Microsemi Corp. F3Q08 (Qtr End 29/6/08) Earnings Call Transcript

Jul.24.08 | About: Microsemi Corporation (MSCC)

Microsemi Corp. (NASDAQ:MSCC)

F3Q08 (Qtr End 29/6/08) Earnings Call

July 24 2008 04:45 pm ET

Executives

Terri Donnelly - IR

Jim Peterson - President and CEO

John Hohener - VP and CFO

Steve Litchfield - EVP and President of the Analog Mixed Signal Group

Robert Adams - VP of Business Development

Analyst

Tore Svanberg - Thomas Weisel

Rick Schafer - Oppenheimer & Co

Vernon Essi - Needham & Company

Craig Berger - Friedman Billings Ramsey

John Lau - Jefferies & Company

David Wong - Wachovia

Steve Smigie - Raymond James

Andrew Huang - American Technology

Harsh Kumar - Morgan Keegan

Vijay Rakesh - ThinkPanmure

Patrick Wang - Wedbush Morgan

Sean Webster - JPMorgan

Christopher Longiaru - Sidoti & Company

Operator

Good afternoon. My name is Vanessa and I will be your conference operator today. At this time I would like to welcome everyone to the Microsemi's Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. (Operator instructions)

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

Terri Donnelly

Good afternoon and welcome to Microsemi's third quarter fiscal year 2008 conference call. I am Terri Donnelly, coordinator of this call. In a few moments, you will hear from and have an opportunity to ask questions of Jim Peterson, our President and Chief Executive Officer; of John Hohener, our Vice President and Chief Financial Officer; of Steve Litchfield, our Executive Vice President and President of the Analog Mixed Signal Group; and of Rob Adams, our Vice President of Business Development.

A recording of this conference call will be available on the Microsemi website under the investor section. Our website is located at www.microsemi.com.

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

However, management undertakes no obligation to update these or any forward-looking statements whether as a result of new information, future events, or otherwise. If an update to our business outlook is provided, the information will be in the form of a news release. We wish to caution you that all of our statements except the company's past financial results are just our opinions, predictions, and present expectations. Actual future events or results may differ materially.

I refer you for some of the risks to see Microsemi's report on Form 10-K for the fiscal year ended September 30, 2007, which was filed with the SEC on November 21, 2007, and Form 10-Q for the quarter ended March 30, 2008, which was filed with the SEC on May 6, 2008. Information about Microsemi is filed with the SEC is available free of charge at www.sec.gov. These reports identify important factors that could cause actual results to differ materially from our projections.

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

Jim Peterson

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

Net sales for Microsemi's third quarter were $129.3 million, up 2.1% from the $126.7 million reported in second quarter of fiscal 2008, and up 13.8% from $113.6 million in the year-ago third quarter. The third quarter of 2008 produced non-GAAP earnings of $0.34 per diluted share, up from $0.32 per diluted share reported in the prior quarter; and up $0.08 or 30.8% from the $0.26 reported in the year-ago third quarter.

Non-GAAP gross margins were 51.9%, up 40 basis points sequentially from the 51.5% and up 100 basis points from the year-ago third quarter. Non-GAAP operating margins were 27.5%, up 140 basis points sequentially and 260 basis points from the year-ago third quarter. We are also proud to announce that our GAAP operating margins improved 420 basis points from our previous quarter.

We're proud of these results as these demonstrate Microsemi's ability to execute on its growth and margin improvement strategy despite the backdrop deteriorating economic conditions. While our peers are pointing to micro driven slowness and uncertainty, we're delivering sequentially revenue growth with dramatic improvements in gross operating and net margin metrics.

With the growing backlog in dis-operational efficiencies in our sites, we expect continued revenue growth and profitability improvements on the horizon. In Q3 Microsemi grew revenues through its strong and diverse business, new product offerings, end market share increases.

Microsemi's high performance Analog Mixed Signal business grew throughout the year, and the High Reliability business continues to show strength. We'll continue to drive our strategic planning role in all of our markets with new product offerings, a unique value proposition for our customers. As we execute on this plan in 2008 and beyond, we expect to outpace our semiconductor industry peers.

Bookings were strong once again, resulting in a book to a ratio 1.07 to 1. The areas of continued strength this quarter were the implantable medical, satellite, defense, wireless LAN, end TV markets. The Analog Mixed Signal Group is delivering steady consistent growth despite macroeconomic driven fluctuations, growing in March, growing in June and expected to grow again in the September quarter.

We are gaining momentum with new product development efforts, and we may remain on track to introduce a record number of differentiated products in 2008 and beyond, thus driving significant long-term growth opportunities. Our mobile connectivity business performed well in this June quarter, driven by the continuing surge of our 802.11n power amplifier products.

We will see continued proliferation of 802.11n product offerings throughout 2008, with WiMAX establishing itself as a key future market. Demands for these higher bandwidth solutions drive performance metric unseen by the wireless LAN market historically. And the system performance benefit Microsemi brings in these applications, has added significant value to our customer solutions.

It's a more seasonal quarter in March. Our power ethernet business resumed its growth path in June, with the solid revenue showing, complemented by strong bookings. In particular we have several new integrated circuits and system level PoE products that have been or soon be released to production, that are driving the next-generation design win strength.

We expect to grow 30% in port shipments this year, driven by increased demand for client devices such as IP video cameras, phones, and wireless LAN access points. We see this market growing with the PoE plus standard [E02.3at] which enables higher power devices and expands our opportunity into the notebook markets.

Our backlighting business has multiple growth records for the second half of the calendar 2008 and beyond. In CCFL, our notebook and TV products show sequential growth through market share gains again, and in the June quarter. We expect more of the same in September quarter, and additionally, we continue to expect upside on our notebook market share as new platforms ramp in the second half.

We remain enthusiastic about our DAZL! with deep backlight solution, the best of either product has no true competition in the marketplace today, and it continues to gain mindshare with top Asian OEMs and ODMs, because it improves performance, lowers cost, and lower the power consumption of next generation LED TVs.

While revenues continue to grow in engineering applications currently, we are more confident than ever in its long-term opportunity. Our industrial and semicap group showed improvements in the quarter. The semicap freefall has stopped for the moment, and we expect a long bordering this business, obviously return to the growth move on to former revenue levels. Our best estimates suggest flat performance again next quarter, with a potential return to growth in a calendar fourth quarter or beyond.

On a positive note, our industrial products growth improved province, relative to recent quarters. We are incrementally more positive on the medical business, due to accelerating bookings from our ICD products. While we have previously taken a more cautious stands to unit growth over the year, recent customer activity and forecast suggest unit growth increasing to double-digit territory and our continually improving dollar content should drive strong year-over-year results in the coming quarters.

The defense industry remained solid with ever increasing electronic content with the continue funding of new programs. Major areas of growth are expected from applications in military avionics, military ground transportation, surveillance equipment, joint service communication systems, navy vessels, radar, missiles, and advance combat unit electronics.

As an example, Lockheed Martin's earnings report earlier this week, the company reported solid upside in the quarter and raised its full year outlook. With exposure to virtually every electronic program that Lockheed, as well as programs that the other top 5 customers in the higher liability segment, Microsemi will benefit.

There has been some public concern over the commercial aerospace markets; we see long-term strength in the sector. Boeing, another top 5 customer of Microsemi, has recently raised its commercial air forecast, believing that the worldwide demand will grow to 29,400 new planes or $3.2 trillion over the next two decades.

Contrary to the popular opinion, this upside is actually driven by the rising cost of oil with the second largest areas of growth expected to come from single -- aircraft such as the newer versions of the 737 as it replaces smaller regional aircraft, everything early retired of less efficient maintenance prone plans such as the MD80s, older generations 737s and the Airbus A-320s. This was one of our strongest segments last quarter with the large backlog in place we expect more the same in the coming quarters.

Our satellite business remains at record levels, driven by strength in both military and commercial satellite platforms. This profitable product line will drive improved gross margins as the business continues to grow. As many of you remember, last week Microsemi acquired one of its competitors in the high reliability marketplace SEMICOA. The small yet strategic acquisition brings us increased capacity and throughput, while also increasing our radar space level product offering.

We look forward to a long period of strength in this marketplace. As discussed earlier, our improved margins helped drive our operating cash flow of $28.5 million in the third quarter. Last quarter I guided that disparity between GAAP and non-GAAP gross margins would disappear over the course of the next five and certainly no more than seven quarters.

We believe this will be accomplished by the ramp up facility in Ireland, closure of our Colorado facility, and the completion of other planned fab transitions. We continue to make progress in closing this disparity, and now we're on track to reach this goal over the next four and certainly no more than six quarters.

In summary, our third quarter clearly demonstrates our ability to outgrow our peers, as a function of our reliability positioning and selective approach to high power Analog Mixed Signal markets. We executed again on our business plan this quarter, and have positioned the company for delivery for the remainder of what is anticipated to be a stronger year for Microsemi.

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

John Hohener

Thank you, Jim. As Jim previously mentioned net sales for the quarter ended June 29th 2008, were $129.3 million sequentially up 2.1% from the $126.7 million reported in the second quarter, and up 13.8% from $113.6 million in the year-ago third quarter.

Non-GAAP gross margins for the quarter were 51.9% compared to 51.5% in the second quarter and 50.9% in the third quarter of last year. This quarter non-GAAP selling, general and administrative expenses were $20.6 million or 15.9% of sales, as compared to $20.8 million or 16.4% of sales in the second quarter, and $19 million or 16.7% of sales in the third quarter of last year.

Research and development costs were $11 million or 8.5% of sales, compared to $11.3 million or 8.9% of sales in the second quarter and $10.6 million or 9.3% of sales in the year-ago third quarter. Our non-GAAP operating margins were 27.5%, compared to 26.1% in the second quarter and 24.9% in the prior year third quarter. We are well on our way to our corporate goal of 30%.

For the third quarter non-GAAP net income was $27 million or $0.34 per diluted share. This compares to $0.32 in the prior quarter and $0.26 per diluted share in the year-ago third quarter, a 30.8% increase. Our non GAAP effective tax-rate was 24.9% in third quarter, compared to 25% in the second quarter and 28.8% in the year-ago third quarter.

Our third quarter results include restructuring costs and other charges these include $8.9 million for transitional idle capacity, a decrease of $1 million from the previous quarter; $2.8 million in amortization of acquisition related intangibles, $4.8 million related to stock-based compensation charges and 800,000 in other charges.

Our GAAP gross margin was 45% up a 140 basis points from 43.6% in the second quarter, and up 300 basis points from 42% in the year-ago third quarter. Operational efficiencies previously discussed are contributing this improvement. Our GAAP operating margins improved 420 basis points from our previous quarter.

For the third quarter our GAAP net income was $13.9 million or $0.17 per diluted share, as compared to $9.8 million or $0.12 per diluted share in the second quarter and $8.7 million or $0.11 per diluted share in the year-ago third quarter -- a 55% increase.

Capital spending was $6.3 million this quarter, compared to $5.5 million in the second quarter. This increase due primarily to our Ireland expansion. Depreciation and amortization expense for the quarter was $7 million compared to $6.9 million in the second quarter.

Our cash receivables were $93 million at the end of the third quarter, compared to $90.1 million at the end of the second quarter, due primarily to increased revenue. Our DSO was 64 days for this quarter same as last quarter.

Inventories were down in both dollars and days, inventory at the end of the third quarter were $116.6 million, compared to the second quarter levels of a $116.8 million. This decrease resulted in our days of inventory dropping to a 172, compared to a 174 days in the prior quarter and a 181 days in the year-ago third quarter.

Cash generation was another significant point in the quarter. Our net cash and investment position increased $32.6 million during the quarter, and our cash flow from operations was $28.5 million. In one quarter we generated more than enough cash for our recent acquisitions.

We believe our operating cash flow this fiscal year will be between $90 million and $100 million. Our best estimate of the end market percentage breakdown of net sales for the third quarter was approximately; Defense 33%, Commercial Air Satellite 20%, Medical 13%, notebooks, LCD TVs displays 11%, mobile connectivity which includes PoE 16%, industrial semicap 7%. Please note that these are all unchanged from our previous quarter.

Now for the business outlook, Microsemi is raising its sales expectations for the fourth quarter of fiscal year 2008 to an increase of between 3% to 5% sequentially. On a non-GAAP basis, we are also raising our earnings expectation for the fourth quarter of fiscal year 2008 to be $0.35 to $0.37 per diluted share.

With that, I'll turn the call back to Jim.

Jim Peterson

Okay, thanks John. So with that, let's open the conference call to questions from analysts.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Tore Svanberg from Thomas Weisel.

Tore Svanberg - Thomas Weisel

Yes, thank you and congratulations on the results. A couple of questions, can you talk a little bit more about visibility going into next quarter? Obviously, these are higher numbers than I was expecting. So I'm just wondering what visibility is the specialist forge of backlog and things like that?

Jim Peterson

That one is stronger than going into last quarter. Churn rates will actually be down from last quarter. If you remember last quarter Tore, we shipped some back-end equipment over to Ireland, that equipment is there, it's up, it's running, it's in place, where that was been to have successful. And some of our markets are stronger, more robust than we've thought going in. And the other markets, we're actually gaining market share penetration. So they will knock on wood, so business fundamentals are strengthening my friend.

Tore Svanberg - Thomas Weisel

So in that mean can you may be also elaborate on what areas will drive some of the growth in the quarter? Whether that's high rail versus high performance mixed signal or maybe even by segment what's going to be driving some of the growth?

Jim Peterson

Let me take a little bulk at it. Certainly when upside I think it's going to be in plan of a medical this next quarter Tore. At least two of the three of the incomes of that are reported are showing a more bullish stands and so is our backlog and I mentioned that first for the fact it's been at least four-five quarters since we are able to highlight that going into the quarter. Satellite once again remains strong. Overall, the bench market commercial air, we highlight the fact that Boeing is actually showing strength in aircraft, here the problem is oil. All we need is a more efficient aircrafts and airline to do that.

I will touch a little bit on the analog mix signal. Analog mix signal looks strong in some areas, we haven't little side-downtick, I mean [CJ] no big surprise. CJ is down this quarter, we'll be down next quarter for Microsemi. Of course semicap and the analog mix-single speak of it. We think the freefall kind of slowed, but I think it could be a long bottoming, that's not going to benefit us much. Probably the star performer was 802.11n.

In the analog Mixed Signal group, we've seen a lot of strength in 802.11n. And certainly enlightening for notebooks and TV's, growing, growing backlog and the reason for that to the fact is markets are growing. We're gaining market share and also the benefit of our Microsemi shareholders. How is that Tore? Tore?

Operator

Your next question comes from the line of Rick Schafer.

Jim Peterson

Rick are you there? Vanessa did we loose people?

Operator

(Operator Instructions). It seems he has fallen out of queue.

Jim Peterson

Look at me for very positive note as we speak. Who's next?

Operator

Your next question comes from Mr. Schafer.

Rick Schafer - Oppenheimer & Co

Jim, can you hear me?

Jim Peterson

I can Schaf, how you're doing?

Rick Schafer - Oppenheimer & Co

You have some technical difficulties. Yeah, I got a couple of questions for you, nice quarter by the way. Just back on Ireland for a second, excuse me, can you just kind of give us an update or tell like things are progressing at least as forecast in terms of ramping things up there, would you say things are progressing better in terms of ramping up capacity over there? Can you kind of give us an idea what utilization is there and now? When do you sort of think you'll have that thing up and 100% running?

Jim Peterson

Okay, well first, in order we'll give you the commercial as to why we're there. And she'll opened the door for me I appreciate it. We're gone to Ireland for couple of every reasons, operational and manufacturing strategies certainly benefit Microsemi there. Certainly benefit Microsemi there but the fact that we get all 20% or better efficiencies since we've been over an Ireland.

We find that they have an educated stable workforce, nationalized medical and certainly a tax rate of about 10%, plus to commercial. Measure the year I think we're going to do all about $50 million or $60 million if you remember. We lift that last quarter to say that we thought we thought we can do $70 million to $75 million. I'm here to tell you that we will close a share at the top end of that, may be slightly higher than 75$ million.

We have '09 doubted at this point, with the backlog we're running probably this month at a $100 million plus run-rate for '09. I can't give of what percent there is total, but the name of the game is to move more and more over there as we build out the infrastructure. So it's ahead of plan, the operational team of Microsemi has done a tremendous job.

Rick Schafer - Oppenheimer & Co

Would you say, I mean you guys can usually [need such a watch by 2% or 4% in a revenue guide from you guys so 3% to 5%]? Is that you guys kind of capturing some of that revenue push from 2Q or from the June quarter?

Jim Peterson

That's for strengthening in other markets. Like I said, we are gaining market share in notebooks and in TVs from, let just say competitors in that particular space. Wireless LAN is a star performer, that's contributing. So it certainly added off two. And then we did make an acquisition, it was small little company, yet very strategic, called SEMICOA. And that's going to contribute a little bit to this quarter. But it's pretty much across the board.

Rick Schafer - Oppenheimer & Co

Okay. Next question just on transitional capacity you mentioned it. Is there any way you can walk us through real quick sort of the top two or three drivers, where that charge is covered from, and I know a piece of it is Colorado. So when it closes in October, should we kind of think about as a step function in terms of closing that GAAP, non-GAAP gap there?

Jim Peterson

Yeah, certainly not linear until we get that thing closed and then we'll see a step down. Probably best thing I cold tell you is that, there's three points, we touched three points many times. And we've now lowered it to four quarters, certainly no more than six. Everything is pretty much on track. Look at the operating margins for the GAAP I think, we closed it to on about 400 basis points last quarter alone. We're closing the GAAP to non-GAAP, everything we said we're going do we are doing, and expect more of the same.

Rick Schafer - Oppenheimer & Co

And just one quick last question on tax-rate, maybe for John. It keeps trending down, what is a realistic target for maybe the back-half of this year or a calendar year or 2009, once Ireland is really cranking and Macau kind of kicks in?

Jim Peterson

Well I'll answer that and let John give you the professional answer.

Rick Schafer - Oppenheimer & Co

Okay.

Jim Peterson

Type of math, certainly going to be coming down. John?

John Hohener

Yeah and that's exactly right. I mean we're going to finish this year out, this fiscal year 25%. What you do is you forecast for the whole year next year and base your tax-rate on a linear basis through out the year, and certainly we see that we can down as Jim said. And I'll go on the record and say probably a couple more points.

Rick Schafer - Oppenheimer & Co

Okay. Thanks a lot guys.

Operator

Your next question comes from the line of Vernon Essi with Needham & Company.

Vernon Essi - Needham & Company

Thank you. Good quarter here, a couple of questions. I don't know if you gave out the number for churns that was in the quarter, John, what was it?

John Hohener

Well what we did, as we said it was down a little bit. Last quarter was about 33% and we expect that could be slightly down this quarter, Vern.

Vernon Essi - Needham & Company

So it was flattish March to June then on terms…

John Hohener

I think 33 was a previous quarter, if I remember we kind expect it to be on about 33 again, and now we're seeing stepping down slightly.

Vernon Essi - Needham & Company

Okay. And as to follow-on Rick's question there, I am going to ask, but I don't know if I will get a straight answer here on the numbers. How much did SEMICOA contributed to this guidance for September? And then also how much was back-end loaded from the June quarter that you're going to see in September?

Jim Peterson

Let me, I'll give you a hard number on SEMICOA, Vern I think I owe you that. SEMICOA we've made slightly two times above revenue. Like I said strategic, the other it was accretive. And the hard number for this coming Q4, it was dilate about $1.6 million plus or minus 10% you're pretty close to the revenue number that's going to be contributing. The code that follows that you can dilate about $2.3 million, plus or minus 10% once again, you won't be too far off on your model there.

And I will go as far as tell you what I think the earnings per share will be, not a lot of contribution this quarter. Now these private companies they seem to ship ahead a little more cash as they are closing their deals different than a public company. So to be safe and conservative, dilate about $0.04 to FY '09 we throw in about a penny a quarter you will be too far off. How's that?

Vernon Essi - Needham & Company

That's great. Thanks for helping out there. And well on the back-end you said about June quarter in last call or the March quarter had a back-end loading effect. But how much of that revenue was there to get that number?

Jim Peterson

John do you remember that exact number? I don't know.

John Hohener

Now I'm not sure that we told you, when you say back-end loading, I don't think we talk about that we just report quarterly revenue.

Jim Peterson

Yes, something else that I'm missing Vernon I apologize.

Vernon Essi - Needham & Company

Okay. And then in terms of the overall seasonal mix, we're heading into what would be characteristically a strong high performance analog season. Are there any products obviously that the back lighting, you're hit in your stride there, you said wireless LAN. Are there any another analog parts that you would highlight in your portfolio that might be winners in the sort of more the consumer and comps?

Jim Peterson

Those are great examples lets throw in PoE, I mean we had that thing growing about 30% import growth. And once again I think in that same market space, you'll IP videos and IP phones and wireless, LAN, the correlation of what we're doing linkage looks like strengthening. So I think if I put in that same bucket Vern and that's going to round up, the areas for Analog Mixed Signal.

Vernon Essi - Needham & Company

All right, thank you very much.

Jim Peterson

You Bet.

Operator

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

Craig Berger - Friedman Billings Ramsey

Thanks for taking my question.

Jim Peterson

Sure.

Craig Berger - Friedman Billings Ramsey

Just to clarify, you said 25% is the tax rate for September?

Jim Peterson

Yes.

Craig Berger - Friedman Billings Ramsey

Okay. Can you talk a little bit about pricing within the context that your gross margins are up, and proforma gross margins are up 100 basis points year-on-year, and that's good. Is that a function of pricing? Should we expect more than that over the next year? I kind of thought frankly that with the price hikes that we might see a little bit more than that?

Jim Peterson

The price hikes, they better can play for years. However, I think what you'll find going forward is really mix. We've introduced a tremendous amount of new products in the Red Hat area, certainly in the satellite area. Analog Mixed Signal products are better mix than newer products, higher margin, more efficient manufacturing overseas of our foundries. So I think this last quarter was more mixed and new next generation product than what you would have found in Microsemi a couple of years ago, to be honest with you, which is a good news.

Craig Berger - Friedman Billings Ramsey

Okay. Can you just update us on Colorado unplugging are you still planning on pulling the plug on that FAS in October?

Jim Peterson

Yeah, that will be decommissioned October 1. Right now we're probably stuck in a lot of wafers in front line for that customer, they've already been -- one particular customer has already qualified our Garden Grove facility and is working diligently with us. And I will ask you to drop by, you should see a "for sale" sign on the building, listings either done now or certainly be done by October 1.

Craig Berger - Friedman Billings Ramsey

When does your last wafers get started in that?

Jim Peterson

If I know my guidance, 30 days, half September. So there you go.

Craig Berger - Friedman Billings Ramsey

That's the last of the starts.

Jim Peterson

If I told my guide to close on October 1, you can decommission it, they'll catch on September, probably go to our last date.

Craig Berger - Friedman Billings Ramsey

Right.

Jim Peterson

It's with that, it's bundled and set.

Craig Berger - Friedman Billings Ramsey

And then last question, then I'll get out. On the operating expenses for next quarter, what should we be dialing in there? And nice job on the spending control this quarter by the way.

Jim Peterson

Pretty much I think, pretty much where you are. Nothing really changed.

Craig Berger - Friedman Billings Ramsey

Even with the semicap, no entries?

Jim Peterson

I think a little bit of contributions some of their equipment. I'm just going to explain it John. I mean, it will go up slightly in terms of dollars but certainly isn't down in terms of percentage for sales.

Craig Berger - Friedman Billings Ramsey

And what should the spending ramp, I was thinking about the OpEx spending ramp for fiscal '09?

John Hohener

Same story, it will gradually go up as our revenue goes up but certainly go down as a percentage of revenue.

Craig Berger - Friedman Billings Ramsey

Okay. Thanks a lot guys.

Operator

Your next question comes from the line of John Lau with Jefferies and company.

John Lau - Jefferies & Company

Thank you. You hit a couple of different areas but you missed my fairly one which is the satellite in space? I was wondering what if there is any changes in the long lean time you have there? And if there was any changes in your outlook as you see going forward?

Jim Peterson

John, the lean time we've also had on this, I hear you go by the new handle of Jonny Lau.

John Lau - Jefferies & Company

Thank you.

Jim Peterson

Well, I'll call you Jonny Lau for now and that we came up earlier today. But here and there, it continue to be extremely strong market both in the military and commercial and the lead times that we had pretty much have been around the same as the cycle time. We were moving back in equipment over to Ireland for the benefits thereof. So, I think what you'll see is that, we better sorry catching up on any capacity but we're certainly working to service our customers than and they are getting product according to the schedules for the most part.

John Lau - Jefferies & Company

How does that forecast look for the business, I mean satellite launch is strong or are any changes recently?

Jim Peterson

Actually, an uptick straight in the strengthen the markets.

John Lau - Jefferies & Company

So, that market continues to be very solid for you guys.

Jim Peterson

I believe that between 2010, 2012 it doesn't continue to strengthen. I mean, look at the dynamics. As you know, the name of the game is electronic warfare, we've got a launch of satellites and (inaudible) and the life will piece of on air. Then, in addition to that, when you try to built 100 plus airports in Asia, you need new satellites for traffic control, radar and the light, and then the communication satellites, the older retired and they are expiring, and new in the business 15 to 20 years ago where you're not given away your linage but those are my age. Those satellites that's were you go with Johnny joining these days, those satellites they are older retire they are being re-launched my friend, it's a wonderful business.

John Lau - Jefferies & Company

Great. And then finally on, how is the burning? Are those constraints still being addressed now?

Jim Peterson

Yeah I think one of the dealer wants to take your equipment, move it over to Ireland, where we're getting better productivity. Whenever you get 20% of better efficiency, you do it. And I think my operations guys, and I think our end customers will testify that we're getting in track, and won't mind -- let me touch a little bit the high real business Johnny. We at Microsemi have invested hundreds and million dollars in this space while others have abandoned it.

We've been in this business for many a year, in the last seven to eight years, we've put our heart and souls into it and over the next seven to ten years we're going to be there, things will be different, as we're getting paid well, sure end customers and prove to the planet that we're going to be a number one supplier, both in quality, both in technology, that encountered us to be there, as they go forward.

John Lau - Jefferies & Company

Great, thank you very much.

Operator

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

David Wong - Wachovia

On the closure of Colorado, at the beginning of October does that mean that there is a sudden drop in transitional either capacity in the December quarter?

Jim Peterson

Well I never gave a sudden drop, right. I'm guiding for certainly no more than six quarters I know I'll step down, there might not be a sudden drop, if those things proven.

David Wong - Wachovia

So but similarly there are things other than Colorado that...

Jim Peterson

Both.

David Wong - Wachovia

Traditional idle capacity?

Jim Peterson

Yeah, most definitely, we're shipping a lot of other products from other fabs, from United States to other locations and.

David Wong - Wachovia

But are you saying that there are some other facilities that will be shutdown over next five quarters until?

Jim Peterson

No what I am saying is - I'm taking some products that I got in Scottsdale facility and moving it over to China. I think it should start from PPG, the APT thing we acquired, and move that nicely over to China in the more efficient manufacturing operations.

David Wong - Wachovia

Right. Okay. Thanks very much.

Jim Peterson

You bet.

Operator

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

Steve Smigie - Raymond James

Thank you. Just hoping you could talk about what Ireland is going to look like in terms of, how much of that facility is going to be front end and versus back-end?

Jim Peterson

More back-end, my friend.

Steve Smigie - Raymond James

And just in terms you mentioned some pretty positive color on the commercial Aerospace Boeing taken up there the forecast there. Are you -- since you're taking their forecast is that actually sort of increasing your outlook or since you're shipping at capacity at this point, you're pretty much constrained there?

John Hohener

Certainly, weren't going to get too bullish on it. I mean they gave a slight uptick in commercial air. I mean it doesn't take a wise man to figure out that the aircraft are flying these days are very, very old. They rebuild electronics three or four times that's a maximum you can do, fuel led efficiencies are grounding their older aircraft. So I'm not really raising it substantially in that area. What I'm saying is that, people panic, they hear that United's grounded 100 airplanes on mine. But they don't hear there maybe 70 of those are sold to rich executives in Dubai to be converted in private aircraft, and the others quiet frankly should have been grounded five years ago.

Steve Smigie - Raymond James

Great. And finally on the wireless LAN, you're seeing some pretty nice growth their. Can you talk about how many LAN customers you have there for this project right now?

Jim Peterson

We're pretty much across the board. The name of my game with the sales guys is there shouldn't be a customer we don't have. The largest guy we've got, that helps you, and like I said strong reform right now on mixed signal.

Steve Smigie - Raymond James

Great, okay thanks a lot.

Operator

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

Andrew Huang - American Technology

Hey, guys. How are you?

Jim Peterson

We're fine. How you doing?

Andrew Huang - American Technology

Pretty good. So just one question, first on the inventories, once Ireland kind of gets fully ramped up, can we expect to see kind of inventories drop kind of more significantly in dollars or what's kind of the plan there?

Jim Peterson

No I don't think you'll see it drop significantly in dollars. John, you want to touch on that?

John Hohener

Yeah I mean Andrew, we've actually done a very good job in terms of lowering our days of inventory and if you think about our revenue ramp, we certainly need to have the inventory in the pipeline to service that. So we're feeling comfortable with our levels right now. And if you measure it in days, I think we are comfortable with the days. Absolute dollars, it will be a function of our revenue.

Jim Peterson

We did bring it down since that became the question of questions about this.

Andrew Huang - American Technology

And then just switching gears a little bit, it looks like your high route business is holding up pretty good here, in this kind of macro environment. I was just curious, like how much of a ramp can we expect out of the notebooks and CD's like how strong could it be in the September quarter?

Jim Peterson

No, let's put it this way. The name of the game there for notebooks for Microsemi and in TVs, it's a share gain game right now. I notice some, you hear some -- people out there say, TV business it's not as strong as it was. Well guess what it is last years it's been growing 60% to 80% year-over-year. It drops down about a 40% growth and everybody's panicking.

I think a 40% growth in the market is a wonderful market to be in and specifically when you're gaining market share. I think Steve and his team, are doing a great job and they are getting a lot of design wins, a lot of design traction. I don't want to give you an exact percentage. But I am here to tell you, expect strengthening over the next two, three quarters, for Microsemi and both notebooks and TVs.

Andrew Huang - American Technology

And then one last question on OpEx, if you don't mind.

Jim Peterson

Sure.

Andrew Huang - American Technology

If you look back historically when you hit your September quarter, that's your fiscal year-end, is there any kind of like step up in expenses that we can expect in either SG&A or R&D, just so we have a kind of a taken into consideration?

Jim Peterson

I think touched on it -- percentage of sales they both so down. I think we talked about that few moments ago. John?

John Hohener

No, there is no one time items, and that's where we are getting to in the September quarter. We have some variables expenses I mean we pay more commissions when our revenues higher, short of that as Jim as it will turn down as a percentage of revenue.

Andrew Huang - American Technology

Great. Thanks a lot guys.

John Hohener

Thank you.

Operator

Your next question comes from the line of Harsh Kumar from Morgan Keegan.

Harsh Kumar - Morgan Keegan

Congratulations, solid quarter, solid guidance. Couple of simple questions, maybe you have talked about this before. But how much of your how should we think about OpEx as you start to get to your goal of 40% by let's say end of the year. Is Colorado a big factor of that and how much of a factor is Colorado in terms how we should look at OpEx?

Jim Peterson

Nothing significant, so I think you just even ignore that there was a Colorado like I plan to do on October.

Harsh Kumar - Morgan Keegan

All right. So then I am kind of battling with this issue, then how should we think of OpEx it's coming down as a percentage of revenue very high over the next quarter, Jim?

Jim Peterson

Let's just say it's going down and I think we reported to you quarterly and I know we'll track it.

Harsh Kumar - Morgan Keegan

I will. Another question, would it be possible for you to give me sort of a breakdown within your commercial aerospace business, Jim? Planes versus airports, do you see a more spending, the question is more spending in planes? Do you seeing a lot of business in airports as well?

Jim Peterson

Right now planes, airports are on the map and starting them specially international. The real game there is write down the name international. I mean international market even for commercial airplanes by the way, I think Boeing is backlog. I think we mentioned last time, which I think about 11% or 12% of the backlog was for domestic United States, now it's suppose international. And so I think right now its commercial air no doubt. And the infrastructure is now starting to be built from satellite down and down from ground up to satellite as we speak.

Harsh Kumar - Morgan Keegan

Okay, that's fair. And as, you just got curious, I know you've targeted a very large OEM for power-over-ethernet. And I'm curious when do you think or where you are with that particular customer, the biggest one in the marketplace? If there is anything you can talk about there?

Jim Peterson

Ben, you know I can't. Our relationship with the largest guy has made significant progress over the last, certainly eight to nine weeks, both in a technical acceptance and at a professional level. And I'd like to leave it at that so I don't get a phone call.

Harsh Kumar - Morgan Keegan

So pretty recent now and so some recent developments sounds right?

Jim Peterson

Yeah, we've been working diligently whatever, I think we've made tremendous progress in let's just say in the last nine weeks or so.

Harsh Kumar - Morgan Keegan

Very good, thanks. And last question, as you move to Ireland, is there a room in the tax rate from here on out?

Jim Peterson

Yeah, I mean, it's 10% for at least for up to three here, John.

Harsh Kumar - Morgan Keegan

Great. Thanks. Thanks guys, thank you.

Operator

Your next question comes from the line of Vijay Rakesh from Panmure.

Vijay Rakesh - ThinkPanmure

Good execution here, just a couple of questions. On your gross margins, what's the long-term expectation there with, they moved to Ireland and the SEMICOA not been accretive, where do you expect gross margins to go in the next three quarters or so?

Jim Peterson

Well let me tell you the target we've got for the team here at Microsemi. If the gross margins get to 55% and operating margins get to 30%, they went to a quick victory lap or maybe a little glass of champagne. And they will reset our targets.

Vijay Rakesh - ThinkPanmure

Okay, great. And on the DAZL!, you mentioned the DAZL! briefly and that you are taking share on the notebook side and TV set. Can you go there a little bit more on how you are taking share of the notebook, TV side if you have any Tier-1 OEMs that you are breaking into on either side? And what's happening there?

Jim Peterson

Okay, don't get confused. The DAZL! is the real high-end how we did driven type TVs okay?

Vijay Rakesh - ThinkPanmure

Got it.

Jim Peterson

And then we're winning assurance on our mindshare and art of engineering content in Pacific Rim, where we're talking about the winning right now is in predominantly CCFL.

Vijay Rakesh - ThinkPanmure

Okay.

Jim Peterson

In next generation notebooks, and certainly CCFL in TV's 32-inch and above, I mean those are very aggressive strategy was a solid product offering for next generation LAD notebooks and probably smaller LED TVs. And we could have got in the lighting I think, we're just historically be number one to number three. I think today without doubt we believe we are number one, looking at the rear view mirrors of the other guy. So, understand the two differences.

Vijay Rakesh - ThinkPanmure

Got it, okay. And is that your second half revenue in that market in the notebook TV market great pretty significantly over the first step based on the design wins and market share gains here?

Jim Peterson

I don't want to get too optimistic with him but it is a share, the gain came for us.

Vijay Rakesh - ThinkPanmure

Got it.

Jim Peterson

The design wins that we've got over the last past six months, these are to believe that it'll certainly be in the right direction which is upwards.

Vijay Rakesh - ThinkPanmure

Okay, guys thanks. That's good job.

Jim Peterson

You bet.

Operator

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

Patrick Wang - Wedbush Morgan

Couple of questions. First-off, can you talk about directionally where lead times are going, I guess as we look into analog and high real?

Jim Peterson

Yeah, no doubt about it. We're working with three areas, so let me do that for you. One area is analog mixed signal, the second one is high reliability, and the third one is satellite. And it looks a lot like last quarters so let me give into you analog mixed signal, still are about 12 to 14 weeks, high reliability on around 20 to 30 weeks, and satellite very consistent, greater than 36 weeks. So it looks very much like the last quarter.

Patrick Wang - Wedbush Morgan

Great. So it sounds like things are pretty stable there. Okay, second onto inventories. Can talk about, I know inventories were flatter to dollar and came down in several days, but what about the mix there between analog and high rel? Is that again pretty stable quarter-to-quarter?

Jim Peterson

Yeah, I've said stable and good work from quarter-to-quarter, no doubt.

Patrick Wang - Wedbush Morgan

Got you, okay I appreciate that. And then, I guess third, if we look at the shape of gross margins in the near term, I know you guys have this price positioning program that you do every year and it takes a number of quarters to finally work its way through the backlog when it turns into revenues. How is that kind of impacting I guess in the near term here?

Jim Peterson

It does feather in, so does includes of the back-end of any one of our fiscal years. So you're probably seeing a little bit of feathering and a little more feathering next quarter.

Patrick Wang - Wedbush Morgan

Okay. Is there something that could consensually help you guys applying 50 basis points?

Jim Peterson

Certainly, it's certainly one of the secrets of ingredients correct?

Patrick Wang - Wedbush Morgan

Yeah, agreed. Okay, great. And then lastly, you guys have done a great job on generating cash and have a very healthy cash balance here. And you guys are, I guess historically fairly acquisitive here. What you guys taking in the near-term regarding acquisitions, like what you guys interested in, is it continuing to buy out some of these high real competitors, any thoughts about extending the analog side of things, what are your thought there? Thanks.

Unidentified Company Speaker

The most important thing to Microsemi right now, is does it fit, is this strategic, and is it accretive. And that's pretty much the criteria. The high reliability, there are other private companies out there, there other private companies out there, the private companies they are usually for us, we've done it before the nice roll ins. And for the Analog Mixed Signal, is all refining area that is not extremely competitive, whether there great margins or some value to it, we look at those as one of our client, but -- important part accretive in nature.

Patrick Wang - Wedbush Morgan

Okay. And then just the quick one on SEMICOA, outside of the one time, I guess you're going to have some one time expenses next quarter. Is this going to be just I guess very incrementally accretive in the September quarter?

John Hohener

Some yes.

Jim Peterson

It's accretive.

Patrick Wang - Wedbush Morgan

Got you.

Jim Peterson

I put it four times in the press release just to make sure everybody understood.

Patrick Wang - Wedbush Morgan

Got it, appreciate. Thanks very much.

Jim Peterson

Right now.

Operator

(Operator Instructions). Your next question comes from the line Sean Webster from JP Morgan.

Sean Webster - JPMorgan

Thank you very much. Can you talk a little bit about what utilization rates did end in the front end sequentially?

Jim Peterson

I can touch it, I think in the Analog Mixed Signal obviously, its so foundry. So that's, if the backlog goes up utilization is not a big issue. In the High Reliability, we continue to ramp our size and put the right equipment in place. I'm guessing utilization certainly in excess of 80% or so.

Sean Webster - JPMorgan

So it sounds like it's up sequentially?

Jim Peterson

Yeah I think we're getting better utilization than we had in the previous quarter. You try to keep it you don't want to get much higher than 80, we can build up equipment in there. Just to if you do get increased business, you want to be able to increase your utilization capabilities. But we're in pretty good shape there Shawn, right now.

Sean Webster - JPMorgan

Okay. Do you expect those to go up again in your fiscal Q4?

Jim Peterson

Yes, I do, yes.

Sean Webster - JPMorgan

Okay. For your guidance for your earnings, what are you expecting in terms of the gross margin percent or how much do you think it will grow up?

John Hohener

Yeah we're going to dial in, just like we did in previous quarter, about 40 basis points gross margin, and then just dial in on or about 80 for operating margin. And let's see how we fair with those numbers.

Sean Webster - JPMorgan

Okay. Just a couple more boiler plate ones, your non-GAAP shares was there any difference between your non-GAAP ex-options versus your diluted share count per GAAP?

Jim Peterson

No.

Sean Webster - JPMorgan

Okay. Can you give us the state of channel inventories as you see them?

Jim Peterson

Yeah I can. Realize lying share of our products, 50% is the direct OEMs. I think channels as percent of sales as to help just the inventories. We watch that real close because that's what nearly bites people and we don't want to get bet. So let's just say I believe it's down, I am convinced it's down.

Sean Webster - JPMorgan

So just it's down and OEMs, how is that looking?

Jim Peterson

We still got lead times, our lead times 12 to 14-weeks in the life for Analog Mixed Signal, and the like we're in pretty good shape, churn rates about 30%. Where I think we're real safe in that area as well. Okay. And then as it relates to the SEMICOA acquisition I believe, there was a 100 folks who were coming over as part of that, is that correct?

John Hohener

I think right there were a 100 folks when we closed the transaction.

Sean Webster - JPMorgan

Okay.

John Hohener

We're sizing that, and we expect 1 October, on or about 35 to 40 employees.

Sean Webster - JPMorgan

Okay.

John Hohener

And some of those will be moving through our Garden Grove facility, so.

Sean Webster - JPMorgan

Okay. The revenue -- thanks for the clarity on the revenue by the way for that and the 2.3. The question I have is it seems like there was disconnect between that revenue run rate, and what is implied by your two ex payment for the company?

Jim Peterson

Just because, the first quarter, I didn't get a full quarter, and Sean let me remind you, private companies will be different than public companies. As the way of tendency, when you're doing a transaction to maybe ship a little more to some of their friends here and there, and it really don't gives us a clearer picture. So we're doing as we go in right away.

And you just start looking at cost cuttings, you start looking at the manufacturer trades of technologies, what products gone where. So I'm just being conservative with the 1.8 I said plus or minus 10% and I jumped to 2.3% plus or minus 10%. So I'm just being a little cautious on this thing.

Sean Webster - JPMorgan

So I guess it was any part of the deal or a value driver of the deal to just cut out a competitor and their revenue stream or do you expect them back up to that $12 million kind of run rate again?

Jim Peterson

I think there's plenty of gas in that tank. Remember there's additional product in Red Hat. Red Hat is a place that I'm excited about, its higher margin product. And that might give a little edge to us I might maybe taking walk away from a little bit of low margin business in one of the other groups. So if I say 120 plus or minus 10% on acquisition it gives me edge in a couple of places.

Sean Webster - JPMorgan

Got you. And I guess just one final one for me, as it relates to the sequential change in your pro forma gross margins. How much of that could you pass it up between mix, pricing, and the rise in utilization rates?

Jim Peterson

I'd say lion share is going to be mix, second will be utilization rates, and third will be pricing.

Sean Webster - JPMorgan

Okay. Thanks very much.

Jim Peterson

You bet my friend.

Operator

(Operator Instructions). Your next question comes from the line of Christopher Longiaru from Sidoti & Company.

Christopher Longiaru - Sidoti & Company

Hey, guys, congratulations on a good quarter.

Jim Peterson

Thank you, my friend. What you've got?

Christopher Longiaru - Sidoti & Company

Okay. First of all, you talked about just some strength in the notebook and the LCD TV space and gaining share, is that just more design ones with existing customers or is that new customers, could you give us a little color on that?

Jim Peterson

Hey good question for this late into it. Actually, in the notebooks it's certainly new customers.

Christopher Longiaru - Sidoti & Company

Okay.

Jim Peterson

I'm glad you brought that up. TVs, we've always had the top five-six guys.

Christopher Longiaru - Sidoti & Company

Right.

Jim Peterson

So there, they're converting it into more Microsemi technology and product. That's a good question.

Christopher Longiaru - Sidoti & Company

All right. And the other thing was, and this is kind of easy one, but that transition flyover capacity cost for Colorado, we all knew it was going to go up before it went down. It's dropped significantly this quarter, are we going to see that kind of continue up until October when that shuts down or is that just kind of an anomaly for this quarter?

Jim Peterson

That was a nice step function, okay. And just understand that's a number one priority on my must-do list. Is that thing complete, more so in no more than six quarters okay?

Christopher Longiaru - Sidoti & Company

Okay.

Jim Peterson

That's a number one priority.

Christopher Longiaru - Sidoti & Company

Okay, got it. Alright, thanks guys.

Jim Peterson

Okay.

Operator

Your next question is a follow-up question from the line of David Wong from Wachovia.

David Wong - Wachovia

Thank you. Just a quick clarification. Will there be any severance charges for the SEMICOA acquisition in the September quarter?

Jim Peterson

No. It's a very small charge if there is, and those are not necessarily our expenses.

David Wong - Wachovia

Okay. And again, I understand they're small but, do your stock option expenses go up with the new employees or do they tend to get stock option?

Jim Peterson

I'll deal with those stock option transfers in this transaction. This was cash and only cash.

David Wong - Wachovia

Great. Thank you.

Operator

Your next question comes from the line of Harsh Kumar from Morgan Keegan.

Harsh Kumar - Morgan Keegan

A quick follow-up. Did I hear that correctly that we should be thinking about operating margins going up to 80 basis points?

Jim Peterson

I say gross margins are about 40 and operating margins down in about 80 and you'd be dead on my friend.

Harsh Kumar - Morgan Keegan

Perfect. And then just a simple question, interest income or other income came down, that was just I taken interest related, just interest rates going down?

Jim Peterson

Yeah, that's exactly right. We're primarily playing it safe maturity money market funds in there, left the economy the way it is and that's where we're at.

Harsh Kumar - Morgan Keegan

When we think about modeling that, should we be just taking it down or keep it flat?

Jim Peterson

No, it can be flat.

Harsh Kumar - Morgan Keegan

Okay, fine. Thanks, guys. Great quarter, great guidance.

Jim Peterson

Thanks, my friend.

Operator

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

Craig Berger - Friedman Billings Ramsey

Hey, guys I was actually going to ask that interest one, but I do have one more on the ROI capacity what kind of back-end capacity growth are you going to see here in the see here in the September quarter, now that you've got more equipment over there and you're kind of getting the efficiencies ramped up? And also what kind of capacity growth do you think you are going to put in for this summer?

Jim Peterson

I'm just stepping that up. I said last year, we thought we're going to do 50 to 60 versus 70 to 75, or at the top end of that. I am on a run rate right now of 100 million plus. So we are going to step that up. I mean, the more the merrier there.

Craig Berger - Friedman Billings Ramsey

Thanks, guys.

Jim Peterson

And if I never thought if I did, I probably wouldn't give it you.

Craig Berger - Friedman Billings Ramsey

Thanks, guys.

Operator

There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

Jim Peterson

Okay. Thank you for joining us today and for your questions by way of review. Here are the main points we covered. We continue with our program to close the GAAP to non-GAAP adjustments, with more to come. Cash investments increased $32.6 million to $171.2 million. And the Ireland transition is on target allowing us to make substantial improvements in our capacity utilization.

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

Operator

This concludes today's Microsemi's third quarter earnings conference call. You may now disconnect.

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