morning. So what I would like to do is talk to you a little bit about go-to-market, how we're taking all of this to market. Well, and maybe what's more important is -- what's more important with go-to-market strategy is the results that we've seen from a go-to-market strategy that we've put together about 2 years ago.

So as you've already heard, market focus, we're about high-growth, high-value, high barrier-to-entry markets. What that really means is we want to play in the places where our customers are going to pay us for our differentiation, right? Differentiation only means something as long you extract value for that. So we're differentiated on performance, security and reliability.

We want to be solutions for growth applications. We're focused on market-maker customers, and the bottom line is increasing dollars per box, which also increases competitive barriers-to-entry. So what I'm going to try to do is explain to you how that works.

So what's the results? What we've seen, and you've seen by our growth over the last several years, an ever-increasing content per box. We've got longer-term strategic engagements with customers. which is really driving an alignment of architecture development and roadmap development. What that does, it causes not just an individual device to become more sticky but the solution to become more sticky. As that happens, and you also raised the barriers-to-entry, which in turn drives higher value.

So how does it work? So you're familiar with the 4 vertical markets that we focus on. We then look at how we develop key relationships with the market-maker accounts. But what's more important is understanding what the growth applications that these guys are driving are. As you understand those growth applications, then we'll start seeing where the value of the breadth of product technology that we bring to market is. The ability to leverage that value into dollars per box is what drives total value creation.

And as you understand, once you're on a board, leveraging the other products into that board to drive our content up is much easier than trying to figure out how to go break into a brand-new market. And so we've been very, very successful in making this happen.

So what are the growth drivers around these markets? You heard Paul and Steve talk about bandwidth. Bandwidth is a key growth driver for us, especially in the communications side. 4G deployment is a really -- key driver, bidirectional data, the fact that you don't just download content from the Internet, you upload content from the Internet, so that bidirectional data is causing an increase in bandwidth requirements, high-definition media of the cloud. Paul spent some time on security. Information assurance, counterfeiting and anti-tamper becoming more and more key areas, as Paul talked about. Military and defense is a key area for that, but enterprise, and how do we continue to add more and more security capability into the silicon.

And then this term electrification, what does that mean? What that means is the content of electronics in everything that we use every day continues to increase.

Transportation. So electrification kind of came out of the aircraft industry, more electrification of planes, you're going to hear about that a little bit later. But there's more electrification of vehicles, hybrid electric vehicles. There's more electrification because of the grid, power generation. Again, the bidirectional generation of power from the home or from the generating station causes there to be electrification in the home.

Energy management, the fact that we manage our energy in the office, in the home from a remote capability causes more silicon content to continue to be put into all of these areas.

So the 4 markets that we're focused on, communication, defense and security, aerospace and industrial, basically, we're going to talk about each of these -- or some of these subsegments that we have in these areas. What I'd like to do is I'm going to concentrate a little bit on the communications to kind to show how those model that I described to you earlier is actually working today or what I said earlier, the results. So from a communications standpoint, you start out with a platform. Where are we at? Okay. We didn't just decide a few months ago, Hey, we're a communications company. We've been building this for a long time. And you go look at the platform that we bring to market, we're the world's leader on timing over packet. What does that mean? That means that the synchronization of data that allows you to -- your phone to communicate with your house, to communicate with somebody else's phone, through that network, we own that piece.

We're the world's first, and Paul mentioned this, in the integration of 802.11ac into a single monolithic device, both 2.5 gigahertz, 5 gigahertz, the PAs, the LNAs and the switches all in a single chip. We're the world's lowest power mix. Mix is a medical band for radio. You're going to hear a little bit about that later on, in 900 megahertz sensor radars.

We have the lowest power customizable SoCs. We're starting to be able to leverage that into system and power management controls in server boxes. We have the highest share of voice line circuits, SLICs and SLACs.

And how important is that? Well, what's really important about that, as you look at virtually all residential gateways that are going out today, have telephony in them. SLICs and SLACs. The ability to have a huge market share in that area and leverage other components into those boxes becomes really key. And we're the world's pioneer of Power over Ethernet, basically invented Power over Ethernet. That platform is where we -- where we're starting from.

So now if you look at the communications infrastructure, how does this work? So 2010, we had a, we'll call it a beachhead into the edge of the communications network. Power conversion in quite a number of enterprise boxes, early penetration of PoE, as well as a very strong and stable gas Wi-Fi business. Well, fast-forward to where we are today, and we've seen a very large PoE expansion has become a very strong product for us. We continue to expand that. The SLIC and SLAC which I talked about in the customer premise equipment or residential gateways, SyncE, 1588 or timing over packet ramp has begun with 4G deployment. And the core timing products have become more and more important into the core of the -- of the networks, we're starting to see that grow. So we'll move that forward into 2014, now you see our platform expanding even further.

Certainly, SyncE and 1588 with 4G deployment continues to ramp up at a higher rate. We start bringing on more solutions around voice processing, which is something we'll be embedding further into more the customer premises kind of equipment. But you also see power RF and our RFIC technology development, which Jim is actually going to talk about right after me, but those things start getting embedded into things like SATCOM, base stations and even to wireless terminals.

So one thing I want to do is -- I talked a little bit about the applications. So it's one thing to look at the whole infrastructure, now you look at the application. What are we doing there? Here's a couple of examples. A previous generation small cell gateway, we would have maybe SLIC and SLAC in there, some power conversion device, 5 gigahertz PA, as I described. As you move forward and look at the next generation -- you have to excuse me, a couple of lines got messed up on this slide, but the green boxes are what's important. The high integration RF front ends, now you look at timing being brought in and replacing GPS as you look at a small cell having that synchronized to the same network timing as the rest of the network is, and then power management units or power management ICs versus just DC-to-DC products, so the content goes up substantially.

Another example, server system and power management devices. Previous generations, DC to DC was really the place we could play, some power FETs, some power diodes. As we move forward into the designing generation that we're in now, now we start being able to replace some of the ASIC components that are in there with the PLD devices that we had, where we integrate microprocessor, as well as PLD, onto the same chip. Moving forward, the ability to have a PLD and a PMU and integrate a power management unit and integrate those devices together allows us to even capture more content as we move forward.

So this isn't just a model, it's real products and real customers. Rolls-Royce, you're going to hear a little bit about engine control. We have multiple products engaged today at this customer on next-generation engine control and system management; Cisco server system and power management, I just talked about that. We have multiple devices in those engagements; Ericsson, base station and backhaul systems; Astrium, we talked about -- Paul talked about space and our ability to move from the bus to the payload power bus and system management; Medtronic, you're going hear today about our ultralow power wireless. But it's not just that, ultralow power wireless plus high voltage for implantable defibrillator devices; Schlumberger, high-temp downhole drilling solutions. These are just a few examples of where we're engaging across product lines and product technologies into these customer applications.

So we have results driving long-term growth. We're focused on growing vertical markets. We're engaged with the market-maker customers on their critical growth applications. This resulted in, as I mentioned earlier, more dollars per box per design in. Stronger strategic customer relations, which, again, that is the stickiness of this, is so important as you look at raising the barriers-to-entry and then the value we bring. Increased integration to Microsemi content and accelerated value creation.

So hopefully, that gives you a little bit of picture. What I'd like to do is turn it over now to Jim Aralis, our CTO, to show you how driving the technology further increases that differentiation.

Jim Aralis

Thanks, Rus. I'm Jim Aralis, I'm the Chief Technology Officer of Microsemi. And today, I'm going to talk to you, not about today but tomorrow and next week and next month. I'll give you a few examples of where we're going with some of the projects that we're involved in.

So I guess the idea is that we're looking for value and differentiation in our products, and we drive that with technology. Our technologies are very broad and deep, and this adds value not just to our products but for our customers and our investors.

Okay, let's go to the next. There's my introduction slide, so my time doesn't start until this slide shows up, so I could get my introduction for free. What is it that drives our technology and what are a couple of the things that drive our technology? Russ mentioned it and Paul did as well, but the bidirectionality, not just of communications where I'm old enough that I remember when you used to watch television and as it came on, you watched it, and if you missed it, you missed it. That doesn't happen anymore. There's bidirectionality in the demand of data across network, of video, of audio, of music. So everything has become bidirectional. It's a huge increase in the communications bandwidth requirements.

Energy. Who would have ever guessed that you would be selling energy to the power companies? That's what goes on right now. If you're in those situations where you have solar energy and the power company needs it, you sell it back. What does that require? It requires intelligence across the communications networks.

Also, who would dream that your electric car would actually be running your neighbor's washing machine at night in order to save electricity, in order to generate a lower-cost electricity?

So we also have data. And just as another example, your data that you used to keep in your filing cabinet at home, it's no longer there. The records and CDs that you used to keep, those are on the net now. And that data needs to be secured both from a consumers' point of view and from a vendor who's trying to protect his IP. So we need [indiscernible] trusted and secured data and control.

Okay. So what do these things mean? Increase in communication bandwidth, the need for switching, conversion, power and control. We need to have a network not only that can switch and convert these generated energies, but also to control it in the back end, so it's appropriately available at your sockets in your house or your EV car. If you charge -- if your EV car ran the washing machine for your neighbor, you want to make sure when you get up in the morning, it's ready to be driven.

Okay. So what Microsemi technologies are involved in, I'm not going to go through each one of these technologies but you can see anywhere from satellites to routing, power efficient switching that I'm going to talk about a couple of examples there, as well as data handling and wireless data PoE for access points, for powering cameras to even extenders for Ethernet.

Okay. So what is it that Microsemi is doing? Well, first off, we are coordinating our roadmaps in order to make sure that we are building the products that work together in an efficient and timely manner. We are coordinating our roadmaps with our customers in order to make sure we're building the products at the right times for them, as well as extending the products in the areas that we're already on route building. As Paul and Steve both mentioned, we're not trying to extend into new areas, we're trying to fill the content of the areas we're already involved with our new technologies and our differentiation.

What are the key technologies? As we mentioned before, integrated and efficient RF technologies. We're looking at silicon germanium, silicon insulator, again, for high-performance RF and integrated passive devices. These are technologies that we're using to enable the next generation of our products. We're looking at high-speed power switching devices and capabilities to allow conversion of energy, radiation hardened and satellite high temperature devices in order to enable the communications bandwidth at these levels. Ultralow power signal processing and then secured processing and data management capabilities. We're investing in these technologies in order to further our product lines and products.

We're also, of course, working to -- on long term, even longer than the stuff I talked about today earlier, we're looking to make sure that our technologies are valid going to the future. We work with universities and partners to make sure we're never blindsided. Part of my job is to make sure that nothing comes out of the woodwork and surprises us. And that's a job that we take very seriously, and make sure that we're there with the technologies as we move forward.

Now I'm not going to go into each one of these, provided they come up. There we go. But as Russ mentioned, bandwidth is extremely important in the emerging areas that we're -- that we're doing in communications. We have a lot of projects here, ultralow, the timing, which I'm going to do a little bit more of, go into a little more detail in a minute. Monolithic Wi-Fi, the SmartFusion, ultralow power radios, it is a companion devices. These are all things that we're actually doing today and projects are underway. I don't have time to go through each one of them, but I'm going to give you a few examples of the technologies that we're involved in.

The next one is security. And again, a number of projects from our CSOCs, our FPGAs, PLDs and secure processing and integration where we can actually build processors that are secured, we're using standard products in our system in a package capability, as well as electrification, where we're going to the next generation of compound semiconductor wideband gap devices, band silicon carby devices that both the process and the device technology we're generating, very highly powered converters and UOP radios for processing the sensors, as well as the local connections.

Okay. So I'm going to go through 4 technical focus areas here that are pretty exciting for us. The first one is increased performance timing. As you go to higher and higher frequency and higher and higher bandwidth communications networks, you need to have timing that is more critically aligned in order to increase the data. You have more data in a smaller time, you have to be able to know when to grab it. We're already the leader in the generation, synchronization and distribution of timing. We have a breadth of features that is unprecedented in the industry. We lead this, we lead even in jitter and in the multi mode timing generations but to get to the next generation we have to actually increase our performance in jitter to get to the next level in communications. So we have a project, and then for you who have seen an eye diagram, what we're doing is open up the eye diagram in order to go at faster and faster data rates.

In this project -- I think I figured it out, you push it twice to get the result. This is actually what is required to go to the 100-gigabit per second data rates. So we're increasing this, the accuracy of our timing, both from positioning the packets, as well as extracting the data for packets. What does this allow you to do? Not only to put more bandwidth but to use less capable infrastructure in order to get higher bandwidth. So you have all of the infrastructure cables in your system, you can actually use these technologies in order to put more bandwidth to the same infrastructure, not have to build new fiber lines. It also allows you to go longer in the existing fiber lines that you are using the existing fiber built for the longer distances and increase your bandwidth.

What are we doing -- what are we using, what technologies, to do this? Well, we're using multiple technologies in order to implement these world-class jitter performance. We're using technologies that allow us to do monolithic integration of these parts, as well as multichip to get even higher performance where we can put systems in a package and build timing networks that truly are world-class in jitter even with all the features that we're including in our parts. The numbers of clocks that we're generating, as well as the features of any frequency to any frequency. This will be the best timing products in the world, continue to be the best timing products in the world. You can see that examples of the technologies we're using, as well as the multichip packaging in the diagram on the bottom right.

Next, we're also focusing on RF, as you've heard mentioned in a number of areas, a number of the presentations before me. We're looking at integration, right? As Paul and Russ both said, we deal in RF where performance makes a difference. we built the world's best PAs for many, many years, highest power, highest performing PAs, because we differentiated ourselves in that market. We built ones that had lowest -- the highest efficiency with the highest power for a reasonable cost. We've actually enabled a new technology of building these analog front ends for RF products. And Amir is going to talk a little bit more about the current products and where we're going. But this technology is allowing us to improve performance, and I'll mention that in a minute. Let me go to the first one.

The first part of it is our ultralow power radios. This is a technology that, again, will be mentioned later by Steve. But this is a technology that we currently use in our medical products to use -- to communicate for implantable medical. This technology is being moved and used for sensors and machine-to-machine communications by hosting it with ultralow power processors and sensor networks, such as processing and processors data, in order to build battery or even battery-less actual sensor networks. We're also using our proprietary technology of wake up circuitry in order to, again, enable ultralow power radios to operate for long periods of time on very small amounts of power, including battery-powered.

Next, our RF front-end integration. This is an exciting, a very exciting area. We're the first company to be able to integrate the entire high-power RF front-end into a single piece of silicon. We're using a silicon germanium technology that we have enhanced with our own capabilities and process design, and use this technology in order to build what used to be, and still is in our competitors, a multichip. And the PA is usually on a separate chip. The RNA is on 2 separate chip switches, put together in a package that looks like a decoupage of electronics at a very expensive cost. We can build this monolithically. We actually get increased performance from this, not just from the fact that it's monolithic and the interconnects can be optimized, but also because it's married with a digital technology that allows us to actually tune this circuitry. So it doesn't have to just be one functional, it can adapt, it can be configured, it can be adapted to any type of temperature environment, voltage environment, power requirement, so this allows us to build the next generation of capability in our RF analog front-ends.

Okay. What's next? Focus on SoCs. Okay. Our next SoCs or PoEs or FPGAs, we truly build the world's only, what I would consider, system on a chip. We batter that word around in the FPGA space. We batter that word around a lot. But we mix analog processors on a single chip with the digital fabric that allows us to be programmable and configurable. This is a unique capability and it's right in line with Microsemi's ability to mix these technologies and add value where others actually are just going for larger and larger. We actually have functionality value that Esam will talk a little bit more about, but this allows us to be truly unique. And what are we doing? We're building the next generation of CSoCs, which will have even increased performance, lower power, higher security and better reliability from radiation, as well as anti-tampering and the security end of reliability as well. So we're building that. It's inherently more reliable. It has lower power than even our current generation and it's extendable, as it says here, to analog, because our non-volatile technology let's everything be enclosed in a single die that we can secure, as well as use the non-volatile technology to use analog at high-voltage. So this is a very powerful technology and a new product area that we'll be seeing very soon.

And we're not stopping there. We're actually going to the next generation. It takes some time to develop these products and these technologies. I mean, this is a process technology, as well as a fabric technology. We're going to the next level, we're working on even increasing the density cost and security of the next level. This is a current project. This is not a future thing. We're working on it today to make sure we're there in time with this high performance and now high density fabric, as well as processing, multiprocessing capability.

Okay. The last view graph I have, I wanted to talk a bit about something I call broad-spectrum efficiency. So the power market is a broad market. It has a lot of segments, as you can see from this view graph. There is downhole for high temperature; there's low temperature, which is in space and some other applications; as well as low-power sensor networks. There's smart grid processing, smart grid -- again, I should point to some of these, smart power generations, smart grid switching, commercial electronics. There's a lot of areas, and we have a lot of companies that participate in portions of this.

Microsemi, with its technologies that we are developing today, can cover all of that space. Now don't get me wrong, we don't want to do all of these products. They're not all where we can differentiate. But we certainly can differentiate in the areas that are on the fringes. As you can tell from today's conversations, we' talk about jet turbines and the very high temperature. Electronics, where downhole is mentioned here as well, where we do have a significant presence in the systems that we build. Sensors, here. One of the interesting ones that I will mention is the no heatsinks applications. Everybody thinks high temperature is high temperature environment. That's not always the case. If we can allow our products to rise in temperature above the ambient by many degrees, we can eliminate heatsinks from the system which eliminates weight, which eliminates costs, while still maintaining the performance of these power systems.

So what are we doing to -- currently in order to increase our footprint in this broad-spectrum power? Well, first off, we're building and investing in high-end -- high efficiency devices. Hundreds of volts, hundreds of amps, switching devices for -- made out of silicon carbide, gallium nitride and some other, even more exotic ones, that allow us to switch a lot of power very efficiently and very quickly.

Now some of these devices, other people have trouble with them because there is some subtleties you have to do when you're switching this type of power, so that you don't blow up the device. We have the technology and the knowledge within Microsemi to build customized drivers that do the protection of these devices. That make sure that they're not driven out of their limits and control them both thermally, as well as the electrical waveforms in order to make these look and used by our customers as if they are just digital switches, which anyone who has switched 100 amps know that it's not.

What do we with these 2 things? We also build those things into power modules. These power modules, again, are one thing that can be switched on and off. They can be used as a digital power switch at high temperatures. We're developing the technology to do this at extremely high temperatures. We are using our cSoCs to do control of the entire system, not only of these high-powered amps but to run nonlinear loops, to run monitoring, margining of all of these different powers, to go to the next level in the power generation and reliability of power systems, which we are more and more and more depending on.

Okay. The last one is we also -- I have no idea -- oh, there we go. High-power system design. We also have a high-power system design group that can do many kilowatts switching power supplies. This allows us not only to build these supplies but also have the knowledge to build the roadmaps of all these other products in order to service customers who are building this type of power systems.

Okay. So those are just a taste of what we're working on. We're working on many projects that I will be happy to talk to you about forever if you give me the chance. And so, Microsemi is truly differentiating itself with its technology, and we are moving forward at a very quick rate to add value and differentiation to our products. I'm sure I went over time.

Next, I'd like to introduce Mahmoon Santo [ph]. He is our timing expert and will take us through what makes us more compelling.

Unknown Executive

Good morning. I'd like to show how we can make money of what Jim said. Okay. So Microsemi timing is mostly focused on timing for communications. We are all aware, for example, the communications sector this year was not doing that well. Though there was a strong opportunity for us, stronger opportunity for growth and I would be showing this. It's mostly driven by the growth of the mobile data traffic, for example. We are looking now at something about 80% growth year-on-year in the biodata traffic driven by, of course, our smartphones, the tablets which are 3G- and 4G-enabled. But it was also driven by the media content. More and more people are going into Netflix, YouTube, downloading pictures through Facebook and so on. And that's driving -- definitely driving the media traffic on the network and changing the traffic mix in the network. And that's driving other needs.

This is like the growth of the mobile data traffic itself, driving the mobile backhaul, driving the Ethernet mobile backhaul. And also the fact that now you cannot rely on huge macro base stations and they are trying to do more and more smaller base stations deployed into a more neighborhood-oriented or even smaller geometry-like enterprise and drives the mobile Internet mobile backhaul growth significantly.

We have a strong play there because mobile network, specifically base stations, has to be frequency- and time-synchronized. You cannot -- you need the frequency synchronization because base stations cannot collide on frequency bands otherwise, you lose -- you will lose traffic. All in some applications like the 4G type of network or CDMA, the older one, they rely also on time synchronization. The base stations share the time slots. So if you do not have the proper time synchronization, you will lose traffic.

Now it's an essence of the mobile network. Traditionally, this was available through the TDM network or 3GPS. And, of course, in the case of the TDM network, we were also providing the solutions for this. Now we switch into pure IP because of the switch of most of the data traffic is in IP traffic and the fact that we are switching further away from the co-located service in terms of base station. Now we are losing synchronization, traditional method of synchronization. You have to apply some method of synchronization over to IP network and this is where we play. Okay.

The second part of this is the, of course, of the traffic -- the growth of that traffic itself or the broadband traffic forcing service providers now to deploy more and more IP switches on routers. Now these networks need to support synchronization. There are lots of synchronized service available today that you need to still continue to support. Plus, the fact that you are combining them to the fixed and wireless network together, you need to carry synchronization over this IP -- over the service provider network. Traditionally, again, this was done by TDM and the edge synchronization. This is where our traditional play. But now we are having more and more IP deployments and timing over this IP networks, right? And again, traditionally, you could have been co-located. But the fact that they're massive, most of the traffic now is IP traffic, we do not want to maintain this old traditional TDM-type timing, okay? I'd like to enter next line.

Our third growth area for us, and it's only recently that our Ethernet starts to cover as a market on its own, which is optical transport network. Now we need to go and communicate between some wireless services, you want to add in some wireless services, you are -- also you want to connect to the data centers through the service provider network, you want to bring some video content, streaming 3G like a high-definition video content into that network. You need to mix all of these together, [indiscernible] on its own does not allow you to mix things in, to add things in and out easily, it does not give you the intelligence. Optical transport network gives you the intelligence.

Now optical transport network can add in traffics from different service providers, Verizon, AT&T. Each one of them has its own downtime domain and this is the beauty of OTN. It allows you to have multiple time, it means -- but that means every client link, every port, needs to have its own synchronizer, its own sort of PLL solution, and this is where we bring our solutions. We provide the synchronizers for the OTN boxes, switches and transport.

So this is really where our play is. We play in packet timing, as you might have heard words like synchronized Ethernet, IEEE 1588, is how to transfer the timing through the backup network. We play in OTN timing, which is the synchronizers we bring in. Also we have the clock management solutions. Usually high performance communication growth there, high-density, they need speed, they need performance, we have the devices like buffers and synthesizers that allows us to -- that, well, allows service providers or people to build systems, which are quite high in performance and reliability.

In the market we play in, as I mentioned, it's communication timing market data means predicted that 2012 -- would actually see 2012 going down significantly. It's still about $550 million. But our plan actually did improve in 2012, mostly driven by the fact that we are targeting applications which are growing in 2012. Also driven by the fact that we introduced products in symphysis and clock distribution that allows us to gain markets which we did not have before.

Now, we are still seeing strong growth going forward in TAM. You'll see more releases, like more announcements from us, new products into clock distribution and clock synthesis, which is going to increase our TAM even further.

Now, we are leveraging a multiple of our timing solutions into a communication market with some of the key players in this market. But actually, there's other time -- others technologies with Microsemi we are bringing onboard. The same way we are offering timing over the IP network, we are offering power over the actual IP network. The same way we are bringing clock management to the communication board, we are bringing power management to the communication board. So there's lots of others plays we'll bring together.

This is just a brief view of what we offer. I'll try to explain simply. Usually packet networks are not synchronized. Our LAN network here is not synchronized, data centers are not synchronized, there's no synchronization in them. And they don't need to be synchronized. But service provider networks has to be synchronized. What we offer is solutions. It's ICs plus the algorithms plus some framework that allow people to -- or allow service providers to transfer time across the packet network. And that means their solutions in every box in this network, or multiple devices in every box in this network for you to be able to carry synchronization across network. And that's becoming more complex when you try to carry time. Traditionally in TDM, it's that actually people carried frequency. Now people wants to carry time, and that's more complex than before. Again, driven mostly by the 4G deployments. That's all time-based right now.

Of course, the other solution we have is OTN. Now we only cover the OTN, the timing part of OTN. OTN allows you, as I mentioned earlier, to [indiscernible] Sonet, Ethernet, video, Fibre Channel into 1 big pipe. Now again, when you cover this, you need to have a synchronizer, parport, parport, to drive the time for that particular transparent timing in OTN. And this is where we play.

In this type of applications, it's not strange to see 24 synchronizers on the board or 48 synchronizers on the board. It's a very high-density because every link need to have an independent timing, okay? Now the fact that we are on these ports, we bring in also other things. We bring in the high performance, high-speed, [indiscernible] or very high clock rates at frequencies which are needed on these ports.

There are other players in this market. We are the leaders in the stuff we play in, we are the leaders in the markets we are targeting. Maybe there are other people who have the integration. Like Sematech, for example, they do have integration, but actually when you go and you try to drive an IP link, a high-speed 10-gig or 40-gig link, you need also the performance, you need the noise, the phase noise, and that's where we have a stronger play.

There is also other players who, for example, have a performance. Though they do not have solutions for packet timing or synchronized Ethernet. They don't have the standard compliance complex timing functions required to actually support things like packet timing or synchronized Ethernet or 1588.

As I mentioned, we do have solutions that really target every application we have right now but we know that we need to evolve. For example, in OTN, I already mentioned we have systems where we have 48 synchronizers, we have a high-density where we can maybe support this with 12 chips or 24 chips, but still density is a must. So in our next-generation solutions, you'll see higher, smarter densities. But it will also -- there's more drive towards the 40-gig and 100-gig bandwidth. And that forces us to even to improve our noise performance further for us to support these much higher-speed links.

And packet timing. We have, again, complete -- we are the leader, actually, in packet timing, as far as providing a complete solution. But we do know that if we provided more optimized solution to provide time distribution, we can expand the deployment of this particular technology. Today, most of our strong deployments is an mobile base station but there's nothing preventing it from being a technology deployed, for example, in the traders desk, to make sure that you have more accurate time in terms of when you are doing your trades. So there's other applications that could enhance with more optimized time distribution.

And in clock management, we have good solutions, and we are driving a larger sort of -- larger breadth of this particular technology because we want to be -- or we want to become the single -- like a one-stop shop for the complete timing of the communication board.

We work with FieldOne in this market. We are the leaders traditionally, as I mentioned, in network synchronization, and they come to us for their next-generation timing. We have -- because we have the expertise, we help people not only in -- like driving the timing from network point of view, we help them driving the timing in their system, we help them driving the timing on their boards, on the clock trees on their board. We are the leader in this market and people recognize this and they work with our system architects on that. We are very active in standards. We are very active with service providers also to bring the technology together.

Over time, revenue this year was stable compared to last year. But we have a very, very strong designing momentum. We are very confident on the fact that we can grow way faster than where the market's grown, and mostly driven by our designing momentum. The only thing I should mention here is that the y-axis was deleted purposely, which represents the actual revenue compared to the data.

And that's all what I have here. I should introduce Amir.

Unknown Executive

Can you just give me a moment?

Unknown Executive


Unknown Executive

I think our -- here, we have a lot engineers onboard. We're running a little bit over time, but this is an important subject for us. How about we pause? A couple of questions on timing for Mahmoon [ph] while we got him?

Amir Asvadi

I guess, I look at more original on the schedule, I should do it in 1 minute. By the way, my name is Amir Asvadi, I'm the General Manager of Analog Mixed Signal. Today, I'm excited to talk about 2 of our products within Microsemi: the PoE, Power-over-Ethernet; and the Wireless LAN. Let's just start with PoE. Okay.

As you guys may know, the PoE was invented by Microsemi. And today, we have the best developed, the largest PoE-related portfolio, both on the application and all the patents and IP within the Microsemi. Today, at Microsemi, we offer a broad range of product line at PoE. From PSE, which is a switching side, to PD, which is a receiving and mid span. I can claim among all of our competition, we have the broadest product line on the PoE today, which we can address all the different market, all the different application. As Mahmoon [ph] said, we are your one-stop shop when it comes to the PoE.

And also, I'm very proud to say that we are in the process of defining and designing the sixth generation product for the PoE. We are going through a lot of details, we have taken advantage of our technical knowledge, application and the software knowledge. And this product, when it hit the market, it's going to offer the lowest cost threshold, the highest efficiency that we can have and the lowest participation. And naturally, it's going to offer the smallest footprint. So really, we are really excited on the Gen 6, as we have always have a lead on the previous generation for the PoE margin.

Moving forward, this clearly show a market which is growing. It shows about 15% compound annual growth on a yearly basis. Though several marketing here, you can look at it, the PoE switch IP phone and there are a lot of new market coming right now which require the PoE. You guys heard about 8211 AC, that's a great opportunity for PoE as it require higher and higher power. That opens up the opportunity for the PoE market at Microsemi. So right now, I go over some of the slides. We are participating on some of the market today, like Voice-over-IP, like the access point. We still have 100% PoE attachment rate. And then the other market that we have participated in and growing and have a strong designing and market share, these are the new market, the team client and the network camera. The network camera is extremely exciting for us. It shows about 30% compound annual growth rate. And today, we can claim we are participating on all the 4 top vendor, the camera today.

And also there are other market, like a synthesis [ph], that require a high-power, that's where we shine, up to 95 watt. We define, we own that market. Naturally, we're very excited to start participating in this market as well.

There are other market I haven't mentioned about HD, which you guys may heard about it. This is connecting the intermittent system through the cable cat 5, cat 6 to RJ 45. That's the market that today, we are sitting and chairing the committee defining the PoE. We have a product today. We have defined, designed, ready to hit the market as soon as this market start growing and get implemented in the market.

Moving on, this shows really a broad product line offering that Microsemi does in the PoE. We offer the PSE, this is the switching side. I mentioned we invented this market so we clearly offer a lot of different product lines from here, anywhere from 1 port to 24 port. Naturally, we support all the different standout for these markets. Cisco, UPoE, which is a 60-watt, also we added energy efficiency to this standard.

The PoE, which is the high-powered 95 watt, naturally, we offer the lowest power participation, smallest footprint. With our unique power supply management, we managed to also even make the ease of design for our customers.

Moving onto the PD side, which is the receiving side. We are participating in phone, iPhone, access point, net camera. Again, we have several products, some of them are internal, external PWM controllers, support up to 95-watt. And again, offering the lowest power participation.

Midspan is simply the power supply we're adding PoE to existing switch network. Again, we're offering anywhere from 1 port to 24 port. So looking back in here, competition that we may have in this market on the PoE side like Broadcom, TILT. On the PD side, we can look at the TIST, LTE.

When I look at them, we see that Microsemi is uniquely positioned to offer all the different product line addressing the PoE, which none of our competition is doing that right now. They're participating in 1 or 2 side of the market. But right now, the PoE switch, PD and mix management is what we create this offering.

Again, looking at the revenue forecast, we are showing about 15% compound annual growth for this market, for our revenue forecast. As a summary, just before I move to the Wireless LAN, I just wanted to summarize it. When we entered the PoE market, we understand the application, we are proud to say our logistics are going to be best in the class when it hit the market, as I mentioned, both on the performance cost and the power efficiency. Also the market opportunities for us is growing right now and we believe we can have a great success with existing generation and the future generation on the PoE market.

Moving on to Wireless LAN. I guess, few of people already touched base on that. That's extremely exciting product line for Microsemi, and let me just touch base with you. Looking at the market, I guess, look back few years ago, there was only a few devices: Desktop, maybe access point, tablet, who had the Wireless LAN. Now you look around, pretty much the market exploding right now. You see anywhere from a smartphone, you're going to see product in the tablet. Everything is going to use a Wireless LAN. I look at some of the marketing report and I just took a note for myself. There are going to be 3 billion Wi-Fi devices shipped by 2015. There are going to be about 2.2 billion wireless LAN consumer devices shipped. There's 1 billion smartphone. What does it mean? All are using wireless LAN. It's a great market, it's a great opportunity for Microsemi, as I'm going to go through some of the product line that we are offering.

Microsemi at a glance, we've been in this market 10 years ago. As Russ mentioned, we started with a power amplifier using the gas technology. About 2, 3 years ago, we reengineered and sit back and started on a new product line, new technology on the silicon germanium. When I look back, today, we have a product extremely unique in the market, in the first monolithic front-end margin in the market. You look at some of our leading competitions here, Skyworks, TriQuint, RFMD, when you look at their product line, they offer the same function using 2, 3 ICs. I have a picture of it. Later on, I'll show it to you.

So that's extremely exciting for us. What does that mean? Probably it offer us the lowest cost base using this technology. So naturally, for the same price that the -- our customer is demanding, we're going to have a higher margin compared to them.

The other thing is we have a strong relationship with the baseband customer Broadcom, Qualcomm Atheros, Marvell, these are the top 3. We are working closely with them to go on a reference design, we are closely working with them to define at this state for the future product line in this market, which is very exciting. So we get the first look to see what's going to come, be able to participate in those markets.

At the same time, we have a strong relationship with the ODM, OEM and the modular company like Moraca [ph], Senco. These are the company who assemble the base LAN with the front product line.

Moving on. It's knowing this, understanding our unique technology, we are expanding our design center capability. Today, we have 3 design center, Aliso Viejo, Ottawa and Atlanta is the 3 main design center for our product line.

And we are expanding our portfolio on 802.11ac. You guys heard about 802.11ac. I just read an article, there's going to be 400 million 802.11ac product line in the market in the next 4 years. So we are very proud, excited that our portfolio today is addressing this market, anywhere from the front-end module, from the PA power amplifier and LMA, which is the low-noise amplifier today. We have products addressing all these 3 area.

I just want to show you a picture, sometimes, to look at it, what is our competition doing to address the requirement? Today, in order to -- for us to address the 2.4 gigahertz spend, 5 gigahertz spend and the digital infraction, our competition to 2, 3 IC within 1 package to operate to their customer. We manage with the silicon germanium technology, we -- the technology that we have develop in-house, we integrate all of them into one single IC. So naturally, it's going to give us the best cost and performance. Because a lot of time, among us, you may think about by integrating, you may lose some of the performance. I'm proud to say by comparing our performance to the key leading vendor today, like Skyworks, RFMD, we have a better performance using this technology.

Let's look at a picture in here. The top one is a broadband set. The left picture is from our leading competition. When you look at it, there are 3 IC to address the same function. There are about close to 60 wire. There's a PC board. What have we done? We managed to integrate all of them into one single IC with less than 30 wire band. So at the end, that translates to the highest level of integration, lowest VOM cost, and at the same time give a better performance. There are -- I have a detail about the performance difference between our dual band and our leading competition today, which shows why this technology even achieved better performance.

The bottom one is the 5 gigahertz. Again, another leading competition to the, on 8211 AC. They manage to achieve the same function using 2 IC. They integrated them using 1 IC, a lot less wire band. So what does it mean? Beside the cost, it offer the highest reliability. You guys all know as the number of wire band get less, as the number of component get less, that offer the highest reliability to our customers.

What else does it offer beside the cost and reliability? As Jim mentioned it briefly, we have a digital tuning. So what does that mean? For the customers, if they are looking to optimize the performance, our competition have to go through another round of the design cycle, that fabrication to deliver that function. We can do it digitally. So that also gives a great advantage for our customers, faster time to market.

So again, saying all that as a summary, I can tell you, we have the highest integration product today in this market. The technology we have is extremely exciting, offer us not just a better cost, which naturally allows us to have better margin compared to our leading competition, at the same time, offer us better performance. And -- let me see -- I guess by saying that, I did it quickly so I can have a few moments. Any question?

Question-and-Answer Session

Unknown Analyst


Unknown Executive

So we did not expose the timing number, actually, but what we showed you the growth trajectory of the business as we see it.

Amir Asvadi


Unknown Analyst

You talked about a lot [indiscernible] ask you how much do you think will come as a division of yours to grow for maybe the next year, the next 5 years over [indiscernible]?

Unknown Executive

So we don't have all the pieces of communications of our business represented today. So you won't see an aggregate growth guidance for that, of course. And as we're showing just the very specific pieces in our growth guidance as we have that, we can talk offline a little bit. I can help you a little bit more. How about for Amir, specifically.

Amir Asvadi


Unknown Analyst

Just a question on the dollar content, as you go from [indiscernible] to AC single streams pretty much on the dollar content to increase. Did you guys go to AC and [indiscernible] single stream versus 2 or 3 streams?

Amir Asvadi

Okay. The AC, as you know, require high power dissipation. So naturally, if you look at compared to N, which appears as standard, you really had a 2.4 gigahertz then. Right now, looking at the dual band, you can have a 2.45. Assuming the price is the same, you are doubling the content dollar-wise. Also, you're looking at some of our customers are adding the LTE requirement. So extra wire -- radio mass. So all of them is going to increase the content, the dollar per application for this standard moving forward.

Unknown Analyst

And do you have a sense on the application for AC [indiscernible] per screen?

Amir Asvadi

For the dollar amount? I mean, again, it depends on what the ASP is because probably we can look at it -- I mean, there was a public news yesterday when they looked at the iPhone 5, $3 content on that.

Unknown Analyst

So I would say the release is just quite demure. It really depends on the application.

Unknown Executive

In mobile, we don't -- we see a dual stream, 3 stream. As some of these standards are getting pushed up, we're seeing -- if there are $2, allows you to push the gigabits through. Right now, you would expect it to emerge at about 750 megabits. So for us, there's an ad or attach to it, and it really comes down to what becomes mainstream. So I think you're going to see, basically, 2 categories. You're going to see here's the minimum requirements, and then for those end applications where they want to increase the media interface, if you will, it's going to command a little bit of a premium. I think for us, it really kind of depends on which bands we're playing in, as Amir mentioned. $8 or $2 may see it as exclusivity 5-gig, although it does look like they would go a little bit backwards on the 2.4 as well. So I would expect we'd see at least a 30% premium as the streams go up. But for us, it's a doubling of the content initially, and then there's going to be some incremental attached to premium devices.

Unknown Executive

Let's move on. David.

Unknown Analyst

Is there any difference on your application or the applicability -- or is there any difference in the applicability of the technology versus compressed and uncompressed, like 5 gigahertz or 60 gigahertz in terms of wireless?

Amir Asvadi

5 gigahertz or 60, technology-wise, we're addressing the part. On the 60, which is the newest standard, we start looking into it. Yes, there's going to be a difference.

Unknown Analyst

[indiscernible] some competition in terms of Skyworth. Skyworth also has some silicon germanium stuff, so why can they not just do what you guys are already doing?

Amir Asvadi

I mean, again, the technology is available. It comes down to the design expertise, that the knowledge we have about this integration, without going through too much of the IP. We manage to master that technology using the silicon germanium.

Unknown Executive

We are using a modified SiGe process, as well, to enable this.

Unknown Analyst


Unknown Executive

In New York, it looks like they like what we're doing.

Unknown Analyst

And the SiGe, is that your own fab, or you're using an outside source?

Unknown Executive

Yes, outside source.

Unknown Analyst

Which one?

Unknown Executive

We have multiple sources there. I think that's the best way to address a mobile market. You don't want to be tied to any one in particular.

Amir Asvadi

Today, we have qualified 2 different foundries for our station.

Unknown Analyst


James J. Peterson

Thank you. Let's move on with [indiscernible]

Amir Asvadi

All right. Thank you.

Siobhan Dolan

Good morning. My name is Siobhan Dolan. I am Vice President of Business Development for aerospace from Microsemi Corporation. Today, I'm going to concentrate on the commercial aviation element of that segment. And I'd like to go through some of the exciting opportunities that's going to present to us right across our product lines in Microsemi.

First of all, having a look at the market, where is it? How is it looking right now? Some of the major market drivers right now, the airlines have managed very successfully to manage capacity increase, passenger load factor, over the last decade and the continuing of such continued battle over the next number of years. In fact, some of the newer aircraft platforms are already doing that very successfully, like the A380.

Profitability is hugely important in this industry, and airlines manage to return to profitability in 2010, continuing that trend over last year and again into this year. Since 2000, air traffic has increased almost 50%. Their fuel has only increased demand only by 3%. So air traffic demand is set to increase and double again over the next 15 years. So there's going to be huge emphasis right now in terms of environmental efficiencies and through commercial aviation productivity or airline productivity.

Fuel efficiency has got a huge, great emphasis, or greatly impacts our future profitability or airline profitability. And oil prices are forecasted by 2030 to reach the 2008 levels of $140 per barrel. And that will drive airline costs. It will almost represent 40% of the airline costs in that time period. So a lot of technology drivers right now is focusing on how do you reduce fuel burn and do it in an eco-friendly way, environmentally efficient way, and you'll see that throughout the various discussions we're going to have over the next platform and next-generation platforms.

Commercial air. So we've seen Boeing and Airbus. I'm sure you've all seen the numbers represented this time last year in terms of market outlook, in terms of the number of aircraft over the next 20 years. 20 years seems a long time away, but I guess we can -- it's pretty normal to look that far out for this industry. They are pretty much talking about 30,000 new aircrafts over the next 20 years, a value of $3.5 trillion. So Microsemi is very well positioned to benefit from that type of growth and that type of market.

These guys, the main OEMs, have got 7-year increases in the backlogs, so 7 years. So they are faced with having to increase aircraft production -- or aircraft deliveries from 1,200 aircraft out to almost doubling that in the forecast period 2030. And there's a huge challenge associated with it for both the OEMs and the basic supply chain. So Microsemi, as the electronic company is going to aircraft, we're capturing a growing percentage of value of that aircraft. Traditionally, we participated in the Onyx Systems, which was represented by 12% the overall value of a jet aircraft. And now as the increasing content, the increasing electrification of the aircraft, we're also participating in the electrical power systems, which adds another 14% that we are now positioned to go address. So about 26% of the total value of the aircraft we're -- Microsemi is addressing in those 2 main segments.

Avionic systems for Frost & Sullivan is scheduled to grow at a compounded annual growth rate of 11% over the next -- from 2012 to 2016, driven by increased number of aircraft in production but also some of the regional modernization efforts like NexGen [ph] of the United States and Ceasar [ph] in Europe. The technology drivers for our products, higher speed, higher data speed, wider bandwidth, increased connectivity requirements on the aircraft, and of course, size, weight, power and higher levels of integration, are always going to be considerations in terms of reducing fuel burn and reducing aircraft weight.

The major area of growth that we see in this industry is the electrical power systems. The adoption of more electric aircraft and the move towards all-electric aircraft, where Frost & Sullivan are again reporting something like a 14% compounded annual growth rate, they're going to double the TAM revenue from $10 billion in 2011 to 2016, which is a $20 billion TAM. Technology driver is here affecting Microsemi. Power optimization, you've heard Jim Aralis talk about that a little bit, it's getting huge emphasis in Microsemi but also from the industry, the airline industry.

Reliability, safety and cost, as you're generating more power, you need to do so in a reliable way and in a very safe way and in a cost-efficient way for the airliners. Power of quality and thermal control, and of course, environmental regulation have huge emphasis and huge drivers in terms of the technologies being adopted on these future-generation aircraft.

So Microsemi's content. Typically, you'll see the airlines are very cost conscious. They have been adopting a lot of commercial off-the-shelf technology. That is not really how Microsemi plays. On flight-critical applications where performance and reliability are crucial, that's where we excel. And that's where our content, it's driving our content and current generation aircraft. And you'll see cockpit avionics and cabin management systems and also engine control systems. We have huge content. We're, in fact, market leaders for our programmable logic devices and also our TVS devices. And Microsemi's uniquely positioned with those product lines. We offer redundancy, and we satisfy the redundancy need for these OEMs. So we have different or dissimilar technologies we can offer and are used in both the primary and secondary systems on the aircraft.

Not only in terms of our programmable logic devices and our TVSs, we are growing content across our product line in Microsemi over the last number of years. So we have a very interesting content from all of microwave and diodes on the avionic systems onboard the aircraft.

We are increasing our content on a more -- we're increasing significantly our content to the more electric aircraft on key systems like actuations. So there are now electromechanical systems onboard the aircraft, and also in terms of the power generation distribution and conversion systems. And those are areas that are going to be increased in significance from Microsemi and for where we're really targeting to increase our content.

So in terms of Microsemi SAM. We're looking at 12% compounded annual growth rate over the next forecast period, 2012, 2016. That's driven by the increased number of aircraft that's going into production you have seen at the earlier slides. It's also driven by our increased content. Microsemi's successfully increased our content to the more electric aircraft. And those aircraft are now entering into service, like the 787 or the A380s. And of course, the long-awaited A350 is coming into service in 2014.

Going to market. And you've heard Russ and some other speakers talk this morning about our efforts in terms of channeling and developing partnerships, long-term strategic partnerships, with some of the key market makers in our segments. And there's no -- there's no more greater evidence of our success in doing that than in this actual segment, in this vertical segment. We are engaged directly with the airframers. We're working very closely with Airbus over the last 2 or 3 years. We're also working with the major guys in terms of power generation, power conversion distribution, the engine control guys. And even now, as the increased power generation capacity aircraft, we're now speaking directly to the engine manufacturers, and partnering with them in terms of advanced power electronics for next-generation aircraft.

So we're leveraging our existing strengths in terms of FPGAs, in terms of TBS and expanding our portfolio, right across from mixed signal capability, we're developing technologies, so gate driver technology. We're integrating memory. And we're being hugely successful in terms of adding value to our customers in terms of the application of the total solution, but also increasing for Microsemi the dollar per box and the value creation for us as a company.

Growing contents and capabilities. Traditionally, you've heard us speak that Microsemi content on the power optimized aircraft or the side-by-way aircraft with approximately about $100,000 per aircraft. We've more than doubled that on the more electric aircraft in the last number of years. It's usually a 5- to 8-year design cycle. So now we're beginning to see the impact of that in terms of the successful design ends in terms of the more electric aircraft that are coming into service, and we're looking to expand that further.

Just to give you an example of the more electric aircraft and the type of content we have, for TVS devices, with anything from 2,000 to 5,000 TBS devices throughout the aircraft. As you see more composite material used on aircraft, of course, they're more susceptible to lightning strike. And that's where Microsemi transient voltage suppressions are widely used on the critical flight control applications.

If you take a look at our programmable logic devices, with more than 1,000 FPGAs that are designed in on A380 and 787, and we are used -- obviously, we are market leaders in that area. We have enhanced reliability built-in for single event immunity offset. We offer huge flexibility in terms of number of devices that we offer, both anti-fuse and flash technology. We have different levels of screening, different levels of packaging. And nobody can beat us in this space, not just in the current aircraft but also in future generation.

Where we're beginning to expand our product is in our power area. So power switching devices, power modules. Expanding our content across analog mixed signal and memory devices. And you'll see over the next couple of slides, we are positioning ourselves right now to be able to increase significantly on the all-electric aircraft as the next wave of redesign and engineering is taking place, which is going towards the all-electric aircraft by 2020.

Okay. What are those growth issues? Some of the growth initiatives, as I mentioned, the next phase of technology development is trying to meet the requirements of the all-electric aircraft. We have customers coming to us now in the marketplace, some of these market-makers, as we refer to them, asking us to help them in terms of the huge challenge that they are facing in terms of meeting the requirements of the all-electric aircraft. Some of those problems are outlined here on the slide. Power utilization of electric aircraft. It's one thing to generate power, but how do you utilize that power in an efficient way? Variable frequency generators and resulting distributor architecture, multiple voltages, multiple loads throughout the aircraft, how do you do that efficiently?

High performance and reliability are essential. A lot of the technologies that are in use up to now has been adapted or enhanced for reliability. Now these guys are looking for us to design reliability into our components. And that's where Microsemi is excelling in terms of we are now engaged in the early stages of the design cycles. We're able to align our technology roadmaps to be able to meet those requirements of the industry.

And of course, higher levels of integration. Microsemi is not only known as it's got huge breadth and depth in terms of our components, but we have the capability to move up along the food chain, right in line with what the industry is requiring, up to component levels and subsystem level. So some of the initiatives that we're working on with the key industry players, so we've got -- we're engaging with an industrial group called DECWG, the Distributed Engine Control Working Group, in terms of engine control, next engine control systems. Right now, we have a very strong leadership position on the full authority engine control units.

As the aircraft moves more electric, you're going to see that they want to move the power generation system closer to the engine, higher-temperature environments. As you move the generation system closer to engine, you have to move engine control systems closer. Right now, there is no solution in the marketplace for some of these high-temperature FPGAs, high-temperature TBSs. And they want to partner with Microsemi and codevelop that technology to allow them come into service as they're required to do by 2020.

Some of the other areas we've got. We are now partnering with a major -- one of the top 3 engine manufacturers in the industry to develop engine start and power frequency generation systems. The goal here is to move these systems right on to the engine. Very harsh environment, high degree of vibration with very high temperatures. We need to develop technology that is able to operate at 200, 250 degrees C. Multiple voltages. We need to be able to -- high power density. Much higher power is 250 kilohertz amperes in these kinds of systems. So Microsemi's Jim Aralis outlined earlier, we're already starting. We're already working with the basic elements, the basic components where we have high temperature, the ability of switching device with silicon carbide and gallium nitride. We're developing and already in development and working on the driver, gate driver technology, in order to be able to operate those devices. We are now working on high-temperature TBSs and various other technology. And what we're going to try and do is leverage not just the components but our ability for integration. We're also -- we already have in Microsemi system capability with 25 years experience in space industry in terms of power supply systems. Now we're going to try and leverage that and bring ourselves up the food chain. And that's exactly what our customers are looking for. They're looking for partners who can deal with these kind of volumes, deal with this kind of power levels and these kind of complexity in the systems with these higher-temperature technologies.

Another major area for Microsemi, you can generate the power, you can distribute the power, but then you've got use the power in various loads throughout the aircraft. So actuation, actuation systems are already electromechanical, the next challenge is to move to all electric. How do you move it so that you're comfortable with the technology that can meet 150,000 flight-hour operational? You need to go back to the design phase. You need to design for that level of reliability. And we are now working with Airbus on a very significant European program called Actuation 2015. We are helping to find that system-level architecture, not just at the power stage where we have content, but at the PDE level, power drive electronics. We are now looking to expand our content from the power stage from the switcher to integrating the driver to integrating a motor control in terms of our FPGAs or our mixed signal, analog mixed signal devices in terms of ASICs. We're going to integrate and build the entire system, and we're helping them gain the efficiencies that they need from those systems and demonstrate that reliability that is required.

As both the actuation systems, the technology goes up to probably about 10 kilowatts, we can scale that up, up to 50 kilowatts. But it's then we've got huge content, increasing our content to power distribution [indiscernible] onboard the aircraft. So huge potential growth for Microsemi, areas of where we're helping customers, growth initiatives where we're actually helping customers solve the difficult problems at the earliest stage of the design cycle.

And avionics. Avionics has always been a huge, important area for Microsemi where our content -- driving our content. We continue to map our technology roadmap in terms of wide band gap technology to meet the higher frequency and greater bandwidth in terms of the avionics systems. We're looking at innovative packaging in terms of our TBS technology and also further integration. And you've heard about SmartFusion 2, some of our integrating more analog and memory with our programmable logic functionality on our chips.

So all-in-all, what does this mean for Microsemi? Our SAM, right now if you take a single-aisle aircraft we're taking as an example on a more electric aircraft, our SAM across most of these -- all these growth initiatives I've outlined, it's approximately $140 million per year. These initiatives in moving the technology to market will increase our SAM to almost $700 million on just one single-aisle aircraft platform. So huge potential for Microsemi as a solution supplier adding value to the customer and increasing our -- or hugely increasing our SAM.

Competitive landscape. Yes, we do have competition, but most of it is at a component level. These guys such as those we compete within specific applications, they are not going after the higher-reliability flight critical applications. That's where Microsemi plays. We differentiate ourselves in the scale and breadth of our product line. You'll see these guys, some of these guys offer FPGA but they don't offer anything else. Microsemi has the entire tools in our bag to be able to offer system solution to our customers. Significant footprint already with these customers. Remember, some of these key players that you'll see in a moment, they already play in the military marketplace, so we have ready significant footprint. Our heritage and our -- has come from defense and military applications. And these guys are going with those in this commercial aviation marketplace. Of course, inherent in growth reliability, single event immunity offset is built into our devices. It gives us a huge edge over the competition and competing technology. Our technology roadmap is closely aligned to the needs of the industry, wide band gap technology, higher temperature, higher levels of integration. And it's usually recognized with our target market.

High reliability heritage in a very regulated environment. These guys absolutely have to prove the technology and the maturity of the technology before they can fly in an aircraft. And Microsemi either has the technology already developed and matured on military applications or we have the capability internally at Microsemi to test and prove that reliability.

Obsolescence management. We are very used to supporting programs over long period, long life time in space and military. So 15 years is normal. And that is a huge advantage for the commercial aviation guys. It takes 5 to 8 years to design. By the time you ramp up production, you seriously do not want to consider -- these guys do not want to consider managing an obsolescence problem.

So Microsemi, overall, has established ourselves as very much a credible solutions supplier, partner for these customers in this space.

So taking a look at the customer base. It's very consolidated marketplace. It's consolidating even further. We've all seen UTC as successfully completed acquisition of Goodrich. That will continue. So the industry is consolidating the electrical power systems to the extent of 70%. In the avionics element, it is consolidated to the extent of 60%. We have now deepened our relationships and engaged in a very long-term significant strategic relationships with some of these key players. And we are giving solutions, developing solutions with these guys, in conjunction with these guys, we are implementing and effecting system architecture and in terms of aligning our technology roadmaps within. So we're very well positioned in terms of growing our business in line with the airline growth projected.

Okay. How does our revenue looking like? We're looking at forecasting double digit both on the avionic segment, about 12%, right in line with the industry average. But if you look at 21% compounded annual growth rate and you're looking at electrical power systems, that's mainly driven with our increased content for all-electric aircraft. They are coming into service, and they're ramping up significantly over the next number of years. So we're going to have -- we're very excited to have them participate in that growth with Microsemi.

Summary. Microsemi is very well positioned to be a key partner on both existing and future commercial aviation platforms. We have key growth initiatives that are based on double-digit growth applications. We're no longer just a component supplier. We have very much repositioned ourselves and regarded in the industry right now as a solutions partner. We have impressive technology and capabilities right across our portfolio, And from semiconductor material to packaging integration and tests, all critical elements in terms of maturing the technology for this segment. At Microsemi, we have the scale and the breadth to drive the best counts of ownership for this industry, and that is recognized by our customers.

And that's it. Thank you very much for your time.

James J. Peterson


Unknown Analyst

What are [indiscernible] participation on [indiscernible] report?

Siobhan Dolan

The new electric aircraft, so it's A380 and the 787, we have increased almost in line and parallel. We've got huge content in both.

Unknown Analyst

Differential between the 2? 737 and A380?

Siobhan Dolan

Both electric aircraft are pretty much in line with our -- they pretty much lack in content because we're using the same type of systems, more electric aircraft, so they're very much in line.

Unknown Analyst

And looking beyond that, the newer aircraft that are coming out like in the next 5, 10 years?

Siobhan Dolan

What we are looking at, in terms of initiatives we're now working on, we're looking to increase by almost a factor of 10, our content to the all-electric aircraft. And we feel we're very well positioned to do so.

Unknown Analyst

Yes. Just a couple of questions. One is just -- can you give us just a rough idea of how much of your Aero business is system power versus the -- I'm blanking out right now -- system versus...

Siobhan Dolan

System versus avionics. About 90-10. 90% avionics, 10% power electrical systems.

Unknown Analyst

Okay, okay. And if you gave us an idea -- you talked a lot about new aircraft, but I know you've got a percent of your business that's retrofit or referred. Can you give an idea of maybe that split?

Siobhan Dolan

Well, the retrofit market is not hugely important. The avionics section is going to be a higher percentage, so that will pretty much -- the retrofit market and the upgraded avionics systems will really drive our content on the avionics side. So that's a 12% compounded annual growth rate. On the power electrical systems, really, there's no retrofit element of that growth.

Unknown Analyst

Okay. So most of your growth comes from new aircraft in that business?

Siobhan Dolan


Unknown Analyst

You talked a lot about the plane side. What about the ground side, airports and avionics [indiscernible], if you could give us an idea.

Siobhan Dolan

We have huge content in ground systems. So air traffic management, air traffic control systems. In fact, a lot of our RF avionics, RF diodes and transistors and the bipolar technology and also now moving towards gallium nitride. We have huge contents on radar applications, primary and secondary radar. So we're looking to increase our TAM significantly in that area as well.

Unknown Analyst

Could you talk about your current SAM and your potential SAM that you brought up in the slide? Because if Boeing and Airbus already designed these planes and how the systems are going to work, how is it that you're going to get to that potential SAM because -- if the design have already been made?

Siobhan Dolan

Well, the design is not really done. In terms of the all-electric aircraft, we are now at the beginning of the design cycle. That is why -- so the goal and target for all this all-electric aircraft entering to service is around 2020 to start introduction into service. So right now, the design cycle is just in early stages. They're still defining their system-level architecture in terms of how they're going to be the requirements that they need in terms of distributing that power generation and power distribution. So optimizing that. So right now, we're at the beginning stages of that design cycle. They have some work done in terms of the more electric aircraft, but they need to get to the next level in terms of the all-electric aircraft. There will be no backup of the electromechanical and hydraulic over the next generation.

James J. Peterson

Great. This is now break time. We're running a little late, so we want to be sure that's 10 minutes [indiscernible].


Russell R. Garcia

So moving on to our space market solutions, we have Esam Elashmawi. He is Vice President, General Manager of our SoC group. He's handled a lot of devices. He can tell you about it. Esam.

Esam Elashmawi

Thank you, Russ. And to those on the webcast, we're starting again. So I'm going talk about the space market for Microsemi and all the growth initiatives that we've employed in that market.

To start off with, let's take a look at the space market. According to Teal Group, there's about a 4.5% to 4% increase in number of satellites launched on a yearly basis. Depending on where you take that curve, it's about 4% of 4.5%. The majority of that, you can see, is civil and commercial satellites.

Now let's contrast that with the growth within Microsemi for the satellite business. If you take a look at Microsemi, we've been doing a CAGR of about 12%. It's about 3x the number of satellites that are being launched. And most of that, you can see it's happening between 2011 to 2013. So just recently, with the last year and the upcoming year, there's even more growth. That's a very predictable market. We know what's happening there. We have a leadership position in the space market.

So let's talk about what those growth initiatives were that's resulting us growing faster than the market itself. So it goes back to the go-to-market strategies that you've heard. Many of us have been talking about this. Russ talked about this as well. Because of our leadership position, we are entrenched with the market makers. Everybody that matters in the space market, we have a relationship with them and a partnership with them. It's a very close relationship because of our leadership position. We've got a wide portfolio of products in Microsemi of devices that are space hardened or radiation hardened or qualified for space applications. Through that, with our go-to-market strategy, we've developed more and more applications that have allowed for more use of Microsemi. And as a result again, more dollars per box, which is a value creation.

So let's dig into that in a bit more detail. Who are the market makers that we're engaged with? Well, here are some of them on the list here. And it's not only in North America and Europe and Japan. But also, we've got a very strong international channel where we've got good market share also in Russia and India. Why are they loyal to Microsemi? What is it that creates this relationship between Microsemi and these market makers? Well, it's our heritage. It's the breadth of our products. It's our commitment to this space. It's our leadership that we have in the space market. So let's talk about some of the trends in the space market. And what I'm going to go through later is talk about how we're exploiting those trends in Microsemi.

So the first trend has to deal with commercial satellites. By commercial satellites, I'm going to satellites that are launched for revenue purposes. The first trend we see is more and more imaging requirements in commercial satellites. We're also seeing a trend where the governments are starting leverage commercial satellites for their imaging requirements. We're also seeing now a redesign of platforms for satellites. Now this doesn't happen on a regular basis. It happens in step functions. Once every 7 to 10 years, they'll come back and say, Hey, we're redesigning our buses moving forward. We're in a perfect position at Microsemi with our engagements and our broad performed of products to take advantage of these redesigner platforms and to increase our content per platform. Now we'll talk more about that as well.

The other trends, more and more digital functions within satellites. The easiest way to think about this, if you have a pipe between the satellite and a ground station, that pipe and the bandwidth doesn't change over time. So it's not changing very fast. So if you want more information to come to the ground faster, you do more of the processing on the satellite itself. That's the easy way to think about it. So as digital content increases on satellites, we're also poised to grow from that as well. And we'll see some of the initiatives we've put in place, and that's why, again, we're growing at a much faster rate than the CAGR on the satellite market itself.

Space exploration, common knowledge, that there's been declining budgets for NASA for space exploration. But because of our strong international channels, we're actually seeing that pick up in Russia and India. Those budgets have gone up, although it's still flat in Europe and Japan, so that hasn't affected us that much.

So let's talk about the space market. With TAM, we'll continue to grow as more and more electronics to grow into the satellites. In our SAM, you'll see that's growing at a slightly faster rate. And there's 2 aspects of the SAM here. You can see from 2014 and beyond, there's a huge jump in our SAM. That has to do with the products that are in R&D today that are being released that will be adopted. It takes a few years to be adopted in the space market. You'll see a huge jump in the SAM as a result of the new products that are being developed. But a lot of our initiatives that we employ already are creating the SAM to increase today. So you've already seen that we're growing about 3x faster than the market, so that's a big deal. What is it that we've done? And why will that continue?

So let's talk about the PLDs. In the space market, we have a leadership position in the PLDs. We are the dominant player in programmable logic in the satellite market. Our competition is ASICs. What you see on the top right-hand side is a graph that came from a prominent ASIC vendor that shows a number of ASICs being developed in space over time is diminishing. Why is it diminishing? It's because programmable logic is taking that business.

Two years back, we've put an initiative in place that says we're going to go after more of that ASIC business. And the type of ASIC business we're going after is what I refer to as high-volume ASIC per satellite. Now high volume in satellite isn't the million of pieces that you see on the commercial application but high-volume ASIC, there's a business there. And traditionally, that's where people would have gone to ASICs.

When we put together at Microsemi a program about 2 years ago that talked about our ASIC life program, we're going to go after high-volume ASICs for satellites. And we're winning that. We're winning that today. And the proof of winning that is if you take a program like Iridium NEXT, that most of you know about, this is probably one of the largest constellations in the space program with 81 satellites. With 81 satellites, you can imagine why would you use a programmable logic, you're going to do ASICs for space. Well, that's a program we've engaged with the market makers. We've shown them our value statement, our capabilities from programmable logic and from developing ASICs for space. We won that contract. It's multimillion dollars over the next -- we've actually started shipping some of it. In the next 2 years, we'll be shipping more of that. So we took the toughest program out there and proved that we can come up with a business model that can now go overnight, just some low-volume ASICs, but now we can win high-volume ASIC business away from the competitors. So that's working. That was one of the initiatives.

The other is we're talking about trends in the imaging for satellites. More and more imaging is on satellites. We took one of our industry standard products, which is RTAX, made minor tweaks for allowing for DSP capabilities, showing our customers with our go-to-market strategy how to do DSP and imaging functions with our programmable logic devices. And we're able to now win more and more in the payload. We told you a little over 1.5 years ago, we're going to go after the payload market. And we're winning designs now and sockets in the payload market. So that's working as well.

Also, I talked about there's a trend now of people redesigning platforms. Why? Well, satellites are changing. Satellites have to be more versatile. Some satellites are getting larger. You're putting more content on it. That's more weight. Well, if you have multiple buses defined or designed for multiple satellites, what we're seeing at space systems [indiscernible] Lockheed Martin Aspen, is they want to redesign these platforms using the latest technology out there. They have fewer number of boxes on their side that can service a larger number of different satellite requirements, where we're positioned very well in Microsemi with the market makers that we are now engaged in those redefinitions of those platforms. And as a result of that initiative that we put in place to be part of that, our contact per bus, which was, on average, about 150k to 250k, is now more than doubled to 300k to over 500k per satellite -- per bus, I'm sorry, that's being designed for a satellite. Why is that? Because we leveraged the breadth of our portfolio. We leveraged our go-to-market strategy with our partnership with the market makers. We've shown them how to best use our components, and those initiatives are working as well.

Also, we're seeing a shift towards higher ASP devices. There are satellite programs out there that no matter what they do, they want the highest grade of material. So we went and put some initiatives in place to provide higher graded material for the screening, for the packaging. And those products with higher ASPs are now being deployed in multiple programs with the bus manufacturers and with military and classified programs as well.

So these are some of the initiatives that we put in place that are resulting in us to go at a faster rate than the CAGR on the satellite market. We will continue to go that way, and that will pick up even more as we introduce the products that are currently in development.

So it's not just about our programmable logic. It's about leveraging how we show our customers how to apply the breadth of our products into different applications within the satellite market. With our hybrids, we're seeing more adoption with our point-of-load solutions, hybrid with DC-to-DC converters for space, our discrete devices, our leveraging of the fact that we are now engaged with the satellite architects and the system architects and not only providing a component solution but a system level solution that's leveraging entire breadth of the Microsemi portfolio as well.

We moved away from providing custom power supplies to now you can go into our part numbers and order a standard power supply for a satellite. And being engaged again with the satellite architects will allow to sell the breadth of the Microsemi portfolio as well. And again, we've always been involved in mixed signal ASICs for space. We continue to grow that market again with our levers. So all of these initiatives have why we see an increase in the CAGR for the space market.

So applications, what are examples of these applications when we went to our go-to-market strategy? Well, there's lots of applications in satellite, everything from tracking telemetry and control and data handling. We've got altitude and orbit control, as well as communication payloads. Lots of different applications that we've gone in, work with the market makers, and here's the best way to solve your problem with the Microsemi components.

So what are examples of that? Again, if you look at the electrical power system, whether you go to telemetry or peak power tracking, you can see the breadth of Microsemi components that are being utilized, everything from discretes to programmable logic and hybrids. So we take that, we work with our market makers, and we get more content per box. Value creation.

Now just if you go into details in telemetry tracking and control, the same story applies. You take that into RF communications and payloads, the same story applies. Again, more breadth of Microsemi per box. If you look at Digital Communications, if you look at the filter and extract, these are duplicated numerous times within the satellite. If you go with an ASICs, it's replicated in multiple times. Well, we're engaged now with our products, whether they be our ASICs or our programmable logics. Imaging payload, the same story applies. So it's the go-to-market strategy that we've employed that's allowing us to grow the CAGR.

So in summary, we've got a very strong leadership in space. We're the dominant player. We're engaged with all the market makers. We're leveraging the breadth of our products. We're winning against the ASIC. We used to be a low volume. Now we're winning even the high-volume deals against the ASICs. The mix is shifting towards the higher ASPs and by leveraging our heritage and providing simple solutions where we're expanding our coverage within these companies, within satellite vendors.

Also, not to take away from the long-term initiatives that we're developing new products specifically targeted for this market, new hybrids, new discretes and new programmable logic targeted more and more for the payload market.

So with that, I'll leave this slide up here. You can see the heritage of where we're at, just some of the programs, again, emphasizing our leadership position. And I'm open for questions.

Unknown Analyst

What's the total dollar content you think you can have in payload at this point?

Esam Elashmawi

We went from, what was it, 150k to 250k, roughly, to 300k to a little over 500k now. It's been more than doubling.

Unknown Analyst

What's the total opportunity there?

Esam Elashmawi

For just the payloads?

Unknown Analyst

Just the total available market. And then what's the -- how much of that -- do you think you can take 70% of the available market or...

Esam Elashmawi

So of our total space, you can pick a satellite and break it into bus and payload. In the past, the bus used to be the majority of our percentage of our sales. It used to be closer to 70% and 80%. We're very small in payload. From the initiatives we've put in place, we're seeing, actually, a shift in that. Now we know we're growing our payload -- our bus market because now we're in larger content per box. At the same time, we're growing the payload market at a much, much faster rate today. Hopefully, that gives you a feel of where we're at without giving you exact numbers.

Unknown Analyst

Just a quick question. I know that maybe price is not a big deal for markets like this, but even when you're trying to replace ASICs with FPGA, how would you compete on -- or how do you stack up on speed and performance, which have historically been associated with things like ASIC?

Esam Elashmawi

So you can take the ASIC market and break it up into 2 segments. When it comes to performance and speed that we can meet with our PLD, we will win them today on the low-volume or high-volume now with our new program so we can go after it. There are applications where the ASIC has an advantage for speed and density. We go after them either with our own ASIC programs or with the next-generation RT/PLDs [ph] that we're going to be introducing to the market. That's part of the SAM expansion that you saw in 2014. Okay?

Esam Elashmawi

So with that, I'd like to introduce Charlie. Charlie Leader is going to talk about the security market, things you want to know and things you may not want to know. He'll share that with you.

Charles C. Leader

Thank you, Esam. Good morning, everybody. I'm Charlie Leader, and I'm Vice President and General Manager of Microsemi's Power and Microelectronics Group. And I'm going to be talking to you today about the bad guys and what Microsemi is doing to mitigate these threats and hopefully defeat them.

So we're working in a global information grid. I think this is probably a familiar graphic to most of you, and it doesn't really matter whether it's DoD or whether it's the commercial world. The concepts are the same. It's all interconnected.

And so we're going to talk for a few minutes about what are the major macro trends, what's driving the defense security environment. Number one is, clearly, by far and away, the biggest issue is that things are becoming ever more interconnected. And the acceleration or the pace of that interconnection is not only a huge productivity gain for society in general, but it also represents our biggest security threat with everything being interconnected.

A second significant point is that the evolution of unmanned platforms and the sensors that go on in the high-speed, high-bandwidth sensors, we're collecting huge amounts of data that have to be protected. That's protected both in transit while it's in motion, as well as protected when it's at rest being stored.

Thirdly, the technology being employed by the bad guys isn't standing still. They're smart. They're motivated. And the solutions that Microsemi brings to the marketplace are uniquely suited to being fast and flexible.

The fourth point, and I think this is familiar to all of you, is that the emergence of nation state actors has accelerated in the past several years. We now have very, very confident nation state actors that are trying to steal our IP, and obviously, for political motivation, are able to bring these tools in the electronic warfare environment to us.

And then lastly, the U.S. has spent a lot more effort for military sales over the past decade. And so to the extent that we're selling more of our frontline systems offshore, that puts critical technology at risk.

So these are not new issues, by the way. I just wanted to give you a brief history of some of the older, what we call, anti-tamper events. We can go back all the way to World War I where the Germans were the first to be able to synchronize machine guns through the props of their aircraft. And the French were able to retrieve a German aircraft and reverse-engineer that, and it allowed the French to maintain parity with the Germans in the first World War in the air.

Subsequently in the '60s, we sold AIM-9 Sidewinder missiles to the Taiwanese. And they had the opportunity, or the unfortunate opportunity to have to fire one of these at a Chinese MiG-17. Unfortunately, the device didn't go off. The Chinese gave it to the Russians. Russians reverse-engineered it quickly, right down to serial numbers and component marking on the individual parts. And that caused the U.S. to have to change its bombing strategy. They had to actually start bombing from a much higher altitude because of that change in capabilities.

Even more recently, I think you remember that the Navy had a collision with a Chinese aircraft, fighter aircraft, off the coast of China. We had to set that EP-3 down in China. We got it back in several wheel barrels about a month later, it had been completely taken part.

And so as a result of these things that are now more than a decade old, the DoD has issued a number of directives that require DoD partners and the DoD itself to integrate anti-tamper on all of our platforms. So with -- the acceleration or pace of these threats continues. I think recently you all have seen the Iranians recovered a top flight -- top-of-the-line RQ-170 drone. They're busy reverse-engineering right now the optics, the electronics, and of course, of external material that makes the RQ-170 a stealthy aircraft.

Kind of changing pace here in the medical area. One lone guy who happens to be a type 1 diabetic hacked and reverse-engineered the operating system for Medtronic's insulin pumps and is able to -- was able to demonstrate change in doses or even shutting the pump off completely. And this is just one guy.

Another example, RSA, one of the top flight security companies in the world, they're responsible -- or their primary business is issuing security tokens that authenticate who's using a particular system. They were hacked. It cost their parent company, EMC, over $65 million to make their customers whole. And their customers are likely to spend between $50 million and $100 million to issue new tokens to their employees and customers.

Everybody knows about Stuxnet and Duqu. I'm not going to go over this much more than to say that the true start of cyber warfare happened with Stuxnet being released.

And so just to summarize the threats, I think some of you may have seen this graphic before. There's a whole range of threats out there and a whole range of actors that are participating in this environment. They range all the way from what we would call a script kiddie, maybe the kid who just got his first personal computer for Christmas, has gone out and retrieved some code off the Internet, and is now able to cause some grief. But the damage to that is very localized and not very big. And it moves through insiders, corporate insiders, where they have a revenge mode, for instance, to damage their employer. And that can be a very significant threat.

Then you get to people that are out there like hackers that may have monetary gain in mind, and that can be a serious threat. And we get to the folks like anonymous, they're good examples of that. And then there's all the players that are participating in the industrial espionage environment, and that can range all the way from nation states to very talented individuals. And then, of course, the biggest risk in terms of life and infrastructure are, in fact, the nation state players themselves. And there are more of them than you would like to think. We tend to think about the 2 big ones, which are China and Russia, but there's a whole host of other players, including people that we would consider to be our allies.

So what does this mean for Microsemi's defense security business? You can see here on this slide that the TAM is currently about $5.7 billion to $5.8 billion. We expect that to increase to north of $16 billion. So it's growing at a rate of about 15% to 16% annually. Similarly, our SAM, the served available market here, is growing a bit quicker than that. It's actually growing at about 20%, or a little bit north of 20% a year, currently a $680 million, $690 million business per year. And we expect that to be about a $1.6 billion business in 4 years. And again, as it has occurred in the other presentations, we are engaged with the market makers.

In our case, in the defense and security environment, that tends to be companies like Lockheed, Raytheon, the Northrop Grumman's of the world. And we offer a highly differentiated solution, some of which I'm going to be going over here on subsequent slides. And again, with the objective of not only providing comprehensive threat mitigation and threat defeat, but increasing Microsemi's dollar content per application.

So how are we -- what are the general things that we're doing to drive our defense security, SAM expansion? The first is that we're using the entire Microsemi technology portfolio to address these security threats.

Secondly, and most importantly, we're assembling, I think, a world-class team of security experts and micro electronic experts to address these threats.

Thirdly, we're forming strong alliances with key industry partners and key government partners. It's an axiom in the defense security business that if you're not trusted, you're not going to even find out what the threats are unless you have an opportunity to solve them. And so Microsemi has an extremely strong trust relationship both with key government partners, as well as key industry partners.

And I'm going to change the wording on the next pull a little bit to say that, as is the case in many of Microsemi's businesses, we tend to address the toughest threats. We want to go after the ones that other people tend to stray away from.

And lastly, and you've heard some of that in Esam's presentation earlier, our portfolio, our technology portfolio, is uniquely suited to address a threat environment that's changing on a daily basis. Our PLDs, our FPGAs are ideally suited for that task. So the way we are addressing this is we have more than a handful of initiatives. I'm going to talk about 5 of them today briefly. And we'll start with the SmartFusion 2 FPGA or PLD. And one of the reasons why this is fundamentally important to us is that it is, in our opinion, the most secure programmable logic device on the market today. It acts as a root of trust in these systems. And basically, what a root of trust is, is it determines that whoever is using the board or the system is actually authorized to do so. That authenticates the user.

Our second major initiative is in the area of developing an integrated suite of firmware and software and IP cores that can sit on top of those FPGAs that provide additional security functions that are important.

The third initiative is in the highly secured storage area. We'll show you a slide on that as well. Here, we're not talking about commercial solid-state storage, we're talking about high-end DoD and intelligence applications where protection of data at rest is critically important.

Then the next initiative that we'll talk about is secure timing and navigation. As you've seen in a couple of the slides that were presented today, GPS is hugely important. Timing is hugely important. And so we make a range of products that protect not only the location data but also the timing signal that comes from GPS.

And then lastly, we have historically been a leader in the threat scanning area, the body scanning area. And we continue to lead technologically and from a market perspective in that area, and we'll touch on that briefly as well.

So talking about FPGAs for just a moment. We have the world's best secured FPGA, bar none. And the reason that we have that capability is because of our secured flash controller, the secure encryption engine and the secured key management that is actually designed into the FPGA itself. Now on top of that, we've designed a suite of additional products that customers can layer in. So you have security in layers that includes cryptography, cores, that can be put on the FPGA, as well as firmware that will prevent tampering with the FPGA itself. And so there's a number of mechanisms that have to be covered there.

And then lastly, we also have developed software suites that are intended to protect the application, the applications that are running on the FPGA. So the result of that is that we have between the most silicon and the products that we can put on top of it are relatively bullet proof, in fact, very bulletproof programmable logic device.

I'm not going to go over all of the features on this, but it's also worth pointing out that it doesn't do any good to have a lot of security on an FPGA if it runs so slow that it brings your customer systems to its knees. And so we spend a lot of time developing the accelerators necessary to run these encryption applications, for instance, very quickly, so the customer doesn't see a huge difference in their system performance.

Here's another example. This happens to be a communications example. And this, I think, is a great way to portray Microsemi's capabilities in the defense and security market. What this block diagram represents is a secure encryption communication system. On the right-hand side, as you're facing it, a sailor or a soldier will program in a mission that needs to be loaded into the cockpit of a helicopter or an aircraft. And it starts out its life unencrypted. They bring it to the box that you see there that Microsemi designs and builds. And in the upper half of that thing, it takes the data out of the mission computer on the right, encrypts it and then loads it into the cockpit. Now why is that important? If we lose an aircraft, we don't want the mission data and the mission profile to be lost to the enemy.

Conversely, when the aircraft lands, all the data that was accumulated by the aircraft, whether it happens to be the aircraft performance, the route that it flew, whatever it happens to be has to be unencrypted and restored on the mission computer on the right. And so Microsemi is unique in the industry in the sense that we have multiple divisions that you can see outlined across the horizontal axis that all contribute to being able to build the box that virtually nobody else in the industry has the capability to do.

We'll talk about SSDs for a minute. This happens to be an example of a 512-gigabyte drive that's designed for intelligence applications. We build these drives in densities that range from 4 gigabytes to 1 terabyte. Given the security and the anti-tamper features that are running on them, they're blazingly fast. And [indiscernible] for weapon systems, we can actually put these things in to field of weapon systems, and they will survive much, much longer than the weapon system itself.

It's also important to note that we're NIST certified for the encryption, and we also have the world's best error correction code. So what that means, why that's important, why it causes us to win is that flash memory, which is a part of this SSD, continues to get smaller and smaller in its geometries and its errors become much easier to occur as a function of temperature and lifetime. And so we found proprietary ways to correct those errors.

And also, another point is that we build these drives in our own factory here in the United States in a DMEA-trusted facility.

Similarly, this is an example of a product that's intended to protect GPS signals, timing and location. It's an encryption module. It uses 2 of our SmartFusion 2 FPGAs along with some other devices. And what's important here is that we're able to take this technology and make it feel programmable. By definition, an FPGA is a field programmable device. But that, in fact, is what will cause us to win here. We're able to take a security threat that has changed over the past day or the past week and cause this monitor to handle that new security threat appropriately as opposed to what existed 2 years ago when an ASIC was designed and [indiscernible].

Like the secured SSD, we also have NIST-certified encryption and also very sophisticated physical firmware and software AT, anti-tamper. If anybody messes with that module that doesn't know how to use that model or isn't authorized to use the module, all the data is gone.

Most of you have seen our threat scanning presentation before. We continue to be a leader in the threat scanning area, both in terms of portables, handhelds and mobile threat scanning. But I wanted you to know what really drives that, what drives our ability to win in this market, is our unique ability to design high-frequency, high-powered mimics and high-frequency RF including up to W band transceivers that form the primary technical content in that L-3 portal that you see there.

Lastly, I wanted to talk to you about the trust issue and the partnerships, because again, this is hugely important. From a government standpoint, we work with all the people that you would expect us to be working with, certainly, DoD including DARPA and AFRL, our key partners. We work with the NSA and we also work with White House Communications Agency, one of our more recent wins in the portfolio.

Also importantly, we're connected with all of the right people in the industry. You can see Digital Asset Protection Association is up there, DAPA, as well as the Amphion Forum. Also Purdue University, which is a hotbed of anti-tamper research and development. So that's a very important interface for us. We work obviously with Wind River. And then memory people, like Spansion and Micron. And then we have a whole host, or a whole ecosystem, if you will, of partners that work with us to bring unique technologies to play for us, including CRI, Cryptologic Research Institute, Intrinsic-ID for puff technology and Spectre Material Sciences for energetics or explosives that will actually give you the final solution if somebody tampers with something.

And then lastly, our key customers are exactly who you'd expect them to be. At the prime contractor level it's the Boeings, Lockheed Martins, the Raytheons, the ITTs, GD. At the embedded level it's the big guys like Mercury Computer, Curtiss-Wright, GE-IP. And then, of course, we have as customers the core services and the DoD, as well as intelligence agencies and law enforcement at all levels.

The last point I wanted to make is that it should be evident, I think, from the presentation here today that I'm talking about defense security but all of these products and technologies that we're talking about here have broad application in other markets.

To give you an example, we're talking to Diebold. Diebold is either the biggest, or certainly one of the couple of biggest, ATM manufacturers in the world. And our secure solid-state drives solve a significant security issue for them, as well as greatly extend the life of their ATMs and reduce the maintenance -- the maintenance cost of their ATMs.

So with that, I'll take any questions.

Unknown Analyst

What are your expectations for gaining share from traditional defense OEMs that also have their own chip operations?

Charles C. Leader

Their own chip operations, well, we're showing -- we should grab probably triple the market over the next 4 years. We expect our share to grow to probably in the range of 15% by 2016. So we definitely are taking share from our competitors, including the ones that have their own chip operations.

Unknown Analyst

And can you give us an update on what you are hearing in terms of sequestration and how that might impact you?

Charles C. Leader

Jim, would you like to deal with sequestration.

Jim Aralis

Sequestration is probably the largest uncertainty facing the United States today. Goes through the back of the envelope mathematics that we talked about, it is for Microsemi would be an impact on or about 2.5%. As you could see, there are other initiatives in the defense and the security are certainly showing a 15% or 20% growth. So I'm not that concerned about 2.5%. I am concerned that the administration cannot address this simple step. But we're going to be facing it, right? And before that, we're going to be facing an election, I can tell you somebody is going to win the election. And then we're going to face sequestration. And then we're going to face who else in Europe has a problem. And, oh, by the way, did China pay a check for somebody? And what about Singapore and Indonesia? There's always going to be something. Sequestration is something that we've seen coming for the last 2 years. We're in that space, we understand it. And I can't control that, but I can control the dollar impact. And we've been investing -- while some of these others who have their fabs and the like -- have been restructuring, which I call dirty towels, they take the blanket, they take it and they throw it to the drier and they re-puff it out and they bring it to Wall Street. The fact of the matter is, while they've been doing that, we've been acquiring technologies and companies and getting prepared for sequestration. And we have initiatives to far, far outpace the growth in those particular areas. Big dissertation of the fact.

Unknown Analyst

Are you doing anything with the national grid and utility companies? There's been, clearly, a lot of press about how tamperproof -- how tamper available they are.

Charles C. Leader

Actually we are. A number of the products that you saw listed just above the FPGA silicon level, the things that we were showing for cryptography and anti-tamper, those firmware and software cores are very transportable over into the devices like PLCs that tend to drive the systems out there in the smart grid. And so, that's not a market that we have attacked yet, but it is certainly in our gun sights at this point.

Okay. With that, I'd like to introduce Steve Swift, who is going to be giving the presentation on our medical products.

Steve Swift

Well -- good morning, still? Yes? Just. I'm Steve Swift and I'm SVP and Business Unit Manager for the Medical Products group. And what I'm going to do today is share with you some important and exciting initiatives that we have undertaken over the last few years and their outcome.

Before I do that, though, I want to sort of position the marketplace. There's a word you'll see often in the literature called telehealth. The idea here is to be able for -- for physicians to be able to remotely monitor their patients without them being physically in the same room. This is being driven by reduced health-care budgets, hospitals are getting squeezed for budgets. In Health Care Reform Act, the last bullet point here on the slide, there's a requirement now that hospitals actually have to pay for readmissions of patients for the same condition within a certain period of time.

And so there's a continual drive now to be able to remotely monitor their patients as they recover from their conditions. There's -- some of the -- you've obviously heard that the aging population, the aging patient dilemma. The whole planet is getting older and fatter, fundamentally. There are 400 million people in the world that are considered to be obese, and 860 million people with chronic diseases. 600 million people are in this aging class worldwide. In 10 years, 32% more people in the U.S. will be over 65, and by 2025, 1.2 billion people worldwide will be over 50.

So the whole population is getting older and chronic diseases are causing -- of aged patients is increasing. We're actually seeing situations where the patient's actually requesting remote monitoring. They feel very comfortable at home. Patients -- it's a known fact that patients actually recover better at home surrounded by their family. And so the patients are beginning to request this technology, because they feel secure. And this gives realtime monitoring and analysis for the physicians in remotely from their patients. And, of course, the Medicare Reform Act, the new health-care bill mandates that there'll be an electronic medical records in 2014 and most of this remote patient data is part of the Electronic Medical Record now.

So the wireless monitoring is actually the future of health care. It has proven clinical value, and there's already studies that have been published that shows the reduced healthcare cost for patients because the patients are staying at home and they're remotely monitored. It's enabling new categories of devices, and some of which I'll talk about in a minute. There's an RF adoption going on. Some of these products -- or existing products, like cardiac pacemakers and defibrillators, initially when they're introduced in the marketplace, didn't have radio technology. So there's an adoption into existing kind of markets, in this existing kind of products.

And the emerging markets are growing. The economies in what we call the BRIC countries, the Brazil, Russia, India and China, are becoming more sophisticated. Health care is becoming more sophisticated in those countries and there's more opportunity for these devices. There's a very large unmet need. There's about, an estimate, the industry estimate, is there's about 40 million people around the world who could use a cardiac device. CRDM, by the way, is an acronym for Cardiac Rhythm Disease Management. And the estimate is about 40 million patients. There's about 1 million pacemakers and defibrillators installed worldwide every year. So you can see, there's a very large unmet need in these patients. And as I said before, the demographics of the patients, the population is aging with increasing healthcare costs.

So here's a graph of the units and shipments in units that reflect the TAM and the SAM. There's a -- currently today, it's around about 1 million devices or so, a little bit under that. And then the SAM -- I mean, and the radio content of these products will actually increase over time as the RF is adopted. The market growth, or the TAM growth is fairly modest, around 6%, 6% to 7%, but the adoption rate of radio frequency devices within these products is actually outpacing the growth of the market at the moment. So we're seeing sort of 28% to 30% growth of the radio content within these devices.

The big customers in this area -- the biggest medical device manufacturers on the planet are St. Jude, Medtronic and Boston Scientific. As I mentioned before, they make up the entire, essentially, the entire content of the world medical devices, about 90% of the market is shared between the 3 of them. Medtronic is the largest, 50% market share roughly. And the market will grow to about $2.3 million in a few -- 2.3 million implanted medical devices in a few years time.

The TAM for the radio is about $200 million and it's growing to about $250 million. But the total silicon content, if you like, of the implanted medical devices is about $1 billion. That's quite a large silicon content that's available. We've started by attacking the new technologies required for the radios and we've made very good progress in terms of securing the sockets for the -- in these major medical device manufacturers for the radios that they need for the future.

So you've seen this slide before, we're engaged with all the market makers, St. Jude, Medtronic and Boston Scientific, we sell them, today, a range of semiconductor devices from surge protection devices to protect the electronics within the implanted device from defibrillator shocks, along with radios and other things. And as you'll see from later slides, there are opportunities for us to expand the footprint of the silicon within the medical device with a very broad portfolio of technology that Microsemi can bring to bear.

This is a slide that shows you currently where we sit in terms of the device ecosystem. You'll see the Microsemi logo all over this slide. We have secured design sockets and wins with Medtronic, St. Jude all of the other smaller players in Europe, and we supply RF modules and RF ICs and surge protection devices and a range of other opponents. High-voltage diodes, high-voltage rectifiers and so forth. And so our footprint is already fairly well established and we have very, very deep and broad relationships with these market makers, which gives us a very prime position to be able to expand our footprint into the products.

One thing to note is that we've produced the -- and now are actually marketing, it's a release for sale in around the world and we're selling the device, the very lowest power radio transceiver in the world today. It's a -- and what's important about this slide in particular is to note that on the left-hand side here is the region we're calling Energy Harvesting. We have a radio and a system that allows us to build, or our customers to build, a system that can be powered purely by Energy Harvesting. We can build systems that have no battery at all. And there's a variety of applications where that's important, it's important for medical devices as well.

So moving into outside the body kinds of devices, we can take that very important low-voltage technology -- low-voltage and low path technology into a very large expanding market for things like -- which are generally markets called machine-to-machine [indiscernible] and we are expecting to ship about $95 million ports or so of that by 2015.

Because we've got the lowest power radio available and the lifetime between battery changes and energy harvesting, we've got -- we're uniquely positioned to be able to produce a very valuable system in this sort of market place. And what's important here is there's 2 things; very low-power consumption translates to either small battery or no battery, but what's most important is that the peak power consumption when the radio is actually operating and sending data back and forth, packets back and forth, the battery is very small.

For example, just to give you a data point, our radio consumes about a factor of 100 less power than the Bluetooth low energy device when it's transmitting. So even if you duty cycle the Bluetooth low energy, you still need a large battery to drive the radio when it's transmitting, which is not the case with our radio.

Capsule endoscopy, something else that we're quite proud of. We produced all of the radio silicon for this company called Given Imaging in Israel who's pioneered this new technology called capsule endoscopy. The goal here, of course, is to eventually supplement and eventually probably replace a colonoscopy with a swallowable camera. I have one of these things, if you're interested in looking at it, you can catch me at lunch and I'll show you what it looks like.

And this is, again, a very large and underpenetrated market. There's about 175 million GI procedures performed every year. And Given Imaging has only penetrated a very, very small percentage of that. So the opportunity here is very large. However, there's time involved in this. The FDA has to be approved -- has to approve the devices, which has actually happened for a couple of the products already but not for the colon capsule. The FDA has to approve it and there has to be insurance reimbursements and adoption by the physicians in the marketplace. So it takes a little time for this -- most of these medical products to ramp. But this technology we already have, we're already on to our fourth generation of the device for Given Imaging. And this is extremely important growth initiative in the future, longer-term, but certainly, a future growth initiative.

So what we're trying to do is replace the wires. So if you look at this slide, you'll see that pulse oximetry is also in patients in hospitals with a finger cuff. They are tethered to the bed. ECG, EKG, monitoring in a hospital bed, patients are tethered to the bed, as are patients with physiotherapy with motion detectors and so forth. That's a very inconvenient thing for both the patients and the physicians. The patients want to roll over in bed or move and they tear the wires off and then the nurses have to run back in and reconnect everybody. That ends up being a very inconvenient and actually quite costly approach.

If we can remove all the wires, which we've successfully done with some demonstration of our radio technology, it's possible for the patients to be much more mobile, they can get up and go to the bathroom. They can roll over in bed and -- the patient can still be continuously monitored using the radio technology. We already have design -- reference designs for pulse oximetry, in fact we had a patent on a pulse oximetry solution, and ECG, EKG, and physiotherapy, we already have reference designs that we can show to our customers on how to use the radio technology to replace the wires.

Here's another -- in 2010, this was kind of an implantable system. It's kind of a defibrillator system. The green boxes are where Microsemi provided solutions in surge protection and some of the switching as well. In 2012, we now have the mixed radio and the RF front end so that we can communicate with the external instruments from the implant. But most importantly, in the future, as we go forward, there will be, obviously, evolutions of all of those products. But we'll also be able to move with -- move forward with the customizable SoC products and very low power consumption and very robust single event upset devices into the controller part of the implantable device as well, which is getting more of the silicon content, that $1 billion with us today, $1 billion worth of silicon content, we can actually capture much more of it. And we have very deep relationships with all of those customers that allows us to do that.

So in summary, we are the market leader in providing wireless health care solutions today. We pioneered semiconductors and medical devices in 1970s and '80s. We're the leading merchant supplier of the very high quality medical grade. Medical grade is similar in some ways to the space quality system. Very high demand for quality requirements, documentations.

And we have 20-plus products and growing, as we develop some of these things further, some of these things further in wireless telemetry and surge protection, and other parts of the -- penetrating other parts of the implanted system, as well as outside the body in other areas. And we've got a customer base, actually quite small, we're in probably 10 customers or so, but we are very heavily entrenched with each of those customers, supplying categories of management with -- including Medtronic, Boston Scientific, and St. Jude.

And a strong growth is to come. This is a fairly long fuse market, it takes a long while to get the designs in and done and ramping. We have been on this path now for a number of years. And there are a number of large applications that are just now beginning to ramp into production. And we have a significant market share, our competitors are really chasing us in terms of the technology. We have the lowest power consumption of radios available for these applications.

So that's me. Any questions?

Unknown Analyst

The RF attach rate -- can you talk about your RF attach rate within IMD?

Steve Swift

There's a two-part answer to the question, there's an adoption rate and an attach rate. And I want to distinguish the 2. The adoption rate is the adoption of radio into the implant. And the attach rate is the external instrument, the key fabs and the programmers that are required in a system. The attach rate, it seems to be from the data that we have, the adoption rate of radios in these devices are growing at about 28% to 30% a year. The attach rate is not yet one-to-one. You don't -- patients don't typically, today, go home with a home monitor, if it's a pacemaker, but they do, if it's a defibrillator, because a defibrillator is a much more serious condition you're trying to control and monitor. So patients with a defibrillator will typically go home with a heart monitor, but the pacemaker will typically not. And in cases of pain stimulation, for example, pain management, all patients have at least 1 control to be able to control the devices implanted in their -- in their body. So the attach rate of external devices is not one-to-one yet, but it's growing.

Unknown Analyst

But the adoption...

Steve Swift

Adoption is about 30%.

Unknown Analyst

Yes, but does that -- eventually, does that go to a 100 eventually? I mean what...

Steve Swift

Oh, in total, it will probably plateau at somewhere around 80% to 85%.

Unknown Analyst

Okay. And just my last question, was there any -- any of you guys made any progress at Boston Scientific with your RF, in terms of penetrating that? I know it's the smallest of the 3, but just curious.

Steve Swift

Smallest of the big 3. We've -- let me say it this way, we are talking to the right people, right now. So yes, we've opened the doors and they are interested in talking to us.

Unknown Analyst

What are the ASP trends? Are the prices actually coming down of the implantables with RF? And what do you expect, if Obamacare continues, what is going to be the reimbursement rates for these devices?

Steve Swift

That's a good question. The radio frequency enabled devices typically occupy the top end of the market. They are the highest functionality ICDs and so forth. So they have the -- highest priced devices. And particularly the implantable defibrillator, patients with an implantable defibrillator are really at risk of sudden death, sudden cardiac death. And so they have to be monitored very closely, typically. And previously, before remote monitoring was available, they'd go back to see their doctor every 3 months or so. And now the doctors can now extend that. With some of the studies that have come out, we're actually starting to see insurance companies reimburse independently for remote monitoring, because they recognize the healthcare cost is lower overall when the patient is remotely monitored. So the reimbursement is helping in that longer term. But of course, the healthcare reform act are causing -- the medical device tax is causing some concern from my OEM customers and they are pushing down on prices and so forth. So there's constant erosion in ASP as we go forward. But the increase in content that we can provide and the increased value actually gives us a growing marketplace.

Esam Elashmawi

Hi, once again. My name is Esam Elashmawi, Vice President GM of SSC products group. I'm going to talk about the industrial market and once again, the initiatives that we put in place with regards to the industrial market.

To begin with, although Databeans is predicting an 8% CAGR growth in the industrial market, if you look at the last 3 years, you'll notice that it's been flat to slightly down. So let's contrast that once again with Microsemi's performance in the industrial market. If you look at Microsemi's growth in industrial market, it's been growing year-on-year. And although there's been a slowdown in the solar market, which we participate in, we're still able to grow the industrial market year-on-year by 10%. So once again, I'm going to walk you through the initiatives, what did we put in place, and why do we expect that growth to continue?

It goes back to, again, our go-to-market strategy that we've employed. We're engaged with the top makers of the industrial market. It's a wide, it's a very broad fragmented market, but we're engaged with the right guys. Again, we're leveraging our product portfolio, we're digging deep into the applications and providing solutions, which goes again to dollar per box value creation.

So let's look at the industry trends. There's many ways to segment the industrial market. We segment it in 5 different ways. We look at energy as 1 segment, then we've got factory, building and business automation, as well as test and measurements. So what are the broad trends we see by working with the market makers for the industrial market? Well, the first one has to do with a redesign for differentiation. More and more because of competition, people are redesigning for differentiation. What it is an example of differentiation in industrial market? Well, clearly, you're designing for more power efficiency, that relates to cost. You're designing for space or weight because factories are becoming cramped. You're also looking for ease of maintenance and accessibility. So lots of differentiations that play into what we have. And we'll talk more about that.

We're also seeing a trend where, because of international standards, there's more unification across these standards globally. Whether it be European, United States or Asia, more standardization, and that plays into the large players such as Microsemi as well. The other area that we're seeing lots of traction is related to safety critical applications. This is new in industrial market, it's gaining a lot of traction and we're going to talk about this one as a specific example. Safety critical is very important. It's not just about human life, if an operator crosses a line, stop your equipment. It's also not about just protecting communities, if you're operating a nuclear power plant, but it's also equipment cost if a robotic arms goes out of whack and starts damaging equipment as well. So safety critical is becoming very important in industrial market.

And clearly, Charlie's out about it, security isn't just about the defense market. It goes into the industrial market, it goes into the commercial market, it's everywhere as well, and our product portfolio and our technologies allows us to sell that value add from a security perspective as well.

So where are we deployed in the industrial markets? It's a very large market. It's segmented in different ways, but where are we deployed today? If you look at the factory and building automation, loss of motor control type applications. That's where we're playing. If you look at business automations, where they're at point of sales terminals, RFID readers.

If you look at test and scientific and some of the medical type of activities as well, we're there in analyzers and monitors and patient monitoring, as we just heard about as well. And in energy, clearly, we play in energy, in energy harvesting, we're there as well. The key here is we're widely deployed in industrial market, and more importantly, we're widely deployed with the customers that matter, the market makers.

So what are the building blocks that we offer? Based on our engagements and the building blocks, we go dig into the applications. Let's just talk about the building blocks, what is the portfolio of products that we offer at Microsemi. Well, it's everything from sense and control, you sense something, you control something, with our digital technology. Also our power management capabilities. We've got power modules, 1588 is not just a standard in the communications market, it's a standard for synchronization in the industrial market as well. We've got lots of IP that we leverage, discrete devices, as well as ASICs and also electromechanical devices.

So let's take one of these applications. I talked about unification of standards. I also talked about safety critical type applications. So you take something in industrial market, which is a generic spec, the 61508. So that's more and more increasingly, people are talking about safety critical applications and that's being proliferated across other standards in the industrial markets such as machines and gas measuring techniques.

So let's look at how Microsemi has taken advantage of that, which is fueling our growth and that will continue to fuel the growth in the industrial market. So first of all, what's the dollar content related to safety? It's hard to predict, but what research says, if you look back last year, that grew 17.5%. Over $2 billion are spent related to safety critical type applications. It's a growing segment of the industrial market.

Let's take a look at our differentiation from an implementation perspective. How do we go to the customers and implement a differentiated and a more valued approach to this. Well, you can take a look at our approach if you're using 2 microcontrollers. If you're using 2 microcontrollers, the way you do it, you got 2 microcontrollers in your system, you've got a fail safe detect circuitry and you're making sure that both are giving you the same results. If 1 has a flaw, you stop the system, you detected an error. That's having redundancy for safety critical using 2 microcontrollers. What we've done at Microsemi is we've taken all the know-how we've got from the space and avionics who have had safety critical applications for the last decades and more, and we've taken that to the industrial market by allowing us to do that on a single chip and using what's even better, dissimilar technologies.

And the reason you want to use dissimilar technologies, just like in the avionics market, is if you have an error in 1 device, what's to prevent that same error being repeated. If you have an error in the code of your microcontroller, you can have that same error in both microcontrollers. So the goal is to move to dissimilar technologies. And with our smart fusion device, we can do that because we are the only vendor that provides a single chip that has an embedded microcontroller with programmable logic, hence we are using dissimilar technologies from that perspective.

So lots of value, that's the implementation differentiation. Now, how about from a technology differentiation, can somebody else go about and do that. Well the thing here I want you to focus on is just the bottom rows that say FITS, that's failures in thousands of device hours. And the message here is because we employ flash technology, it is immune to configuration upsets. And as a result of that, and this is independent data, our technology is immune to configuration upsets, hence no configuration failures. We have a 0 fit, there is no fits for this. So that's the same technology that we've leveraged in space and the avionics and now we're taking that to the industrial market. So that gives us a technology differentiation, as well as a implementation differentiation.

So let's take a look at another aspect of it, motor control. In motor control, according to the International Energy Agency, they estimate that electric motors represent 45% of all electrical energy consumption, whether it's 40, 50, it's a lot of energy consumption. What's the result of that? Well, there's lots of initiatives and mandates to make more efficient motors. Microsemi plays in that as well. We play that in different types of motors, from standard AC the compact AC drivers, but where we win and excel is when you're driving more than a single motor, and most applications we have today are multi-motor access or driving multiple motors.

So let's take a look at some of these examples again, whether it be in robotics, and warehouses, mining equipment or even elevator control, we have an advantage with our Microsemi portfolio products to do motor control much more efficiently.

Other engagements where footprint matters in the medical market, whether it be in medical purifications, driving 5 motors, or even because the footprint matters, you want to do in a single chip, motor control and blood analyzers. Just some of the examples of where we've won sockets and shipping units for. Again, to remind you, it's about leveraging the portfolio. So in the example of motor control, you're not just selling a single product, you're selling a portfolio of products. So you won't find just our programmable logic, but you'll also find IT BT's, network connectivity devices as well. It's selling the platform. It's part of the go-to-market strategy that we have.

So in conclusion, although the industrial market has been flat to slightly down, we're continuing to grow our industrial segment. It has to do with the initiatives we put in place, penetrating growth markets in industrial market, specifically safety critical and system critical type applications, and the new areas that we've defined with the market makers such as motor control and other aspects and that's continuing as well.


Okay. With that, I'm going to introduce you to Kelly Jones, our Senior Vice President of Corporate Operations.

Kelly Jones

Good afternoon. I'm real happy to be here, Jim doesn't that operations guys out much, so I appreciate it. Steve mentioned before about our volumes and what we did at foundry, I think in 2006, we did about 25% of our volume at foundries and now today, as you can see from the graph, it's about 75%. With that it gives us a lot of leverage at our suppliers. In particular, since about 2009, 2010, we more than doubled our capability to attain lower-cost. Additionally, throughout our time of acquisition, we brought a lot of foundries then. And again, we have an opportunity, as we consolidate those foundries, into 4 or 5 partners to leverage again and get more value for our volume.

Additionally, and opportunities in the technology side on die shrinks, additionally, with working with Jim and finding the sweet spot, that's where technology and wafer pricing kind of come together and we're working a lot on that in each of the product lines. And again, there's opportunities in yields.

Internally, on our fabs, we spent a lot of time with consolidating our internal fabs and didn't have a lot of opportunity to work on yields. And so there's tremendous options in that regard to improve yields. And additionally, we have a few lines in our fabs, internal fabs, that we can transfer out to foundries here in the short term.

Next, looking at the back end, a similar picture that you see. Our spend is about $80 million here, versus $100 million in our foundry side. Again, it gives us a lot of leverage. We're in regard about $250 million devices between internal and external. And our subcons, we have a little more leverage, we're getting about 5% to 15% ability to lower pricing on an annual basis. Again, the same kind of scenario we have probably 18, 19 back ends that we want to consolidate in to 4 or 5. One real win is on the PoE mid spans. I think we were able to take from 5 vendors down to 2, reduce our cost substantially.

One big win we have over the course of the next 18 months is a transition from gold to copper wire bonding with the price of gold being so high, we can realize a savings of probably 15% to -- in excess of 30% in that regard. And on the test side, a lot of multi setting, getting rid of testing on a lot of wafer level products. And of course our yields. When I say improved yields, our yields are pretty good, but the important thing is we have new products. You can see, 150 new products coming out, it's important to have high yields from the get go.

Internally again, gold, if you look at our medic line, we have a lot of gold, and there's a lot of opportunity to take that raw material, reduce it by 20%, 30%, I think in excess of about $2 million or $3 million we've got identified there, we can take out over the next year or so. Paul Pickle stole a word from me, "boutique." I put that in there. The marketing guys are always taking words from me. So we can move that over to Asia, and that one's a big one, I'll talk about that on the next page. And all this strategy is with our -- the finance guys looking at me and saying, Remember the tax stuff, so we're always doing this stuff with our tax strategy intact.

So I say possibilities. All these possibilities there are, there's already plans, there's already actions in place to do it. The Northern California facility, I think we're about -- we're into it about 6 to 9 months, we've got probably 6 months left. Offshore assembly, we've kind of got the plans together, we're waiting for the okay from Ralph in that regard. But that's a big one, $8 million to $10 million, where we're in a competitive landscape on our medic packages now and moving them overseas will lower the labor content by 75%.

Additionally, the wafer fab I talked about at $2 million to $3 million, and also we've got some facility consolidations.

So with that, any questions? Did I get the minute? Asking a question of a manufacturing guy.

Unknown Analyst

I guess it's coming back to finance, but you've got a lot of savings up there. Again, any sense of timing when that could hit the income statement? Is this all in the next year...

Kelly Jones

John is going to answer all those questions. And with that, I'm going to turn it over to Big Bob, John Hohener, to respond, okay? Good segue. John?

John W. Hohener

I do love following Kelly, because he does all the heavy lifting on my gross margin stuff. But to answer your question, this is teeing up for how we're getting to 60% and we've said numerous times, we're quite comfortable that we're going to get there by the end of 2013, and that's still the case today.

John W. Hohener

Okay. You've heard today kind of about our transformation over the last several years and maybe, more importantly, kind of the continued vision and the continued transformation to continue to drive growth in the business. There's been a lot of people that you've met today, people that you don't normally see, you have a chance to see me. But what's exciting about that is what we all get to learn and how I can translate that into financial results.

And you can see, I've got a little history here going from FY '07 to FY '12 estimating kind of what the current level of guidance for FY '12, where we're going to end up. Certainly, it's a nice chart, I love charts that go up and to the right from a revenue standpoint, increasing revenue we're at that $1 billion growth rate we've talked about, gross profit, significantly high. Again, about 56.1% moving up to 60% by the end of 2013.

Operating income, EBITDA, kind of trending with each other, as you might expect. From a margin standpoint, Kelly did do a very good job in terms of laying out what we've done in the past and what we're going to continue to do to drive gross margins. If you think -- if you go back to the 2009 time frame, we were at the -- somehow the scale fell off of this thing, it's on the right-hand side, but we were in the mid-40s in terms of our gross margins. Right now again, we're at 56.1% driving to 60. Our gross -- I mean, I'm sorry our GAAP and our non-GAAP gross margins, which is represented by the green and the blue, trend together. The only differences are when we do an acquisition or when we dispose of a property, the accounting rules do say we have to expense certain aspects of that and we adjust that and modify that for our non-GAAP reporting.

From an operating level, represented by the orange, again a non-GAAP operating level, we do takeout stock-based comp and amortization of intangibles in reporting our operating margin. As we drive toward 60%, we're also going to drive that towards our 30% in the same timeframe that we talked about in the past. A number of initiatives there. I mean, obviously, we're going to trail on with the improvements in the gross margin line. But we also have the infrastructure in place, primarily that we don't need to put a lot of spend in as our revenue goes up. We did have a little slight downturn, as you can see in Q1, that was for the macro that we experienced in our December quarter. But you can see we've ticked right up and we're moving forward from that point.

Now how exactly do we get to the 60%? What this slide is intended to represent is the various pieces, and again Kelly has touched on a lot of these. Starting with where we ended up last year quarter, kind of marching to a 60%. This graph is not intended to talk about anything sequentially. All these things are happening at one point in time as we go -- as we drive towards that. We do have, obviously, some of our businesses, we've talked about ASP declines, we have some prices that do go up, but we have some prices obviously that go down. That picked up. While we can drive revenue that way, it does hurt the gross margin percentage, but that's offset by the things that we're talking about to the right of that. Obviously, we have growth initiatives, macro improvement in environment, and one thing we talked a lot about today is share gains and new wins. I think that's a theme that you're going to continue to hear from us.

Kelly talked about some additional consolidation that we're going to see. And again, with all the new product development that we have, we're focusing on higher-margin products and, of course, we have exited some low-margin products as well. And then Kelly also touched on decreases in material cost, talking about gold and copper, also foundry consolidations and such.

Even though we report on a non-GAAP basis, we are very sensitive of about stock-based compensation as a percentage of revenue. We have driven that down over the last several years, we're around 3.5% now. Our peers are in the neighborhood of 5% or 6%. So that is a statistic that we're very cognizant of.

Here is something that I really do like. I know it may bore a lot of you guys, but it is an initiative that, in my mind, not only does it drive bottom line, but it drives cash generation. And we've done a great job over the last several years. We were in the mid-30s, if you go back even a year before this, it was about 35% tax rate and with our initiatives that we've done in Ireland, Macau, the Philippines and other Asian operations, we've driven that down at the end of FY '10 to about 16%. When we bought Actel's, they were a full rate taxpayer. That did cause our rate to go up, but we were, with their Asia presence, in terms of their end market, we were able to implement them into our overall strategy and help drive that down, and you'll see us exiting FY '12 at an overall rate of 10%. The last quarter here, we're going to be at 7%, and we see a forecast next year at 7% as well. But we're continuing to work on driving that down.

Again, primary responsibility of mine is balance sheet management and cash management. A key focus, obviously, in the type of business that we are, is on our inventory. Our inventory, we measure it by days of inventory. If you go back a few quarters, we were upwards of over 200 days. We've driven that down, and now we're significantly below that in the neighborhood of 135-140 days. We're quite comfortable with that level, although we do see that coming down, as more of our business goes to foundry and is fab-less as we've been talking about.

Equally important is cash collections as measured by DSO. The good news is, our customer base is all Tier 1 solid customers. We don't ever have any bad debt that I can remember. So it's just a matter of when we collect and we're quite comfortable with the DSO that we have at this point in time, which is hovering around 50 days.

And as you managed that and as we grow the business, as we've been talking about, our cash flow is going to rise. This shows FY '12 of being $160 million -- over $160 million, but we're actually on a run rate greater than $200 million in terms of our operating cash flow.

One thing we've done in the last couple of years, you're well aware, is we took advantage of some leverage within the marketplace. And the way we measure success and how we manage that is on a number of fronts. But one thing we do is we want to drive down our leverage ratio, our debt-to-EBITDA ratio. And our goal right now, it's around 3, our goal is to get that around 2 in the next 4 quarters. We're going to do that by natural EBITDA growth, but also by focusing on paying down the debt. And we estimate that we'll pay it down by about $100 million over the next 4 quarters. That's represented by the blue line. If you look at our net debt position, which is represented by the green line, we're close to 2 right now, and we're going to get that down just a little bit above 1 in that same 4-quarter period.

And with that, I'll turn it over to Jim. Oh, questions?

Unknown Analyst

John, you did talk about growth rates, but in the presentations we've seen earlier today, almost all the TAMs were greater than 10% CAGR for Microsemi's targeted markets. Can you give us an overall target growth rate for Microsemi total corporate? What do you see it growing at over the next 3 to 5 years on an organic basis?

James J. Peterson

Let me take several parts. [indiscernible] put on a slide with a very interesting note. It said about 4 years ago, we identified that we'd get Microsemi built to a $1 billion company. And right now, we're at a $1 billion run rate. And we also put a little clause there and said, Okay, about 3 years ago, we put an initiative together and we said, okay, we're going to grow this to a $3 billion revenue company. So for timeframe, that's an important thing. Litch and I have discussed that more than once, I assure you. And on or about 5 years, we'll be a $3 billion revenue company. We also put a stamp on that our goal at this point is 2/3 organic, 1/3 through M&A. But to the short, I assure you, we'll be organic. That's what our shareholders should see. We built a value chain to get us to a $1 billion infrastructure and what you saw in the presentation today is the cross-pollination of the strength of those acquisitions that we've had. And there are so many investment bankers here today that have helped us, and I do want to thank you. So let's just plug in 12% to 15% in the rearview mirror year-over-year. And why not shoot at that going forward, but Microsemi, without a doubt, is a revenue growth company. Litch?

Steven G. Litchfield

I understand [indiscernible] specifically the question. So as Jim stated, the [indiscernible] hasn't changed at all. You saw 8 initiatives that we walked you through today. That in aggregate, I mean, kind of adds up to $300 million, $350 million, in that range. And that portion of our business should grow on or about 20% a year. Okay? So what we've highlighted is the real growth drivers of our business. That's what you're going to see the organic growth come from.

Unknown Analyst

So you just outlined 2/3 organic, 1/3 acquisitions. And I know the last couple of quarters you've been trying to show that organic growth. So what is your approach now? How should we look at M&A for you guys over the next 12, 24 months? I mean, I know you had some pretty big deals that improved your business, but what are you looking to do in the next 12 to 24 months?

James J. Peterson

I think -- let me give you for a short term and then a little long term. For the next several quarters, I'm going to show pure organic growth for the most part. I think that's what the shareholders want to see, they want to see where we put our monies and how we bring that leverage down. I think -- built in within that is going to be strategic acquisitions and there were some interesting carve outs, where I find a unique technology that will benefit one of the presenters today in your market areas where they say, Hey Jim, we would like this technology, want to build accretive value to our product, or from time-to-time for a barrier-to-entry. So you'll see, let's say midterm, in the mid period of time of your 12 to 18 months, maybe 24 months. Very strategic, very specific carve out type technology applications from Microsemi. However, we have good appetite, we have a good eye. You've seen with the properties that we have acquired and we have integrated, which is the Microsemi family, that if we find something that deviates from that for a bit, will be sure to address that with the shareholders, why, when and how.

Unknown Analyst

John, when you talked about the 60% gross margin, should I also think of that as translating to 30% op margin by the end of fiscal, or...

John W. Hohener

By the end of calendar '13, we said publicly, and, yes.

Unknown Analyst

And then you talked about taxes going down from 10% to 7% potentially. Could you maybe lay out for us the drivers associated with that?

John W. Hohener

Yes, certainly. You've seen it in terms of -- in the past, what we've done is some of the things that help improve the gross margin actually help -- it's an operational play in terms of driving profitability in the company, also benefits us from a tax standpoint. Historically, that's been Ireland. Historically, that's been Macau. We're continuing to increase the business that runs through our Macau facility, where we actually have a 0% tax rate. So that helps in our overall tax benefit. Philippines, same story, we have a tax holiday there that we're taking advantage off and which is why we want to run business through the Philippines.

Unknown Analyst

And, Jim, maybe for you, you talked about 1/3 growth coming from M&A, what would be some of the areas you talked about niche acquisitions, technology-based acquisitions, what are some of the areas that come to your mind just broadly speaking where you might get active?

James J. Peterson

It might be more in some of the processes, for the process development, I think, my lead team would look for. They'll be heavily guided in this next life cycle by my Chief Technology Officer and my Chief Strategy Officer, in those areas. As Litch said, I don't need a lot of new markets, all right? I tend to keep away from the multiple 10 player consumer markets, where you wake up the next morning and you see a lovely price cut by somebody with a name I can't even pronounce. So it will be very selective and very detailed and very profitable, I assure you. Greg [ph], did you have a question you want to -- Greg, you had your hand up, and I don't want to ignore you.

Unknown Analyst

I just wanted to understand if you -- how are you thinking about the sequestration in terms of magnitude, timing, what your customers are saying? You said that's kind of the biggest long-term risk out there. I know there's a lot of great things going on, but investors always want to know about the risks, so...

James J. Peterson

Yes, it's the biggest risk out there for the fact of its uncertainty. I think -- as an individual, I think you should be asking the current administration, What are you thinking? Because that would help. So let's talk about our large customers. Our large customers, they're up -- they're enraged. For the fact of the matter is, there's no specifics on which programs. The only color we've gotten on it from the administration is that it's going to affect heavily for Army programs and Marines. Which tells you, if you're in my business, that means older technology, all right? We know that the Defense Department, 40% of it was administrative cost, I know they've been working on that in a constructive manner, but it all leads back to 2011 when we had the tax and budget problem, we brought it to the certain committee and they couldn't meet it. So they said, If you don't do it, we'll engage in sequestration. And we're going to do that, by the way, January 2, 2013. And as our administration normally do, they said, Good, we'll deal with it then. So I guess what you're going to see is, around Christmastime, when everybody is real critical post-election, you're going to hear people complaining -- people we pay for, complaining that, Oh, we are working during our Christmas vacation trying to figure this out. For us, it will be -- if it's a 10%, 10%, 10% over 10 years. It could be as much as maybe 2% to 2.5% impact on Microsemi. However, we've deviated from it. We will -- as you know, we've been investing in electronic content, electronic warfare. Just most recently, within the last 48 hours, you saw our national security had been breached. We've been putting a lot of money in eyes in the sky, we mentioned it years back. And even though sequestration is going to come -- and it might not be all bad, okay? There are some programs that should be reviewed. But it's not just going to hit Microsemi's line of defense, it's going to go across the board range. And customers, they need to know, they want to know now for a very good reason. There's a thing called the WARN Act. And if they need to structure in programs, they need to let their employees know. So their threat to the administration right now is, before election, we'll start sending the letters out to our employees. So give us some color and some insight. This is one -- I know we're on wire and live, but this is one that's quite honestly one of the big problems that our large customers have are pension problems. This might be one way they can address their pension issues and structure their business. But that's just a thought of Peterson, not necessarily fact. I'm concerned with sequestration for the national public, but I am not that concerned about it for Microsemi, that I assure you.

Unknown Analyst

Are they depleting inventories ahead of sequestration? Or it's not that dire yet?

James J. Peterson

It's not that dire yet. Right, Ralph, you want to...

Unknown Executive

[indiscernible] program.

James J. Peterson

Yes, they've built a program, and you might even see a nice uptick going into it because of [indiscernible] factors of certain sorts. But no, we're not -- that's not an issue. Thank you.

Okay. So closing off -- thank you, John. In closing, I want to thank those that traveled here that are in the room for taking the time. Those who listened in the webcast, I want to thank you, as well. So I want to take one moment to tell my team that put together this presentation and what you guys do on a day-to-day basis and your families for allowing you to do it, but as usual, I am extremely proud, and I thank you, from my heart. And I love you guys, you know that.

So let's just do a couple of takeaways. Takeaway 1, Microsemi is certainly a growth company. We're creating a tremendous amount of value, we're going to generate a large, significant amount of cash versus our peers, versus our industry. And I'm going to pay down the debt and put the leverage where it should be.

I want to thank everybody for coming. I know you came for the lunch and the sandwiches. So if there aren't -- are there any more questions before we put this one in? Litch, you want to put a comment in? Any more questions before we go and have the sandwiches? Yes?

Unknown Analyst

[indiscernible] move the needle for all of us?

James J. Peterson

The collaboration. I think what moves the needle is -- and I hope you felt it, is the fact that the companies, although divisionalized, are acting as one. I like the fact that we're sharing the technologies, creating the value with it, and it's all about the people. At the end of the day, it's about the people and technology. That's pretty much what I am most excited about. And then the value creation of the products. There's just a substantial amount. And not all will hit their home runs. But if you watch baseball, you get a bunch of guys hit a bunch of singles and a couple guys hit a good solid home run, you win. So I think I'd have to say, I really don't have one that I could say, This is the best one. The one that people identify us with a headwind is in defense. And I went out of my way to get Charlie up here to tell you about the bad guys, because we put defense security together. And we're growing it on a very unquestionable year, 8% to 12% and I'm very confident in that. Unfortunately, world peace is not near at hand. And so it's pretty broad, my love and respect for the growth of the company.

Unknown Analyst

Jim, when I look at companies similar to yours, that do things that you do, one of the areas that they're all digging to [indiscernible] that I don't see [indiscernible]. Are there areas [indiscernible] that you're looking at [indiscernible]?

James J. Peterson

Certainly, silicon carbide, we have is a technology, so hybrid can be on the agenda. So we have some one-off unique technologies. Litch, you want to touch on automotive, where your belief is as a...

Steven G. Litchfield

[indiscernible] potential opportunity [indiscernible]. It's a tough market from a profitability standpoint. [indiscernible]

James J. Peterson

Yes, but it's a great market, right? It takes a while to get into it, but once you get into it, it's sticky. I like it a lot. So they'll be a day when I step up and say, Okay, this is my penetration of the auto market, I assure you.

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