Microsemi Corporation (MSCC)

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Microsemi (MSCC)

Q2 2011 Earnings Call

April 28, 2011 4:45 pm ET


Terri Donnelly - IR

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

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


David Wong - Wells Fargo Securities, LLC

Craig Berger - FBR Capital Markets & Co.

Richard Schafer - Oppenheimer & Co. Inc.

Andrew Huang - Sterne Agee & Leach Inc.

Erik Rasmussen - Pacific Growth Equities

Jonathan Smigie - Raymond James & Associates, Inc.

Harsh Kumar - Morgan Keegan & Company, Inc.



Good afternoon. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Microsemi Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Terri Donnelly. Please go ahead.

Terri Donnelly

Good afternoon, and welcome to Microsemi's Second Quarter 2011 Earnings Conference Call. I am Terri Donnelly, coordinator of this call. In a few moments, you will hear from and have an opportunity to ask questions of Jim Peterson, our President and Chief Executive Officer; John Hohener, our Executive Vice President and Chief Financial Officer; and of Steve Litchfield, our Executive Vice President and Chief Strategy Officer.

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

Microsemi issues guidance in the form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of April 28, 2011, and is continually subject to reassessment due to changing market conditions and other factors, therefore must be considered only as management's present opinions. Actual results may be materially different. However, management undertakes no obligation to update these or any forward-looking statements, whether as a result of new information, future events or otherwise. If an update to our business outlook is provided, the information will be in the form of a news release.

We wish to caution you that all of our statements, except the company's past financial results, are just our current opinions, predictions and expectations. Actual future events or results may differ materially. For a review of risk factors, please refer to Microsemi's report on Form 10-K for the fiscal year ended October 3, 2010, which was filed with the SEC on November 23, 2010 and our Form 10-Q for our first fiscal quarter of 2011 that was filed with the SEC on February 10, 2011.

That said, I am going to turn the call over to John to discuss our financial results and then Jim will address our end markets and overall business strategies. Here's John Hohener.

John Hohener

Thank you, Terri. Net sales for the quarter ending April 3, 2011, were a record $207.5 million, up 12.6% from the $184.4 million in the first quarter of 2011 and up 75.5% from the $118.2 million recorded in the year-ago second quarter. On a non-GAAP basis, gross margin was 56.2%, up 260 basis points from the 53.6% in our first quarter of 2011, and up 880 basis points from the 47.4% reported in the year-ago second quarter. This growth was driven by increased revenue and operational efficiency improvements. Approximately 107 basis points or $2.2 million of the sequential improvement is related to cost savings associated with the final quarter of our Scottsdale transition.

Our non-GAAP gross margin forecast for the next quarter is expected to improve by 20 to 80 basis points from this quarter. This quarter, non-GAAP selling, general and administrative expenses were $35.3 million or 17% of sales compared with $32.5 million or 17.6% of sales in the first quarter and compared to 18.2% or 15.4% of sales in the second quarter of last year. The increase was primarily due to having Actel for three full months for the quarter versus two months last quarter when the acquisition occurred.

SG&A will be up next quarter between $500,000 and $1 million in support of the growth of the business. Research and development costs were $28.2 million or 13.6% of sales compared to $24 million or 13% of sales in the first quarter and compared to $12.1 million or 10.2% of sales in the year-ago second quarter. The increase is primarily due to having Actel for three full months for the quarter versus two months last quarter when the acquisition occurred. We are continuing to benefit in the latest generation of our product roadmap, which will increase our R&D investments between $1 million and $1.5 million next quarter. Our non-GAAP operating income was $53 million or 25.6% of sales compared to $42.4 million or 23% in the first quarter of 2011 and $25.8 million or 21.8% in the prior-year second quarter. The 25.6% level highlights our strategic success in the integrating acquisitions and expanding organic profitability in driving returns to our shareholders.

We recorded $5.1 million in non-GAAP interest and other expense, primarily due to the interest expense on our term loan. This is a for a full quarter compared to the $3.2 million recorded last quarter for the two months our term loan was outstanding. During the quarter, we successfully refinanced our term loan, reducing our borrowing rate by 100 basis points. Interest and other expense is estimated to be approximately $4.6 million next quarter.

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