Welcome everyone. Welcome to the Microchip's Inaugural Analyst Day. It's the 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 Herculean 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. We had a plan B. I'm glad we are executing plan A. Welcome everyone.
All of you have a little goodie bag. They're, you know, cheap Microchip gifts, the Microchip way. What's in them? You know, there is a thermal cup. There is a spider screwdriver that has all these various type of screwdrivers with a light, and there's a baseball cap. There's a notebook to take notes. Some of you have speaker in them, some of you have LED flashlight. We ran out of speakers, so we put the flashlight. There's also a USB disk that has a touchdown video. Last year, we had a challenge to reach $1 billion in annual sales, I'm sorry, $1 billion in quarterly sales, which you know we did that in September quarter.
We had a motivational program called Touchdown 2018, that if we achieve that, and when we achieved that, we got a high school football team, and Microchip executives played against a high school football team 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 dancers are my granddaughter's dance class. At the end of this session, if you still are here, you wanna spend another 12 minutes, we can play the video. Otherwise, you can watch on your own time. 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.
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. We'll consider it read and into the record. With that, here's the agenda today. I'll go through the overview of Microchip and value proposition, and then we'll take your questions. This will be the organic part of the business. I'll cover the Microsemi acquisition, and then we'll take questions on that. Followed by that, Ganesh Moorthy, President and COO, will talk about how our products are enabling smart, connected, and secure applications. Rich Simoncic will talk about our total system solutions, and Eric with financial metrics. After my two presentations, we'll also take a break, and then we'll cover the other three. Let's begin.
When we made the last quarter earnings announcement, there was clearly a disconnect, the disconnect was clearly driven by Atmel seasonality, which didn't happen last year, which threw all of you off, and it threw us off too. Prior five years, Atmel's March quarter business had gone down 7.8% roughly. It didn't happen last year because, number one, we were raising prices, number two, we had just gone live on our IT system, 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 the seasonality. This year, seasonality came back in droves. Ever since, the question for investors and analysts have been, well, how does the June quarter look? Do you make something, some of it up? You know, where does it go?
Today, we'll help you with that. Let me cover the business update we issued after market close today. The March quarter is tracking according to the midpoint of the guidance. The old guidance was -3% to +1%, and the new one is flat to -2%, with the midpoint of -1% unchanged. March quarter guidance at the midpoint is a 9% growth year-over-year over the same quarter a year ago. Here is the June expectation. We're expecting June quarter net sales to be up about 5% sequentially, and that would be 6.3% over a year ago quarter, which I call soft landing in our scenario that we have described to you with a, you know, mid to high single-digit kind of growth.
That's kind of the soft landing on the lower end of that. Bookings are very strong. Our three months book-to-bill ratio, ending December, was 1.0. I couldn't give you the March, we just started March, but we pulled the book-to-bill ratio for three months ending February, and it was 1.09. I'll show you that on a graph. 12 months backlog is at an all-time record, and June 2018 backlog is well above the March 2018 quarter backlog at the same point in time. 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. Here's the book-to-bill ratio. 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 sometimes 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 a confidence why our business is alive and well, and why June quarter will be a good quarter. Here is the first one, and I'll read the tea leaves with you.
You know, this was the time when the lead times were going out and the book-to-bill ratio was rising, and it went to 1.06, it went to 1.11, which was the highest book-to-bill ratio in this cycle. When we saw that happening, lead times pushing out to 115,000+ customers, you know, 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 are buying. We have the obligation to let all of our customers know, not only our direct customers, but the worldwide customers, what is happening in our business.
We do not know any other way to communicate with 115,000 + customers other than issuing a public CEO letter that we post on the web. We posted that letter on April 4th after seeing this book-to-bill ratio ending March. You know, some of you believe that, you know, that drives booking somehow or that pulls a 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. When the customers covered the backlog for the lead time, then the bookings started to go to normal.
They only have every week, they have to place the order for a out week, every week out week. 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. The February book-to-bill ratio was 1.09. I'm not saying that March ends at 1.09. March is a strong billing quarter. You know, it's always a little back-end loaded after the Chinese New Year, but it's also a strong booking quarter, so 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 we can compare it to February? It was 0.99. That shows you the health of a bounce from the soft landing and the business is in very good shape. Let's go to the second page of reading the tea leaves. Now, this is a total backlog history. The squares show various acquisitions as we add their backlog to ours. On the very left was the Supertex and ISSC. Those were not needle movers. Micrel was a little larger, so we got the backlog bump. With Atmel, we got a significant Atmel bump. After we consolidated Atmel's bookings into our booking backlog, you could see how business has continued to grow after that.
In the last couple of months, you can see the bumps. The week-to-week data can be very noisy. Every point here is one week, so it can be very noisy. So you could see that soft landing. After that, as the business strengthened past December again into January and February, leading to that 1.09 book-to-bill 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. That is a second evidence of why the business is in very good shape and we are experiencing record backlog. Let's go to the third page. Again, reading the tea leaves here.
Let's start with the bars. The blue bars are where the billings plus backlog is. We're in the middle of the quarter. We have shipped a bunch of stuff already, and we're gonna ship much more in March. 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. That flatness for the last couple of weeks is the Chinese New Year for 2018 we just came out of. As we go into the stronger four or five weeks of March, this is headed towards where our current guidance is confirming for the current quarter. 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.
The Chinese New Year last year was earlier than this year, about four weeks earlier. When you look at where I say CNY 2017, that was a flatness during Chinese New Year for June backlog a year ago. 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 builds coming out after the Chinese New Year into the rest of the March and then continues to build into June. 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 Taiwan really, you know, shipping to China, so it's same as Hong Kong.
Where the pink dots are, the pink dots are the same billings plus backlog for June quarter this year. Now obviously, billings are zero because quarter hasn't started, so that's all backlog. You can see the pink dot, you can see the flatness there also because of Chinese New Year 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. That shows you the year-over-year growth, pink dots this year's June quarter versus the green line last year's June quarter. 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.
The June quarter slope is a lot higher coming out of the Chinese New Year. The distance you see to the green line, that distance should continue to build going higher. 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 four months to go. As those lines fill up, when you read those tea leaves, that's a pretty good scenario, and we have years and years of history in reading these tea leaves. The June quarter is building fine. This was the Greater China. When you add it to the Microchip total, all the other geographies, this is largely similar.
On the right-hand side, you see the slowdown because of Chinese New Year in the blue bar. You come to the left side, you see the Chinese New Year of last year. This one is less pronounced, that's why I showed you Greater China, because when you add the U.S. and Europe and Asia, like Korea, Japan and others, which do not hold Chinese New Year, it gets muted. 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. 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. Those are the four slides I wanted to take the time to read the tea leaves 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, you know, the math doesn't work or something goes wrong in the world where the tea leaves go off. This one is very predictable and that's really the evidence to the very first slide I showed. Let's move forward. With that, I'll briefly summarize the Microchip 1.0, which is the last 25 years or so of our history, and 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, shareholder friendly with consistently increasing dividends and free cash flow, and a very successful M&A strategy. This is the annual net sales growth showing 109 consecutive quarters of profitability. 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 million-$90 million, when we went public to a company that's closing on $4 billion and with today's acquisition, approaching approximately $6 billion. The largest business is microcontrollers, followed by analog in blue, followed by memories and licensing. This is the worldwide microcontroller market share ranking. In 2003, we were number eight. We were number 25 in 1990.
Even since 2003, in the last decade plus, we have gone from number eight to a number three position in microcontrollers. This is the numerical share. It's measured by our revenue divided by revenue that SIA posts. You know the SIA data doesn't quite jive with the Gartner data. You know, there are differences, Gartner puts out number once a year, SIA puts out number every month. For any kind of level tracking, as long as we do it consistently, and we do, we plot against the SIA, this is kind of what it shows.
When we bought, you know, a lot of organic growth here over the years, the big jump in 2016 was with the Atmel acquisition. 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 is now $950 million annualized based on a fiscal year 2018 run rate. One quarter missing out of that. Historical financial performance, you can see the revenue growth on the top left, the top right, gross margin percentage.
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 four, five years ago. Bottom left is EBITDA in dollars and margins. Even the EBITDA margins have also increased. EBITDA dollars have more than doubled. Then the free cash flow. Very, very substantial free cash flow, which helped us pay down essentially most of the debt we had from the Atmel acquisition and Prophet Equity acquisition. Now we are getting ready for the next acquisition. Expanding our solution through acquisitions. You have seen us through many of these acquisitions.
Many of these are small, unknown private companies, but a handful of really public companies, large acquisitions that you were aware of them, like Atmel, Micrel, Supertex, Silicon Storage Technology. They've all been integrated into Microchip system, adding enormous value to Microchip. 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. Ganesh Moorthy, in his presentation, will take you through smart, connected, and secure, very eloquently. I will not cover that part of it. These are the salient features of Microchip 2.0.
Total system solution in embedded control that Ganesh will cover. Leading customer preference to design with our MCUs, 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. A 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. A 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 system solution. Our VP of Analog, Rich Simoncic, later on, will have his entire presentation on total system solution. This is just one slide that shows the result. What the graph shows is, number of Microchip parts per project.
There's a customer board which has a microcontroller, a number of analog parts, converter, power management, maybe it has Ethernet connectivity, maybe it's connected to Wi-Fi, maybe it needs some memory, maybe it needs 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. Here's the first data we're sharing with you the result of it. We've shown you lots of diagrams and Rich Simoncic will show you many more slides how various products are selling together with our microcontroller, but numerically, this is the first data we're sharing with you. This is the revenue by end markets.
Our two largest markets are industrial and automotive, which give very sticky sockets, high margin, 60% of our business. Consumer for us is not consumer electronics. Consumer for us is not, you know, the, the Samsungs and other consumer electronics of the world. Consumer for us is more dominated by appliances, household, drones, you know, 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. Computing, communication, defense, and aerospace are smaller. Incidentally, those three are the largest segments for Microsemi. I'll show you in the second half of my presentation, you know, they're stronger where we have less exposure.
Together, it gives a dramatic cross-selling opportunity, and it makes the pie much more homogeneous. 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 caution I would give you is we went out of the way to share a lot of internal data to read the tea leaves. Don't expect us to bring that every day. You know, that was kind of one time here because there was so much nervousness on the street regarding because of the disconnect in March. That was a one-time thing.
Premium long-term non-GAAP financial model to 62.5% gross margin, 22.5% operating expenses, and 40% operating income. Last quarter was 39.5% operating income. We're pretty much on the heels of the 40%. Executing on Microchip 2.0, total system solution, smart, connected, and secure. State of the union at Microchip is very strong. That state of the union got attacked after a January announcement, hopefully I took some pains to convince you today that state of the union at Microchip is very strong.
With that, I will take questions on the organic business of Microchip, first from this audience, then we'll ask the operator to open it to the audience on the web or on the phone, then we'll go into the second part of the presentation, where we will cover Microsemi acquisition. If you have a question, please raise your hand and let the mic get to you.
Thanks, Steve. Kevin Cassidy from Stifel.
Yes, Kevin.
You showed 24% of your revenue is exposed to consumer right now. Can you say what it was before Atmel?
Anybody has the numbers?
I, you know, we didn't measure for a number of years. This was a difficult process to go through. When we last did, you know, that number was probably within plus or minus some. Atmel had a higher exposure, over time, the classic Microchip before Atmel has systematically moved more towards industrial and automotive. All I know is, you know, Atmel 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. 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. Honestly, we stopped 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 Atmel consumer business was very different than what Microchip was. We go into garage door openers and washers and dryers, and they don't have the cyclicality where, you know, for Christmas, 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, but it's consumer appliances and things like that, which are not tied to as much the gift cycle and, you know, updates on the phones and all that.
Will Stein from SunTrust. Thanks very much for hosting this and congrats on the deal, I understand you're taking on the organic business.
Yes.
I'd like to maybe address something that came up on the call.
Sure.
On the call and for the aftermath of that.
Could we get you closer?
Sorry.
Yeah, sure.
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 ex Atmel, and then weigh in what Atmel seasonality. 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. Can you help us square those two data points? I think Atmel had actually negative growth in the last few years, that seasonality is certainly not what you're sort of proposing.
That's really why we can't put four quarters of seasonality and sit down with you and say, "This is our seasonality for the other quarters." Atmel was a broken franchise. In 2015, their business was down, I think, 24%. You know, when you have, you know, that kind of business and combine, you know, Microchip, Atmel business has grown every year, every quarter since we have bought them, you know, other than the seasonality part of that. You gotta take that data with a grain of salt. March quarter seasonality was real. It was masked last year. 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 were right upon it.
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 zero growth for the year. If you believe that, then I can't help you. We have to really establish new seasonality and new numbers. March quarter was just so much more pronounced because the kind of business. The rest of it, work with the guidance, and I think you'll be okay.
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 Atmel?
Yeah.
Perhaps directionally quarter-to-quarter, that's what we should look to.
Yeah. Even now, we do not know how to completely modulate Atmel seasonality from a declining business to a growth business. Is the seasonality exactly same as a declining business had versus a growth business is? You know, that's why this is the first clean year. You know, last year had a lot of noise as we were integrating and raising prices and adjusting things. I think that's a challenge we didn't fully realize. You know, most of our other acquisitions were relatively small. They moved some needle, they were not large enough to change the seasonality. Atmel was, you know, nearly 40% of our business when we bought them. The largest acquisition, Micrel, was $200 million of business when we bought them. This one was very sizable.
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 fences, you know, swimming for fences, raising some prices. It's a new game, and I think we got to, you know, bear with us for a few quarters as the new seasonality emerges. Unfortunately, you will get muddled again with Microsemi. Yes, sir. Talk into the mic.
I'm Raymond Rund from Shaker Investments. Now that you have Atmel, you've acquired Arm technology, which you didn't have, how are you gonna leverage that, I think? In what part does that new technology, does that new opportunity play in the plans going forward? How are you gonna make the most of it?
You wanna take that? Yeah.
It's not completely correct that we did not have Arm technology before Atmel. We extensively used Arm in many of the specialized microcontrollers, not only SMSC, some of the other ones too. We're very familiar with the architecture. Our standard products did not necessarily use them. I think with Atmel, 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. You know, the best architecture when combined with the core and everything else wrapped around it, wins with the customer. We have two architectures, our PIC microcontrollers from Microchip before Atmel, the SAM microcontrollers from Atmel that are all 32-bit.
To repeat the question, the question is, do we plan to expand the Atmel product line? Yeah, we're expanding on both sides, right? They have different strengths, they have different ways in which we integrate the products. We have announced both new products that are with the PIC32 from before Atmel, and we've announced new PIC32 since Atmel that have an Arm core in them. They're all with the PIC brand. They just happen to have different cores depending on what we're trying to accomplish with them. Okay?
What we accomplished in last year and a half, two 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 stealing a little bit of Rich Simoncic's thunder, he was gonna talk about it. They said Microchip's ecosystem was better, and they wanted Atmel products to be able to run on Microchip's ecosystem. The surveys were saying that, but when your competitors, you know, people badmouth competitors, when they became part of us, they said Microchip had great development tools. Their ecosystem was better. We want the Arm products to run on Microchip's ecosystem, and today they do. Even the Arm products that came from Atmel today are able to run on Microchip's development tool, MPLAB.
We also produced a PIC32, which has an Arm core in it. We also have many PIC32s which have MIPS core on it. Rich Simoncic will show you some data, you know, really what the surveys are saying about the ecosystem, ours is better. You know, getting that from a competitor, you know, is even better. Okay, anybody else? Rajiv?
Rajvindra Gill from Needham & Company. Thank you. Just a question on inventory. 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 in the December quarter. The inventory dollars outgrew overall revenue. I was just wondering if you could maybe talk a little bit about that and how you're seeing the inventory situation going forward.
Well, I, you know, I believe, again, it's kind of reading the tea leaves a little bit, but I think some of the foundry lead times got long and foundry capacities were constrained. We negotiated with foundries some additional capacity and was able to get that capacity to build a little bit of inventory so we don't get short. A lot of the products we build at foundries are higher level microcontrollers in silicon and chips, so their silicon content is higher, because those are more leading-edge lithographies versus what we do inside. I think some of that difference was driven by the inventory build more came out of the foundry.
Hi, Kristen Schacker from Nomura Instinet. Thanks for having us here today. I just wanna touch on automotive and industrial a little bit. I know that a lot of your peers, you know, we're seeing those two segments grow in the high single digits, double digits, you know, clearly well above, you know, average historical rates. 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 two businesses over the next upcoming year?
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 in 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, we're selling a microcontroller, an analog part, a power management, a connectivity, either a USB, a Wi-Fi, a Bluetooth, and others. I think Ganesh's presentation and Rich'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.
Yeah, I would say also on the website there is a more detailed industrial presentation and a more detailed automotive presentation for the industrial one Ganesh just gave a week ago at the Citi conference, and 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. 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 use the term, and I see you use the 7%-9% soft landing to 7%-9%.
Really, was it just a timing situation where things just fell off as they always do at Chinese New Year? Would you say that 7%-9% is still a good thing for us to think about, at least for the near term, mid-term? Also, as you talk to your customers, I'm curious if you've noticed any change in their body language, particularly since this tax law's come out. Are they feeling better or worse or any kind of color since you guys have a lot of customers?
You know, soft landing, I showed the June quarter with the 5% growth guidance. The June quarter will be up 6.3% over June quarter last year. That's below a little bit from that 5%, 7%-9% range, so that's kind of the soft landing. You know, often, industry is known for crash landing where, you know, business goes -5%, -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, you know, may be better than that, I think that's really what's the soft landing.
The second part of your question, what we hear from customers, you know, comments we have received from customers, suppliers, other business leaders that, you know, I meet routinely, the impact of tax law is universally positive. I mean, I haven't heard anything negative. You know, small businesses that largely were exposed to U.S., it's a bonanza for them. You know, tax rate goes from 35%- 21%. The businesses that were international and shipped a lot of business elsewhere 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. What we got was we can use all of our foreign cash now.
We got, you know, $2 billion 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, $1.6 billion we're using out of our treasury, this would have been overseas and either would have required complicated, some sort of structuring where we can use the foreign cash to buy some foreign assets or leverage it higher in U.S. and not be able to use that money. I think that's very universally positive. I think I think it's creating economic activity. GDP growth is showing it. I don't see there's any negative in it. Let's take a couple of questions maybe from Operator, can you see if there are any questions on the web audience?
Thank you.
On that call.
Thank you. If you would like to ask a question over the phone, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. 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? On the question, I wanted to revisit this growth question that was asked before. I think for June you're guiding to 6.3% year-over-year. Is that a sustainable growth rate for the year given the record backlog and strength in trends? Importantly, what is the difference between conditions now versus when you laid out the target to grow, you know, 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? Like I said, you know, we have essentially one year experience with Atmel, 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 that, you know, we couldn't overcome, and that would be negative and will affect seasonality. I don't think we are totally comfortable laying that out for every quarter. If the Microsemi acquisition closes in June, it's going to change a lot of the things anyway. You know, and then we have to refigure out what the combined company growth rate is.
I think I probably can't answer your question, but organically, we're not looking at it any differently. We're not changing our target. We're not changing our growth rate. Eric Bjornholt will talk about it in his presentation, show you a future model. And, you know, we're comfortable that with TSS, total system solution, the higher attach rate we're getting, by the time you see Ganesh Moorthy's presentation and by the time you see Rich Simoncic's presentation hopefully gives you more comfort that those numbers are achievable.
Okay. 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, could go into a, some sort of headphone, could go into something else, but I don't really think we're in a phone.
Okay.
Anytime you say literally we're not in any phone, you're most likely gonna be wrong, but we're not really in any major phone.
Okay.
Apple, Samsung haven't put us in any phone.
Thank you. Our next question comes from Chris Caso with Raymond James.
Yes. Thank you. I just had a question about lead times. 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, five to eight weeks. Could you clarify what portion of products still have elevated lead times now? 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 updates since only one 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 than what we gave you at the earnings call. Our next update, we could give you again in the next earnings call. You kinda have to think about where our energy has been. You know, we set this analyst day about 2.5 weeks ago, and we've been working on this acquisition probably for about four months now and trying to have it land on the day, you know, the I signed that deal 1 minute before market close today, 3:59 P.M. New York time. This was a Herculean task.
We probably all lost some weight trying to get there. Some of the answers probably we didn't spend time to prepare for that.
Okay. I guess just conceptually if, you know, there's still a portion of products with lead times coming down, maybe you could just address that dynamic. I guess what you had said earlier is with, you know, 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, you know, what effect should that have on order rates in the business? Just in general.
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 four to eight weeks, but we still had, many products, many business units, spot problems here and there where the lead time was up to 14 weeks. I think what we said, lead times now were about four to 14 weeks, right?
Correct. We said by the June quarter, we expected 85%-90% of our standard products to be in that four to eight week.
In the four to eight week time frame. Yeah. I think we're still on that schedule. By the end of June quarter, we have four more months. In those, we believe that many of the products where the lead times are, you know, 14 weeks, 10 weeks, 12 weeks, 14 weeks, would be all coming down slowly. The 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, the business wasn't declining. You know, book-to-bill never correlates to business. Book-to-bill only is, you know, 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 the revenue.
You can grow business with 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. Bookings and billings are same. What you booked, what you shipped, the book-to-bill is 1, and your business can grow. I think as the lead times on the remaining products come down, you know, the book-to-bill of 1.09 is not sustainable. I don't think it'll be that even for the March quarter. I don't know, be somewhere between 1 to 1.09. Longer term, book-to-bill ratios are usually 1.01 or 1.0 or, you know, that's the 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, you know, quarters ahead.
I didn't hear that last part.
I said because then your revenue, more of the revenue is being shipped on a turns basis rather than being booked one or two quarters ahead.
Yeah.
Right
When the book-to-bill ratio is lower, that means the lead times are shorter. You do much of your revenue by booking and billing in the same quarter. 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 the longer lead time. Going through the quarter, you have less fill in. You have less turns because people have already given you the order.
Right. Good. That's a helpful explanation. Thank you.
Thank you. Any other question? Otherwise, we move to the next section.
At this time, there are no further questions in the queue.
Okay. Wonderful. Thank you. Let's move to the Microsemi acquisition. One more time, a very long forward-looking statement. Many of you in the room may also be investors in Microsemi. In that case, you would be voting on the merger agreement when the proxy is filed. Therefore, we need a longer safe 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, I don't think there is a person in the room that, you know, hasn't looked at who Microsemi is, unless you're living in a cave, which you, I know you're not. You're constantly connected. I'll 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. 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 is 80% of their business. That one is only about 14% of our business. There is a lot of cross-sell opportunity. Fiscal 2017, their fiscal year ends in September 30, 2017, was a revenue of approximately $1.8 billion. First company we're buying in our string of acquisitions where their gross margin is higher than us. We have to work harder, get ours there.
64% non-GAAP gross margin, 32% non-GAAP operating margin. Fiscal first quarter, which ended in December, the revenue was $468.7 million, 63.2% non-GAAP gross margin, and 32.2% 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. 64% of the revenue is in Asia and Europe, 49% is through distribution. Net debt of $1.8 billion on the balance sheet.
They're headquartered in Aliso Viejo, Southern California, near Los Angeles. Approximately 4,800 employees worldwide. 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. We first got Ethernet portfolio through acquisition of SMSC, and we have done extremely well with it. It's a very good, very high margin growth business. We in fact got some more with the Micrel acquisition, and now we get even some more with, you know, with this Microsemi acquisition. 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.
It's kind of building on acquisitions. Where did we get the timing products? It came from Micrel. You know, low-power wireless. Every company we have bought had some sort of wireless exposure. ISSC had some, and Atmel had some, and ZeroG had some, and Roving Networks had some. There were a couple of private companies. You know, analog power, Micrel had some. Mixed signal solutions, SMSC had some. We built our own products too in all of these markets, but it extends our portfolio really in all these markets with help of Microsemi products. It adds discrete and FPGA 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 portfolio of over 1,500 patents to our strong portfolio.
Synergy, you know, significant EPS accretion. The deal is accretive on a day one without doing anything, without any synergy. We have identified $300 million in estimated synergies in third year after close. We are assuming a June close. There's very little product overlap with the company, we think the regulatory approval should be, you know, relatively quick and, you know, takes three or four months to get the shareholder vote. That's where we begin. TAM expansion. Microchip currently serves about a $32 billion market, $15 billion in microcontroller, $17 billion in analog and mixed signal. That's the total served available market. That's not our share of that market. I wish it was. Microsemi serves about an $18 billion market across all their products. Combined together, we will be serving a $50 billion 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, the Microsemi end market exposure. The three areas where we have lower exposure, computing, communication, aerospace, those are the largest one for them. The bottom shows the combined two companies, and you can see how homogeneous the pie becomes. Industrial staying the largest and automotive staying number two, followed by consumer communication computing. In this slide, again, the red bar shows 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.
Aerospace and defense, in rockets and engines and planes and missiles and everything else. On the top-It just shows you the various product lines. We have microcontrollers, analog, mixed signal, interface, memory, power management, switches and controllers, high-rel discrete, those coming from Microsemi, enterprise storage coming from them, FPGA coming from them. Combined capabilities become quite enormous. Very highly profitable financial model. What I've done on this slide is, these numbers are December 2017 quarter x 4 for both companies. December quarter annualized. Microchip, last quarter, annualized was almost $4 billion in sales, 61.4% gross margin, and going to the bottom, 39.4% operating profit. Microsemi was about $1.875 billion annualized, little higher gross margin, 63.2%, and an operating income of 32.2%.
The next column is the mathematical addition of Microchip plus Microsemi, and what's the long-term model we're looking at. Long-term model, we believe, combined companies, we can add another 100 basis points to the combined company gross margin. They recently acquired an acquisition that took their gross margin lower, and I think that can be improved. Microchip itself is working from 61.4%- 62.5%. Each company adding a percent of gross margin, I think that's where it leads us. 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 40.5%.
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 something we can achieve. Synergy and accretion expectations. Transaction is expected to be immediately accretive to a non-GAAP earnings per share. Let me check. Short term, we're targeting 18% growth in non-GAAP EPS from fiscal year 2018 to fiscal year 2019, with accretion from Microsemi and continuous improvement and growth in our own business. This is assuming June 2018 close. If the close pushes out, 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 first year after close.
They'll be at some rate, but by the end of the first year, it's a run rate of $0.75. Longer term, which is third year after close, which would be our fiscal year 2021, again assuming a June close, $300 million 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. 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 $1.75, 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. Please don't do that.
You know, you have a history and, you know, we leave some room. The numbers 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 the most desirable, where the largest leverage is. 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 2018 to fiscal year 2021. It extends Microchip's record of organic as well as acquisition-driven revenue and a non-GAAP EPS growth. Summary of the transaction.
I know, you know, the news came out at, you know, 4:03 P.M. New York time, and then you were walking here at that time, so may not have time to kinda look through what we said in the press release. It's a transaction value of $10.15 billion. There's a $8.34 billion we're paying for the equity, and the other $1.8 billion are for net debt from Microsemi, adding up to $10.15 billion. 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 aha moment. Wow, you know, $10.15 billion dollar, how are you gonna fund it?
Well, I asked the same question, and I do have the answers. The transaction is being funded through a combination of $1.6 billion of cash from combined company balance sheet. Most of it is ours, but some of it from theirs. Here we can use all the foreign cash now. Between now and close, we generate about $600 million of free cash between Microchip and Microsemi. JPMorgan, 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 billion is coming from our existing line of credit. The line of credit is about $3.15 billion.
As part of this process, we're also expanding the line of credit. We'll have some more headroom in it, but we will draw $3 billion from existing line of credit, and there'll be approximately $5 billion of new debt. Large portion of this new debt is going to be, you know, Term Loan B, which will be pre-payable. You know, pro forma net debt to EBITDA leverage starting at transaction close will be 4.7x. You know, that may look shocking. However, the combined company's business is a very high margin, sticky socket, industrial, automotive, defense, aerospace. These are not, you know, consumer electronic businesses where, you know, a large customer change their design from you to somebody else.
It's a very predictable business, we'll be generating right away approximately $2.4 billion of EBITDA per year run rate. This is, you know, our quarter backward-looking EBITDA of about $2.4 billion. From that, paying for interest, paying for taxes, paying for dividend. After all that, we'll be generating approximately $1.4 billion of free cash flow, you know, per year starting right away. With the growth, as we add synergy, that number grows with synergy and with growth, $1.4 billion right away. Therefore, we plan to rapidly deleverage post-transaction close through a combination of growth in free cash flow and the EBITDA extension. Debt would be coming down, EBITDA would be growing.
Coming from both sides, our denominator getting larger and numerator getting smaller, we will get that leverage down rapidly. Expect the transaction to close in CQ2 2018, subject to customary closing conditions and stockholder as well as regulatory approval. 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 two 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. It's really this acquisition is the next step in Microchip's track record of successful M&A.
We strongly believe that this will be another compelling transaction, that we'll look back and say, "My God, this was a home run." 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 Ellis, B. Riley.
Yes.
Can you speak to divestiture potential and the extent that those would be considered, what the criteria is that you would use and whether that would be considered in the $300 million of long-term synergies?
Currently, we are not anticipating any divestitures from the Microsemi business. We usually don't do a lot of divestitures. We didn't do any divestiture in SMSC. We didn't do any divestiture in Micrel. We didn't do any divestiture in Supertex, any of other smaller acquisitions. In Atmel, we did one very, very small divestiture, which was a $19 million deal of really a very deteriorating, going down, you know, touch cell phone kind of a business they had. Every time we do a transaction, there are a large amount of speculation. Some of you kinda tend to jump the gun and forecast Microchip, you know. When the deal leaked out, I've already read articles, you know, and I've gotten calls from bankers, "I can help you sell the PMC-Sierra business. I can help you sell FPGA.
I can sell you this and that." We don't do a lot of divestures. These are all great running businesses, high margin, sticky socket, tremendous cash flow, and they will help us to get the leverage down. There is no plan for any divesture. Take Harsh. Harsh?
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? Secondly, Microsemi 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, bond, etc , can you maybe talk about some of the challenges you might have as you look at those areas? 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 was writing notes. The first one was, really could a superior offer emerge. You know, I do not know what sort of process they're in. Obviously, I was on this side. We will see when the proxy comes out and read the background of the merger, what was really all done. You know, their banker ran some sort of process. Any deals, any other offers could have emerged.
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 attractive to the shareholders, then that's something we have to deal with. They usually, there is a significant breakup fee in the agreement, and we have usually two options in that case, either to match the superior proposal or to take a breakup fee. That's kinda hard to speculate. You know that we were the superior proposal in Atmel. You know, they are signed a deal with the Dialog Semiconductor. Once before we were the superior proposal in Silicon Storage Technology, they had signed a deal with Prophet Equity, I think, was a private equity partners. We ourselves have done it twice.
It hasn't been done to us, but the deal is still kinda open. That's number one. The second part of your question was, you know, a lot of businesses which we are not in today. This is a concern for analysts and investors every time. You know, they're vertical, you're horizontal, they're, you're MIPS. How would you do this? How would you do that? Over the last two years, as I have met with many of you, I've gotten repeat commitments from many of you that you won't do that this time. Right? You have told me that you earned your credibility, and we're not gonna beat you over, you know, you don't know this, you don't know that, how are you gonna do that? I'm gonna call on that commitment. We are a great team.
Do not misjudge or underestimate Microchip 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 SMSC, we did that with Atmel, we did that with, you know, other businesses, and whatever we have to do that this time, we will do it. We did not break it down. Yeah, we did not break it down.
Mark Delaney with Goldman Sachs. Thanks for doing the presentation and 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. Do you see opportunities on that front? Thank you.
You know, take example. Let's take data center communication and Arrow defense, three businesses they have. Those three 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. They might need a Flash memory to store something. You know, a lot of those things Microsemi don't have. Those are opportunities for us to be able to attach Microchip's microcontroller, analog, connectivity, memory, and other products to their applications. Similarly, the reverse way. If some of Microchip's applications requires a small FPGA, they require, you know, a lot of the parts require discretes.
You know, there is a few hundred million dollar discrete business with the resistors and capacitors and Zener diodes and, you know, whatever else is in the discrete. There's clearly synergy in being able to add, you know, put that business next to ours. 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 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. I think that potential would be significant.
Wait till Richard's presentation. He will show you know, what we are doing so far with the acquisitions we have done, how successful we are. With that, you can get a feel for even more successful we can be with this acquisition, which is even, you know, more different end market mix, which brings all these opportunities. Question.
Thanks. Will Stein from SunTrust again.
Sure.
First, a clarification. The $300 million of synergies, that's a mix of cost and revenue synergies. We should think about it as $300 million incremental cash flow, by year three. Is that right?
Yes. $300 million incremental cash flow. The largest piece. There are three pieces, OpEx, gross margin, and some of the incremental revenue falling through. The largest piece tends to be OpEx.
Okay. 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 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 our targets distribution channel"? Do you take the other approach and pull back and say, "We're gonna 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. You don't want a distributor 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? Nothing changes. 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. You know, that's not good for us. We like the way the business is structured in working with multiple distributors.
Rajvindra Gill from Needham & Company. Thanks again. In terms of financing the deal, you decided to take on more leverage as opposed to issue out equity. Given the potential of rising interest rates, I wanted to get a better understanding of kind of the thought process of adding, you know, another $5 billion of debt. What's the interest rate component of that, and why the decision to maybe use debt versus equity?
Well, the decision for debt versus equity was pretty simple. You know, the target didn't want equity, that one is easy answer. You know, that doesn't mean that, you know, one couldn't issue equity elsewhere. You know, you didn't have to give the equity to the target. Day one today, there is a target didn't want equity, so it's an all-cash deal, and it has to be, you know, it has to be funded day one by a commitment letter from the advisor JP Morgan, we have commitment letter for all the money that we have shown you. Deal is significantly more accretive with cash than it is with equity. You know that. Equity is very expensive. If we can fund it with cash, that's really where my preference is.
Right now we see that we can fund it with cash. Leverage is high, but there's extreme significant headroom to the covenant, I'm not concerned about it. 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, deal passes all of our tests. When it doesn't pass the test, I don't do those deals. I mean, you've seen one deal that spilled in the public domain was CSR. CSR basically failed the stress test. Everything else was okay, but it failed a stress test where I couldn't go above a certain amount, Qualcomm paid more. If this deal had failed a stress test, I wouldn't have done this deal either.
This deal is comfortable. We have a very large covenant amendment backstop from JP Morgan, which gives a significant headroom to the covenant. If the rates rise, first of all, you know, rates don't rise in a quarter or two. We very rapidly deleverage. I talked earlier, starting off, we have $1.4 billion of cash in the year, and then EBITDA rises during that timeframe. You rapidly de-lever. Even if the interest rates goes higher, the deal is still very accretive and passes all the tests. Any questions from the phone operator?
Once again, that is star one to ask a question. Our first question comes from Vivek Arya with Bank of America Merrill Lynch.
Thanks again for letting me ask a question. Steve, actually two 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? On the deleveraging aspect, do you have certain milestones? You know, obviously, you guys have a very strong track record of delevering as we saw with Atmel. In this case, the leverage levels are higher than what you have done in the past. Do you have certain milestones where you plan to be after a year, two years, three years, etc ?
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. The disclosures are an unlimited headache in that case. You know, where if we think the leverage comes down to pick a number, three, and it is 3.2, and bond happens to be trading at 99.5, then you have exposure. You told me three, and it is 3.2. Just the disclosure headache with that is really enormous.
We're not taking that thing 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. Feel comfortable that we have dotted all the Is and crossed all the Ts.
Got it. Anything on the regulatory side? Do you need approval from China antitrust in any way?
We do need MOFCOM. I think there are about six countries we need the approval in, the longest one usually tends to be MOFCOM. Many people's experience on MOFCOM is many times they tend to wait, you know, U.S. or Europe, they kind of take cues from it. A number of these high-profile deals, you know, they've been stuck in Europe rather than MOFCOM 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, 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% and 20%.
There is really negligible overlap, therefore we expect no problem in U.S., no problem in Europe. China has built up their resources, used to take a long time. The average deal where there is no product overlap has only taken 30 days after filing in China last year. Since this one has a very little overlap, we don't think MOFCOM would be a problem.
Okay. Thank you.
Thank you. Our next question comes from Chris Rolland with Susquehanna International Group.
Hey, guys. Congrats on the deal. I guess the inexpensive ones are back to dropping like flies. Just back to the $300 million, you know, if you use some average accretion from some recent deals, it's more like, you know, if we apply it to this one, it'd be more like $200 million. I know they're not including top-line synergies in their number, but that $300 is still a little high there. As I think about your two businesses, there isn't a ton of overlap, product overlap, I'm not sure there are a ton of shared R&D opportunities there. 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.
Given the two companies, you know, 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, you know, OpEx gross margin, you know, versus the growth revenue falling through, I mean, you know, you're in the range. not exactly, you know. The number 300 may look high to you because it has revenue synergy, revenue growth. you know, their business has been growing even without acquisition. Like, you know, last year, their business has been growing. They have done very much like what Microchip have done. You know, they don't call it total system 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. There's a significant revenue synergy.
When you have revenue synergy, almost the entire gross margin falls through because there's no more expenses you need to add. 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. We're including it.
Okay, great. Thanks for that color, and congrats.
Thank you.
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? 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 three vehicles you talked about, the line of credit, Term Loan 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 first year? The answer is yes.
Okay.
The second part of your question was, are we looking at a cost of debt?
Yes.
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. We're using $1.6 billion 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. $3 billion comes from line of credit. The highest ladder interest on that is, I think, 225 basis points above LIBOR, which would probably fall somewhere around 4%.
Then whatever the rest of the $5 billion 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 of integrating all your acquisitions and improving operations. You know, certainly the size and scope of this deal is much larger. Can you just talk about that? And Microsemi also has been very acquisitive, just, you know, kind of how you approach that on the size of this type of deal.
Well, I mean, this deal is not any larger in percentage terms than Atmel was at our then size. It was about a billion-dollar company. We were about $2.2 billion or something at that time. Percentage-wise, it was about the same. When we did SMSC, it was $400 million dollar company. We were about $1 billion, it was about the same. You kinda ask that question every time. The sizes get larger and larger, 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's a good succession planning, we ask these people to really go help integrate the other companies.
There's systems set up. I don't think it's any, percentage-wise, any bigger, very minutely bigger in percentage-wise than Atmel was.
Okay. Then as a follow-up, I know from a COGS perspective, one of the things you're doing with Atmel in terms of bringing assembly and test in-house, can you talk about that potential opportunity here as well?
You know, this question is really more of integration planning. Even in Atmel and other deals, we talked about it closer to or after we closed the deal. Between now and the time we close the deal, we are able to look into the business a lot more than we were able to look in before. Some of those, we 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 day we announced the deal because you don't really have that detail information. Otherwise, the deal leaks out, which leaked out anyway.
We'll have more information, but I would think, you know, many of the synergy potentials we had in Atmel and Micrel and SMSC and other deals would be here also. I don't have the numbers and, you know, we have some, you know, internal analysis, but it has to be further, details have to be built on.
Okay, thanks for the color.
Operator, with that. Any other question on the phone?
We have one further question from Vijay Rakesh with Mizuho.
Yeah. Hi, guys. Good acquisition here. Just wondering if you are seeing any divestitures on the Microsemi side, and would you keep all the segments separate? You know, obviously Microsemi has given, you know, guidance and disclosures by segment. Do you expect to do the same? Thanks.
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 they operate only in one segment, and I don't know if that will change.
Got it.
On a revenue basis, we'll piece it out into, you know, microcontroller and analog and maybe some others, but they wouldn't be segment. They would just be product lines. It will just be one segment.
Got it. You expect to keep all, you don't see any divestitures here, right?
What's that? No divestitures.
Any divestitures?
I answered that question earlier.
Yeah.
We have no divestitures planned right now.
Got it. Thanks.
Thank you. At this time, we have no further questions.
Okay. What we'd like to do is take a break. We're right, 3:58 P.M., almost 4:00 P.M.. A little bit behind schedule, but I think we're okay, right? Yeah. Let's just 10 minutes? Okay. Stretch your legs, use the bathroom if you need it, and let's get back here at 4:10 P.M..
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 break. Ladies and gentlemen, we will begin again shortly. Please stand by.
[Break]
I don't think it's work Okay. All right, we're gonna get started here. All right, thanks, everyone. Let's get started with the next portion of this. Really what I'd like to highlight as we go through this is, you know, how are we thinking about the various markets and product lines and how they will drive long-term growth for Microchip? This is all, you know, 95% of which you're gonna see, this is all classic Microchip, so this is not a Microsemi piece. There's a small number of slides where you'll see some of the common approaches and where we might intersect. 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? When they're connected, how do we ensure the security of those things? Smart, connected, and secure is really where all of our investments are going into creating the solutions that our embedded control customers require. I wanna start with an analogy of, you know, what you see, which is in an iceberg, which is what is visible above the line and what is visible below or what is not visible, that is below the waterline. This is not about Microchip, this is the industry at large.
I call this the news echo chamber, and in this echo chamber, what you hear every day and what you probably, you know, see is artificial intelligence, virtual reality, autonomous car driving, big data, Bitcoin, and all that. You know, you wonder, so what does Microchip do in all of these areas? What you don't see beneath 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 markets in which we play. This is really what drives a big part of the consumption of semiconductors, of the growth opportunities that are out there. That's where we play.
I wanna show you what does that mean, in specific examples here. I'm gonna go through four 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. Here's an alarm system, and, in the very, top left is the earlier things. It was a simple, you know, 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.
You know, 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. 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. We're in 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. The very first of these probably didn't even have electronics. There 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. Bit by bit, it got a little bit of intelligence.
It could be, you know, electronically controlled, 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. That journey again of smart, connected, secure has created tremendously valuable products that consumers have used. Here's another one. This is more industrial in its nature. This is the little box that sits outside our homes measuring the energy that we're consuming.
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 spin, to slowly starting to add more electronics, to having then connectivity, 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. 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 hacked as well. Another example of the journey of a smart, or an electric meter from being largely dumb to being smart, connected, and secure. Okay. I apologize. I don't know what happened. Brad? I'm gonna 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. 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 range to ensuring that when there's this wireless transmission of valuable data, it doesn't get captured and it's in fact secure in where it goes. Again, another example of things going from purely mechanical to having a high degree of smart, connected and secure.
That And, and you can take this, and there's 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. This is the space in the area under the, 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. I'm gonna take Microchip 1.0, just at the, at the product line level and trying to compare where we were to where we are. On the left-hand side is, you know, we were, if you go back five, six, seven years ago, we were predominantly an 8-bit, 16-bit microcontroller company. We've always had world-class development tools and software. We were emerging with our analog portfolio, strong EEPROM 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. Microchip 2.0 has expanded that. All of what we were good at and strong at stayed, 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 this small line. Analog has, you know, four or five thousand different products. It's a, you know, an business in and of itself, very substantial portfolio of products for analog. We've expanded even in memory. We used to have EEPROM. We now have Flash. We have some other embedded memory in a few slides as well.
That also continues to expand in new embedded memory categories. We went from having very, very little in connectivity to being a very strong portfolio of 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 two in Rich Simonci's presentation as to how are we going to go to market. The channel partnerships remain strong. We remain one of the most, you know, 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. That's kind of the transition over time between 1.0 and 2.0 in terms of what it's done from a product line standpoint. At the end, you've seen these diagrams. We show these as this is what, you know, when we look at a customer system, all the different building blocks that they potentially are gonna require, and how do we build them out? In the middle, in the red is the microcontrollers and microprocessors. In blue are many of the analog and connectivity segments. We have some new ones that came from acquisitions in timing and encryption and security.
All these are critical parts of how we go to market with a total system solution approach. 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, you know, it's not just about the product and the price, but it's also about the approach of how we go to market. Those long product life cycles create a tremendous stickiness, create tremendous long-term revenue streams from the designs that go into automotive, that go into industrial, that go into the infrastructure side of communication, that go into some of the aerospace and defense side of the businesses. I want you to take away from here, you know, we're thriving below the waterline.
We may not be as visible as some of these other things in, you know, artificial intelligence, et cetera, that is talked about a lot. If you look at our business transformation from fiscal year 2010 to the fiscal year 2018 using the third calendar quarter run rates, right? We've gone from $1 billion of revenue to $4 billion of revenue. From 57.4% gross margin to 61.4% gross margin, and from 30.3% operating margin to 39.4% operating margin. 300% growth in revenue, 400 basis points in gross margin, 900 basis points in operating margin. That's all working on the many, many opportunities that are below the waterline that don't get a lot of highlight but make a tremendous amount of money.
You may feel, you know, 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. You know, we're in Google's do it yourself AI box. They have an artificial intelligence thing for hobbyists 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. We're in those. We're on the data on-ramp. If you wanna have a big data system, it's collecting data from many places. 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. Finally, in Bitcoin, we're in the smart power. The largest cost of operating a Bitcoin farm is power. Power supplies that can be efficient are highly sought after.
We do this in many other spaces in the computing space and other server 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 that go to market that enables people to grow quickly into the types of innovation that they wanna be able to achieve. Even though we don't necessarily talk as much about the things above the waterline, we're still very much in many of those as well. Now, with all of that, Microsemi actually farther expands that available market for us. The product lines that they have and FPGA, you know, we don't do anything there.
Some of the high reliability that they have, we don't do much there, in the mixed signal and optical. 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. It would have been the products that over time we would have had to build out. Now together, we're gonna 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 products we would have built over time. Again, by combining them, we get a more co-powerful portfolio for each of us together to be able to sell more effectively.
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. Of course, in industrial, we have some common areas. I think we're gonna 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. I wanna spend the next few minutes on innovation from a product line standpoint. Now, what are we doing to create these ongoing, you know, ability for customers to be able to make their systems better, faster, cheaper, smarter, you know, connected, and secure, whatever the dimensions are.
Let's look at first, you know, what do our customers expect from us. These are trends in the embedded market that our customers face. You know, they are constantly facing how do they relentlessly innovate their products, how do they take market share from their, you know, competitors that they may be. Especially in the case of industrial, automotive, aerospace, etc , there are demanding and harsh environments in which their products have to work, and therefore, our products have to work as well. They want flexibility to the various phases. How do they be, you know, able to be nimble as they develop their products, as they get to manufacturing, as it gives them many, many SKUs that we can provide.
Their, you know, 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 conversion that's more efficient. Many dimensions of energy efficiency. Human interface is a way in which people are looking to differentiate their products. 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 wanna do? Intelligent sensors and then smaller, thinner packages.
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. I'm gonna take you through the principal product lines, not every single one of them, but many of them here. Here's 8-bit, and you would think, 8-bit, there's innovation left? You know, 8-bit has tremendous amounts of innovation. That's why it continues to grow. That's why the December quarter was a record quarter for the 8-bit microcontrollers, and nobody else knows or focuses on doing it, except every new place where you're first building intelligence into a system more often than not starts with an 8-bit.
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. Here there's a deterministic performance, core independent peripherals, which allows you to have more performance than you'd think an 8-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. A peripheral pinout select, which allows you to define the pinout that is appropriate. If you wanna 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.
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, etc . There's huge amounts of innovation left and huge amounts of innovation continuing in 8-bit in a product line that for 20+ years, people have said, "Why are you still doing 8-bit?" Because it is tremendous in terms of helping us grow and drive profitability. Switching to 16-bit. These are quantized by 8-bit, 16-bit, 32-bit, but the microcontroller market for us is really a continuum of microcontroller requirements. In 16-bit, there are two or three areas we focus on that are incrementally there.
On the top is precision motor control, we have designed these products. This is the first time in which Microchip added a DSP onto the microcontrollers as well. Very complex algorithms that are required to run motor control are often driven out of our 16-bit product. 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. 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. They're very much at the top end of what 8-bit does. Lots and lots of 16-bit products in some cases get utilized into those systems which are a broad base of applications. Lastly, it's in robust applications. 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. We design our products to be very robust because industrial and automotive is the place we play, a significant portion of our business.
The ability to tolerate noise, voltage, ranges that you can be at, et cetera, a big part of what 16-bit does. Moving to 32-bit, here we have both microcontrollers, and we have microprocessors. The microprocessors came to us through the Atmel acquisition. They had a fantastic product line that was there. These products go, they're into the leading applications software. 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 the harsh requirements of these markets.
In secure, we also have, and Atmel, 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, used in many of the point-of-sales, product lines that we have, etc . 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 in ecosystem, that's in tool, etc , and I'll show you some of that in another slide as well. Moving from microcontrollers to analog. 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. Sometimes, and 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. These are going to many automotive applications for networking, for LED lighting, etc . Another class of where the power products go into is a USB Type-C power, and some of the high voltage capabilities that we have developed or come through some of the acquisitions. We enable 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. Finally, into some of the optical networking areas as well. Those are all new areas where innovation is being applied from an analog power standpoint. 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. 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, this is extremely critical because we have lots of battery-operated applications in which we sell analog. 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 A/D converters, this is a path we've been on for some time, 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 smoke detector or carbon monoxide detector that you see, you know, will not have some Microchip content in it.
The analog front ends that are in it, you know, largely come from us. Then measurement systems, AC-to-DC, some 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, so typically those are in automotive, computing, industrial, and communication. Starting from the top left, you know, from industrial factory automation, which often has an Ethernet basis to it and some specialized Ethernet products that go with it. We're the leader in infotainment, with the most networking that came to us from the SMSC 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 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 automotive connectivity requirements. Rapid expansion across the ADAS systems. All the ADAS systems require that these subsystems all be connected, and they be connected reliably, fast, to be able to make good decisions as to what is it 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. Eventually, those are the things that lead into some form of autonomous, depending on level one through level five that is there.
We have a bunch of other networks we work with in the car. A car is not a, you know, single network. There's probably six, seven, eight different networks. There's networks that are called LIN, CAN. CAN is a 20-year standard in automotive that is now starting to also be in many industrial applications. It has faster CAN called CAN FD, and then a new Ethernet standard called a 100BASE-T1. Power line, you don't think about the meters conveying data through a power line communication. There's a modem that is required, and that wired connectivity and the protocol that goes with it requires semiconductors that go into the meters themselves. We're also in other segments.
We're into the server segment with some of our USB Ethernet. We're in some of the computing segments with those products as well. A pretty broad area of innovation that we're doing to go after the next generations of new designs, and these are all driving, you know, 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. This has a slightly broader set of applications. It's where everything in IoT has some form of a wireless often that is used, but it's also in automotive and computing, industrial appliances, and medical.
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. We're in many of those systems. In cars, we're the leading provider of passive entry, passive start solutions for cars, so they call them PEPS, with more, you know, best-in-class security that we're continuing to add to these things. Appliances, we have some specific large appliance manufacturers who are 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 wanna be able to monetize it. 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. Again, it's quite fragmented. It can be proprietary, it can be Zigbee, it can be, you know, many other different standards that go into it. In these smart speakers, we often have the 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.
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 these smartphones. An area we haven't spoken much about is in security, and, you know, 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.
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. Keeping secrets secret is a big part of what the security business is. There's a 20+ year track record of these products from many, many, you know, low-end solutions to high-end solutions. 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.
Here are three kind of broad areas in which these security solutions fit. First one's what I call consumables, 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, and you wanna make sure that those razor blades use your product. For those type of applications, we have fantastic solutions that are being used today, where people wanna protect their brand, people wanna protect their profits, and people wanna make sure that there's an easy, low-cost way for them to be able to achieve those objectives. Second is around cloud and cloud authentication, and this is where you wanna connect.
We have good partnerships with Amazon Web Services, with Google Cloud Partners. We have several others as well that I haven't listed here. Here you wanna 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. 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. 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 in 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. 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. 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.
You know, in the first thing, as I call it, the one 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 part of that is the two dimensions, and these are, typically touch screens and, you know, we have a tremendous position in these in the industrial and automotive areas. We probably have a 70%+, you know, market share in the automotive side of this thing. The industrial part of this is growing as well because industrial touch requires a high degree of, robustness in that touch. You need to make sure that in these environments that are harsh, you have a solution that doesn't create false touches, false, things.
Lastly is in gesture, which is the third dimension of what we do. We're the sole solution provider that can have all three dimensions of one, two, and three dimensions with solutions that we bring. This has been a fantastic business for us to drive growth. Clock and timing, you know, I call this, you know, 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, you know, well controlled and well seen in what it does. These go into products that we call oscillators.
In fact, part of the acquisition that Microsemi did of a company called Vectron, which was spun off from Knowles more recently, builds oscillator kind of products. Clock generators, clock buffers. So these are all different parts of a system. The more complex the system is, if you go into a very complex, enterprise, level system, you know, 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. The focus is around how do you achieve small size, how do you get low jitter, and how do you get low power? The trick is getting all three of them is hard, and that's where the magic of what the timing group does here is.
There's an adjacency to this that is exactly, you know, similar products, but in different spaces that Microsemi does as well. I think between the two, we get a very powerful clock portfolio for the two companies. In the area of oscillators, we've done something unique. This came through the Micrel acquisition. We use a MEMS-based solution rather than a quartz-based solution. It's a silicon solution. I wanna show you kind of what it looks like, you know, physically. 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. You can have, instead of a small number of discrete frequencies, you can have any frequency you like for a given application.
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. We see them, and especially when you have a silicon-based, you know, solution, which is what MEMS is, your reliability is extremely high, your operating voltage is extremely high, the 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 requires. That's where we're finding a lot of our success as well. Even in memory, which some of you may think is a commodity. You know, 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 EEPROM and Flash.
You may or may not know, we have something called a Serial SRAM. It's an SRAM which is, you know, built in a much smaller package with a serial interface. Then our most recent addition to product technologies is what we call an EERAM, which is a non-volatile RAM, technology as well. In these, we focus on how do we get them to be in the most protectable areas of this business. How does it work over, you know, reliably over wide temperature ranges? How does it work in terms of the package types that we can get? In general, reliability is the focus for this part of the business. You know, reliability from how we define the products, how we design the products, how we deliver the products.
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 command an appropriate premium for that differentiation. Next is around ecosystems. You take all these pieces of silicon, it's not enough. A customer needs much more to be able to turn that silicon into a solution. We focus on software tools. Some of them are ours. We have, you know, third-party tools. We have software stacks that go into it. 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 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 you know, either get partway through the design faster or all the way through the design, depending on what their intention is. 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 a stage of their career where they are still going through school or at a stage of their career where they're doing a lot of hobbyist kind of work, we wanna create those communities for them, and we work extensively with the universities to be able to do that as well. Why do we do it? Because every year, as EE 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 when they choose a microprocessor. Year in and year out, in the middle, I've circled it out, it talks about the ecosystem.
Yes, the chip supplier is important, yes, the chip itself is important, yes, the price is important, you know, by a large margin, that ecosystem is important. If you can define, deliver, and have an innovative ecosystem, you have a huge advantage. When they measure who has the best ecosystem, we're at the top of that list. 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 ecosystems that we have. Shifting a little bit to Microsemi.
I'm not an expert on their product lines, but I'm gonna give you a glimpse into some of what they do, and you might notice some similarities to what we do. First is it strengthens our industrial offerings. 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. They're building products that are going into similar applications to where, you know, we have other products in-built into them. There's a significant amount of work we're gonna 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 and all the access infrastructure you need. 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 or aggregation side of what they do to the last mile, which gets into the home premises itself. You know, lots and lots of products. 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 two 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. More examples. This is Ethernet as a platform, in the way Microsemi looks at it and how we get products. These are FPGAs, clock management, optical drivers, etc , going from the signal integrity, making sure that you got a good signal, to the physical layer, you're translating that to the Ethernet switches themselves and all the things that go in between them. Microsemi today is the only complete Ethernet 1588, which is a high-reliability Ethernet requirement that is used in many industrial type of applications that's available out there.
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 area, data centers. You know, whether they are looking at storage systems, rack systems or servers, the product lines that Microsemi brings in are in storage and data protection and switching, interconnect, network timing, so on and so forth. Again, they have a leading position in these data centers utilizing the complete solution from what they do.
This is a busy slide, but I just wanna 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. I think the two approaches are very, very similar, and we're gonna find that when they see our product line and when we see their product line, there's gonna be far more things that we're gonna be able to go to market on a combined basis. A business we don't talk much about is Flash technology licensing.
I'll give you a little insight here because, you know, from time to time, there have been questions, but we don't spend as much time here. This is another fantastic business that's driving growth and profitability for us. All right, Brad, what am I doing wrong? There are three generations of the technology is called SuperFlash. It's the best flash technology out there, the most reliable flash out there. I'll show you some examples of that. 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. That's what the licensing business does.
If you want to look at the market share, this is 2014 versus 2018, there's been more penetration of SuperFlash in microcontrollers. It's used in some analog products, in smart cards and some other areas. 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. There's a large market of microcontrollers, analog, smart card and others that are use Flash technology, and the SuperFlash 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.
To give you a sense of, you know, in this timeframe, this spans about 20 years of time, there's over 85 billion parts, units, chips that have been shipped. Today, you know, it's running at a greater than 12 billion, almost 13 billion annual run rate. 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. All right, Brad, what do I do? All right. I'm gonna 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 it unless I run into a slide that can't be read. Here's the top 10 microcontroller companies out there, and you can see eight of the top 10 use that technology.
It's either used That's my PC. I have it on it. Yeah. Go ahead. There's something else that's going on. Okay. For the folks on the phone, I have a technical glitch we're trying to work through. Sorry. It came off the back. Okay, where I was was if you look at the top 10 microcontroller providers out there, eight of the 10 use the technology. They use it either directly internally or they use it in the foundry processes that they're using. It's established itself as the best Flash technology that's out there for embedded applications.
You know, the business model is technology for the embedded market licensed to foundries, fabless companies, independent device makers, design partners that are just stick with our technology, so we get microcontroller in a 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. We're on track to being the first $100 million revenue in this fiscal year at very high margins, 100% kind of margins. I'm gonna spend three slides on TSS, not to steal Rich's thunder, but I wanna clarify perhaps a question that's come up in two of the recent conference calls.
So, you know, the portfolio of products obviously has quadrupled in the last 6 years, creating a very powerful power platform, creates attach opportunities. TSS to me is how do you make the whole from a customer's perspective greater than the sum of the parts? 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. TSS also will shift revenue classification over time between analog and microcontrollers, and I wanna show you two examples of how that happens and why, and why it's still the right decision. Here's the one example. In this case, it's a USB hub.
You know, 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. You know, it ran for many years, and continues to have a little bit of revenue that, you know, has a residual revenue on it. When we look at that system, we said, "Okay, how are we gonna make that system higher ASP, better margins, more protected, very sticky socket?" The way you do it is you start to put some of this stuff together. We pull the microcontroller in, we pull 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, you know, that's what how we report it as. 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. This is like a power meter or an energy management system. It's got our front end of analog, which is that 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, etc., that go into it.
That product, the next generation of it, 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. Day in and day out, we're gonna make this decision every single time that gets us the best Microchip results. I don't want you to feel concerned if, you know, from time to time there's revenue that's in analog, there are revenues in microcontrollers.
At the end, if it says Microchip on it, that's the best answer for us. I wanna conclude with a section that perhaps you don't always think about, which is, you know. This is not about products, but I wanna 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 that. Really, culture is one of our most enduring competitive advantages, and some of the elements of that culture are about a strong and practiced guiding values. I'll show you two slides of, you know, how do we measure, how do we know, an ethos where teamwork is prized over prima donnas. You know, it can be different in different companies. This is what works for us.
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 gonna have great results for everybody on the up cycles that go with it as well. The non-commissioned 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 to the detriment of the company's results and how that happens.
Takes many, many years of a system and culture and values to be able to get there. A 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. Fundamentally it fits with our value set of how do we build from within? If people are our greatest strength, how do we make sure that they are able to get the things that they have? Lastly, something Steve talked on a little bit earlier on, which is the leadership development and the succession planning, and what we do. We do a fantastic job with it.
It's helped us both in our own you know, organic efforts as well as to help us with the acquisitions we do. you know, at the end of the day, I saw this somewhere which said, you know, "Culture eats strategy for breakfast." You can have the greatest of strategies, but if you have a strong culture, you find ways to adapt. Your people find ways to do things without having to be told. That's what the magic of Microchip is, the results 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. 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. Values are not what we write down, right? You'll find all of our conference rooms have this stuff, and 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. We measure this every year. We ask our employees, without having to tell them what to score it at, they tell us, how are we performing? On the 11 dimensions of guiding values, we ask them, what percentage of the time do you see us practicing it? Then we go into more detail. Do you see your supervisor practicing it? On and so forth.
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. You'll see all the scores are well into the 80s for them, and that's kind of what our baseline is. We wanna 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. This shows you a cross-sectional view over 26 years in this chart.
You can see in the early years, the scores were lower, and we worked on it, we worked on it, we improved it, role modeled it, promoted the right people, weeded out the wrong people in what we did, and created this tremendous thing. I wanna leave you with the sense that this is not always seen as a critical part. It's a touchy-feely, soft thing, but it works. You'll find the best companies in the world have the strongest cultures by which they achieve things as well. 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 of, you know, from dumb to smart, maybe slightly smart to smart, to connected, to 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 so 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 be 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, you know, their innovation adds complementary solutions and complementary end market emphasis to us.
Microchip 2.0 and its completeness and the TSS has us well-positioned to capitalize on this growing opportunity. We have several growth multipliers that, you know, we've been working on and continue to execute on that we expect will drive our organic growth and market share gains. Finally, our unique culture, we believe, is a hidden but an enduring competitive advantage for how we deliver our results. On that point, let me stop and poll for any questions. We'll start with the room here before we go to the line. Any questions I can answer for you? Have I bored you to tears?
Yeah, Ganesh, Analog Devices had their call not too long ago, I think a couple of days ago. They talked about some 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? Then also, second question I had was you gave a interesting slide about a MEMS microphone.
Not a microphone.
I'm sorry.
It's a clock.
A MEMS sensor, correct. It's a nerdy question, but could that be used as some kind of a filter potentially?
On your second question, can it be used as a filter? I'm not sure. I'm sure there are smarter guys than me who know the answer to that. Today, it's driving a portion of our timing business. The MEMS technology has many applications beyond just, you know, oscillators that we can go into. Today, that's where we're focused on. On your first question, I don't have a precise number to give you that says, you know, if you got a dollar a thing. What you're gonna 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. I think 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 phone. Operator, can you poll if there are any questions from the folks who are still on the phone?
Once again, for those on the phone, that is star one on your telephone keypad if you do have a question today. At this time, we have no questions in the queue.
Thank you, everyone, I'm gonna hand off to Rich to take you through his exciting total solutions.
All right. I'm gonna try to do this just by pushing the button as I happen to go through this. We'll start off with total system solutions. You've heard that phrase several times today. Probably wondering what that means. Is that world domination? Is that the one ring that rules them all? Or is it Microchip that wants to own your home and own your car and own the factories? 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?
You've seen this several times today, but I wanna show you something 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. What we have to do at Microchip is package this all together and make it easy for them. That's why you're seeing in this embedded time survey that engineers every year are judging companies based on the ecosystem more than the products and more than the company itself. When you look at that total system solution, we're looking at it from eight unique areas. We're looking at it from design support.
When you look at Microchip, you can get phone, technical, web support 24 hours a day, seven days a week, 365 days a year. As Steve had alluded to earlier, Atmel teams, when we acquired them, were extremely excited about getting involved in Microchip's ecosystem. In many ways, Atmel was a technology-rich company. They had Arm processors, they had great power technology, they could not get the leverage of the footprint that they were looking for customers when competing with Microchip. 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 work together, put them, make them all work together.
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. 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. Products, building blocks, end equipments. When you look at functions, the world, you know, we break it down to about 9 different areas. You've got wired networking, wireless, motor control. As I go through some of the block diagrams, I'll give you some idea of the trends and how we piece these different functions together to meet customer needs. Here, tractor 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 the tractor-trailer is. It's a trend within the marketplace. To know where everything is all the time. Whether it's a cat, a dog, a tractor trailer, a car, this is a trend that we see in the marketplace. You can see on this chart here, this block diagram, how the different pieces of Microchip all fit together, whether it's wireless or power, Atmel with the Tri-City Wi-Fi supply. If you see the particular block diagram here, we've got three different colors on here, Micrel, classic Microchip and Atmel. As we have the different acquisitions, we add them to the block diagram.
Here, an automotive water pump, and what's key about this is the world is going three-phase brushless DC, right? In that, Microchip had the dsPIC previously. We added the high voltage drive from Micrel. Most recently we added the LIN transceivers for communication within the car network with Atmel. When we acquire a company, we put all customers through a synergy review with that company. 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.
Here's medical, and sometimes as we're doing these, putting these block diagrams together as we acquire companies, there's reverse synergy or reverse synergy growth. Here is an example of a medical micropump 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. Ironically, the device here is actually an 8-bit device. You talk about innovation, one of the interesting things about the 8-bit device is 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, you can see how it ties in a number of products from a total system solution. In this case, we are the entire board, the customer simply adds a battery. As we get into computing, and data communication, you know, here's where we start to see some of the synergy with Microsemi. Right? We'll see synergy with Microsemi on the GigaNET, Etherbits, the switches. We'll see it in base stations. Here is looking at a Microsemi reference design, that's their blocks are all in the silver. We've added some of the classic Microchip, or SST or microblocks in there.
In this particular reference design, we're gonna estimate there may be six to 10 Microchip devices in there between LDOs, DC-to-DC converters, clocks, intelligent shift registers, that will fill this particular block diagram. As we work with Microsemi or every company we've acquired through synergy reviews, we update, our total system solution so that we can 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 an LED agricultural light.
Not really sure what they're growing with this agricultural light, you know, 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, Arduino, hobbyists, all the way to pretty impressive products that come out around the world. 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 block diagram. Consumer applications. You know, here's a case from ISSC, Bluetooth audio, where we acquired that company and brought in some of our smaller devices to help support that particular chip.
Camera accessory unit. We could go through In fact, today, just in the mail, I got a number of other examples from bit miners to kind of some other medical applications where we had multiple products, 5, 10, 15 products all designed in on a board. Then what we do with those within our community at Microchip, we socially share those so that we learn from each other. Here's an example of an audio system, and what's fascinating about this is you see some of those block diagrams, you'll see a white or a light gray block, where it was empty, right? It wasn't colored in.
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. 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 nine main functions, and understand what that value proposition will be for customers. Steve had earlier talked about reading the tea leaves, right? Reading the tea leaves. What is the result of this total system solution effort? Here we're going to talk about multipliers. If we were to look at one part, that would be 1x. This is actual data looking at Microchip's funnel from 2017. One part is 1x.
If we get three parts, we're looking at a revenue multiple of 1.7x for that particular application. You're probably looking, well, why is one 1x and three is 1.7x? Typically, the first few devices that are attached may be an LDO or a small memory device or a LIN transceiver, a CAN transceiver. It's the lower cost devices, so you don't get the huge revenue multiple. Let's go into more complex systems such as base stations, GigaNET 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. The revenue multiple, like four parts or greater, starts to really increase.
That's 3.1x multiple. If you think about it, more parts per application is higher revenue and profit, and it's also an implied productivity improvement from our sales teams as well. 1.7x for three parts, 3.1x for four parts or greater in terms of revenue multiplier. Steve had brought this up before. We're seeing the amount of devices or parts per project increase significantly. 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. Here's another look at that, where we're looking at greater than one product family.
We've had over a 40% improvement in projects where we had more than one product family involved. Again, with the, as Ganesh had described earlier, looking at Microchip's culture, we are geared to work together, right? It's that culture that causes us to get together, brainstorm, figure out ways to maximize revenue growth, right? That's really, in the end, what we look for from TSS. If you look at the total system solution, it's really a co-created combination of software, services, hardware, working together to meet that client's goal and grow revenue, right?
In the end, by working together, with all of the companies that we've acquired over the years into 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 manufacturer's reps or not. You certainly use distribution.
Yes, we do.
Use distribution significantly. Presumably, you website for sure.
Yep.
-you might even, you might even do samples or sales directly on that. I'm not sure.
Yep.
Can you talk to us about the typical or the largest modalities for going to market? What's sort of the biggest driver in terms of the interface directly to the customer?
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-combine them together. We offer free samples. We try to make it as easy as possible on the website. We're also on every shelf in the world, in terms of the distribution channel. What 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. We don't. We try to support and be very distributor-friendly.
Like I said, we have over 1,000 design partners around the world. We have reps and stocking reps as well. Some customers prefer that as a place to get it. I work very closely with Arrow and Avnet because they work with Indiegogo and Kickstarter and supporting those particular areas in the maker community. I think we 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 in trying to figure out the best way to go to market for each one.
One of the tagline that we use is driving design wins to revenue. 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 or 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 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 + engineers how to use our products every year in our Worldwide MASTERS Conferences . There are about 10, 12 conferences we hold in India and China and U.S. and Russia and Europe and South America, and train large 30,000 + 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.
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 and years ago, when we used to compete with Motorola at that time, which became Freescale, many of our competitors will use many of the third-party tool manufacturers as competitors, you know, because they take some revenue away if they sell their tools rather than we selling 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 then 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, you know, 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 those customers like using local tools, and we encourage them. We share our roadmaps. We gave our emulator chip for them to develop the tools. Then sales came from Microchip. They buy Microchip's microcontroller. We practically, you know, had a very, very large market share in all those countries. Some of the strategies we deployed were very much partnership-oriented and building a strong ecosystem and training large number of engineers, winning designs.
After that, wherever they buy from, we don't really care. People have placed a lot of attention on go to single distributor, some terminated Arrow, some terminated Avnet. That's not where our business is. They can buy from any channel they like.
The question was more around the design win process.
Yes
‘cause you have one very big competitor that seems to have a view that all design goes on on its website.
Well, that competitor is different.
He's referring to a lot of Texas Instruments . Some happens on its website, some happens, 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 them. Many customers, in fact, every company we acquire, has hundreds of consultants that are working on designs for that company, hardware designs, putting in different sockets or other companies. In, in the end, we want our devices in there. Engineering or consultants are still highly valuable out there.
Thank you.
Other questions? Any questions? Oh, right here.
Once again, that is star one for our telephone audience.
Thanks. With the total system solution, are you getting other semiconductor companies now coming to Microchip saying, "We wanna be part of your system solution," you know, if it's a product that you don't have?
The answer is yes.
Okay.
We partner with, we coopetition with several semiconductor companies where we work with them on reference designs and working together to bring a solution to a customer. The answer is yes. Any questions on the phone?
Once again, that is star one to ask a question.
Okay.
We have no telephone questions.
Well, let's take this home with the financials. I'm gonna give a, kind of, a brief financial overview, talk about some of the things that have driven our outperformance from the market. 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 one 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. We think long term, we've got the ability to drive this thing to a 40% plus operating margin, as 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 delever the balance sheet very quickly. Over the course of time, we've returned almost $5 billion to shareholders through our dividend program, which has been increasing on a very steady basis and our share repurchase program. We'll talk a little bit more about inventory. There was a question on that earlier. We think it's appropriately managed and well-positioned, and our capital intensity has been quite low. Here's just a few accomplishments 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 nine years. Almost an 18% compounded annual growth rate in revenue, 18.6% in gross margin, and really an amazing 21.1% in operating income on average over the last nine years. On an EBITDA basis, that's been growing at a very nice rate also of about 18.2%. We've had 109 consecutive quarters of non-GAAP profitability. Pre-Microsemi, the business model was 62.5% 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 in our last earnings call, we think our cash tax rate is gonna 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 billion return to shareholders. We've done 17 acquisitions since 2008. It's kept the team very busy and, you know, have seen tremendous growth in our financial metrics because of that. We've seen a 1,200 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 Microsemi acquisition, and this is just a very diversified business with 115,000 customers worldwide.
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 brought 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 improved those to be posting record operating margins for the company today. This is the same slide that Ganesh showed in his presentation, but just since fiscal 20 10, we've transformed ourselves from about a billion-dollar revenue company to about $4 billion. You know, with the Microsemi acquisition, that's gonna be close to $6 billion.
Gross margin has improved over this timeframe by about 400 basis points, and operating margin has improved by 900 basis points. Here's just a chart that shows the annualized revenue and the CAGR over that time period. Back in fiscal 2009, fiscal 2010, we were under $1 billion in revenue. Today, end of fiscal 2018, which ends at the end of March, in one month, we're gonna be at just about $4 billion. I think the midpoint of our guidance puts us somewhere around $3.96 billion. 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. 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 and Americas. Very, very, very much diversified. Our revenue is split, but about 45% of it goes directly to end customers. We service about 5,000 or 6,000 customers directly. The other 110,000 customers are serviced 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% of our revenue that goes through distribution comes from smaller regional distributors, that typically carry one microcontroller line, are fully trained on our product line, and can go out there and be effective in creating demand and growing the top-line revenue for Microchip. Very engaged with distribution. 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. Here's gross profit, 18.6% CAGR since fiscal 2009. We do about 60% of our wafer fab requirements in-house.
We've got three fabs, one in Colorado that came from Atmel, and then a fab in Tempe and one in Oregon. Very cost-efficient with that, 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 clean room space that we can grow into. On the assembly and test side, we've got three very cost-effective factories in Asia, two in Thailand and one 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. On the final test side, we do about 65% of the test in-house today, like to take that to 80% + over time.
you know, that's driven some capital expenditures, but, you know, 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. The long-term model is 22.5%. 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% today, but we're making sure that we're making the right investments and the technical resources that we need to drive our business long term at the 40%+ operating margin. Breaking that out a little bit, this is R&D. R&D is roughly 12% of revenue today. You see it's been a little bit lumpy over time.
You know, 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. We think this is about the right level. 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% of revenue. We continue to be more and more efficient as we continue to grow the top line and integrate acquisitions.
Here, that all results in the operating income, which has grown at a 21.1% compounded annual growth rate since fiscal 2009, and driving to over $1.5 billion in fiscal 2018, which ends at the end of this month. 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. You can see that the net income will be well over $1.3 billion for the fiscal year and has grown tremendously from being under $400 million just back in fiscal 2012. Something that investors really worry about is free cash flow.
I think we've done a really good job of growing the free cash flow from the business. In the current fiscal year, we'll be over $1.2 billion in free cash flow generation, and that's essentially cash flow from operations minus CapEx. 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 and bringing a lot of the assembly and test operations in-house, and that has made the CapEx spike, I'll show you a slide on that in just a little bit. The cash flow from this business is tremendous.
This is a slide that we've shared before in the past and essentially shows from the date of the Atmel acquisition through the last quarter, how has the business improved. We've gone from $844 million in revenue in a quarter to $994 million last quarter. Probably more importantly, the operating margin has improved by 1,200 basis points from 27.4%- 39.4%. Just a tremendous growth that we've seen over the course of the last seven or eight quarters, and we're driving and getting very close to the 40% operating margin target.
Here's the slide that Steve showed that shows the combination of Microchip and Microsemi, be about a $5.9 billion revenue company with 62% gross margins and operating income of about 37.1%. 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% since fiscal 2009, and is gonna be well over $1.6 billion in the fiscal year that will close out at the end of this month. This has always been a concern of investors when we close an acquisition and we use debt. Obviously, the leverage increases, and that's going to be the case when the Microsemi deal closes.
This just shows an example of that. When we closed Atmel, the first quarter after we had closed Atmel, our leverage was about 3.2 x. That was at the end of the June quarter. We acquired Atmel in early part of April of fiscal 2017. You can see how we rapidly delevered. Our free cash flow improved, our EBITDA was growing, at the end of the current fiscal year, we expect our leverage to be just over one. 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. $5 billion returned to shareholders through our dividend program and stock buyback program.
You can see the bar 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 2018 is in the $340 million range. We're very much committed to that program. We think our shareholders value that, and that will continue. Speaking to inventory. Our long-term target for inventory days on Microchip's balance sheet, which is represented by the red bars on this slide, is 115-120 days. We ended last quarter with 115 days of inventory and expect, based on our guidance for the March quarter, that we're gonna be in that 115-120 range.
Right where we want to be. I think it positions us very well heading into the stronger quarters of the year in June and September. 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. 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. The target range for distribution inventory is 30-40 days. We ended this last quarter with 34 days of inventory. It's very normal to base on regular holding patterns for the distributors. Overall inventory is in excellent condition. Okay, CapEx. This shows annualized CapEx.
Historically, we've been at higher percentages. This current fiscal year, we're about five and a quarter percent. That's plotted at the midpoint of our guidance for the fiscal year, which is about $205 million in CapEx, and it's higher than it's been over the last couple of years. The reason for that is really the integration of Atmel, investing in the capital that we need to grow our organic business, but then taking the opportunity to bring in-house some of the assembly and test operations that Atmel outsourced almost all that to third parties, bringing that in-house, gaining control of the supply chain and driving significant cost improvements. We still have a long ways to go on that, as I mentioned before. You know, the CapEx still is pretty low as an overall percentage of sales.
To summarize the financial presentation, we're a consistent market share gainer. Our long-term business outlook is very positive, as you've heard from Ganesh and Rich Simoncic 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 gonna drive to 40% + 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 in a very good position. With that, do you have any financial questions? Okay. Can we get a mic out to you? Go ahead, Craig Ellis.
Yeah. Thanks, Eric. Craig Ellis, B. Riley. Eric, can you just speak to two things? One, do you have the same potential, do you believe with Microsemi to do some of the same insourcing that you did with Atmel on the back end? If so, what does that mean for year one and year two capital intensity for the business relative to your current targets? 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 wanna break out the source and the income statement of the synergies, can you provide any color on the linearity of the synergies from here to year three? Thanks.
Okay. On the insourcing of manufacturing activities, you know, 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. Absolutely, there's opportunities. We don't know specifically what they are at this point in time. Ganesh and Steve, you can feel free to add on to that.
Through the diligence, you know, some of the packages, some of the products that we have compared, our costs internally are same level, lower than we saw in the Atmel deal. The opportunity also exists in this case because we have taken some of their costs, which are outsourced, and we're bringing them in at a similar level. Although the task becomes very monumental because we're still very busy with Atmel. 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 Atmel product. In the combined system, some of the lower hanging fruit might become Microsemi.
It will change, 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. The task becomes monumental. It will take some time.
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 third year. I think you could, you know, just rest is you almost have it.
We know it's not that easy. You have to put it in your model and make it work. Until the transaction closes, I don't think we're gonna share much more.
Does those 7%- 9% revenue growth goal still apply to the combination with Microsemi, or is there a new target?
Again, too early for us to comment on that.
Yeah. I think somebody was asking me, during the break, and they were looking at, you know, last 10 years of Microsemi business. If you take the acquisitions out, the growth was nearly zero. We believe with some of the stuff they have done in their business, acquiring some great companies like PMC-Sierra and others using a similar total system solution mentality, although they don't call it that, they are growing. Their organic funnel looks good, and last year, the business grew organically. 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, you know, the same day as we announce 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 John Vinh from KeyBanc Capital Markets. Thanks for letting me ask a question. Just wanted 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, will Microchip be willing to increase its offer?
How about no? Otherwise, I'm inviting a higher offer.
We will deal with that.
I was joking today that we'll take the break-up fee and, you know, divide it among ourselves.
Eric, can you comment a little bit on the structure of how Microchip may raise that incremental debt? The company's used converts in the past. Is that the structure we should think about or bonds or other forms of debt financing?
It is not our intention to use converts for this debt. It'd probably be a combination of Term Loan B and then the investment grade, high-grade market.
Steve, I 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 Hock Taw philosophy that's have been happening in the industry for the last two 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? Why isn't anybody stepping up trying to take market shares, trying to add capacity, in your opinion?
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 microcontroller building a combined product is no longer commoditized. You know, it's very differentiated product. In differentiated product, customer has a two-year design cycle to put somebody else in there. I think having a proprietary socket, that's a part of it. Supply and demand in balance, you know, industry doesn't grow 50% one year and then goes down 20% next year anymore. Cycles have gotten a lot muted, and so that really has helped. 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 disciplined. Industry margins are higher, operating margins are higher. They're better operators, you know, we have retired a number of bad operators, Hock has retired a number of bad operators and others have. That will continue to happen. It's a combination of all those things.
Any other questions in the room? Any? How about on the phone? Any questions on the phone?
Once again, that is star 1 to ask a question over the phone. 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 above 40%? I know you don't wanna get specific on the synergies at this point, but, you know, just given Microsemi's size, I'd have to imagine the operating 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 thinking about things, or am I missing something?
I think the way I'd answer that is, you know, we see continued improvement in our operating model. We've got 100 basis points plus of gross margin to take for the Microchip, I'll call it Microchip classic now, business. We see that as we bring these companies together for acquisition, that there's, you know, 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. What exactly that mix is gonna look like, we are not updating the Microchip model today. Essentially, it's a combined company model that we're giving you.
Okay. Fair. Thank you.
Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley.
Yes, thanks, Eric. Just a question on the OpEx as a percentage of sales, as you've driven it down steadily. Can you just talk about the benefits of scale? you know, 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%-9% revenue growth target?
You know, scale definitely helps with operating expenses, right? I mean, you get certain synergies from being able to combine things that you don't need two of at a combined company. 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.
Yeah, just the level of investment that you think is required.
Okay. Yeah. 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 and R&D, in customer-facing activities that we need to drive the long-term health of the business. You can't under-invest and drive long-term, out in time, 5, 10 years, 40% operating margin.
I think we keep hearing the 7%- 9% going forward. We're not really changing our outlook on what Microchip can do, we today don't have a on a continuous basis, long-term, revenue growth target for Microsemi. As we said earlier, their organic growth really has been zero. They've largely grown from acquisitions. In the last year or so, they did grow organically, the industry was very good in 2017. Everybody grew. It takes more time for us to understand what is the organic growth there, and we think we can make it better through some of our methodologies and total system solutions. Don't make the error to, number one, assume our seasonality. That's the error we all made with the Atmel.
Don't make the error that the new combined company is a 7%- 9% growth. We don't know that. You know, ours is 7%- 9%. We don't know what is theirs, and we have to figure it out. I know that may make your modeling difficult, but leave some room. We've given you some guidance regarding where the earnings could go.
Any other questions from the phone?
Once again, that is star one to ask a question. We move now to Chris Rolland with Susquehanna 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&A environment overall and how you see it, you know, maybe talk about valuations out there. I know Microsemi was kinda on the cheaper side. Was this the only deal that you guys could identify out there that kinda met the kind of valuation structure you were looking for? Or did you potentially identify some other targets out there as well?
Well, let me take that. Number one, 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. Your question is, how do we see the environment? I think, you know, for us, it's irrelevant now. We are, you know, we're locked up for two years now, you know, trying to integrate this and a lot of hard, you know, a lot of heavy lifting like we did with Atmel. What the environment is and who else is available is relatively irrelevant for us right now.
Fair enough. Thank you.
Thank you. 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. We can hang out afterwards for those of you who are here if you wanna watch the Touchdown video. Thank you very much.
Yeah, we really are honored to have you here.