Microsemi Corporation (MSCC) September 13, 2012 9:00 am ET Executives 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 Charlie Leader 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 Presentation Robert C. Adams
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. LitchfieldAll 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. Read the rest of this transcript for free on seekingalpha.com