Welcome, everyone. Welcome to the Microchip Synagural Analyst Day. It's, first time ever that so many of our investors and analysts are here under our roof. We're humbled by your presence. We know we gave you a very short notice about a couple of weeks to arrange your trips to come to this Analyst Day.
Hopefully, you now know why. We wanted to coincide the acquisition with this Analyst Day there are a lot of moving parts when you do an acquisition to bring all these things together on a given day is a Harkulian task. We were completely prepared if that acquisition didn't come together today and needed another week or so, we would have just only talked about our organic business. So we had a plan B, but I'm glad we are executing plan A. So welcome, everyone.
Now all of you have a little goody bag that, you know, cheap microchip gifts, the microchip way What's in them? You know, there is a thermocup. There is a spider screwdriver that has all these with these type of screwdrivers, with a light, and there's a baseball cap, there's a notebook to take notes. Some of you have speaker and then some of you have LED flash light. We ran out of speaker, so we put the flashlight.
And there's also USB disc that has a touchdown video last year, we had a challenge to reach $1,000,000,000 in annual sales I'm sorry, $1,000,000,000 in quarterly sales, which you know, we did that in September quarter. And we had a motivational program called test down 2018 that if we achieved that and when we achieved that, we got a high school football team Michael Chip executives played against the high high school football teams to achieve a touchdown and win the game. It's all in good humor. You have a USB stick and watch it when you like. The dances are my granddaughter's dance class.
At the end of the at the end of the session, if you still are here and you want to spend another 12 minutes, we can play the video. Otherwise, you can watch in your own time. So, I'll begin with the safe harbor. Today, we'll be making some projections and other forward looking statements regarding the future financial performance of Microchip. These involve predictions and the actual results may vary materially So I refer you to Microchip's filings with the SEC regarding some important risk factors.
This is a larger version of it for the acquisition. Will consider it red and into the record. So with that, here's the agenda today. I'll go through the overview of my Chapen value proposition. And then we'll take your questions.
This will be the organic part of the business. Then I'll cover the Microsemi acquisition. And then we'll take questions on that. Followed by that, Ganesh Murti, President and COO will talk about how our products are enabling smart, connected, and secure applications. Rich Simonsec will talk about a total some solutions and Eric with financial metrics.
After my 2 presentations, we'll also take a break, and then we'll cover the other 3. So let's begin. When we made the last quarter earnings announcement, there was clearly a disconnect And the disconnect was clearly driven by Atmel Seasonality, which didn't happen last year, which through all of you off and it threw us off too. Prior 5 years, Atmel's March quarter business had gone down 7.8% of It didn't happen last year because number 1, we were raising prices. And number 2, we had just gone live on our IT systems Atmel Business moving to our IT systems.
And there were a lot of moving parts. There was so much noise that it kind of masked seasonality. And this year, seasonality came back in droves. So ever since the question for investors and analysts have been, well, how does the June quarter look? Do you make something come up with up?
Where does it go? So today, we'll help you with that. So let me cover the business update we issued after market closed today. The March quarter is tracking according to the midpoint of the guidance. The old guidance was minus 3 to plus 1 and the new one is flat to minus 2 with the midpoint of minus 1 unchanged.
March quarter guidance at the midpoint is a 9% growth year over year over the same quarter a year ago. So here is the June, expectation. We're expecting June quarter net sales to be up about 5% sequentially, and that would be 6 0.3% over a year ago quarter, which I call soft landing in our scenario that we have described, to you with a mid to high single digit kind of growth, that's kind of the soft lending on the lower end of that. Bookings are very strong. Our 3 months book to bill ratio ending December, as you know, was 1.0.
I couldn't give you the March. We just started March. But we pulled the book to bill ratio for 3 months ending February, and it was 1.09. I'll show you that on a graph. 12 month backlog is in an all time record.
And June 2018 backlog is well above the March 2018 quarter backlog at the same point in time. So this is the end of February. And if you compare the June quarter backlog now to the March quarter backlog at the end of November, I'll show you that in a graph. Latest market share data shows consistent market share gains. So Canary has not died in the coal mine.
So here's the book to bill ratio. And, in the next four slides, this one being the first I'll, read the tea leaves together with you, you know, the guidance based on panoply of data that we get sometime can be confusing. I know in your business, it can be confusing. And I'll help you read the tea leaves regarding how we are reading to give you confidence why our business is alive and well and why our June quarter will be a good quarter. So here is the first one, and I'll read the tea leaves with you.
So this was the time when, when the lead times were going out and the book to bill ratio was rising, And it went through 1.06. It went through 1.11, which was the highest book to bill ratio, in this cycle. And when we saw that happening lead times pushing out to our 115,000 plus customers large majority of them buy from distribution, many of them do not know lead times are going up because distribution may have stock for the product they're buying. So we have the obligation to let all of our customers know, not only customers, what the worldwide customers, what is happening in our business. And we do not know any other way to communicate with 115,000 plus customers other than issuing a public CEO letter that we posted on the web.
So we posted that letter on April 4th after seeing this bookable ratio ending March. And, you know, some of you believe that that dry booking somehow or that pulls the backlog in, it does really none of that, in the June quarter last year. The book to bill ratio was very similar. Just many more customers who were not aware of, you know, place bookings to secure their place in line so they don't really get short of product as the lead time was longer. And when the customers covered the backlog for the lead time, Then, bookings went to start to go to normal.
Now they only have, every week, they have to place the order for a out week. Every week, out week. They didn't have more weeks to cover. So then the September book to bill ratio was 1.05 some of the lead times started to go down also and the December book to bill ratio was 1.0, I have described that as a soft landing. So the February book to bill ratio was 1.09.
Now I'm not saying that March ends at 1.09 March is a strong billing quarter, you know, it's always a little backend loaded after the Chinese New Year, but it's also a strong booking quarter. I don't really know where it will end. It could moderate some, but it would be a very strong book to bill ratio, to get a better comparison it would be a good question to ask. Well, what was the November ending book to bill ratio so you can compare it to February? It was 0.99.
So that shows you the health of, bounce from the soft landing and the business is in very good shape. So let's go to the second page of reading the tea leaves. Now this is a total backlog history. And, the squares show various acquisitions as we add their backlog to ours, and the very left was the Supertext and ISS Those were not needle movers. Micraer was a little larger.
So we got the backlog bump with atmel. We got a significant atmel bump. And after we consolidated Atmel's bookings into our booking backlog, you could see how business has continued to grow after that. And then in the last couple of months, you can see the bumps, the week to week data can be very noisy. Every point here is 1 week.
Can be very noisy. And, so you could see that soft landing. And then after that, as the business strengthened past December again into January February, leading to that 1.09 bookable ratio, you see that leading to the record backlog. We just came off the Chinese New Year. So very last point was a tick down that's because of the Chinese New Year.
As it recovers from there, the backlog is in the record territory. So that is the second evidence of why the business is in very good shape. And we are experiencing record backlog. So let's go to the 3rd page, again, reading the tea leaves here. So let's start with the bars.
The blue bars are where the billings plus backlog is. So we're in the middle of the quarter, We have shipped a bunch of stuff already, and we're going to ship much more in March. So if you add what the billings are plus add what is already on the backlog for the March quarter, that number would be the top of the blue bar. And that flatness for the last couple of weeks is the Chinese New Year for 2018 we just came off of. And then as we go into the stronger 4, 5 weeks of March, this is headed towards where our current guidance is confirming for the current quarter.
So now let's go to the left hand side of that graph. First look at the green line. That green line was the June quarter of last year. And the Chinese New Year last year was earlier. Than this year, but 4 weeks earlier.
So when you look at the, where I say CN by 2017, That was the flatness during Chinese New Year for June backlog a year ago. So during the Chinese New Year, the backlog for June quarter wasn't growing. When it came out, then it accelerates. And that's a reasonable slope, the green line, how the backlog build coming out after the Chinese New Year into the rest of the March and then continues to build in the June. And this is for Greater China.
Greater China for us is China, Hong Kong, and Taiwan. That's the region we manage as Greater China because a lot of the designs done in in Taiwan, really shipping to China. So it's in Hong Kong. So where the pink dots are, the pink dots are the same billings plus backlog for June quarter this year. Obviously, billings are 0 because quarter hasn't started, so that's all backlog.
And you can see the pink dot You can see the flatness there also because of Chinese New Year and then coming out from that. But this year, the flatness is much less than last year. You could see how much pink dots are above the green line. So that shows you the year over year growth think that this year's June quarter versus the green line last year's June quarter. And second thing you can compare is the pink dots are above the blue bars.
Blue bars are the March quarter and pink dots are the June quarter. And, and the June quarter, slope is a lot higher coming out of the Chinese New Year. So the distance you see to the green line that distance should continue to build going higher. And if that happens, even if some distance closes, you can see how much higher we could end up over the top of the blue bars on the right side. Remember for June quarter, we have 4 months to go.
So as those lines fill up and you read those teles, that's a pretty good scenario. And we have years years of history in reading these teles. So that June quarter is building fine. So this was a Greater China. And when you add it to the microchip total, all all the other geographies, this is largely similar.
On the right hand side, you see the slowdown because our Chinese New Year, in the blue bars, you come to the left side, you see the Chinese New Year of last year. This one is less pronounced. And that's why I showed you greater China because when you add the U. S. And Europe and Asia like Korea, and others, which do not hold Chinese New Year, it gets muted.
And when you look at the current year, you almost can't tell the Chinese New Year. Bookings have been so strong in other geographies, building the backlog that it's barely noticeable. So when you then add the slope of the green line, you can see where it could possibly end up significant growth of the June quarter. So those are the four slides I wanted to take the time to read the tealies with you. This is what we do here, you know, often.
And it's not a perfect science, but, you know, over the years of perfection, I think, you know, most of the time, we have delivered it to you every once in a while, the the math, it doesn't work or something goes wrong in the world where the tea leaves go off. But, this one is very predictable and And that's really the evidence to the very first slide I show. So let's move forward. So with that, I'll briefly summarize the Microchip 1.0, which is the last 25 years or so of our history, then go into the Microchip 2.0. During Microchip 1.0, we saw a very consistent growth perennial market share gains high margin business model, our shareholder friendly with consistently increasing dividends and free cash flow and a very successful M and A strategy.
So this is the annual net sales growth showing 109 consecutive quarters of ability. This is non GAAP because sometimes acquisitions bring a lot of charges and taxes and other stuff. This is a tremendous graph from a humble $80,000,000, $90,000,000 when we went public to a company that's closing on $4,000,000,000. And with today's acquisition, approaching approximately $6,000,000,000. The largest business is microcontrollers followed by analog in blue, followed by memories and licenses.
This is the worldwide microcontroller market share ranking. In 2003, we were number 8. We were number 25 in 1990. But even since 2003 in the last decade plus, we have gone from number 8, to a number 3 position in microcontrollers. This is the numerical share.
It's measured by our revenue divided by revenue that the SIA posts and you know the SIA data doesn't quite jive with the Gartner data I know there are differences, but Gartner puts out a number once a year. SIA puts out a number every month. For any kind of nimble tracking, as long as we do it consistently and we do, we plot against the SIA, and this is kind of what it shows. So, when we bought a lot of organic growth here over the years, and then, the big jump in 2016 was with the Atmel acquisition. And then this is after we acquired Atmel, we had another year of significant market share gains.
This one continues. This is the, growth of the analog business. It's now $950,000,000 annualized. Based on a fiscal year 2018 run rate. So 1 quarter missing out of that.
Historical financial performance, you can see the revenue growth on the top left and the top right gross margin percentage. So did despite buying numerous acquisitions and during that time, whose gross margins were substantially below us, We fixed them, improved them, brought them into our manufacturing, raised some prices, and resulting gross margins are higher than where we were for 5 years ago. Bottom left is EBITDA in dollars and margins. So EBITDA margins have also increased EBITDA dollars have more than doubled and then the free cash flow. It's a very, very substantial free cash flow, which helped us pay down essentially most of the debt we had in from the Atmel acquisition and prior acquisitions.
And now we are getting ready for the next acquisition. Expanding our solution through acquisitions. You have seen that through many of these acquisitions, Many of these are small unknown private companies, but, you know, handful of really public companies, large acquisitions that you were aware of them. Like ethanol, Micro, Supertech, Silicon Storage Technology. They've all been integrated into Microchip system, adding enormous value to Microchip.
And it is expanding our solution through all these acquisitions as well as organic product growth internally, which really then builds the foundation for what I will go into next, which is Microchip 2.0, in which our vision is to be the very best embedded control solutions company ever. Products and applications that are smart, connected, and secure. Now Ganesh Muthi in his presentation will take you through smart, connected, and secure very eloquently. I will not cover that part of it. So these are the salient features of Microchip 2.0.
Total system solution and embedded control that Ganesh will cover leading customer preference to design with our MCU is also Ganesh will cover. We'll show you some charts showing how We are the leading choice for customers to design with our microcontrollers, multiple growth drivers, record gross margin target with multiple drivers, a record OpEx, low OpEx. Our end market mix is skewed to industrial and automotive. I'll show you a pie chart. And the new long term model with industry leading operating profits.
I'll cover a few of them. Let me first just show one slide in total solution. Our VP of analog, Rich Simonsack, later on, will have his entire presentation on total system solution. This is just one slide that shows the results. So what the graph shows is, number of Microchip parts per project.
So there's a customer board, which has a microcontroller, number of analog parts, converter, power management, maybe has Ethernet connectivity, maybe it's connected to Wi Fi, maybe need some memory, maybe need some power management, Whatever it has, how many of Microchip parts are on that design? It's growing at 20% plus year over year since we have been talking to you. So here's the first data we're sharing with you the result it. We've shown you lots of diagrams and, Eric Simon, Rick Simon's segment, I can show you many more slides how various products, selling together with our microcontroller. But numerically, this is the, first data we're sharing with you.
This is the revenue by end markets. 2 largest markets are industrial and automotive, which gave very sticky sockets, high margins, percent of our business. Consumer for us is not consumer electronics. Consumer for us is not the the Samsung's and other consumer electronics for the world. Consumer for us is more dominated by, appliances, household, drones, you know, and, and I have some pictures, many of those kind of things rather than, you know, your cell phones.
That's the kind of business we don't like. It's, usually, lower gross margin and fast moving. And then computing, communication, defense, and aerospace are smaller incidentally, those 3 are the largest segments for Microsemi. And I'll show you in the second half of my presentation, then they are stronger where we have less exposure. So together, it gives a dramatic cross selling opportunity and it makes up high much more homogeneous.
So summarizing this first part of the presentation that largely talked about our organic business, We are a consistent revenue grower and market share gainer with multiple growth drivers, a high margin business model and shareholder friendly, successfully managed a soft landing with seasonal March quarter and a strong expectation for June quarter with record backlog. One question I would give you is we went out of the way to share a lot of internal data to read the T leads. Don't expect us to bring that every day. You know, there was kind of one time here because there was so much nervousness on the street regarding because of the disconnect in March. So that was a one time thing.
Premium, long term, non GAAP financial model to 62.5 percent gross margin, 22.5 percent operating expenses and 40% operating income. Last quarter was 39.5 percent operating income. We're pretty much on the heels of the 40%. Executing on Microchip 2.0, total system solutions, smart connected and secure. So state of the union at Microchip is very strong.
That state of the union got attacked after a January announcement. But, hopefully, I took some pains to convince you today that state of the union at Microchip is very strong. So with that, I will take, questions on the organic business of Microjet. First, from this audience, Then we'll ask the operator to open it to the audience on the web or on the phone, and then we'll go into the second part of the presentation where we'll recover Microsemi acquisition. So if you have a question, please raise your hand and let the mic get to you.
Thanks, Steve. Kevin Cassidy from Stifel. You showed 24 percent of your revenues exposed to consumer right now. Can you say what it was before Atmel?
Anybody has a number? Yes. We didn't measure for a number of years. This was a difficult process to go But when we last did, that number was probably within plus or minus something. AppNEL had a higher exposure.
And so over time, the classic microchip before Atmel has systematically moved more towards industrial and automotive. All I know is, you know, ethanol had higher percentage exposure and also larger customers. If you remember, in the early days of the acquisition, we said one of the things that characterized the business was swinging for the fences. And many of these swinging for the fences ended up being consumer kind of applications where there was a quicker revenue return that goes with it. But honestly, we stop measuring because it doesn't affect our business for a long time.
The last April or May was the first time we did it in a while.
What, the kind of customers and the kind of applications, the Atmel consumer business was, was very and what Microchip was. We go into garage door openers and washers and dryers, and they don't have the cyclicality where for customers, cell phones rise, and then there's a hard landing. You know, Atmel business was much more what you call it consumer electronics. Our business is consumer versus consumer appliances and things like that, which are not tied to as much the gift cycle and, you know, updates from the phones and all that.
Will Stein from SunTrust. Thanks very much for hosting this and congrats on Neil, but I understand you're taking on the organic? Yes. I'd like to maybe address something that came up on the call call and for the aftermath of that. Sorry.
So on the one hand, you talked about how investors to understand what we should have expected, for the March guidance, we should look to historical seasonality for microchip, let's say, Heritage Microchip X Atmel and then weigh in what Atmel's seasonality. So I understand that. But I think if I were to do that, I wouldn't come anywhere close to high single digits organic growth if I string those seasonalities together. So can you help us square those two data points. I think atmel had actually negative growth in the last few years.
And so that seasonality is certainly not what you're sort of
So that's really why we can't put four quarters of seasonality and sit down with you and say, this is a seasonality for the other quarter. Because Atmel was a broken franchise in 2015. The business was down, I think, 24%. So, you know, when you have, you know, that kind of business and combine, you know, Microchip, Ethanol Business has grown every year, every quarter since we have bought them, other than the seasonality part of that. So, you gotta take that data with a grain of salt.
March quarter seasonality was real. It was math left last year. Yeah. It's not only the street that made the error. We made the same error.
You know, we could have corrected you, but we didn't decode it either till we relied upon it. But if you kind of do that number for every year and take the declining Atmel business and add it to our growing business, you'll get 0 growth for the year. And if you believe that, then I can't help you, but we have to really establish a new seasonality and a new numbers. And March quarter was just so much more pronounced because the kind of business, but the rest of it, worked with the guidance and I think you'll be okay.
So maybe as a follow-up, should we think about seasonality being different than sort of that weighted average because of all the improvements you've made to AppL, but perhaps directionally quarter to quarter sort of that, that's what we should look to this.
Yeah. And and even now, we do not know how to completely modulate Aetna seasonality from a declining business to a growth business is the seasonality exactly same as the declining business head versus the growth business is. You know, that's why this is the 1st clean year. You know, last year had a lot of noise that we were integrating and raising prices and adjusting things. And, I think that's a that's a challenge we didn't fully realize.
You know, most of our other acquisitions were relatively small, they moved some needle, but they were not large enough to change the seasonality. Ethanol was, you know, nearly 40% of our business when we bought them. And, and the largest acquisition, Microwel was $200,000,000 of business when we bought them. So this one was very, very sizable. And, And we largely changed the complexion of it.
The kind of customers we're going after, the kind of markets we're going after, you know, no more shooting for senses, you know, assuming senses, raising some prices. So it's a it's a new game, and I think we gotta, you know, bear with us, a few quarters as the new seasonality emerges. Unfortunately, he will get murdered again with Micro SIM. Yes, sir. So talking to the mic.
I'm Ray Run from Shaker Investments. Now that you have atmel, you acquired farm technology we didn't have. How are you going to leverage that? What part does that new technology, does that new opportunity play in the plans going forward? How are you going to make the most of it?
You want to take that?
So it's not completely correct that we did not have ARM Technology before we extensively used arm in many of the specialized microcontrollers, not only SMSE, some of the other ones, too, And so we're very familiar with the architecture. Our standard products did not necessarily use them. I think with Appmel, we got a set of standard products that had arm as well, and it adds to the portfolio. We remain consistent with the view that the core is not important. If it is important to somebody, we now have another arrow in our quiver to address them.
And the best architecture when combined with the core and everything else wrapped around it wins at the customer. And so we have 2 architectures that are pick microcontrollers from Microchip before AppMEL the SAM microcontrollers from AppNOL that are all pretty too bad. So to repeat the question, the question is, do we plan to expand the Aframal product line? Yes. And we're expanding on both sides, right?
So They have different strengths, they have different ways in which we integrate the products. We have announced both new products that are with the PIK32 from before Appmel, and we've announced new PIK32 since Appmel that have an ARMcore in them, they're all with the PIK brand, they just happen to have different cores depending on what we're trying to accomplish with them.
What we accomplished in the last year and a half, 2 years is After we bought Atmel, and this is the best form of appreciation in a way, Atmel Engineers, marketing, apps, system engineers and design engineers, and I'm feeling a little bit of, He was going to talk about it. They said Microchip's ecosystem was better. And they wanted ATML products to be able to run on Microchip's ecosystem. The surveys were saying that, but when your competitors, you know, people, Badgemont compared when they became part of us, they said Microchip had great development tools. Their ecosystem was better.
We want the on products to run on Microchip's ecosystem, and today they do. So even the on products that came from Atmel today, I'm able to run on Microchip's development to MPLAS. And we also produced a PIC 32, which has an ARM code in it. We also have many PIK32s which have MIPs croed on it. And Brits Finenset will show you some data.
You know, really what the servers are saying about the ecosystem, ours is better. And, you know, getting that from a competitor, you know, is even is even better. Okay. Anybody else? Rajiv?
Yes. Rajiv Gill from Needham And Company. Thank you. Just a question on inventory. So your inventory levels increased about 10 days within your normal range.
But inventory on absolute dollars grew about 16% year over year versus revenue growth of about 13% year over year December quarter. So the inventory dollars outgrew overall revenue. So I was just wondering if you could maybe talk a little bit about that and how you're seeing the inventory situation going forward.
I I, you know, I believe, again, it's kinda reading the chilies a little bit, but I think, some of the, Foundry lead times got long and, foundry capacities were constrained. We, negotiated with foundry some additional capacity and was able to get that capacity to build a little bit of inventory so we don't get short And a lot of the foundry, a lot of the products we build at foundries are a higher level microcontrollers in silicon and chips. So they're silicon content is higher, because those are more leading edge lithographies versus what we do inside. So I think some of that difference was driven by the inventory build more came out of the foundry.
Hi, Chris and Jacque from Nomura Instinet. Thanks for having us here today. I just want to touch on automotive and industrial a little bit. I know that a lot of peers, we're seeing those 2 segments grow in the high single digits, double digits, clearly well above average historical rates. And I was just wondering if you can maybe delve into a little bit kind of what are the factors that you've been seeing pushing growth for Microchip in those two businesses and how you're looking What your outlook is for those 2 businesses over the next upcoming year?
So, those businesses are the largest business segments in Microchip and some of our above industry growth really has come from a very, very large penetration and new design wins in industrial and automotive that's where, TSS is bringing a lot of additional content where we may have only sold a microcontroller a few years ago today, with selling a microcontroller, analog part, a power management, a connectivity, either a USB or Wi Fi or Bluetooth and others, And I think Ganesh's presentation, and Richard's presentation both touch on it a lot more. I know Rich has examples of industrial and automotive designs showing you by colors, various different parts coming from various acquisitions. So maybe we can hold for that.
Yes. I would say also on the web site, there is a more detailed industrial presentation and a more detailed automotive presentation for the industrial 1 Kinesh just gave a week ago at the city conference. Then there was a Needham conference that was specific to Automotive last June. And I think those are good references for you.
Steve, Harsh Kumar, Piper Jaffray. So as I looked at the charts that you presented, I'm kind of forced to ask myself where's the soft landing. I see you used the term. And I see you used the 7% to 9%, soft landing, 2.7% to 9%. But really, was it just a timing situation where things just fell off as they always do a Chinese New Year?
And would you say that 7% to 9% is still a good thing for us to think about at least for the near term, mid term. And then also, as you talk to your customers, I'm curious if you've noticed any change in their body language, particularly since this tax loss come out, are they feeling better or worse or any kind of color since you guys have a lot, a lot of customers?
So, you know, soft lending, I showed the June quarter with the 5% growth guidance, the June quarter will be up 6.3% over June quarter last year. And that's below a little bit from that side and 79% range. So that's kind of the soft landing. Often, industry is known for, crash lending where, you know, business goes minus 5, minus 10%, and you've seen that in the past with various companies, if, you know, we're just that much out of the range and who knows it, maybe better than that. I think that's really what's to start landing.
The second part of your question, what we hear from customers, I think comments we have received from customers, suppliers, other business leaders that I meet routinely, the impact of tax law is in which positive. I mean, I haven't heard anything negative. You know, small businesses that largely were exposed to U. S, to Bonanza for them, tax rate goes from 35 percent to 21. The businesses that were international and shipped a lot of business, where where their tax rates were lower, like ours were, our tax rate didn't change.
You know, our tax rate, we gave you guidance of about the same 9%. Relatively unchanged. But what we got was we can use all of our foreign cash now. And we got, you know, a couple of $1,000,000,000 of foreign cash and if we had done this acquisition, microsemi acquisition without the new tax law and not having advantage of the, you know, $1,600,000,000 we're using out of a treasury, you know, this would have been overseas and either we would have had to acquire complicated some sort of structuring where we can use the foreign cash to buy some foreign assets or or leverage it higher in US and not be able to use that money. So I think that's very universally positive.
So I think, I think it's creating economic activity. GDP growth is showing it. I don't see there's any negative in it. Okay. Let's take a couple of questions maybe from operator.
Can you see if there are any questions on the web audience?
Thank you. And our first question comes from Vivek Arya with Bank of America Merrill Lynch.
Thank you for taking my question and congratulations on the Microsemi announcement. I actually, Steve had a clarification and a question the clarification, what is your specific smartphone exposure? I know it's pretty small, but what is it now versus what it was pre Atmel? And then on the question, I wanted to revisit this growth question that was asked before. So I think for June, you're guiding to 6.3% year on year.
Is that a sustainable growth rate for the year given the record backlog and strength and trends? And importantly, what is the difference between conditions now versus when you laid out the target to grow at a somewhat higher pace? Thank you.
Well, I think, it's just a different form of asking the question. What happens in all the other quarters? And like I said, you know, we have essentially 1 year experience for that mill, you know, while fixing their business while raising their prices. So there's really not enough data to bank on, the drop in the first quarter was so significant, that we realized a we couldn't overcome and that would be negative and will affect seasonality. But I don't think we are totally comfortable, laying that out for every quarter.
And if the microsemi acquisition closes in June, it's going to change a lot of the things anyway. And And then we have to refigure out what the combined company growth rate is. So I think I probably can't answer your question, but, but organically, we're not looking at it any differently. We're not changing our target. We're not changing our growth rate.
I think we'll talk about in his presentation, show you a future model. And, you know, we were comfortable that with with TSS Total System solution, the higher attach rate we're getting by the time you see, Ganesh's presentation and by the time you see rate sinus X presentation, hopefully gives you more comfort that those numbers are achievable.
And on the smartphone exposure, any color?
Smartphone, I personally can't identify any of our parts that go in the phone. You know, some Chinese, somewhere, you know, you know, add a little bit, but it's really not, you know, we don't go in the phone. We may have some parts in the, you know, phone infrastructure. It could go into a charger. It could go into a some sort of headphone could go into something else, but I don't really think we're in a phone.
Anytime you say, literally, we're not in any phone, you most likely are going to be wrong. But we're not really in any major phone. Apple Samsung haven't put us in any phone. Thanks.
Thank you. Our next question comes from Chris Caso with Raymond James.
Yes, thank you. I just had a question about lead times. And on the most recent earnings call, you had seemed to indicate that the lead times for at least, I guess, some, but not all of the products were returning to the normal levels, 5 to 8 weeks. Could you clarify what portion of products still have elevated lead times now. And I guess as those lead times start to come down, due to your capacity additions, do you anticipate any changes in order patterns or book to bill rates as those remaining products come down?
Or should we be pretty stable from here?
I don't think we have any update since only a month ago when we gave you update in our earnings call. We didn't really prepare for that. I don't really have any different answers in what we gave you at the earnings call. So a next update, we could give you again in the next earnings call. You're going to have to think about where the energy has been.
We, we set this, this analyst day about two and a half weeks ago, and we've been working on this acquisition probably for about 4 months now. And, trying to have it land on the day, you know, the I signed that deal, one minute for market close today. 359, PM, New York time. This was a herculean task. We probably all lost some weight trying to get there.
So some of the answers probably we didn't spend time to prepare for that.
Okay. I guess just conceptually, if there's still a portion of products with lead times coming down. Maybe you could just address that dynamic because I guess what you had said earlier is with the book to bill, it tended to moderate as some of the lead times came down for some of the existing products. I guess the question is just then as the remaining products as the lead times come down, what effect should that have an order rate the business, just in general?
So what we said in the earnings call, you know, it's really not much different today. A good number of products lead time had returned to normal, which is 4 to 8 weeks, but we still had many products, many business units, spot problems, here and there where the lead time was up to 14 weeks. And I think what we said lead times now were about 4 to 14 weeks, right? Correct.
And we said by the June quarter, we expect that 85, 90% of our standard product to be in that 4
to 8 weeks time frame. Yeah. So I think we're still on that schedule. So by the end of June quarter, we have 4 more months In those, we believe that many other products where the lead times are 14 weeks, 10 weeks, 12 weeks, 14 weeks, would be all coming down slowly. And other part of your question is what impact it has, you know, on the bookings and all that, I think by looking at that chart, book to bill chart, you can see when the book to bill ratio was 0.94, a business was declining.
Book to bill never correlates to business. Book to bill only is how far customers have to go to give you the visibility in bookings you know, it directly correlates to lead time. It does not really change that revenue. You can grow business where the 1.0 book to bill ratio forever If your lead times are very short, you know, you get bunch of bookings this quarter, you ship them. So bookings are billing, they're assume what you booked, what you shipped, the book to bill is 1 and your business can grow.
So, but I think as the lead times on the remaining product come down, you know, the book to bill of 1.09 is not sustainable. I don't think it will be that even for the March quarter. I don't know if it's somewhere between 1 to 1.09. But longer term, book to bill ratios are usually 1.01or1.0 or, you know, that's a normal book to bill ratio.
Right. Because more of the orders are more of the revenue is shipped on a turns basis as opposed to being booked quarters ahead.
I didn't see that last part.
I said because then your revenue more of the revenue was being shipped on a turns basis rather than being booked 1 or 2 quarters.
Yes. So when the book to bill ratio is lower, that means the lead times are shorter and you do much of your revenue by booking and billing in the same quarter. So your turns are higher. When the lead times go longer and the book to bill ratio goes higher, you enter a quarter like we will enter June quarter with a stronger backlog in position because people have already placed their orders for the June quarter because of longer lead time. So going through the quarter, you have left fill in.
You have left turns because people have already given you the order.
Right. Good. That's a helpful explanation. Thank you.
Thank you. Any other question, otherwise, move to the next section?
At this time, there are no further questions in the queue.
Okay, wonderful. Thank you. So let's, let's move to the Microsemi acquisition one more time, a very long forward looking statement, many of you in the rooms may also be investors in Microsemi in that case, you would be voting on the merger agreement when the proxy is filed. So, therefore, we need a longer, say, harbor statement, and we will assume that this has been read and into the record second time. This deal leaked a couple of times in the last month.
So I don't think there is a person in the room that hasn't looked at who Microsemi is unless you're living in a cave. So which you I know you're not, you're constantly connected. So I kind of go through this very quickly. You know who Microsemi is. Many of you know, and many of the analysts in the room even cover Microsemi So they have strong complementary portfolio of specialized ethernet storage, optical networking, microcontrollers, FPGA, wireless timing, analog and mixed signal products, I already covered that they are stronger in the end markets where we have less exposure.
Defense, aerospace, data center and communication market, which is 80% of their business. That one is only about 14% of our business. So there's a lot of cross sell opportunity. Fiscal 2017, the fiscal year ends in September 30, 2017, was a revenue of approximately $1,800,000,000. First company we're buying in a string of acquisitions where the gross margin is higher than So we have to work harder, get ours there.
64% non GAAP gross margin 32% non GAAP operating margin. Fiscal 1st quarter, which ended in December, that revenue was $468,700,000, 63.2 percent non GAAP gross margin and 32.2 percent non GAAP operating profit. Both gross margin and operating margin were slightly lower in December quarter because in that quarter, they acquired a business unit of Knowles. Which was a timing product business unit that had a substantially lower gross and operating margins than their own. In fact, in the current quarter, they will have the entire acquisition.
Last quarter was partial. So that was the impact of that. Diversified global customer base and channels. The 64% of the revenue is in Asia and Europe. 49% is for distribution.
Net debt of $1,800,000,000 on the balance sheet and they had quoted in Aliso Viejo, Southern California near Los Angeles. Approximately 4800 employees worldwide. So strategically and financially, a very compelling transaction It strengthens Microchip's presence in those three segments where we have less exposure, defense, aerospace, data center, and communication. Expands our ethernet portfolio. So we first got ethernet portfolio through acquisition of SMS.
And we have done extremely well with it. It's a very, very good, very high margin growth business. We, in fact, got some more with the Microw acquisition, and now we get even some more with the with this Microsemi acquisition. So expand that portfolio to serve the industrial IoT enterprise and carrier markets. It adds some specialized microcontrollers to serve the storage market, enterprise storage, and optical networking.
It extends Microchip's portfolio of timing, low power, wireless, analog power, and mixed signal solutions. So it's kind of building on acquisition, where did we get the timing products that came from micro, low power wireless, came with some, you know, every company we have bought had some sort of wireless exposure, ISS had some, and Atmel had some, and 0 G had some, and roving networks had some. There were a couple of private companies, you know, analog power, micro had some mixed signal solutions, SMSC had some. And we built our own products too in all of these markets, but it extends our portfolio really in all these markets where help of Microsemi products. It adds a discreet and SPGA as new product capabilities, to add to the portfolio.
Drives much further, you know, scale in manufacturing, customer reach and sales channels. It adds a patent for full year of over 1500 patents to our strong portfolio and, synergy, you know, significant EPS accretion. The deal is accretive on a day 1 without doing anything without any synergy. But we have identified $300,000,000 in estimated synergies in, in 30 year after close. And we're assuming a June close.
There's a very little product overlap with the needs. So we think the regulatory approval should be relatively quick and it takes 3 or 4 months to get the shareholder vote. So that's where we begin. Same expansion. So Microchip currently serves about a $32,000,000,000 market, $15,000,000,000 in microcontroller, 17,000,000,000 in analog and mixed signal.
That's the total served available market. That's not a share of that market. I wish it was. Microsemi serves about an $18,000,000,000 market across all their products. So combined together, we will be serving a $50,000,000,000 market End market diversification.
I've kind of talked about it off and on. The left pie on the top shows our end market exposure than microsemi end market exposure. The three areas where we have lower exposure, computing, communication, narrow space, those are the largest one for them. And then the bottom shows the combined 2 companies. And you can see how homogeneous supply becomes, industrial staying the largest and automotive saying number 2, followed by Consumer Communication Computing.
So In this slide, again, the red bar shows you, you know, the percentage exposure in each of the end markets, ending with that blue bar, Below that, there are some application examples where the industrial parts go, where the automotive go, where the consumers go, communication, in the communication infrastructure, computing largely in the data centers, and Aerospace And Defense And Zarket and engines and planes and missiles and everything else. And on the top, it just shows you the various product lines. So we have microcontrollers, analog, mixed signal, interface, memory, power management, switches and controllers, high level discrete. So it's coming from microsemi, enterprise storage coming from them, FPGA coming from them. So combined capabilities become quite enormous, very highly profitable financial model.
So what I've done on this slide is These numbers are December 2017 quarter times 4 for both companies. So December quarter annualized So Microchip, last quarter, annualized was almost $4,000,000,000 in sales, 61.4% gross margin, and going to the bottom 39.4 percent operating profit. Microsemi was about 1.875 annualized bill higher gross margin, 63.2 and an operating income of 32.2. And then the next column is the mathematical addition of Microchip plus for semi and what the long term model we're looking at. So long term model, we believe, combined companies, we can add another 100 bps to the combined company gross margin.
They recently acquired an acquisition that took the gross margin lower, and I think think that can be improved and Microchip itself is working from 61.4to62.5. So each company adding a percent of gross margin, I think that's where it leads us. And then if I just go all the way to the bottom, operating income We are pretty close to 40. And today, we're raising that target to about 40a half. With the scale of the combined company, manufacturing efficiency, we can achieve synergies in R&D and other things coming from the acquisition.
I believe that's, that's something we can achieve. Synergy and accretion expectations. So transaction is expected to be immediately accretive to a non GAAP earnings per share and check. Short term, We're targeting 18% growth in non GAAP EPS from fiscal year 'eighteen to fiscal year 'nineteen with accretion from Microsemi and continuous improvement and growth in our own business. This is assuming June 2018 close.
If the close pushes out, then some of these numbers would change because the accretion would start later. Microsemi in this June close assumption will add about $0.75 of non GAAP EPS accretion annualized run rate in the 1st year after close. So they'll be at some rate, but by the end of the 1st year, it's a run rate of $0.75, longer term, which is 30 year after close, which would be our fiscal year 2021, again, assuming a June close, $300,000,000 in synergy from cost saving and revenue growth. Microsemi will contribute approximately $1.75 of non GAAP $1.75 of non GAAP EPS We're targeting consolidated microchip non GAAP EPS of approximately $8 per share. So a little bit of caution.
I know you guys are good in math analysts, and I know this is what you would do. You will take $8 take out 175, get the organic number, look at the number now, do the percentages, and hit me with my own data. Oh, you know, that doesn't show this growth, that growth. It wouldn't do that. You know, you have a history and, you know, we leave some room.
The numbers are could be conservative. There's a lot of work to do. You know, when you acquire such a large company, you have to shift some focus from what you were gonna do to what you have to do and look at the combined company opportunities and pull through the funnel. What is what is the most desirable with the largest leverages and So don't, don't please take this data and hit us with our own data. Represents non GAAP EPS growth of over 14% per year for Microchip from fiscal year 'eighteen to fiscal year 'twenty one.
And it extends Microchip's record of organic as well as acquisition driven revenue and a non GAAP EPS growth. So, somebody of the transaction, I know, you know, the news came out at, you know, 403 New York time, and then you were walking here at that time. So may not have time to kind of look through, what we said in the press release, It's a transaction value of $10,150,000,000. There's a $8,340,000,000 we're paying for the equity. And the other $1,800,000,000 of net debt for Microsemi adding up to 10.15.
The price of the deal is $68.78 per share in all cash to Microsemi shareholders. The transaction is So, you know, this could be the moment, Waha, you know, $10,150,000,000, how are you going to fund it? Will I ask the same question? And, I do have the answers. So the transaction is being funded through a combination of $1,600,000,000 of cash from balance sheet.
Most of it is ours, but some of it from theirs. And here, we can use all the foreign cash now. Between now and close, we generate about $600,000,000 of free cash between Microchip and Microsemi. So JP Morgan, our financial advisor, has given us a free cash flow bridge and that bridge disappears over the next few months as we raise that cash. $3,000,000,000 is coming from our existing line credit.
The line of credit is about $3,150,000,000 as part of this process. We're also extending the line of credit So we'll have some more headroom in it, but we will draw $3,000,000,000 from existing line of credit. And there'll be approximately $5,000,000,000 for a new debt. Large portion of this new debt is going to be, you know, term loan B, which will be pre payable. So, you know, pro form a net debt to EBITDA leverage starting at transaction close will be 4.7.
And, you know, that, that may look choppy, shocking. However, the combined company's business is a very high margin, sticky socket, industrial, automotive, defense, aerospace, and these are not, you know, consumer electronics businesses where you know, a large customer change their design from you to somebody else. So it's a very predictable business and we'll be generating right away approximately $2,400,000,000 a $1,000,000,000 of EBITDA per year run rate. This is, you know, 4 quarter backward looking, EBITDA of about $2,400,000,000. From that, paying for interest, paying for taxes, paying for a dividend.
And after all that, we'll be generating approximately $1,400,000,000 of free cash flow, you know, per year starting right away. And with the growth, and as we add synergy, that number grows with synergy and with growth. But $1,400,000,000 right away. So therefore, we plan to, rapidly de leverage post transaction close to a combination of growth and free cash flow, and the EBITDA extension. So debt would be coming down.
EBITDA would be growing. And coming from both sides, Our denominator getting larger and numerator getting smaller, we will get that leverage down rapidly. A transaction to close in CQ2 2018 subject to customary closing conditions and stockholder as well as regulatory approval. So summarizing this part of the presentation, you know, Microsemi adds strong complementary product lines, which supports the Microchip 2.0 strategy, strength in the end markets is very different for 2 companies. Combined company would be essentially strong in all those markets.
Microsemi adds further operational and customer scale in a consolidating industry. Transaction creates significant stockholder value from strong non GAAP EPS accretion. And it's really this acquisition is the next step in Microchip's track record of successful M and A. And we strongly believe that this will be another compelling transaction that we will look back and say, regardless of the home run. So with that, I'll take your questions again first from the audience which are present here, then we'll open it up for the conference call.
Thanks for all the details, Steve, Craig LSB Riley. Can you speak to divestiture potential and the extent that those be considered what the criteria is that you would use and whether that would be considered in the $300,000,000 of long term synergies.
So currently, we are not anticipating any divestitures from the Microsemi business. We usually don't do a lot of divestures. We didn't do any divesture in SMS. We didn't do any divesture in micro We didn't do any divestiture in Supertech, any of the smaller acquisitions. In Atmel, we did one very, very small divested, which was a 19,000,000 dollars deal of really a very deteriorating going down, you know, touch cell phone kind of the business they had And, every time we do a transaction, there are large amount of speculation.
Some of you kind of tend to jump the gun and, forecast, Microchip, you know, when the when the deal, leaked out, I've already read articles and I got calls from bankers, I can help you sell the PMC Sierra business. I can help you sell FPG. I can sell you this and that. We don't do a lot of divestures. These are all great running businesses, high margins, sticky sockets, tremendous cash flow, and they would help us get the leverage down, there is no plan for any divestitures.
Thanks, Steve. I had a couple of questions. This deal is so massively accretive. There was a lot of speculation that there would be other people that would come in and try to drive the price up as they try to get Microsemi. Can we assume since we're doing this meeting now that the window for that is closed that this is now yours?
And then secondly, my consumer was in a lot of areas that are not familiar to you. You've certainly shown ability to get into new areas and make them work, but things like data center, optical stuff on, etcetera, Can you maybe talk about some of the challenges you might have as you look at those areas? And maybe I missed the COGS versus OpEx synergies, if you've broken them out, or maybe it's too early to ask that.
Well, let's take one at a time. I wasn't writing notes, but the first one was, really could a superior offer emerge. So, you know, I do not know what sort of process they're in. Obviously, I was on this side, And we will see when the proxy comes out and read the background of the merger what was really all done. But, you know, but their banker ran some sort of process.
And, so any deals or any other offers could have emerged, but that's almost never a guarantee because in the merger agreement, if a superior proposal comes in that the board thinks it's financially more attracted to the shareholders, and that's something we have to deal deal with. They usually, there is a significant breakup fee in the agreement. And, we have usually 2 options in that case, either to match the superior proposal or to take a break up fee. And so that's kind of hard to speculate. You know that we were the superior proposal in Atmel.
You know, they assigned a deal with the dialogue. Once before, we were the superior proposal in Silicon Storage Technology. They had signed a deal with profit, profit equity, I think, was a private equity partners. So we ourselves have done it twice. It, hasn't been done to us.
But the deal is still kind of open. So that's number 1. The second part of your question was, you know, a lot of businesses which, we are not in today, So this is a concern for analysts and investors every time, you know, their vertical, your horizontal, their, your map how do you do this? How would you do that? Over the last 2 years, as I have met with many of you, I've gotten repeat commitments from many of you that you want to do that this time.
Right? You have told me that you have earned your credibility And, we're not gonna beat you over, you know, you don't know this, you don't know that, how you're gonna do that. So I'm gonna call on that commitment. We are a great team. Do not misjudge or underestimate Microchip's executive team's ability to transform our organization and transform our working methods, transform ourselves to take on the challenges of tomorrow.
We did that with SMS We did that with Atmel. We did that with, you know, other businesses. And, whatever we have to do that this time, we would do it. So we did not break it down. Yeah.
We did not break it down.
Mark Delaney with Goldman Sachs. Thanks for doing the presentation. Congratulations on announcing the deal. You did talk about revenue synergies and maybe you're not ready to quantify what revenue synergies may be specifically. Can you just talk a little bit about what areas you see those coming from with Atmel, some of the revenue synergies were increasing prices.
And I know, Microsemi does operate in some pretty consolidated markets. So do you see opportunities on that front Thank you.
So so, you know, take example. So let's take, data center communication and aero defense, 3 businesses they have. Those 3 businesses require, you know, those sockets, those boards in those businesses, they require power management. They have displays. They might need touch They might need a, you know, they might need a microcontroller to send something, to process something, to they might need a flash memory to store something.
You know, a lot of those things, Microsemi don't have. And those are opportunities for us to be attached, to be able to attach Microchip's microcontroller, analog, connectivity, memory and other product to their applications. Similarly, the reverse way, if some of, microchip applications requires a small SCGA, They require, you know, a lot of the parts require discreet. You know, there's a few $100,000,000 discrete business. With the resistors and capacitors and xenodiodes and whatever else and is in the discrete.
So there's clearly synergy in being able to add put that business next 2 hours. So I think because of such a different end market mix, I think that opportunity, I believe, is substantial. It's, very hard to dollarize, you know, especially prior to the DA because, you know, you work very hard to not not have it, you know, go so deep to meet the people to assess that. You have to meet the business leaders and meet with marketing and do all that, and we will be doing it now once the deal is public between now and close. But I think that potential would be significant So wait till Richard's presentation, he will show you, you know, what we are doing so far with the acquisitions we have done, how successful we are.
And with that, you can get a feel for even more successful we can be with this acquisition, which is even more different end market mix which brings all these opportunities. Question.
Thanks. Steve Will Stein from SunTrust again. First, to clarification, the $300,000,000 of synergies, that's a mix of cost and revenue synergies. So we should think about it as $300,000,000 incremental cash flow, by year 3?
Yes, $300,000,000 incremental cash flow the the largest piece there are three pieces, OpEx, gross margin and some of the, incremental revenue falling through. And the largest piece tends to be our tax.
The question that I had relates to, go to market, specifically sales channel, distribution channel. Microsemi last year in response to a move from Broadcom, consolidated their distribution with, with Arrow. I think you're very tight with Avnet and Arrow, perhaps both of them. Are we more likely to see you potentially do something like what Analog did when they acquired Linear, where they looked at it and said, look, we can save a lot of money if we consolidate with, with our targets distribution channel or do we then pull or do you take the other approach and pull back and say we're going to give Avnet some of that business back?
These are not the thoughts we can process in a public marketplace. You know, acquisition takes a few months to close. Don't want to distribute it to start taking negative actions in response to what we might or might not do. Microchip's core business continues with the distribution we have. Microsemi's core business continues with the distribution they have.
We do business with all of their distributors, and we do business with all the distributors, okay? So nothing changes. Then joint company, joint management teams, meets with the distribution partners. And in the coming year, evaluate if any changes should be made, Those changes usually are made very slowly here. The moves they have made, they have made for a reason.
And we will value those changes and not change it right away or not even change it later. Why we are in multiple distribution, we like it. We don't copy anybody. If ADI did something good for them, that's not good for us. We like the way the business is structured in working with multiple distributors.
Roger Gil from Newman Company. Thanks again. In terms of financing the deal, you decided to take on more leverage as opposed to issue out equity. And so given the potential of rising interest rates, I wanted to get a better understanding of kind of the thought process of adding another $5,000,000,000 of debt. What's the interest rate, component of that and, why the decision to maybe use debt versus equity?
Well, the the
decision for debt versus equity was pretty simple. The target didn't run equity. So that one is easy answer. You know, that doesn't mean that, you know, one couldn't issue equity elsewhere. You don't have to give the equity to the target.
But day 1 today, there is a target agreement on equity. So it's an all cash deal. And it has to be, you know, it has to be funded day 1 by a commitment letter from the advisors, JP Morgan, and we have commitment lender for all the money that we have shown you. And a deal is significantly more accretive with cash than it is with equity. You know, that equity is very, very expensive.
Or if we can, if you can fund it with cash, that's really where my preference is. And right now, we see that we can fund it with cash and, leverage is high, but there's extreme significant headroom to the covenant, so I'm not concerned about it. And, we have done stress modeling by taking the interest rate higher and even taking some sort of, you know, economic recession contraction in revenue in a distressed scenario to see what happens and, deal passes all of our tests. When it doesn't pass the test, I don't do those deals. Mean, now you've seen one deal that's built in the public domain was CSR.
CSR basically failed to stress her. Everything else was okay. But it failed to stress test where I couldn't go by a certain amount and Qualcomm paid more. So if this deal had failed to stress test, I wouldn't have done this deal either. So this deal is comfortable.
We have a very large covenant amendment backstop from JP Morgan. Which gives a significant headroom to the covenant. So if the, is that rates rise? First of all, rates don't rise in a quarter or 2, and we very rapidly deleverage. I talked earlier, starting off, we have $1,400,000,000 of cash in the year and then EBITDA rises during that time frame.
So you rapidly de lever. And even if the interest rates go higher, the deal is still very accretive and pluses all the tests. Any questions from the phone operator?
Our first question comes from Vivek Arya with Bank of America Merrill Lynch.
Thanks again for letting me ask the question. Steve, actually 2 quick ones. You are expecting the deal to close fairly soon. Do you need any China antitrust approval any other regulatory hurdles that we need to be aware of? And then on the deleveraging aspect, do you have certain milestones Obviously, you guys have a very strong track record of delevering as we saw with the Atmel.
But in this case, the leverage levels are higher than what you have done in the past? So do you have a certain milestones where you plan to be after a year, 2 years, 3 years, etcetera?
Absolutely. We have milestones internally, but, we're not able to share it. Basically, if you share them publicly today, then when we place the bond, they have to go into that document. And and the the disclosures are an unlimited headache in that case, you know, where If we think the leverage comes down to pick a number 3 and it is 3.2 and bond happens to be trading at 99.5, Then you have exposure, you told me 3 and it is 3.2. So just the disclosure headache with that is really enormous.
So We're not taking that thing public public, but, yeah, internally, you would expect us to have analyzed it to the death. And have, milestones not only yearly, but how quarterly it waterfalls and then do a stress test on it and do it again and do it again. That's the kind of management team we have, we are and we have done it. So feel comfortable that we have gutted all the I's and crossed all the teams.
Got it. Anything on the regulatory side? Any do you need approval from China antitrust
and any of it? We do need maskram. I think there are about 6 countries. We need the approval in and The longest one usually tends to be MAFCOM. Now many people's experience on MAFCOM is many times they tend to wait, you know, U.
S. Or Europe. And then they kind of take cues from it. A number of these high profile deals, they've been stuck in Europe rather than MAFCOM. And MAFCOM usually approves it very quickly after Europe.
There is no overlap in business between Microchip and Microsemi. There may be a negligible overlap somewhere in analog, power management, you know, but there is really very small overlap. 2% of our business is in defense. 5% of our business is in PCs And Data Centers. You know, those businesses for them are 29% 20%.
So there is really negligible overlap. They're we, we expect no problem in U. S, no problem in Europe. And China has built up their resources used to take a long time, but the average deal where there is no product overlap has only taken 30 days after filing in China last year. And since this one has a very little overlap, we don't think MAFCOM would be a problem.
Thank you. Our next question comes from Chris Rolland with Susquehanna International Group.
Hey guys, congrats on the deal. Guess the inexpensive ones are back to dropping like flies. So just back to the $300,000,000, if you use some average accretion from some recent deals, it's more like, if we apply it to this one, it'd be more $200,000,000. And I know they're not including top line synergies in their number. But that $300,000,000 is still a little high there.
And as I think about your two businesses, there isn't a ton of overlap, product overlap. So I'm not sure there are a ton shared R and D opportunities there. And then if I think about manufacturing, they kind of have a lot of digital products there. I'm not sure you can bring all of their manufacturing in house. So given the two companies, I was surprised a little bit by the magnitude of those synergies and perhaps you can expand a bit on where those synergies are coming from and maybe give us some examples.
Well, I mean, you know, I think you kind of answered the question. You know, the numbers, for, you know, OpEx, gross margin, versus the growth revenue, falling through. I mean, you know, you're in the range. Not exactly, you know, so the number 300 may look high to you because it has, revenue synergy, revenue growth. Their business has been growing, even without acquisition, that, you know, last year, the business has been growing, they have done very much like what Microchip has done.
They don't call it total some solution, but they're going to market very similarly in any given socket. They're attaching a lot of different parts, and now we get to even attach more parts. So there's a significant revenue synergy. And when you have revenue synergy, almost the entire gross margin falls through. Because there's no, no more expenses you need to add.
So even if, with a small growth in revenue at a 63% gross margin, you rapidly have, you know, large amount of operating profit falling through. So we are included, we're including it.
Okay, great. Thanks for that color and congrats.
Thank you. Our next question comes from Chris Caso with Raymond James.
Yes, thank you. Just two quick questions. First on the $0.75 of near term accretion you referred to in your slide, is there any cost saving or synergy contemplated in that number? Or is that just continuing the businesses as they are? And then as a follow-up to that, if you could talk about, some of the financing rates that you've assumed in your assumptions for the the three vehicles you talked about the line of credit term B and the longer term debt?
The first part of your question is, are there some OpEx and other synergies included in the $0.75 accretion at the end of the 1st year. The answer is yes. The second part of your question was, are we looking at a cost of debt?
Yes.
So we're not, we're not prepared to give you a number for the cost of the debt today. Because, you know, we gotta get the ratings. Microchip has never gotten an official rating from the rating agencies. The only rating we have is an unsolicited rating, which can be unreliable sometimes. But, you know, we're using, $1,600,000,000 of our own cash So the cost of that is just the interest we lose on it, and that's not very high.
That brings the overall cost lower And then a $3,000,000,000 comes from a line of credit. The the highest letter interest on that is, I think, 225 bps above LIBOR, which would probably fall somewhere around 4%. And then whatever the rest of the 5,000,000,000 debt would be We have internal assumptions, but I'm not willing to share yet.
All right. Thank you.
Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley.
Yes, thank you. Steve you guys have done a really good job integrating all your acquisitions and improving operations. Certainly, the size and scope of this deal is much larger. So, can you just talk about that And Microsemi also has been very acquisitive. So just kind of how you approach that on the size of this type of deal?
Well, I mean, on this deal is not any larger in percentage terms than ethanol bars that are then sized. Was about a $1,000,000,000 company. We were about $2,200,000,000 or something at that time. So percentage wise, it was about the same when we did SNC was $400,000,000 company. We were about a 1,000,000,000 and it was about the same.
So you kind of ask that question every time the sizes get larger and larger and, you know, our team expands. There's a deep bench you know, every time we do an acquisition, we take a number of our executives, we pull them out of, you know, what they're doing today. The next person steps up. There is a good excession planning, and we ask these people to really go help integrate the other companies and, their system's set up. So I I don't think it's any percentage wise any bigger, very, very minutally bigger in percentage wise than ethanol was.
Okay. And then as a follow-up, I know from a COGS perspective, one of the things you're doing with that Mel in terms of bringing assembly and test in house. Can you talk about that potential opportunity here as well?
So, this question is really more of integration planning in even in Atmel and other deals. We talked about it closer to or after we closed the deal because between now and the time we closed the deal, we, we are able to look into the business lot more than we were able to look into before because some of those you sit down with their engineer and manufacturing people and you know, and be able to look at exactly what the cost is and what the combined cost would be. What happens if you bring it in? In the prior acquisition like Atmel, we didn't share it at this time. The Debbie announced the deal because, you don't really have that detail detail information.
Otherwise, the deal leaks out, which leaked out anyway. But, we'll have more information, but I would think, you know, many of the synergy potentials we had in, Atmel, and Microw, and SMSE and other deals would be here also, but I don't have the numbers And, you know, we have some internal analysis, but it has to be further details have to be built on.
Okay. Thanks for the
color. Any other question on the phone?
We have one further question from Vijay Rakesh with Mizuho.
Yes, hi guys. Good acquisition here. Just wondering if you're seeing any diverse teachers on the microsemi side? And would you keep all the segments separate? Obviously, Microsemi has given guidance and disclosures by segment.
Do you expect to do the same?
It's again an integration question. We don't really know how we will integrate, but our really thinking is that we're in one semiconductor market. So I don't think, you know, today, today they operate only in one segment, and I don't know if that will change. Got it. And inefficiencies, we'll piece it out into microcontroller and analog and maybe some others, but but there wouldn't be segment.
There would just be product lines. So it will just be one segment.
Got it. And do
you expect to keep all, you don't see any divestitures here, right?
No divestiture. Did I answer that question earlier? We have no divestiture planned in there.
Got it. Thanks.
Thank you.
At this time, we have no further questions.
Okay. What I'd
like to do is, take a break. We're right, what, 3:58, almost 4 o'clock. A little bit behind schedule, but I think we're okay. Right? Yeah.
So let's, just 10 minutes. Okay. Cut your legs. Use the bathroom if you need it, and let's get back here at 4:10.
Ladies and gentlemen, there will now be a 10 minute break. Please stay connected to the call as the presentations will resume immediately following the
Well, I mean, you know, you look at their product, my Ladies and gentlemen, we
will begin again shortly.
I don't think it's worth okay. Alright. We're gonna get started here. All right. Thanks everyone.
So let's get started with the next portion of this And really what I'd like to highlight as we go through this is, how are we thinking about, the various markets and product lines and how they will drive long term growth for Microchip. And this is all, you know, 95% of which was sequencing. This is all classic Microchip. So this is not a microsemi piece as much. There's a small number of slides where you'll see some of the common approaches and where we might intersect.
So you've seen the vision, and the three building blocks around which we're developing our solutions are around how do we enable systems to get smart, how do those smart systems when they can be more valuable as they're connected? How do we provide that connectivity? And when they are connected, do we ensure the security of those things? So smart connected and secure is really where all of our investments are going into creating the solutions that our embedded control customers require. I want to start with a, an analogy of what you see, which is, in an iceberg, which is what is visible above the line and what is visible below what is not visible, that is below the water line.
And this is not about Microchip. This is the industry at large. So I call this the news echo chamber. And in this echo chamber, what you hear every day and which we probably see is artificial intelligence, workflow reality, autonomous car driving, big data, Bitcoin, and all of that. And, you wonder, so what does Microchip do in all of these areas?
But what you don't see beneath, the, the waterline is the 90% of the iceberg, which has all this broad range of applications that are smart connected and secure, with tens of thousands of customers in these six segments, we showed you the market in which we play. And this is really what drives a big part of the consumption of semiconductors or the growth opportunities that are out there. And that's where we play. And I want to show you what does that mean, in specific examples here. So I'm going to go through 4 examples of common products and their journey as they have gone from being either completely dumb or marginally smart to how have they gotten better over time.
So here's an alarm system. And, in the very top left is the earliest things. It was a simple keypad, mechanical keypad and what it did, some basic electronics that were there, moved from there to having more smarts programmability that went into it. Moved from there to having some more, human machine interface with some nicer displays, easier control that came with them, added in some cases connectivity. Where you could have either a proprietary connectivity line, or it could be a connection to your Wi Fi as the case might be.
And then ultimately adding security to make sure that when those systems are deployed, they can't be hacked and, completing that circle of smart, connected, and secure. And that's a journey that's taken place over many years, but that's all being fueled by the kinds of products that Microchip builds. And we're in many, many, many of these alarm systems. Here's another example of a product that each of us has in our home. And it's a thermostat.
And the very first of these probably didn't even have any electronics. It was a mercury switch on it, and it was on, it was off. You had the big noise of the compressor turning on in the home. And then bit by bit, it got a little bit of intelligence. It could be, you know, electronically controls, and it could be electronically programmed.
It could be programmed remotely. It can be programmed with a touchscreen, that's on it. It can be connected to the web, to the cloud. And you could be in your regular home monitoring what's happening in your vacation home. So that journey, again, of smart connected secure, has created tremendously valuable products, the consumers have used.
Here's another one. This is more industrial in its nature. So this is the little box that sits outside our homes, measuring the energy that we're consuming. And you have the very old versions of these things, which were largely mechanical, things that were spinning around and you were counting, you know, how many times that it's been, to slowly starting to add more electronics to having them connectivity. It's just typically power line where it would send back data to the utility provider who then aggregated some of that to now you're seeing more wireless cases of connectivity.
And as important here is when you are able to operate these devices, that it's secure and that a consumer doesn't have their home electric or their business electric connection that is a hacked as well. So another example of the journey of a smart, or an electric meter from being largely dumb to being smart, connected and secure. Hi. I apologize. I don't know what happened.
Brad? I'm going to try this. Here's the last one. This is the car door lock, many of you may not remember, but there used to be these mechanical keys. We stuck into the door to be able to physically open cars.
And went from there to you had a little bit of, sometimes, some buttons where you could enter some numbers in and it could open it, to where you had the remote keyless, passive keyless, where it could recognize, when we were in the, in the range to ensuring that, when there's this wireless transmission of, valuable data, it doesn't get captured and it's, in fact, secure and where it goes. So again, another example of things going from purely mechanical to having a high degree of smart connected and secure. So that and you can take this in this hundreds of these kind of applications where I can put the same journey of how something has gone from where it used to be to how it's added. And this is the space in the area under the waterline That's the iceberg. This is what has created large amounts of opportunity and growth, for Microchip and what we have done.
Now I'm going to take, Microchip 1.0, just at the product line level and try to compare where we were to where we are. So on the left hand side is, we were, if you go back 5, 6, 7 years ago, we were predominantly an 816 microcontroller company, We've always had world class development tools and software. We were emerging with our analog portfolio, strong East Quay prom memories, We were using attach. And many of you heard us at that time talk about, okay, we want to attach to our microcontrollers, strong partnerships with our channels. And then consistent growth and profitability and market share gains in that timeframe.
Now, Microchip 2.0 has expanded that. So all of what we were good at and strong at Stayed, but in microcontrollers, we added 32 bit microcontrollers first, microprocessors later on, the tools have expanded to stay with that entire portfolio. Analog is no longer the small line. Analog has 4, 5000 different products. It's a, an all dollar business in and of itself.
So very substantial portfolio of products for analogs. We've expanded even in memory. So we used to have East Coast prom. We now have Flash. We have some other embedded memory in a few slides as well.
So that also continues to expand into new embedded memory categories. We went from having very, very little in connectivity to being a very strong portfolio are both wired as well as wireless connectivity. And I'll show you some of those examples here in a minute. We again had almost no security other than perhaps in some remote keyless at that point in time to a pretty broad portfolio of security solutions. Taking the whole approach of, not just attaching, but really looking at it as a total system solution.
And we'll show you the difference between those 2 and in Rich's presentation as to how are we going to go to market? Channel partnerships remain strong. We remain one of the most, sought after broad lines for channels to be able to work with. We have a friendly policy of working with them and a long history of joint success
and continuing to have consistent growth
and market share gains. So that's kind of the, the transition over time between 1.02.0 in terms of what it's done, from a product line standpoint. And at the end, you've seen these diagrams. We show these as this is what when we look at a customer system, all the different building blocks that they potentially are going to require. And how do we build them out, in the middle in the red is the microcontrollers and microprocessors and blue or many of the analog, and connectivity segments.
And we have some new ones that came from acquisitions in timing, and encryption and security So all these are critical parts of how we go to market with a total system solution approach. And one of the things we do uniquely is to not end of life products, which in the target markets, the ones that have long lifetimes, the ones that have high switching costs, is extremely important and makes us a it's not just about the product and the price, but it's also about the approach of how we go to market. So those long product life cycles create a tremendous stickiness, create tremendous long term revenue streams, from the designs that go into automotive or go into of go into the infrastructure side of communication that go into some of the aerospace and defense side of the businesses. And so I want you to take away from here. We're thriving below the waterline.
We may not be as visible as some of these other things in, artificial intelligence, etcetera, that is talked about a lot. But if you look at our business transformation from fiscal year 10, to the, fiscal year 'eighteen using the 3rd calendar quarter run rates, right? We've gone from $1,000,000,000 of revenue to $4,000,000,000 of revenue. From 57 percent, 0.4% gross margin to 61.4% gross margin, and from 30.3% operating margin to 39.4% operating margin, So 300 percent growth in revenue, 400 basis points in gross margin, 900 basis points and operating margin. And that's all working So you may feel these poor guys, they don't really get to play in these exciting fun applications, all the sexy buzzwords that are there.
But by the nature of our business, we end up in many of these too. And let me give you some examples. So, you know, we're in Google's, do it yourself, AI box. So they have an artificial intelligence thing for, hobbyist and various other people to get started. We're in it.
We have a technology from our licensing business. Which is called neuromorphic memory technology. It is highly sought after to create analog computing for artificial intelligence. We're in artificial, in the AR, VR space, as well with, the USB hubs that go into these devices. We have smart sensors, connectivity, security for the autonomous driving.
So that the building blocks for autonomous driving are many of the advanced driver assist capabilities. More than those. We're on the data on ramp. If you want to have a big data system, it's collecting data from many, many, many places. And at those points, it's often the smart connected systems that are out there doing the work, collecting the data, passing it on to be able to collect and aggregate and have something which has some data intelligence applied to it.
And finally, in Bitcoin, we're in the smart power. So the largest cost of operating a Bitcoin farm is power. And power supplies that can be efficient are highly sought after. And we do this in many other spaces in the computing space and other service spaces and all that, or right there in it, not because we targeted each of these as a place to be and place to be sexy with, but because we have the ubiquity of our solutions, the ease of use of our products, the go to market that enables people to grow quickly into the types of innovation that they want to be able to achieve. So even though we don't necessarily talk as much about the things above the waterline, we're still very much in many of those, further expands, that available market, for us.
So the product lines that they have in FPGA, we don't do anything there. And some of the high reliability they have. We don't do much there, in the mixed signal and optical. So many, many products that they have, even if the categories like ethernet may sound the same, where we play in ethernet is very different from where they play. And it would have been the products that over time, we would have to build out.
But now together, we're going to have a much more powerful portfolio. Where we are in timing is, in a different space than where they are in timing. But those have been in products we would have built over time. And again, by combining them, we've got a more powerful portfolio for each of us together to be able to sell more effectively. And the focus is around, in the case of Microsemi, is around communications, data centers, aerospace and defense, all areas that we don't play much in, and of course, in industrial, we have some common areas.
But I think we're going to bring substantial strength from what we do in industrial to the product lines that join us, from, Microsemi and be able to take it into many, many more applications and customers that we're strong in. So I want to spend the next few minutes on innovation from a product line standpoint. Now what are we doing to create these ongoing ability for customers to be able to make their systems better, faster, cheaper, smarter, connected and secure, whatever the dimensions are. So let's look at first, what do our customers expect from us? So these are trends in the embedded market that our customers face, you know, they are constantly facing how they relentlessly innovate their products how do they take market share from there, you know, competitors that they may be?
Especially in the case of, industrial, automotive, aerospace, etcetera, there are demanding and harsh environments in which their products have to work, and therefore, our products have to work as well. They'd want flexibility to the various spaces. How do they be able to be nimble as they develop their products, as they get to manufacturing, as it gives them many, many skews, that we can provide. Their distributed intelligence or IoT is a growing area of opportunity for our customers to make money, to save money, or to mitigate risk in what they do. Energy efficiency is an area that our customers work in to be able to create either motors that spin better, lighting that consumes less power, power conversion that's more efficient.
So many dimensions of energy efficiency. Human interface is a way in which people are looking to differentiate their product. How do I make it aesthetically easier to use? How do I make it where I have an ability to make that, interface easier, more appealing, for what they want to do. Intelligence sensors and then smaller thinner packages.
So these are all the things we hear, when we work with our client base, when we understand what are they trying to go do, and this is what drives our, response. So I'm going to take you through the principle product lines, not every single one of them, but many of them here. So here's APET. And you would think APET is innovation left. You know, ink that has tremendous amounts of innovation.
That's why it continues to grow. That's why the December quarter was a record quarter. For the 8th microcontrollers. And nobody else knows our focuses on doing it, except every new place where you're 1st building intelligence into a system. More often than not starts with an 8 bit.
And so it's a fantastic area. And in its own way, 8 bit has created a level of innovation that opens up many, many more opportunities. So here, there's a deterministic performance, core independent peripherals, which allows you to have more performance than you'd think an eight bit product would be able to have. Connecting up some of these building blocks to create new functions that a customer could not otherwise be able to achieve, put a full pin select, which allows you to define the pin out that is appropriate. So if you want to lay out your board in one way, then you realize, oh my god, I gotta lay it out a different way.
You can make the pinout of the product, electrically be different than what it is physically. And then some of the core areas where industrial and other people care about, which is How do you make sure that it's best in class for noise performance in these harsh environments? How do you have the lowest power? How do you operate over the widest voltage ranges, etcetera? There's huge amounts of innovation left and huge amounts, huge amounts of innovation continuing in eight bit in a product line that for 20 plus years, people have said, you're still doing APAC?
Because it is tremendous in terms of helping us grow and drive profitability. Switching to 16 bit. And when we these are quantized by 81632, but the microcontroller market for us is really a continuum of microcontroller requirements. And in 16 bit, there are 2 or 3 areas we focus on that are incrementally there. So on the top, it's precision motor control.
And so we have designed these products This is the first time in which Microchip added a DSP onto the microcontrollers as well. And so very complex, algorithms that are required to run motor control are often driven out of our 16 bit products, same with power conversion. We have some unique capabilities on our 16 bit products, In some cases, we have a dual core product line. In other cases, we have the ability where a system can be like if you have it in a data center, you can continue to run it but you can update the software. And so it's called a live update.
A system will not go down. You can switch over a hot switch in terms of what the microcontrollers are doing it's loved by the people who build digital power systems. We also have a broad general market, so they're very much at the top end of what 8 bit does. Lots and lots of sixteen bit products, in some cases, get utilized into those systems, which are a broad base of applications. And lastly, it's in robust application.
So as you go up into higher and higher frequency products, more complex products, very often you're going to more advanced lithographies. When you go to advanced lithographies, you don't always have the same robustness, that's available to them. They're not always designed for that. And we design our products to be very robust because industrial and automotive is the place we play, a significant portion of our business. And so the ability to tolerate noise, voltage, ranges that you can be at, etcetera, a big part of what 16 that does.
Moving to 32 bit. And here, we have both microcontrollers And we have microprocessors, and the microprocessors came to us through the Atmel acquisition, and they had a fantastic product line that was there. But these products go there into the leading applications of where graphics is used, touch control is used, some of the lower cost product lines that you need from a microprocessor standpoint, some of the examples are shown there, also a high focus on industrial and automotive. The ability to design these products to withstand Appmel, prior to Microchip had a long history of having security capabilities, starting in smart cards, a number of other places And that has evolved into creating the most secure microprocessors used in financial transactions, usually mainly as a point of sales, product lines that we have, etcetera. And finally, 32 bit also has a very big portion of the innovation that goes into creating all the things that go around the silicon.
That make it easy to use. And that's in software, that's in hardware, that's an ecosystem, that's in tools, etcetera. And I'll show you some of that in another slide as well. Moving from microcontrollers to, analog. So analog power is an area where we have significant amount of innovation going on.
We have something called a digitally enhanced power analog. This is an analog product, which has got smarts built into it. And sometimes, I'll show you some examples. This is where sometimes, over time, something that is analog could potentially be reclassified or changed in classification for revenue purposes to call it a microcontroller because you're putting more smarts into it. It's not just a standard analog product alone.
So these are going to many automotive applications, for networking, for LED lighting, etcetera. Another class of where the power products go into is USB Type C power. And some of the high voltage capabilities that we have developed or come through some of the acquisitions, we enabled the LiDAR technology, which is going into much of the autonomous car and ADAS requirements. We also have some of the best imaging products for ultrasound going to many medical applications both portable, as well as the big iron type of ultrasound. And finally, into some of the optical networking areas as well.
So those are all new areas where innovation is being applied from an analog power standpoint. And finally, when you have motors, you not only need the microcontroller, which has the smart algorithms and all that. You also need the power drivers on the other side that work hand in hand to be able to do these. And so we have an expanding set of motor drive front ends, that match up with the microcontrollers, allowing us to take more complete solutions for motor control to our customers. On the other side of analog, we have linear and mixed signal solutions as well that have been growing.
There's a very broad family of low power and ultra low power analog. And this is extremely critical because we have lots of battery operated applications in which we sell analog. And we have distinguished our analog capability in this area with how low of a power can we achieve to enable those battery operated solutions. Very high speed ADD converters. And, this is a path we've been on for some time, and continuing to have new products that'll open up the available analog to digital converter space, for us.
We're a market leader in smoke and carbon monoxide detection, almost no the test smoke detector or carbon monoxide detector that you will see, you know, will not have some microchip content in and the analog front ends that are in it largely come from us. And then measurement systems, AC to DCs, temp sensors, precision voltage references. So, lots of areas of innovation in the linear and mixed signal area as well. Moving to connectivity, we have a strong presence in many embedded wired connectivity segments. And so typically those are in automotive, computing, industrial, and communication.
And, starting from the top left, from industrial factory automation, which often has an ethernet basis to it and some specialized ethernet products that go with it, with a leader in infotainment. With the most networking that came to us from the SMSE acquisition and then has evolved from there to USB, you know, if you have a USB port in your car. And, it has any kind of, of media connectivity that goes with it, there's a very, very high chance that's coming from Microchip. We're building out our Ethernet portfolio to also be able to address our automotive, connectivity requirements. Rapid expansion across the ADAS systems, all the ADAS systems require that these subsystems all be connected and they'd be connected reliably fast to be able to make good decisions as to what is it that the car is being told from the driving conditions to be able to make decisions that are faster than what a driver would normally be able to do independently.
And eventually, those are the things that lead into some form of autonomous depending on level 1 to level 5 that is there. We have a bunch of other networks we work with in the car. So a car is not a single network. There's probably 6, 7, 8 different networks, there's networks that I call Lynn, can. Can is a, a 20 year standard in automotive that is now starting to also be in many industrial applications.
And it has faster can called can FD, and then a new, new Ethernet standard called, 100 based T1. Power line, you don't think about the meters, conveying data through a power line, communication. So there's a modem, that is required. And that's wired connectivity and the protocol that goes with it require semiconductors that go into the meters themselves. And then we're also in other segments.
We're into the server segment with some of our USBs and airplanes. Some computing segments with those products as well. So a pretty broad area of innovation that we're doing to go after the next generations of new designs. And these are all driving growth for us. In fact, I'll show you a couple of examples where this is also enabling us to take analog and microcontroller and create more valued solutions, in the process of doing that.
Now moving to wireless. Now this has a slightly broader set of locations. It's, everything in IoT has some form of a, wireless, often that is used, but it's also an automotive and computing industrial appliances and medical. So again, starting from the top, you know, anytime you have, these barcode readers and various other things, often they have a wireless communication. Of some sort associated with them, where in many of those systems, in cars, we're the leading provider of passive entry, passive star solutions for cars.
So they call them pets. With more, best in class securities that we're continuing to add to these things. Appliances, we have some specific large auto appliance manufacturers or adding connectivity to be able to both monitor the state of health of these appliances so that they can tell when a service call is needed and other ways that they want to be able to monetize it, but you need an industrial grade capability to be able to do that. We work with the leading light bulb manufacturers who are, using Zigbee in this case, different stacks, or different, connectivity in this case. To deploy their solutions.
In, the metering space, there is not only the wired, but there's some choice, depending on part of the world, sometimes it's a wireless requirement as well. And it's quite, fragmented. It can be proprietary. It can be Zigbee. It can be, you know, many others different standard go into it.
In these, smart speakers, we often have a Bluetooth solutions from Microchip that are integrated and designed. Into them. And that Bluetooth has to be able to meet the audio requirements, the speed requirements, the fidelity requirements for an audio, solution. And then in power tools and some of those areas as well, people are starting to put these, wireless communications so that you can measure state of charge, you can have an ability for that device to be able to speak to the smartphones. An area we haven't spoken much about is in security.
And, this is a rich area for us. And I won't go through all the different blocks here, but security is not just a single chip solution security has many, many dimensions that go with it. It has software elements. It has hardware elements. It has elements that we program into the device.
As a part of our manufacturing flow. And there's a 20 year history of building these products, which have intrusion prevention, which have authentication capabilities, secure boot capability, specific algorithms that are in the software side, but also physical protection where you can't hack it. From the outside. And it's very difficult to have, an e beam or some other way by which you go steal secrets from it. So keeping secrets is a big part of what the security business is.
And, there's a 20 plus year track record of these products from many, many low end solutions to high end solutions and we provide a complete thing. This is not a chip sale. This is a complete solution sale that ensures that a customer can be taking advantage of security depending on their need. So here are 3, kind of broad areas in which these security solutions fit. 1st is what I call consumable.
And a consumable is where you're selling something, which is a razor and a razor blade, and you make a lot more money on the razor blades. You want to make sure that those razor blades use your product. And so for those type of applications, we have fantastic solutions that are being used today, but people want to protect their brand, people want to protect their profits, and people want to make sure that there's an easy low cost way for them to be able to achieve, those objectives. 2nd is around cloud and cloud authentication. And this is where You want to connect.
We have good partnerships with Amazon Web Services with Google Cloud Partners. And then we have several others as well that I haven't listed here. But here, you want to make sure that when something connects to the cloud, connects to one of these services, that they have a high, reliability to know that it is what it is, and it is authorized to be on that cloud. And that takes some work to be able to go do it. And that's where the partnership with Amazon and Google have taken us to.
And then finally, there's the other elements of security, which is enterprise, gateways, POS. I didn't list automotive, but there's a huge requirement for, security and automotive that we're working with, how do you make sure it boots off of a secure, you know, boot where you know it's authentic, how do you make sure that it's resistant to attack in a network that may have been created 20 years ago and people had not thought about security as a requirement in automotive? But in today's car, there are plenty of ways in which it has external communication from a car, and you need to make sure that a legacy network cannot be hacked. So lots of work in this area going into creating solutions in these three areas. Moving to touch.
We have a rich portfolio here. Some of it came from Microchip before Atmel, some of it came from Atmel. So, In the first thing, as I call it, the 1 dimension or the first dimension of this thing, it's proximity detection, it's buttons, it's sliders, it's wheels, It's all the things that are tactile for what we do. The next generation or the next part of that is the two dimensions, and these are typically touch screens and, we have a tremendous position in these, in the industrial and automotive areas. We probably have a 70 plus percent market share in the automotive side of the thing, and the industrial part of this is growing as well because industrial touch requires a high degree of robustness in that touch.
And you need to make sure that in these environments that are harsh, you have a solution that doesn't create false touches, false I think. And then lastly is in gesture, which is the 3rd dimension of what we do. So we're the sole solution provider that can have all three dimensions of 1, 2, and 3 dimensions, with solutions that we bring. And so this has been a fantastic business for us to drive growth. Falcon timing, you know, I call this every system has a heartbeat.
Every system needs a clock of some sort, upon which the rest of the system is depending so that it knows when it gets a piece of information or when it delivers a piece of information, it is, well controlled and well seen in what it does. And we have and these go into products that we call oscillators, in fact, a part of the acquisition that Microsemi did of, a company called Vectron, which was spun off from Knowles more recently, build oscillator kind of products. Clock generators clock buffers. So these are all different parts of a system. And the more complex the system is, if you go into a very complex enterprise level system, there are multiple clocks, in these multiple clock domains that need to be managed.
They need very intelligent clocks to be able to put into these things. And the focus is around how do you achieve small size, how do you get low jitter, and how do you get low power? And the trick is getting all three of them is hard, And that's where the, the magic of what the timing group does here is. And there's a adjacency to this that is exactly similar products, but in different spaces that Microsemi does as well. And I think between the two, we get a very powerful clock portfolio, for the two companies.
And, in the area of oscillators, we've done, something unique. This came through the micro acquisition, but we use a MEMS based solution rather than a court based solution. So it's a silicon solution. I want to show you kind of what it looks like, physically. So that's a piece of silicon that's oscillating at a very precise frequency that you can control based on an electrical stimulus that is delivered, to that piece of silicon.
And so you can have, instead of a small number of discrete frequencies, you can have any frequency you like for a given application, and we have the programmable tools available for a customer to be able to achieve that precise frequency that they can use in their system as well. And we see them and especially when you have a silicon based, solution, which is what MEMS is, your reliability is extremely high, your operating voltage is extremely high, operating temperatures are extremely high. The robustness is extremely high. The accuracy is high. All very, very demanding requirements that an industrial market and an automotive market required.
And that's where we're finding a lot of our success there as well. Even in memory, which some of you may think is a commodity. We focus on the parts of memory in which there's innovation to be had. And we focus that innovation in product lines, so in esquareprom and Flash, You may or may not know, we have something called a serial Sram. It's an Sram, which is, built in a much smaller package with a serial interface.
And then our most recent addition to product technologies is what we call an EE RAM, which is a nonvolatile RAM technology as well. And, in these, we focus on how do we get them to be in the most protectable areas of this business. So how does it work over reliably over wide temperature ranges, how does it work in terms of the package types that we can get? And in general, reliability is the focus for this part of the business, reliability from how we define the products, how we design the products, how we deliver the products. And so this is a very nice business for us, even though you might think of memory as being a commodity product line, we have much differentiation.
In what we do and, and command an appropriate premium for that differentiation. Texas is on an ecosystem, so you take all these pieces of silicon. It's not enough. The customer needs much more to be able to turn that silicon into a solution. And we focus on software tools, Some of them are ours.
We have, you know, 3rd party tools. We have software stacks that go into it. So many, many things, that are required to make it easy for that customer to take our silicon and convert it into their solution. We have an extensive amount of technical support that we provide. Some of it on the in the field, some of it in our web, some of it with our call centers that we use for this kind of work.
Training programs, masters programs, which is really training at a much larger level in more detail that goes with it. Reference designs that we provide that make it easy for people to be able to pick up and either get partway through the design faster or all the way through the design, depending on what their intention is. Then managing the communities that create, you know, fanatics for the products, whether the communities are around the PIC microcontroller, around the AVRs, around Arduino, the maker movement, you know, we want people who are looking to do innovative things. And perhaps either at the stage of the career where they are still going through school, or at a stage of the career where they're doing a lot of hobbyist kind of work, we want to create those communities for them, and we work extensively with the universities to be able to do that as well. And why do we do it?
Because when you every year, as, e times, goes out and collects the data, they ask for, what is the single most important thing that is important for a designer to be successful and they choose a microprocessor? And year in and year out in the middle, I've circled it out it talks about the ecosystem. So yes, the chip supplier is important, and yes, the chip itself is important, and yes, the price is important, but by a large margin, that ecosystem is important. And if you can define, deliver and have an innovative ecosystem, you have a huge advantage. And when they measure, stuck again here.
Sorry about that.
Monday measure, who has the best ecosystem? We're at the top of that list. And that doesn't happen by accident. That happens by lots of work that we do to ensure that we have innovation, not only in our products, but also innovation in the systems that we have. In the, the ecosystems that we have.
Shifting a little bit to microsemi. I'm not an expert in their product lines, but I'm going to give you a glimpse into some of what they do. And you might notice some similarities to what we do. So first is it strengthens our industrial offering. So in industrial, They have the product lines of FPGA, high reliability power, clocks and timing, power over Ethernet, something we don't have.
RF and microwave and industrial Ethernet kind of applications. So they're building products that are going into similar applications to where you know, we have other products built into them. There's a significant amount of work we're going to be able to do to get the best of both and the additive power of both in this market. In the communications market, they have a strategy of how do you go from, core to the last mile on all the the access infrastructure you need. And again, if you take a look at the product lines that they provide, all the way from the core side, to how do you access the access and integration side of our aggregation side of what they do to the last mile which gets into the, the home premises itself, you know, lots and lots of products.
And here you can see the power of what we call TSS very much demonstrated here. Every box here has products listed. And these are the products that Microsemi makes and takes to market in an aggregated way. You know, our 2 styles of going to market are extremely well matched to be able to create the maximum value at a system level by providing complete solutions to them. For example, this is ethernet as a platform, in the way, Microsemi looks at it.
And how we get our products, these are FPGAs, clock management, optical drivers, etcetera. Going from the signal integrity, making sure that you got a good signal to the physical layer, you're translating that, could be Ethernet switches themselves and, all the things that go in between them. And Microsemi today is the only complete Ethernet-fifteen eighty eight, which is a high reliability Ethernet requirement, that is used in many industrial type of applications, that's available out there. And again, you can see the approach is very similar, taking many of the acquisitions or organic work that they've done, but to put a complete solution into it. Similar data centers, whether they are looking at storage systems, rack systems or servers, the product lines that, that Microsemi brings in are in storage and data protection and switching, interconnect, network timing, so on and so forth.
And again, they have a leading position. In these data centers, utilizing the complete solution from, what they do. And this is a busy slide, but I just want to show you some of the examples of how on the left hand side in storage, on the right hand side, on rack infrastructure, what they've done, to be able to take the products and technologies and the stand and the position that they're able to achieve in the market. So I think we are the 2 approaches are very, very similar. And we're going to find that when they see our product line and when we see their product line, there's going to be far more things that we'll be able to go to market on a combined basis.
A business we don't talk much about is a Flash Technology Licensing.
So I'll
give you a little insight here because, from time to time, they've had they've been questioned we don't spend as much time here. But this is another fantastic business, that's driving growth and profitability for us. Alright, Brad. What am I doing wrong? So there are 3 generations of so the technology is called Super Flash.
It's the best Flash technology out there, the most reliable Flash out there. I'll show you some examples of that. And the business is about, licensing the process. Licensing designs and offering design services that enable them to go to market and being able to monetize all of that. So that's what the licensing business does.
If you want to look at, the market share, so this is 2014 versus 2018, there's been more penetration off superflash in microcontrollers. It's used in some analog products in smart cards and some other areas. So, it's getting more penetration. The available market. And this is not the market for licensing.
This is the market for products that use the licensing technology is growing. And the served market is continuing to grow as well. So there's a large market of, microcontrollers, analog, smart card, and others that are used flash technology. And the super flash technology is finding that it is the best technology out there to be able to go, which is why it continues to have. Growth on a consistent basis.
And to give you a sense of in this timeframe, so this stands about 20 years of time, with over 85,000,000,000 parts, units, chips that have been shipped. And today, it's running at a greater than 12, almost 13 billion annual run rate. So, every year, that's the volume of products that are shipping out there with this technology built into it. Apologize. There's something in this that's not Hi, Brad.
What do I do? All right. I'm going to run it with the, thing as is at this point in time, unless you have a quick fix, you have a quick fix? Okay. We'll keep running with that.
Unless I run into a slide, that can't be right. So here's the top 10 microcontroller companies out there. And you can see 8 of the top 10 use that technology. It's either used, that's my PCI have it on it. Oh, there's something else that's going on.
So Okay. For the folks on the phone, I have a technical glitch we're trying to work through, but,
Sorry?
Okay. So where I was was if you look at the top can microcontroller providers out there. A, as a tank, use the technology. They use it either directly internally, or they use it in the foundry processes that they're using. So, it's, it's established itself as the best flash technology that's out there for embedded applications.
So we licensed the business model is technology for the embedded market, licensed to foundries, fabless companies, independent device makers, design partners synergistic with our technology. So we get microcontroller capability in our building block for microcontrollers earlier in the process of doing that. Revenue streams have an upfront NRE followed by royalties for, you know, eternity effectively. And we're on track to being, the first $100,000,000 revenue in this fiscal year, at a very high margins, 100% kind of margins. I'm going to spend three slides on TSS, not to steal Rich's thunder, but I want to clarify perhaps a question that's come up in 2 of the recent conference calls.
And, so the portfolio of products obviously has quadrupled in the last 6 years, creating a very powerful platform. Creates attached opportunities. And TSS to me is, how do you make the whole from a customer's perspective greater than the sum of the parts? And that's the magic of TSS is how do you put it all together so that they see something that is much more than just the parts that they're buying. The PSS also will shift revenue classification over time between analog and microcontrollers.
And I want to show you two examples of how that happens and why and why it's still the right decision. So here's, one example, in this case, it's a USB hub, in its prior generation, and still running to some extent in production, but not at the same volume. This is an analog product. There was no smarts in it. There was some external components.
There was a microcontroller. You can see that in the red box outside. And, it ran for many years and continues to have a little bit of revenue that has a residual revenue on it. But when we look at that system, we said, okay, how are we going to make that system? Higher ASP, better margins, more protected, very sticky sockets.
And the way you do it is you start to put some of this stuff together. So we pull the microcontroller in We pulled the second hub in. We wrote a bunch of firmware that now resides inside the chip. In our classification, that's a microcontroller because it's using a microcontroller core, And so that's what how we report it as. But you should think of it as that result actually has created a far better result for us even if it took it away from analog and shifted it into MCU.
Give you a second example, but this is like a power meter or an energy measurement system, It's got our front end of analog, which is our gray box. That's the chip number we sell it as. It uses a microcontroller, sometimes it's ours, sometimes it's somebody else's. It's got some communication, etcetera, to go into it. And that product, a next generation effect, which is also a real product number that we have, pulls the microcontroller in so that it now creates that same protected solution, that is sold from us, and it's more sticky.
Higher revenue, better gross margins in it. So day in and day out, we're going to make this decision every single time that gets us the best microchip results. And I don't want you to feel con concerned if, you know, there's from time to time, there's revenue, there's an analog, there's revenues in microcontrollers. At the end, if it says microchip on it, that's the best answer for us. I want to conclude with the section that perhaps you don't always think about, which is, you know, and this is not about products.
But I want to talk to you about what is the most enduring competitive advantage that we have? Yes, we have products, yes, we have technology, yes, we have a bunch of other things, roadmaps, and all of that. But really, culture is one of our most enduring competitive advantages. And some of the elements of that culture are about strong and practiced guiding values. And I'll show you two slides of how do we measure, how do we know, and ethos where teamwork is prized over prima Donas.
And, you know, it can be different in different companies. This is what works for us. And that team does extraordinary stuff because they can work as a team versus what a singular individual or a single expert alone can do. A system of shared rewards and sacrifices. We've gone through business cycle after business cycle, and we've been able to show that when we pull together, we can survive the down cycle.
And when we succeed, we're going to have great results for everybody on the upcycle that go with it as well. The noncommissioned sales force, something that was started 22 years ago when people wouldn't even have thought about it, but it's such a critical part of how you make sure that you protect your designs, you protect your gross margins, you make sure you don't have internal competition that is through the detriment of the company's results and how that happens. Takes many, many years of system and culture and values to be able to get there. It's substantial investment in training, and I don't mean customer training. I mean, our internal training.
Year in and year out, we punch well above our weight in terms of being ranked among the highest training organizations. And ranking with much, much larger companies with much larger capabilities because fundamentally it fits with our value set of how do we build from within how do we if people are our greatest strength, how do we make sure that they are able to get the things that they have? And lastly, something Steve talked on a little bit earlier on, which is the leadership development and the succession planning, and what we do. And we do a fantastic job with it. It's helped us both in our own organic efforts as well as to help us with the acquisitions we do.
And, at the end of the day, I saw this somewhere which said, culture eats strategy for breakfast. You can have the greatest of strategies But if you have a strong culture, you find ways to adapt, you people find ways to do things without having to be told. And that's what the magic of Microchip is. It's the result you see isn't just a small number of people making these decisions alone. It's about a large number of people who are engaged who believe in the culture and who execute every day greater than what their abilities they thought were to be able to get there.
So all business, you know, we have 11 guiding values. I won't go through all of them, but they focus on the key elements that all of them do. But values are not what we write down, right? You'll find all of our conference rooms have this stuff, and many, many companies have it too. Values are not what we say.
It's what we practice because it's in that practice that you create the differentiation. It's in that practice that we get the competitive advantage. And we measure this every year. We ask our employees without having to tell them what to score that, they tell us how are we performing. So on the 11 dimensions of guiding value, we ask them, what percent of the time?
Do you see us practicing it? And then we go into more details, do you see your supervisor practicing it, so on and so forth? And these are the scores from the last one we did. It was just about a year ago. We're doing the one for this year, in about the next month or so.
But you'll see all the scores are well into the 80s for them. And that's kind of what our baseline is. We want to be able to get there. Now we weren't always at '80s, right? If you go back 20, 25 years ago, we had work to do, to improve the culture from how Microchip was formed and what the challenges in the early days were.
And this shows you a, a cross sectional view over, 26 years in this chart. And you can see in the early years, the scores were lower. And we worked on it. We worked on it. We improved it.
Road modeled it. Promoted the right people. Weeded out the wrong people in what we did. And created this tremendous thing. And I want to leave you with a sense that this is not always seen as a critical part.
It's a touchy feely soft thing. But it works. And you'll find the best companies in the world have the strongest cultures by which they achieve things, as well. And we have one which we're exceptionally proud of in terms of what it does. To wrap up, the growing and innovative embedded market that forms what I call the iceberg below the waterline.
It's driving huge amounts of innovation opportunity for microchip to be able to grow. Many, many embedded systems are on this journey, from dumb to smart, maybe slightly smart to smart to connected secure. That's really what IoT is. You know, it's not some magical thing that's going on out there. It's this journey of taking ordinary systems, maybe not to ordinary systems and taking them through that journey.
Our innovation in making these smart connected solutions is what's enabling our clients to be able to create and drive their innovation. And that's the number one thing that they need to do to be able to thrive is de innovative and create innovative solutions. Microsemi now adds and you saw some examples and I'm certainly not an expert on their products, but I can see their approach. And, their innovation adds complimentary solutions and complimentary end market emphasis to us. Micro took 2.0 in its completeness and the TSS has us well positioned to capitalize, on this growing opportunity.
We have several growth multipliers that we've been working on and continue to execute on that we expect will drive our organic growth and market share gains. And finally, our unique culture, we believe, is a hidden, but an enduring competitive advantage for how we deliver our results. And on that point, let me stop and, poll for any questions. So we'll start with the room here, before we go to the, the line. Any questions I can answer for you?
Or have I bored you the tears? Ganesh, analog devices had their call not too long ago, I think, couple of days ago. They talked about kind of a similar metric for every dollar of a particular product, there's a dollar of power that goes in. Would you have any kind of metric you'd share with us microcontroller versus other things that are driven? And then also, second question I had was you gave an interesting slide about a MEMS microphone just kind of Not a microphone.
It's a clock. The MEMS sensor, correct. And it's a nerdy question, but could that be used some kind of a filter potentially?
I mean, your second question, can it be used as a filter? I'm not sure. I'm sure there are smarter guys in me who know the answer to that Today, it's driving a portion of our timing business, but the MEMS technology has many applications beyond just, you know, oscillators that we can go into. But today, that's where we're focused on. On your first question, I don't have a precise number to give you that says, if you got a dollar of things, but what you're going to see in Rich's presentation?
Is a way that you can see how does the multiplier accelerate? And what are we doing to accelerate that multiplier? And I think that, that very much, whatever Rich talks about, you'll see ultimately, that's what Microsemi has been doing, as well. Any other questions? Okay.
Going to the, the phone. Operative, can you poll if there are any questions from the folks who are still on the phone?
And at this time, we have no questions in the queue.
Okay. Thank you everyone. And I'm going to hand off to Rich to take you through this exciting total olutions.
Alright. I'm gonna try to do this just by pushing the button as I, happen to go through this. And, we'll start
off with Total system solution.
So you've heard that phrase several times today. Probably wondering what that means. Is that world domination? Is that a one ring that rules them all? Or is it microchip that wants to own your home and own your car and own the factories, and it's the latter?
You know, microchip wants to get every device possible from every acquisition that we've done working together on a board. As we've done numerous acquisitions, we've found we are masters at operational excellence. Well, how do we take all of these products and bring those solutions to customers to give enduring value from Microchip? Well, you've seen this several times today,
but I want to show you something for
a look at it from a different perspective. The world is becoming much more complex. Many engineers today do not have the time or the resources to keep up with modern technology at the pace that it's evolving. And so what we have to do at Microchip is package this all together and make it easy for them. And that's why you're seeing this embedded time survey that engineers every year of judging companies based on the ecosystem more than the products and more than the company itself.
So when you look at that total system solution, we're looking at it from 8 unique areas. So we're looking at it from design support. So when you look at Microchip, you can get, phone, technical, web support 24 hours a day, 7 days a week, 365 days a year. And as Steve had alluded to earlier, Atmel teams, when we acquired them, we're extremely excited about getting involved in Microchip's ecosystem. In many ways, Aetna was a technology rich company, had ARM Processors.
They had great power technology, but they could not get, the leverage of the footprint that they were looking for at customers when competing with Microchip, and then that all came down to the ecosystem, the non commissioned sales force, how we build building blocks, global support infrastructure. We have thousands of design consultants around the world, helping our customers design these products in and So when you look at our overall client engagement process, it starts out with products, systems, software, services, we then form those or craft them into, building block functions. And I'll talk about that a little bit on the next slide. And then we target those building block functions into some form of end equipment, and then we tailor it, in a total system solution for our customers. So products, building blocks and equipments.
So when you look at functions, the world, you know, we break it down to about 9 different areas. So you've got wired networking, wireless motor control. And as I go through some of the block diagrams, I'll give you some idea where the trends and how we piece these different functions together, to meet customer needs. So here, track the trailing, does anyone track everything, right? It seems like I just saw an app recently where I could track where my cat is, right, track where my dog is, track where to track the trailer is.
Well, to trend within the marketplace, to know where everything is all the time. And whether it's a cat, a dog, a tractor trailer, a car, this is a trend that we see in the marketplace, And you could see on this chart here at this block diagram, how the different pieces of Microchip all fit together, whether it's wireless or or power, atmel with the, with Trichiti Wi Fi's supply. So if you see the, the big yellow block diagram here, we've got 3 different colors on here, micro, classic microchip, and atmos, And as we have the different acquisitions, we add them to the block diagram. So here, an automotive water pump, in which key about this is the world is going 3 phase Brussels DC, right? And so in that, microchip had the DSPIC previously we added the high voltage drive, from, micro.
And then most recently, we added the Lynn transceivers for communication within the car network, with Aetna. And so when we acquire a company, we put all customers through a synergy review with that company. And in that synergy review, we update all of our block diagrams, our reference designs how we go to market. We share this information with all of our function teams around the world, to make sure that we get every dollar we can from each application. So here's medical.
And sometimes as we're doing these and putting these blocked diagrams together, as we acquire companies, there's reverse synergy. Or reverse energy growth. So here is an example of a medical micro pump where Supertex, was the lead in company into this particular application, the lead in company and then drags in all of Microchip devices as I'm working with that customer for that total system solution. And ironically, the device here is actually, an 8 bit device. You talk about innovation, one of the interesting things about the eight bit devices, we use a very intelligent code configurator, which allows customers to bring products to market very quickly.
Tie that together with all the peripherals around it, and we have a very synergistic solution. Nebulizer, another small product, low power battery operated, and you can see how it ties in a number of products from a total system solution. In this case, we are the entire board and these customers simply has the battery. So as we get into computing, and data communication, you know, here's where we start to see some of the synergy with Microsemi. Alright.
So we'll see, synergy with Microsemi on the gigabit, etherbits, the switches. We'll see it in base stations. And here's looking at a Microsemi reference design And that's the their blocks are all in the silver. We've added some of the classic Microchip, or SST or micro blocks in there. But in this particular reference design, we're going to estimate there may be 6 to 10 microchip devices in there between LDLs, DC to DC convert is clocks, intelligence shift registers that will fill this particular block diagram.
And as we work with Microsemi or every company we've acquired through synergy reviews, we update our total system solution so that we could bring that to more customers around the world. If you look at industrial, IoT gateways, people are collecting much more data today, a typical example of an IoT gateway for industrial control? This is a an LED agricultural light, not really sure what they're growing with this agricultural light, but, It's interesting about Microchip, because we make it so easy to use our products, through our ecosystem, that our products typically turn up all over the place, you know, whether it's makers, arduinos, hobbyists, all the way to pretty impressive products that come out around the world. And we particularly really like this block diagram, because you can't fit all the blocks on a page, you actually have to overlap them, which gives an idea of the amount of revenue that's generated, from that particular blocked eye grip. So consumer applications, here's the case from, ISSC Bluetooth audio where we acquired that company, and brought in some of our smaller devices to help support that particular chip.
Camry accessory unit. And we could go through, in fact, today, Justin, the mail, I got a number of other examples from bit miners to, on some other medical applications where we had multiple products, 5, 10, 15 products, all designed in on a board. And then What we do with those within our community at Microchip, we socially share those so that we learn from each other. So here's an example of an audio system. And what's fascinating about this is you see some of those blocked diagrams, you'll see a white or light gray block, where it was empty.
Right? It wasn't colored in. So here's an example where microsemi, we would look at our block diagrams or our customer base, and we'd see how we can use them to fill in these block diagrams. And this has been a pattern with every acquisition. We look at this total system solution.
We go through these synergy reviews, We understand how they could fit into our functions, our 9 main functions and understand what that value proposition will be for customers. So Steve had earlier talked about reading the tea leaves. Okay. Reading the tea leaves. So what is the result of this total system solution effort?
So here, we're going to talk about multipliers. So if we were to look at one part, that would be 1x. And so this is actual data looking at Microchip funnel from 2017. So one part is 1x. So if we get 3 parts we're looking at a revenue multiple of 1.7x for that particular application.
Now you're probably looking well, why is 11 and 3 is 1.7. Well, typically, the first few devices that are attached may be, an LDO or a small memory device or a Lynn transceiver, a can transceiver. So it's the lower cost devices. So you don't get the huge revenue multiple. But then let's go into more complex systems, such as base stations, gigernet ethernet ethernet switches, all of a sudden now, you're looking at 5, 6, 8, 10, 15 devices.
The one agricultural example there, I think had about 20 devices from Microchip built into it. And so then the revenue multiple, like, four parts or greater, starts to really increase. That's 3.1x multiple. So if you think about it, more parts per application is higher revenue and profit. It's also an implied productivity improvement, from our sales teams as well.
The 1.7x for 3 parts, 3.1x for 4 parts or greater in terms of revenue multiplier. So, Steve had brought this up before. So we're seeing the amount of devices or parts per project increased significantly. So in that total system solution, we bring the company in synergy reviews, review work with both teams, engineering and sales teams, find where all the opportunities are And then we bring those opportunities into our client base. So here's another look at that where we're looking at greater than one product family.
So we've had over a 40% improvement, in projects where we had more than one product family involved. So again, with the, as Ganesh had described earlier, looking at Microchip's culture, we are geared to work together. Right? And and it's that culture that causes us to to get together, brainstorm, figure out ways to maximize revenue growth. Right?
And that's really in the end what we look for from TSS. If you look at the total system solution, it's really a cocreated combination of software, services, hardware, working together to meet that client's goal, right, and grow revenue. And in the end, by working together, with all of the companies that we've acquired over the years and the tens of thousands of products and over 100,000 customers, we figured out a process that allows us to get the most revenue synergy possible. Any questions?
Think about cross selling or we think about maybe even before that, just how you interface with customers there are lots of channels to market, right, direct sales force, which is non commissioned. I don't recall if you have third party manufacturers reps or not, you certainly use distribution significantly. Website for sure and you might even, you might even do samples or, or sales directly on that. I'm not sure. Can you talk about the typical or the largest modalities for going to market?
Sort of the biggest driver in terms of the interface directly to the customer?
So we, we use the web, quite a bit, you know, in terms of really offering tools. So people can actually simulate entire environments on our web. Whether it's analog, digital, co combining together, we offer free samples. We try to make it as easy as possible on a website. We also work, we're also on every shelf in the world, in terms of the distribution channel.
So we found is that, many customers, when you have such a diverse customer base, customers pick and choose where they want to buy from, and you can't dictate the channel that they want to go to. And so we don't. So we try to support and be very distributor friendly. We, like I said, we have over 1000 design partners around the world, We have reps and stocking reps as well. Some customers prefer that, as a place to get it.
We work very closely, with Arrow and Avnet because they work with, indiegogo and Kickstarter and supporting those particular areas. In the maker community. And so there's a, I think we support, try to support all of the channels. And we have a number of sales teams And I should say an integrated BU sales teams, that work for each one, and trying to figure out the best way to go to market for each one?
1 of the tagline that we use is driving design wins to revenue. Once we have won the design and customer has it should be on. Yeah. Once we have won the design and customer has designed their end application using many of our devices, then we don't really care where it is served from to fulfill. They can go buy it from a catalog distributor, Digi Key and Mouser.
They can go to Arrow Future Avnet. They could come to Microchip Direct and buy on the web. If they're a large customer, they can have direct relationship where they can buy it. You know, that doesn't really matter. We we honor worldwide pricing and They can buy it from any channel.
It's the focus on design win to revenue. We train about 30,000 plus engineers, how to use our products every year. And our worldwide master's conferences are about 10, 12 conferences we hold, in India and China and U. S. And Russia and Europe and South America and and trained large 30,000 plus engineers every year.
Many of them are training on the web, many of them are in person. We take our products and demo to the customer sites, customers come here. And so you know, in that large amount of training and web support and tools and ecosystems and consultants, you know, working around the world, from very beginning years years ago, when we used to compete with Motorola at that time, it became free scale, many of our competitors will use many of the 3rd party tool manufacturers as competitors. Because they take some revenue away if they sell their tools rather than reselling the tools. We didn't see them as competitors.
We saw them as partners because tools is a very small revenue. You know, by selling their tools, they will buy it in our chips. You know, that's where the revenue is. We essentially, if you go to any, you know, small countries from Israel to South Africa to you know, Russia to parts of India, to Australia, you know, South Africa, in all those countries, there are lots and lots of local tool manufacturers that develop tools and have great relationships with the local customers, indigenous customers, speak their language and have relationships and, and those customers like using local tools, and we encourage them. We shared our roadmaps.
We gave our emulator chip for them to develop the tools. And and then sales came from Microchip. They buy Microchip's microcontroller. We practically had a very, very large market share in all those countries. So some of the strategies we deployed were very much partnership oriented in building a strong ecosystem and training large number of engineers, winning designs.
After that, wherever they buy from, we don't really care. That's why people have placed a lot of attention on go to single distributors, some terminated arrow, some terminated Avnet, we don't that's not where our business is. They can buy from any channel they like.
The question was more around the design win process because one very big competitor that seems to have a view that all design goes on on its website.
Well, that that competitor is very important.
It's, it, it, it, it, some happens on its website, some happens to engage with the customer. I mean, it happens all over the place. We really value our design partners that are out there going into customers and helping support many customers. In fact, every company we acquire, has 100 of consultants that are working on designs for that company, hardware lines, putting in different sockets or other companies, and in the end, we want our devices in there. Engineering or consultants are still highly valuable out there.
Other questions. Any questions?
Thanks. With the total system solution, are you getting other semiconductor companies now coming to Microchip saying we want to part of your system solution, if it's a product that you don't have?
Yes, sir. Yes. We partner with, we partner coopetition with, several semiconductor companies where we work with them on reference designs and working together to bring a solution to your customer. So the answer is yes. Any questions, on the phone?
And we have no telephone questions.
Okay. Well, let's take this home with the, the financials.
So I'm going to give a kind
of a brief financial overview, talk about some of the things that have driven our outperformance from the market. So we've got a very consistent track record of being a revenue grower and market share gainer. We've done a lot of acquisitions. We've talked about that today with our TSS approach. We've got 1 of the premium business models in the Semiconductor Industry, where we've consistently improved our gross margins consistently reduced operating expenses, driving higher operating margins.
And we think long term, we've got the ability to drive this thing to a 40% -plus operating margin that Steve showed in his model that he showed earlier in the microsemi part of the presentation. We've got significant free cash flow generation from the business, which allows us to deleverage the balance sheet very quickly. And over the course of time, we returned almost $5,000,000,000 to shareholders through our dividend program, which has been increasing on a very steady basis and our share repurchase program. And we'll talk a little bit more about inventory. There was a question on that earlier.
We think appropriately managed and well positioned, and our capital intensity has been quite low. So here's just a few complishments and targets that we have for the business. On the top line, it talks about the CAGR in certain area that we've experienced over the last 9 years. So almost an 18% compounded annual growth rate in revenue, 18.6% in gross margin. And really an amazing 21.1 percent in operating income on average over the last 9 years.
And on an EBITDA basis, That's been growing at a very nice rate also about 18.2%. We've had 109 consecutive quarters of non GAAP profitability. And pre Microsemi, the business model was 62.5 percent gross margin. This last quarter, we posted 61.4%. So we're getting close.
On the OpEx side, we're 22.5%. We're actually a little bit below that. The way we're operating today and overall operating income target of 40%. On a tax rate basis, we shared information on our last earnings call that we think our cash tax rate is going to be about 9% on a go forward basis. U.
S. Tax reform is giving us great flexibility with cash, which we mentioned earlier. I mentioned the $5,000,000,000 return to shareholders. We've done 17 acquisitions since 2008, kept the team very busy and had seen tremendous growth in our financial metrics because of that. We've seen a 1200 basis point improvement in operating income.
Since the acquisition of Atmel, which happened in the first quarter of fiscal 2017. We've got an undrawn revolver, We hope to use that very soon with the other Microsemi acquisition. And this is just a very diversified business with 115,000 customers worldwide. So here's the history of our acquisition. This was in Steve's presentation earlier.
17 acquisitions since 2008 Every single one of these acquisitions has bought us something new and unique in terms of product and technology and fed into the total system solution for our company. When we've done these acquisitions, these have been companies that have been at much lower operating margins than Microchip. And through a lot of hard work and operational efficiencies, we've prove those to be posting record operating margins for the company today. This is the same slide that Ganesh showed in his presentation, but in fiscal 10, we've transformed ourselves from about $1,000,000,000 revenue company to about $4,000,000,000. And with Microsemi acquisition, that's going to be close to $6,000,000,000.
Gross margin has improved over this timeframe by about 400 basis points and operating margin has improved by 900 basis points. So here's just the chart that shows the annualized revenue and the CAGR over that time period. So back in fiscal 'nine, fiscal 'ten, we were under $1,000,000,000 in revenue. And today, end of fiscal 'eighteen, which ends at the end of March in a month, We're going to be at just about $4,000,000,000. So I think the midpoint of our guidance puts us somewhere around $3,960,000,000.
We're very diversified from a geographic perspective. About 40% of our business is in what we call Greater China. Steve described that earlier when looking at our billings and backlog charts, but that's Taiwan, China and Hong Kong. So 40% of our business is there. Somewhere around 24% of our business on average is in Europe and about 18% each in the rest of Asia America.
So very, very, very much diversified. And our revenue is split, but about 45% of it goes directly to end customers. We service about 5 or 6000 customers directly. The other 110,000 customers our service through distribution. So it's a very important channel for us.
We partner with, I think, over 120 distributors worldwide. We have, From a global distribution standpoint, we have Arrow Avnet and Future, but that's less than 20% of our overall revenue. The other 35 percent of our revenue that goes through distribution comes from smaller regional distributors, that typically carry 1 microcontroller line are fully trained on, our product lines and can go out there and be effective in creating demand and growing the top line revenue for Microchip. So Very engaged with distributions. Some of our competitors have taken a little bit of a different tactic where they've terminated distributors, gone to a single distribution margin model, they've taken demand creation, margins away from distribution, Microchip is partnering with our distributors, compensating them for the work that they're performing, and happy to pay them when they're helping drive new designs to revenue.
So here's gross profit. 18.6 percent CAGR since fiscal 'nine. We do about 60% of our wafer fab, requirements in house. We've got 3 fabs, 1 in Colorado that came from outmel and then a fab in Tempe and 1 in Oregon. Very cost efficient with that.
And the other 40% of our business is outsourced to the professional foundries. Our factories are very efficient. We don't need to go out and buy another fab. We've got lots of cleanroom space that we can grow into. And then on the assembly and test side, we've got 3 very cost effective factories in Asia, 2 in Thailand and 1 in Philippines that we're continuing to ramp.
We only do about 40% of the assembly in house today, We'd like to take that to over 60% over time. And on the final test side, we do about 65% of the test in house today and like to take that to 80 percent plus over time. And that's driven some capital expenditures, but these factories are very efficient, give us control of our supply chain, and have allowed us to be very cost effective over time. Operating expenses, so long term model is 22.5%, So the bars are showing the dollars by fiscal year, and the blue line is showing the percentage of revenue over time. We're operating a little bit below the 22.5 percent today, but we are making sure that we're making the right investments and the technical resources that we need to drive our business So R and D is roughly 12% of revenue today.
You see it's been a little bit lumpy over time. When you see it going up, that's typically driven by an acquisition, and then there's a lot of hard work in integrating the businesses and finding the right cost to drive the business longer term from that. But we think this is about the right level. And our selling, general and administrative expenses as a percentage of revenue have come down dramatically over the course of time. I think this last quarter, it was about 9.9 percent of revenue.
So we continue to be more and more efficient as we continue to grow the top line and integrate acquisitions. And here, that all results in the operating income, which has grown at 21.1 percent compounded annual growth rates since fiscal 'nine and driving to over $1,500,000,000 in fiscal 2018, which ends at the end of this month. So this slide shows net income on an annualized basis and diluted earnings per share, diluted earnings per share for the current fiscal year is targeted at about 5.42 at the midpoint of our guidance, for the current quarter. And you can see that the net income will be well over $1,300,000,000 for the fiscal year and has drawn tremendously from being under $400,000,000 just back in fiscal 2012. And something that investor really worry about is free cash flow.
And I think we've done a really good job of growing the free cash flow from the business in the current fiscal year will be over $1,200,000,000 in free cash flow generation. And that's essentially cash flow from operations minus CapEx. And it's over 30% in the fiscal year. And we think that we've got the ability to continue to take that higher. The capital intensity of the business is quite low.
We've been investing a lot over the course of the last year in bringing a lot of the assembly and test operations in house, and that has made the CapEx spike. And I'll show you a slide on that in just a little bit, but the cash flow from this business is tremendous. So this is a slide that we've shared before in the past and essentially shows from the date of the Aetna acquisition through the last quarter, how has the business improved? So we've gone from $844,000,000 in revenue in the quarter to $994,000,000 last quarter. And probably more importantly, The operating margin has improved by 1200 basis points from 27.4 percent to 39.4 percent.
So just a tremendous growth that we've seen over the course of the last 7 or 8 quarters, and we're driving and getting very close to the 40% operating margin target. So here's the slide that Steve showed that shows the combination of Microchip and Microsemi be about a $5,900,000,000 revenue company with 62% gross margins and operating income of about 37.1 percent. We think over the course of time, long term, we can drive that to 63% gross margins, about 22.5% operating expenses, driving 40.5% operating margin. Our EBITDA has been growing quite rapidly, 18.2% fiscal 2009 and is going to be well over $1,600,000,000 in the fiscal year that will close out at the end of this month. So this has always been a concern of investors when we closed an acquisition and we used debt, obviously, the leverage increases and that's going to be the case when the Microsemi deal closes.
But this just shows an example of that when we closed Atmel, the 1st quarter after we had closed atmel, Our leverage was about 3.2 times. So that was at the end of the June quarter. We acquired Atmel in the early part of April of fiscal 2017. And you can see how we rapidly delivered. Our free cash flow improved, our EBITDA was growing.
And at the end of the current fiscal year, we expect our leverage to be just over 1. So come down tremendously. You can see how this shows how we integrate an acquisition, how cash flows improve, and how leverage can come down very, very rapidly. So $5,000,000 return to shareholders through our dividend program and stock buyback program. So, you can see the borrower is showing essentially the annualized run rate for the dividends that we pay per share.
And then the dollars on an annual basis for fiscal 'eighteen is in the $340,000,000 dollars range. We're very much committed to that program. We think our shareholders value that and that will continue. Okay. Speaking to inventory, so our long term target for inventory days on Microchip's balance sheet which is represented by the red bars on this slide is 115 to 120 days.
We ended last quarter with 115 days of inventory, and expect based on our guidance for the March quarter that we're going to be in that 115 to 120 range. So right where we want to be, I think it positions us very well heading into the stronger quarters of the year in June September. And we don't think that we have any sort of inventory issue. We think we're in very good shape right now. The blue bars show what our distributors are holding.
Now you know that we recognize revenue today on a full sell through basis for distribution. We don't push inventory into distribution, essentially they find a level that they think they need to support their customer base. And the target range for distribution inventory is 30 to 40 days. We ended this last quarter with 34 days of inventory it's very normal to based on regular holding patterns for the distributors. So overall inventory is in excellent condition.
Okay. CapEx. So this shows annualized CapEx. Historically, we've been at higher percentages. This current fiscal year, were about 5.25 percent.
That's plotted at the midpoint of our guidance for the fiscal year, which is about $205,000,000 in CapEx And it's higher than it's been over the last couple of years. And the reason for that is really the integration of Atmel investing in the capital that we need to grow or our organic business, but then taking the opportunity to bring in house some of the assembly and test operations that atmel outsource almost all that to third parties, bringing that in house, gaining control with supply chain, and driving significant cost improvements. And we still have a long ways to go on that, as I mentioned before, but, the CapEx still is pretty low as an overall percentage of sales. So to summarize the financial presentation, we're consistent market share gainer. Our long term business outlook is very positive as you've heard from Ganesh and Rich today with Microchip 2.0.
We've got one of the premium models in the industry from a gross margin standpoint. Operating margins, overall, we think are going to drive to 40% plus over time. We've got a very good track record from a financial standpoint with our acquisitions. Integrating those and driving towards higher margins. Our cash flow from this business is extremely high, and we can delever very quickly.
And our inventory is We'll get a mic out to you.
Hi, Craig.
Yes, thanks, Eric. Craig Ellis, B. Riley. Eric, can you just speak to 2 things? 1, do you have the same potential, do you believe, with microsemi to do some of the same in sourcing that you did with that mill on the back end?
And if so, what does that mean for year 1 and year 2 capital intensity for the business relative to your current targets. And the follow-up question would be back to some of the financial targets that Steve initially talked about with the synergies. I know you don't want to break out the source and the income statement of the synergies, but can you provide any color on the linearity of the synergies from here to year 3? Thanks.
Okay. So on the, on the in sourcing of manufacturing activities, we're sure that there's opportunities for that, but it's very early stages. We need to get connected to the next level of management and start having those discussions and figure out what makes sense. So absolutely, there's opportunities. We don't know specifically what they are at this point in time.
Ganesha and Steve can feel free to add on.
Through the diligence, some of the packages, some of the products, that we have compared, our costs internally are same level lower than we saw in the AT and T. So the opportunity also exists in this case because we have taken some of their costs which are outsourced and we bring them in at a similar level. Although the task becomes very monumental because we're still very, very busy with that, Mel, And, so, you know, take on all of this, again, some of the low hanging fruit might change before that, the next thing to do could have been an ethanol product in the combined system, some of the lower hanging fruit might become microsemin. So it will change, but and we can also increase some energy, but we can't double up because the inside factories are very busy and also doing our organic business. So the cap becomes monumental.
It will take some time.
And I think the second portion of your question was a little bit more detail on synergies. We are not ready to break that out at this point in time.
Well, I think we gave you a number at the end of first year, and we gave you the number in 30 years. So I think you could, you know, access to almost heavy.
You know, it's not that easy. You have to put it in your model and make it work, but until the transaction closes, I don't think we're going to share much more.
That's the 7% to 9% revenue growth goals still apply to the combination with Microsemi or is there a new target?
Again, too early for us to comment on that.
Yeah. So I think somebody was asking me during the break and they were looking at, you know, last 10 years of Microsemi Business you take the acquisitions they have done in their business, acquiring some great companies like PMC Sierra and others using a similar total system solutions mentality although they don't call it that, they are growing. Their organic funnel looks good. And last year, the business grew organically. But we think there is organic growth there also.
But to, at this point in time, look at for us to judge what the organic growth is, and what the incremental cross selling is and with all that, be able to put a number the same day as we announced the deal. I think that's impossible. We have to see over time.
Grab one of those mics and pass them around. We've got one in the back. Thanks.
This is James Wong from KeyBanc Capital Markets. Thanks for letting me ask a question. I just want to follow-up on the comment prior comment that there could still be competing offers that could be made for Microsemi. And we were just wondering if this scenario happens is Microsemi? Would Microchip be willing to increase this offer?
How about no? Otherwise, I'm inviting a higher effort.
So we will deal with that.
We're talking today that we'll take the break off fee and divide it among ourselves.
Eric, can you comment
a little bit on the structure of how, Microchip may raise that incremental debt? Is the company's use convert in the past, is that the structure we should think about or bonds or other forms of debt financing?
So it is not our intention to use convert for this debt. It's probably a combination of term loan B and then the investment grade high grade market.
Steve, Steve had a question for you. Not just for Microchip, but for most of the broad what I call as the broad suppliers of analog and microcontroller products. The ASPs are holding relatively steady now. Everybody's talking about it. Part of it, I think, is the hawk 10 philosophy that's been happening in the industry for the last 2 years.
And part of it is just very good supply balance. You've seen a bunch of cycles in the past. When was the last time you saw this kind of balance and how long did it last? And why isn't anybody stepping up trying to take market share trying to add capacity in your opinion?
So I think, A good part of the reason is that increasing portion of semiconductor industry is no longer commoditized. You know, a lot of the, you know, Ganesh gave great examples. The resulting product with a analog to a micro controller, building a combined product, it's no longer commoditized. It's very differentiated product. So in differentiated product, customer has a 2 year design cycle to put somebody else in there.
So I think, having a proprietary socket, that's that's a part of it. Supply and demand imbalance industry doesn't grow 50% 1 year and then it goes down 20% next year anymore. So cycles have gotten a lot muted and so that really has helped. The, the, mergers have helped you know, they're not, you know, 10 guys parked at every door and trying to, you know, lower the price. So that thing has helped.
I think, you know, some of the old management has retired. The new breed of management is more price discipline, the industry margins are higher, operating margins are higher, they are better operators and, you know, we have retired a number of bad operators and Hark has a number of that operators and others that and that will continue to happen. So it's the combination of all those things.
Any other questions in the room? See any. How about on the phone? Any questions on the phone?
And we'll take our first question from Chris Caso with Raymond James.
Hi, thank you. Thanks, Eric. Just a question on the operating margin target. And that 40.5% target now, does that assume that you'll be able to push the core Microchip operating margins well below well above 40%. And I know you don't want to get specific on the synergies at this point, but just given Microsemi size, I'd have to imagine the margins on the microsemi part of the business would have to get pretty close to 40% in order to achieve that for the company as a whole.
Is that at least a reasonable way of about things or am I missing something?
So I
think the way I'd answer that is we see continued improvement in our operating model We've gotten 100 basis points plus of gross margin to take for the microchip. I'll call it microchip classic now business. And we see that when we bring these company companies together for acquisition, that there's joint team effort of taking the best in class from both companies to find ways to improve both the gross margins as well as the operating expenses and overall operating margins. So what exactly that mix is going to look like we are not updating the Microchip, model today. Essentially, it's a combined company model that we're giving you.
Okay. Thank you.
Thank you. And our next question comes from Craig Hettenbach with Morgan Stanley.
Yes, thanks. Eric, just a question on the OpEx as a percent of sales as you've driven it down steadily. Can you just talk about the benefits of scale? And then looking forward, once you get to kind of a steady state, can you talk about the OpEx investment and how much that drives the long term 7% to 9% revenue growth target?
So scale definitely helps with operating expenses, right? I mean, you get, you get certain synergies from being able to combine things that you don't, you don't need 2 of. At a combined company. So that absolutely helps. I think you had a second piece of your question that was revenue based.
I'm not quite sure how that's linked to the expenses?
Yes, just the level of investment that you think is
Okay. Yes. So we think in the model that we provided today for the combined companies, it leaves us room to make the proper investments to continue to invest in technical resources in R&D and customer facing activities that we need to drive the long term health of the business. And you can't under invest and drive long term out in time 5, 10 years, 40% operating margins?
So I think, we keep hitting that 7% to 9% going forward, we're not really changing our outlook on what Microchip can do but we, today, don't have a, you know, on a continuous basis, long term, revenue growth target for Microsemi. As we said earlier, their organic growth really has been 0. They were largely grown from acquisitions but in the last year or so, they did grow organically, but the industry was very good in 2017. Everybody grew. So, you know, So it takes more time for us to understand what is the organic growth there, and we think we can make it better through 75 methodologies in total system solution, but, you know, don't don't make the error.
To number 1, assume our seasonality, that's the area we all made with the Atmel and don't make the error that the new combined company is at 7% to 9% growth. We we don't know that. You know, ours is 7 to 9. We don't know what is there, so we have to figure it out. And I I know that may make your modeling difficult, but but leave some room.
And we're giving you some guidance regarding where the earnings could go.
Any other questions from the phone?
International Group.
Hey guys, thanks for the question. And this one's probably for both of you guys. If you could talk about kind of the M and A I mean, was kinda on the cheaper side. Was this the only deal that you guys could identify out there that kinda met kind of valuation structure you're looking for? Or did you potentially identify some other targets out there as well?
Well, let me let me take that. Number 1, Microsemi is not on the cheaper side. We paid the highest you know, price to revenue that we've ever paid, you know, company obviously was more profitable and higher gross margin and all that, but it's the most expensive deal in total dollars or by any multiple you look at. So it's not cheap. And your question is, how do we see the environment?
I think, for us, it's irrelevant. Now we are we're locked up for a couple of years now, trying to integrate this and a lot of hard, you know, a lot of heavy lifting like we did with Atmel. So what the environment is and who else is available is relatively relevant for us, right now.
Fair enough. Thank you.
Thank you. And at this time, there are no further questions.
Okay. Well, thank you very much, everybody. I appreciate you showing up on the phone and in person with very short notice. And We can hang out afterwards for those that you are here if you want to watch the touchdown video. All right.
Thank you very much.
Yeah. We really are honored to have you here. So we finished on time. It's about 6 o'clock. The video is about 13, 14 minutes.
If you want to watch, welcome to stay here and we'll play it. If you, if you want to watch it yourself, it's on the USB stick also. So Debbie, how are we doing it? How are we playing it?