安森美 (ON) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ON Semiconductor first quarter earnings conference call. [OPERATOR INSTRUCTIONS].

I would now like to introduce your host for today's conference, Mr. .

Ken Rizvi.

Sir, you may begin.

Thank you, [Matt].

Good afternoon, and thank you for joining ON Semiconductor's first quarter 2005 conference call.

I am joined today by Keith Jackson, our CEO, and Donald Colvin, our CFO.

This call is being webcast on the investor's relations section of our website at www.onsemi.com and will be available on our website for approximately 30 days, along with our earnings release for the first quarter of 2005.

Our earnings release in this presentation includes certain non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures most directly comparable measures under GAAP are in our earnings release and posted on our website in the Investor Relations section.

Now, I would like to highlight our upcoming event calendar.

We will be hosting our Analyst Day in Phoenix on May 2nd.

We will also be presenting at the at the JP Morgan Technology Conference on May 16, the FBR Technology Conference on June 1st; the Citigroup Semiconductor Conference on June 2nd, and the Morgan Stanley Small Cap Conference on June 13th.

During the course of this conference call, we will make projections or other forward-looking statements regarding future events or future financial performance of the Company.

The words "estimate," "intend," "expect," "plan," or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-K and other filings with the SEC.

The Company assumes no obligation to update forward-looking statements to reflect actual results, or changed assumptions or other factors.

Now let's hear from Donald Colvin, our CFO, who will provide an overview of the first quarter.

Thank you, Ken, and thank you to everyone who is joining us today.

ON Semiconductor Corporation today announced that total revenues in the fourth quarter of 2005 were $302.4 million, a decrease of approximately 1% from the fourth quarter of 2004.

Revenues were greater than our original guidance of down 4 to 5% due to higher distribution sell through at the end of March.

During the fourth quarter of 2005, the Company reported net income of $14.8 million on approximately $0.04 per share, which included restructuring asset impairment and other charges of $1.1 million.

During the fourth quarter of 2004, the Company reported a net loss of $88.3 million, or $0.36 per share, which included a loss on debt prepayment of $96.3 million and restructuring asset impairment and other charges of $5.6 million.

On a mix adjusted basis, average selling prices in the fourth quarter of 2005 were down approximately 2% from the fourth quarter of 2004.

The Company's gross margin in the fourth quarter was 31.8%, a decrease of approximately 30 basis points as compared to the fourth quarter of 2004.

This was ahead of first quarter guidance by approximately 180 basis points, due to higher sales, better mix, and cost reductions.

EBITDA for the fourth quarter of 2005 was $55.4 million and included $1.1 million in restructuring, asset impairment, and other charges.

EBITDA for the fourth quarter of 2004 was $39.7 million deficit and included $96.3 million loss on debt prepayment, restructuring, asset impairment, and other charges of $5.6 million.

A full reconciliation of this non-GAAP financial measure to the Company's net income or net loss, and net cash provided by, or used in, operating activities prepared in accordance with US GAAP, is included on our website and in our earnings release and related 8-K filed with the SEC today.

During the first quarter, cash, cash equivalents, and short-term investments increased by approximately $18.4 million from the end of the fourth quarter of 2004 to $204.1 million.

Operating expenses in the first quarter were slightly higher than the fourth quarter of 2004, primarily due to increased spending for SOX 404 compliance and the normal FICA, vacation, and bonus accruals that occurred during the first quarter of 2005.

These expenses should be lower in the second quarter of 2005.

During the first quarter, days sales outstanding increased to 46 days.

This was due to higher sell in to distributors, rather than extended payment terms.

Through proactive management of our manufacturing capacity we were able to reduce total inventories for the second consecutive quarter.

Total inventories, which included both internal and external inventories, were reduced by approximately 5%, or $20 million in the fourth quarter.

Over the last two quarters, we have reduced our inventories by approximately 14%, or $55 million.

Of the $55 minimum total inventory reduction during the last two quarters, approximately half was attributable to reduction of inventories at distributors, and the other half was attributable to reduction of internal inventories.

Distributor weeks of inventory fell by approximately 1 week to 12 weeks at the end of the first quarter.

Capital expenditures during the first quarter were $9 million, compared with approximately 17 million in the fourth quarter of 2004.

Now, I would like to turn it over to Keith Jackson for additional comments on the business environment.

Keith?

Thanks, Don.

During the first quarter of 2005, four of our end markets, automotive, consumer, industrial, and networking, saw sequential revenue growth over the fourth quarter of 2004.

Automotive represented approximately 21% of sales, up from 19% in the prior quarter; consumer represented 19% of sales, up from 18% in the fourth quarter; industrial represented 15% of sales, up from 13%, and networking increased from 5% of sales in the fourth quarter to 7% of sales in the first quarter.

Computing and wireless end markets saw normal seasonal declines as anticipated.

Computing decreased to approximately 24% of sales in the first quarter from 28% of sales in the fourth quarter, and wireless represented approximately 14% of first quarter sales, down from 17% of sales in the prior quarter.

During the quarter, sales to our largest OEM customer, Motorola, decreased slightly and represented approximately 8% of sales in the first quarter of 2005.

Our top five customers, excluding distributions for the first quarter, in alphabetical order are: Delphi, Flextronics, Motorola, Siemens and Visteon.

On geographic basis, our contribution this quarter from sales in Asia, excluding Japan, decreased by 400 basis points to 49%, reflecting normal first quarter seasonality in the computing and wireless end markets.

Sales in the Americas increased by approximately 100 basis points to 26%, mainly due to normal seasonal gains in the industrial and automotive markets.

Sales in Europe represented approximately 19% of our total sales, up approximately 200 basis points from the prior quarter.

In Japan, our sales increased by approximately 100 basis points to 6% of sales.

Looking across the channels, sales to distributors increased by approximately 200 basis points to 48% of sales.

The EMS channel decreased by approximately 100 basis points to approximately 10% of sales, and direct sales to OEMs decreased by 100 basis points to 42% of sales.

We also estimate that approximately 10% of sales through the distribution channel were for third-party logistical services for the EMS channel.

Now, I would like to provide you some details in the progress we made in some of our end markets.

We continue to provide designers with effective tools to help them meet the growing demand for more efficient power supplies including the stringent requirements in desktop computer ATX power supplies, as well as providing innovative ways to reduce both standby and active power consumption for a wide range of power supply designs.

We showcased our 80%-plus ATX power supply solution at the Applied Power Electronic Conference in Austin, Texas, in March of this year.

Due to increased power consumption, governmental agencies such as EPA through its ENERGY STAR program, the CECP in China, and Blue Angel in Europe, are developing programs to encourage manufacturers to produce more efficient power supplies.

Our complete solution is a first to make this goal easily achievable for designers.

In the first quarter of 2005 we launched 18 new individual products aimed specifically at power supply applications, including a dual in-channel MOSFET driver that delivers improved efficiency, and Ford converters, typically found in ATX and other high powered, switch mode power supplies, and two new power factor correction devices that aid designers in reducing active and standby power consumption levels in power supplies with input levels from 75 watts to several kilowatts, such as those found in flat screen monitors, notebook adapters, off-line battery chargers, and white goods.

We also introduced a new family of trench MOSFETs in the first quarter.

These products deliver significantly better performance in the critical spec than existing solutions, and will allow our customers to design more power circuits that can being up to 30% more efficient, and turn extended battery life in many portable consumer applications.

Five of our products were elected as 2004 innovative analog IC products of choice by a leading Chinese electronic industry trade magazine, Electronic Engineering and Product World.

The winning ICs including three [P-dimium] controllers, a power factor correction IC, and a dual synchronous [buck] controller.

These products, selected by a panel of experts, were judged based on industry leading performance, technological invasion, and novelty of approach in addressing application challenges.

And finally, we were named a preferred supplier by Flextronics for the third year in a row, the only semiconductor company to be so honored.

This award goes to suppliers that consistently demonstrate superior performance in delivery, logistics, and support.

Now, I would like to turn it back over to Donald for our forward-looking guidance.

Thank you, Keith.

Second quarter 2005 outlook.

Based upon booking trends, backlog levels, and estimated [tons] levels, we anticipate that total revenues will be flat in the second quarter, plus or minus 2%.

Backlog levels at the beginning of the second quarter were down slightly from backlog levels at the beginning of the first quarter and represented approximately 80% of our anticipated second quarter revenues.

We believe we are in a high [inaudible] environment, similar to that of the first quarter.

We expect that average selling prices will be down approximately 1 to 2% for the second quarter of 2005.

We also expect cost reductions to offset the decline in average selling prices and that gross margin will be approximately flat to slightly up in the second quarter of 2005.

For the second quarter of 2005, we expect cash capital expenditures of approximately $16 million.

For the second quarter we expect total SG&A and R&D expenses of approximately 20%;

SG&A expenses in the 12 to 13% of sales range, and R&D expenses in the 7 to 8% sales range.

We anticipate that net interest expense will be approximately $50 million for the second quarter of 2005.

We also expect common shares outstanding to be approximately 255 million, and that preferred chairs may be convertible into approximately 48 million shares.

The [inaudible-heavily accented speaker] on contingent convertibles which became effective in the fourth quarter of 2004 may result in an increases share count of approximately 27 million shares in the second quarter.

And to the diluted share current you can also add 6 million shares from stock options.

Further details on share count and EPS calculations are provided regularly in our 10-Qs and 10-Ks.

With that, I would like to start the Q&A session.

[OPERATOR INSTRUCTIONS] Our first question is from Michael Masdea of Credit Suisse First Boston.

You're question, please?

Yes.

Thanks a lot.

Good quarter, guys.

The first question is give us comfort in terms of the late quarter streng we're now seeing distributors speculating or stuff in the channel or if there is any kind of price concerns going on out there or anything.

Help us understand what was going on there.

Michael, Keith Jackson here.

Remember that we measure on a sell through basis, so there is really no impact of stuffing, and in fact just the inverse was true.

We brought weeks of inventory down in the channel by another week during the quarter, so we've got less inventory in the channel and re tealz are up.

Which tells us it is not just an inventory phenomenon at this point but some actual strength in the in markets.

From a pricing prospective there is always pricing pressure as we announced earlier in the first quarter we saw less pricing pressure at the low end of our divide answer that we had given, and as we had in the Q2 we're seeing the same phenomenon, very moderate type of pressure under the circumstances, so overall I'd define it as a high turns, low visibility environment, but with some stability behind it in the end markets.

Maybe just ask that differently.

What gives you comfort or as you look into that strength in distributors, where is it coming from and what giferz you comfort that end demand is real and not speculation of some sort?

I guess is what I'm getting at.

I know you don't recognize on sale end but obviously the distributors are selling.

What gives you comfort this is being consumed and not sitting some place?

Again, kind of a couple factors.

We do periodic checks and we do think that people's models as represented by the orders we get are for a lienor inventory, not a Morrow bust inventory.

We don't believe anybody is building inventory at this point in at all.

Substantial move to orders inside the four to six week range.

Which again is all indications of people consuming the products, not building the products.

That makes sense.

Just going back to some of your commentary tear about less visibility and customers Lasing to keep things lean.

A lot of the companies out there are calling the bottom, does this seem strange to see this pattern right now or make some sense to you?

No, actually it normally does make sense to me and another one of those indicators that the bottom if not here is near.

You basically do have people look to go take every advantage they can on a pricing outlook if they think availability exceeds the supply exceeds the demand full.

They're going to order as late as they can possibly order so that they can get the best pricing.

We definitely see that going on.

Again, I mentioned earlier our percentage of orders coming in with short lead times have increased dramatically.

These are all pretty normal signs that it's a mature down cycle.

Conversely we are starting to see our lead time stretch out a little bit and that's also the other sign from our perspective that we are indeed moving into a stronger period rather than a weaker period.

Final question on the last .

What are you seeing overall happening with industry capacity and how are you managing your starts given your commentary tear about the lead times.

We actually are in a situation wafer capacity exceeds that of assembly tests.

We have been aggressive in making sure inventories are lien but not to the . we wouldn't be able to respond to an up particular.

I would say in general the comafts in the industry were more fully iewt liesd in the first quarter than we were in the fourth quarter.

In other words, capacity utilization I believe moved up across the industry.

Even though the absolute revenues were not up, we do believe the units will be up when they're through publishing data for the market place.

Thanks a lot.

Our next question is from John Barton of with a coff asecurities.

Your question, sir.

You comment that about the strength at the end of quarter coming from distribution can you give us insight as to how the OEM customers or direct business played out to the end of the quarter and if it wasn't a parallel strength, how would you interpreted that data?

The OEMs I would say have been much more steady pattern, definitely the ship that we've seen there to shorter lead times was noticeable as we went through the quarter, and so I would say there is no real as we get into the second quarter here, no real Delta that I expect.

I expect that pattern to continue, and I would call it much more stable than the distribution environment.

I think distribution has recovered a little bit first and again, that is normal.

Normally we do see movement up or down first in the distribution channel.

Just a compliment some of the points there, John, some end markets we sell exclusively through distribution like networking and that was stronger with E C L business, and so that's something that for end market I think and some of the industrial, too, is mainly served through distribution and not that's usually stronger in the first quarter, so these were end markets that benefited through distribution.

As Keith mentioned before, we could never remind people often enough that we only count revenue on sell through basis, so we have no interest at all in shipping stuff to distributors that are not going to sell it.

Got that.

From a.

S P perspective, down 2 % in March quarter, down 2 % in June quarter, any out lie ers thereby end market vertical or product types, prices more stable than that, prices more aggressive than that so to speak?

In general we see the same types of pressures across the industries.

Nothing really jumps out at you.

A little bit more pressure full on the multi-sourced type products that we have, but it's not a dramatic shift, so in general I would say it's a moderate tightening of prices across the board.

Our next question is from Tim Luke of Lehman Brothers.

Your questions, please.

Thank you very much.

I was wondering if you could provide color on how you've seen the trends to date in April having seen the stronger trends at the end of March?

Okay.

So far through April we have seen things pretty good.

Bookings have come in stronger than the same period through January.

Our book to book ratio is fast approaching.

The quarter is filling up well in line with the times that we need, so I think that we did see the quarter the first quarter end nicely, and that trend has continued across the board through the first three -and-a-half weeks or so of April.

And I was wondering if you could give us the just the tons that you need in the second quarter on what terms you had in the first quarter and also wondering Keith gave helpful comment tear on different segments and how they performed in the first quarter and into the second quarter how you would look into some of the different areas to perform or whether they would broadly all be flat?

We definitely were up with terms in Q1 of about 17%.

Our expectation in Q2 is about 20% and again, in part due to the expectations that customer order patterns were continuing to shrink through Q1.

We think they now are stable and will not be shrinking further.

We think 20% is a reasonable number and as Donald pointed out a moment ago.

Our turns here the first three weeks of this quarter were stronger than the first three weeks of last quarter.

We still have confidence that that's an appropriate expectation.

As far as looking into which segments might pick up a bit in Q2, we are seeing a bit more activity in the wireless segment than we did in Q1 which of course was down.

Computing rather flat issue, not a strong move in either direction there, the industrial and automotive again not a major directional shift in either of those as far as networking, either, so I guess the simple answer would be if there is up side here in the quarter, I believe wireless and consumer will be the two areas that lead us upward.

Our next question is from Ramesh miss ra. your question.

Good afternoon.

Could you update us on trends in chine and Asia overall after the lune ar new year?

The trends in China and Asia book to bills now are positive post Chinese new year.

We're seeing continued streng here in April and so I would have to say that that is in a strengthening mode, and certainly is a strongest region we have right now.

Okay.

A brief update on your consolidation of your manufacturing plants both in Rhode Island and China?

Okay.

Well, the factory in China that we've got is running pretty close to full capacity, well over 90% iewt liesd there.

We do see a strengthening as I mentioned earlier in the units as we're going quarter to quarter.

In Rhode Island we're in the final phases of closing that fab.

I believe our last manufacturing lots are through, and so it is a matter now of buttoning up the facility and starting the clean-up activity.

Our next question is from Steve Smigie of Raymond James.

Thanks, a bookkeeping question first of all.

Can you give us the break out between analog extended components power et cetera.

Sure.

Analog here we are.

Analog is about 31% of sales.

Panel components about 46, most about 17 and E C L about 6.

Okay.

Another question related to the trench you mention you had new products filling up there.

Are those products based on internal R&D or license og that as well.

Those are all based on internal R&D.

Once again ladies and gentlemen if you have a question at this time please press the 1 key.

The next question is Chris Danely of JP Morgan.

Could you comment on just the level of utilization rates from first quarter to the second quarter?

Yes, I can.

We are operating basically our assembly test operation in the low 80s in the first quarter.

I expect that will trend up slightly in into the second quarter and our wafer fabz were in the high 50s in the first quarter and I would expect that to start approaching the 60s to mid-60s.

Thank you.

In terms of just the house keeping the total Cap Ex guidance for calendar '05 and also the depreciation guidance.

We had stated before that we would be running about 66 million second quarter over 25 the first half, 35 the second half but obviously we will judge that in function of how we see the business evolving.

Our next question is from Vernon of Jane Montgomery.

I was wondering if you could you can give me color on the actual unit volumes and the -- I am trying to figure out the blended number.

They moved slightly up quarter on quarter, less than leetle see here.

I don't have the exact numbers. 1 to 2% up in total units.

Okay.

And the E C L side of the business, are you seeing any activity there?

There has been buzz that a.

T E might pick up a little bit.

Are you seeing any of that activity?

Committee did sigh apick up in the first quarter in the high frequency business over the fourth quarter.

Not quite back to the levels we were a year ago, but certainly moving in the right direction.

Our next question comes from Alan see more of Columbia management group.

Your question, sir.

My question has been asked and answered.

Thank you.

Once again if you have a question please our next question from tryst an of Robert W bared.

Your question, please.

Good afternoon.

Could you tell us what the utilization rates were in your wafer fabz last year at the peek I was trying to get a sense of how much this thaz declined since mid-last year roughly.

I think we were not surprisingly pecked last year in the second quarter which is when the revenue pecked and our fab utilization and our assembly and test were over 90%.

Okay.

And is it fair to assume that on the wafer side it was roughly the same number as well.

Yes, yes.

Fab and the test facilities but we have always said that we do have a little bit more flexibility in our fab to incremental capacity than we have in the assembly and tests which we ration and use at a gauging factor.

Sure.

Now, given the flat revenue outlook and the fact that utilization rates have come down, somewhat surprising to see that pricing is holding relatively well both in Q1 and in terms of your Q2 outlook.

Is there any specific factors you can mention that would lead pricing to be relatively stable as opposed to down more than the low single digit that you talked about?

Well, we will show we have an analyst day here and we'll show trends on pricing.

I think serl factors in there.

One, cannot ignore the beneficial impact of the currency on semiconductor's major competitors are European and Japanese companies suffering from the week dollar.

That is clearly a major change from two years ago.

I think the second factor is some companies are going after sales in a finite market, none he lass particular market and bombing their margin have now withdrawn from that game.

I don't want to mention other companies on our conference call but some of them have been pretty open to you guys that they are managing margin a lot more than going for market share in a fixed market, so I think that's also helping, so better discipline and weaker dollar plus also internally within the company we have focused remained this way over the last fw years also on managing margin, and a routine at the profitability by product family by device type and also by customer to make sure we have opt mized our margin and our mix.

Our next question is from mark Edelstone of Morgan Stanley.

Your question, sir.

This is on behalf of mark Edelstone.

I have a quick house keeping question.

I was con derg if you could go over the share count for the current quarter again.

I believe you said it was 48 million for the preferred and --

That's right.

I think we said, too, let me go through the numbers. 255, 48 for the preferred. 27 potentially from convert and 6 or so from stock options and the total was about 336 million.

That's all I have.

Thank you.

[Operator Instructions] Our next question is from tryst an of Robert W bared your question.

Hi.

Sorry I have one last one.

Curious to know if in Japan you've seen any changes in either competitive landscape or entry adjustments into one?

Not nothing changed from Q4 to Q1.

I think that is pretty much the same environment for the last six to nine months.

Great.

Thank you.

Next question from John Barton of waw coff asecurities.

Your question, sir.

On the topic of gross margin trends as we gay forward the guidance was flat to marginally up.

Is that based upon flat revenues and if the answer to that is dwre I assume it's coming from cost saving and then also as we look out in the business continues its growth rate.

What do you believe the incremental gross margin is on the incremental gross sales dollar.

I believe something in the 50% yield, John.

And your assumptions are both correct.

The guidance we gave was for roughly flat revenues as we mentioned earlier we expect to see utilization up slightly which gives us some strength moving into the gross margins, and we do believe our cost cutting efforts should exceed the a.

S P erosion.

That holistic equation says they should be flat to up and building as done said through the year with about a 50% fall through.

I think it was Dan asking the question on the units.

I think last year was remarkable in the and the second half much lower in units than the first half, and the first quarter of this year in units is much lower than the first quarter of last year, so I think this is all indicative of what mentioned in the reduction of old inventories both in distribution channel and with our customers, so we believe that there will be normal seasonal second half and we will see a normal seasonal growth in units volume in the second half which will drive that higher capacity utilization starting this quarter, and our trains with normal seasonal growth we can expect 5 to 10% up second half over first half.

Final question if I could and I realize I am asking a look out a little bit.

If you keep in behind product mix shifts, utilization as the revenue grows, as the business grows, getting up into 85, 90% utilization, pricing trends as you see them, where you do you think you can run the company from an overall gross margin perspective?

Again, there is lots much ifs, ands and buts in that seated of assumptions.

We're running at about 32% for a $300 minimum business today if you use the 50% fall through that Donald gave you I think you will come you up with a reasonable model where it can be run moving forward.

Next question is from Tim Luke of Lehman Brothers.

Your question.

Just a follow up on the expense operating expense outlook.

Could you give us some sense in second quarter how you see that and maybe whether we would expect the R&D to be flat issue for example and whether you see the sales and marketing down slightly or howl we think about that.

I think we gave specifics on that.

I would dpp that we would save a little bit more in the G&A in the second quarter.

We did say that the operating expense overall would be 20%.

I think we said if we did -- if you picked up my point I would expect a little bit reduction in G&A because we have a higher cost in Q1 related to -- which was not going to recur to the same dimension in Q2 I would expect the sales and marketing roughly flat and roughly slightly down and slightly down also in R&D, so that total numbers would come in around about the 20% of sales slightly rukdz over the first quarter number.

You think the second half of the year sales would move up.

We will try to keep the operating expense a rough way flat in absolute dollars.

That's what we are fighting to do.

Obviously a certain winds working against us like higher commissions with higher revenue, which we project and anticipate, but we are looking for efficiency savings and we do have some savings planned.

We will be saving in the I T area.

We are rationalizing some of other other activities to save costs.

This absolute dollar number that we project for the second quarter will be the bench mark that we want to hold ourselves to for the second half of quarter.

This conclusion the question and answer session for today.

Ladies and gentlemen thank you for participating in today's conference this includes conclusion the program.

You may now disconnect.

Good day.