安森美 (ON) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ON Semiconductor Fourth Quarter Earnings Release Conference Call. [OPERATOR INSTRUCTIONS.]

As a reminder, this conference is being recorded.

I would now like to introduce your host, Mr. Ken Rizvi.

Sir, you may begin.

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

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

This call is being webcast on the Investor Relations section of our website at www.onsemi.com, and will be available for approximately 30 days, along with our earnings release for the fourth quarter of 2005.

Our earnings release and this presentation include certain non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to the 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 present at the Wedbush Institutional Investor Conference on March 2nd, the Raymond James Institutional Investor Conference on March 6th, and the Morgan Stanley Semiconductor and Systems Conference on March the 6th.

We also intend to have our Analyst Day at the end of March, and will pass along details later this month.

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

The words “estimates,” “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 fourth quarter and 2005 results.

Donald?

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

ON Semiconductor Corporation today announced the total revenues in the fourth quarter of 2005 were $341.8 million, an increase of 9% from the third quarter of 2005.

During the fourth quarter of 2005, the company reported net income of $43.8 million.

Fully diluted earnings per share for the fourth quarter of 2005 were $0.07 per share, which included a deemed dividend charge of approximately $0.06 per share associated with a non-cash premium in the form of inducement shares for the conversion of the Series A cumulative preferred stock into common stock.

During the [third] quarter of 2005, the company reported net income of $23.5 million, or $0.06 per share on a fully diluted basis.

On a mixed adjusted basis, [our base] selling prices in the fourth quarter of 2005 were down approximately 2% from the third quarter of 2005.

The company’s gross margin was 35%, up approximately 180 basis points as compared to the third quarter of 2005.

This gross margin exceeds our previous 2000 peak margin adjusted for [overall] mix of communication IC products.

EBITDA for the fourth quarter of 2005 was $76.8 million and included a $0.8 million restructuring asset impairment and other benefit.

EBITDA for the third quarter of 2005 was $65.4 million and included a $0.2 million loss in restructuring, asset impairment and other charges.

For our total revenues for 2005 of $1.261 billion were approximately flat as compared to $1.267 billion of revenues for 2004, fourth quarter 2005 revenues of $341.8 million were up approximately 11% compared to the fourth quarter of 2004 revenues of $306.8 million.

During 2005, the company reported net income of $100.6 million.

That included 3.3 million in restructuring, asset impairment and other charges.

We were also profitable in all four quarters during the year, our first in our public history.

During 2004, the company reported a net loss of $123.7 million.

That included a loss on debt repayment of $159.7 million and restructuring, asset impairment and other charges of 19.6 million.

The company’s gross margin increased by approximately 80 basis points to 33.2% in 2005 from 32.4% in 2004.

During the fourth quarter of 2005, the company reduced debt by approximately $68 million and made its final payment to the legacy Motorola pension plan of approximately $20 million, which reduced cash, cash equivalents and short-term investments by approximately $39 million from the end of the third quarter of 2005 to $233.3 million as of the end of the fourth quarter.

At the end of the fourth quarter, days sales outstanding decreased by four days to 43 days.

Total inventories were reduced to a record low on a dollar basis at the end of the fourth quarter of 2005.

Distributor inventories fell to below 10 weeks, and internal inventories fell to approximately 70 days.

Cash/capital expenditures during the fourth quarter were relatively flat to the third quarter at approximately $13 million.

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

Keith?

Thanks, Don.

2005 was a significant year for the company.

During the fourth quarter, we had our highest quarterly revenue since the first quarter of 2001.

We had our highest annual and quarterly gross margin since 2000, our highest annual and quarterly net income ever, and our lowest total and net debt ever.

We also ended 2005 with our lowest total inventory weeks ever, which includes both internal and external inventories.

We look to continue our success in 2006, and are excited about our prospects.

Now for an overview of our end markets.

During the fourth quarter 2005, we saw significant growth in the consumer end market, which grew by over 40% from the third quarter and represented 24% of our fourth quarter revenues.

The growth was driven mainly by wins on major gaming and MP3 platforms.

Computing stayed roughly flat on a dollar basis in the fourth quarter and represented approximately 21% of fourth quarter sales.

Our next largest end market, wireless, grew by approximately 6% on a dollar basis from the third quarter and represented approximately 19% of fourth quarter sales.

Automotive and industrial were roughly flat on a dollar basis, and represented approximately 17% and 12% of the fourth quarter sales respectively, and networking remained at approximately 7% of sales.

During the fourth quarter, sales to our largest OEM customer, Motorola, represented approximately 10% of sales.

Our top five OEM customers on a direct billing basis for the fourth quarter were Delta, Delphi, Motorola, Samsung and Siemens.

On a geographic basis, our contribution this quarter from sales in Asia, excluding Japan, increased by 200 basis points to 58% of the total sales, reflecting the increased strength we saw in our consumer-driven end markets.

Sales in the Americas were down approximately 200 basis points and represented approximately 22% of total sales.

Sales in Europe and in Japan remained flat on a percentage of sales basis at 15% and 5% respectively.

Looking across the channels, sales to the distribution channel increased by approximately 100 basis points to 48% of sales.

Direct sales to OEMs decreased by 200 basis points to approximately 40% of sales, and the EMS channel was up 100 basis points to approximately 12% of sales.

We also estimate that approximately 10% of sales through the dis5rinution channel were for third-party logistical services in the EMS channel.

Now, I’d like to provide you with some details on the progress we’ve made.

Our strategy of aligning our sales and development resources toward leading OEMs or market-making OEMs is beginning to show results through improved design penetration and revenue growth.

A key component of this strategy has been the establishment of our solution engineering centers and customer site-based design centers, which enable us to work directly with customers on new product development and achieve a higher level of customer intimacy.

An example of our market-making OEM success has been in the consumer gaming market, where we have increased our total available market, or CAM, from approximately $1.75 per game console in 2004 to over $7.00 per console in 2005.

We’re also beginning to see early traction in penetrating market-making OEMs in portable consumer audio markets, and have won key designs on a number of leading MP3 platforms that have helped increased our CAM from approximately $0.50 per unit in 2004 to over $2.00 per unit in [2006].

These successes have helped fuel the growth in our consumer end market in the fourth quarter of 2005, and should continue to fuel our growth into 2006.

In the wireless end market, we have grown our revenues by approximately 13% since 2004, and over 65% since 2003, led by our portfolio of protection and power efficiency products.

These products are well positioned with the market makers in this segment.

In the last year, our filter revenues grew by over 20%, and our analog switch revenues, led by products such as our full-speed USB 2.0 compliance switch and our ultra-low resistance dual switch, more than doubled.

These businesses are each running at more than 8 million a quarter, and are expected to continue at a double-digit growth rate in 2006.

Another area of corporate focus over the last year has been in the computing end market.

In 2006, we expect to see benefits from our work, and have significantly expanded our CAM opportunity from approximately $3.50 per board in 2005 to over $7.00 per board in 2006.

This CAM expansion is a result of several new product introductions, including our dual edge V-Core solution MOSFETs, based on our next-generation trench technology, and other new products offerings around DVR controllers, gate drivers and analog regulators.

As an example of our commitment to delivering leading-edge power efficient solutions to the market, we work closely with industry standards organizations and our customers worldwide to develop power solutions that reduce power consumption while maintaining optimal performance.

Our GreenPoint ATX reference design was the first in the industry to provide a viable solution to the 80% efficiency initiative for computer power efficiency standards.

The initiative challenges computer manufacturers to incorporate internal power supplies that operate at 80% efficiency or better across several load points.

Our GreenPoint design is currently being implemented at a number of leading computing and power supply companies.

As part of our commitment to this market, we have also been active in the development of a generalized test procedure for measuring the energy efficiency of internal power supplies with the EnergyStar product development group at the US Environmental Protection Agency.

We recently hosted the final EnergyStar conference at our headquarters in Phoenix prior to the formal announcement of the new EnergyStar requirements to be rolled out at the upcoming APEC conference in Dallas.

Our products continue to win awards from the technical letters and the press.

Our family of ESD protection diodes was recently selected as one of the 2005 top new products by EDN magazine, and has won more than 10 design wins at key Chinese and Taiwanese ODMs.

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

Donald?

Thank you, Keith.

First quarter 2006 outlook, ON Semiconductor recognizes revenue through our distribution channel on a sell-through basis.

Based upon booking trends, backlog levels, estimated [ton] levels and a modest distribution inventory replenishment, we anticipate that total revenues will be approximately $330 million in the first quarter of 2006 as compared to revenues of $302 million in the first quarter of 2005, a year-over-year increase of approximately 9%.

Backlog levels at the beginning of the first quarter of 2006 were up from backlog levels at the beginning of the fourth quarter of 2005.

Backlog represented over 90% of our anticipated first quarter revenues.

We expect that average selling prices will be down approximately 1% in the first quarter of 2006.

We also expect cost reductions to offset a decline in average selling prices, and that gross margins will be flat at approximately 35% in the first quarter of 2006.

For the 2006 calendar year, we expect cash/capital expenditures of approximately $110 million.

This includes approximately $22 million of carry-forward from 2005.

For the first quarter of 2006, we expect cash/capital expenditures of approximately $40 million.

For the first quarter, we also expect total SG&A and R&D expenses of approximately 19%, with SG&A expenses at approximately 12% of sales and R&D expenses of approximately 7% of sales.

We anticipate that net interest expense will be approximately $12.5 million for the first quarter of 2006.

Beginning in the first quarter of 2006, we are required to expense stock-based compensation.

This is in accordance with the Statement of Financial Accounting Standards number 123(R), Share-Based Payment.

We currently expect this expense to be approximately $2 million in the first quarter of 2006, and this expense is included in our guidance.

This is a pre- and post-tax adjusted expense.

We will provide an update for expenses related to stock-based compensation for the second quarter of 2006 at the time of our first quarter earnings release.

I am happy to say that we have eliminated the two-stock methodology on a go-forward basis, and we expect our fully diluted share count to be approximately 346 million shares in the first quarter of 2006, which includes approximately 311 million of common stock, approximately 27 million shares associated with our convertibles, and approximately 8 million shares related to 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.]

Romit Shah of Lehman Brothers.

Thank you, and nice job in Q4.

Keith, just given your momentum and where backlog levels are, I’m a little surprised that you guys are forecasting Q1 to go back to normal seasonality.

Can you comment on what you saw with respect to orders [and] the channel in January, and perhaps what your expectation in terms of linearity in Q1?

Yes I can, and we’re in a very interesting time here in Q1.

Clearly, the backlog has been going up, continues to look strong through January.

Demand certainly is not part of the equation that would lead to normal seasonality going down.

What we’re seeing is some constraints in our assembly test portion of the business on several packages, and we are also seeing inventory levels in our distributors that have reached very low levels.

So, the caution that has led us to believe the more seasonal kind of thing is really around how much product can we get delivered and how much of that will end up as a small replenishment and distribution and not be able to make it all the way through to the end customer.

So, it’s really how fast can we run.

It’s not a reflection on any kind of decrease in the actual end market demand.

And if I can just add a point on that one, what Keith said, is that our actual shipments into the channels will be higher in the first quarter than the fourth quarter because the fourth quarter we benefited from the inventory depletion in our distribution channel and, as you can see from our guidance, we have anticipated a replenishment, a modest replenishment in the first quarter.

But, if you take our total shipments, they will be up Q1 over Q4.

OK.

Last quarter your original guidance proved to be very conservative.

As you think about the swing factors in Q1 being -- potentially alleviating some of these constraints in assembly and test and getting inventories back to more normal levels in the distribution channel?

Yes, I think that’s what we’re trying to build a plan on.

We do try and be a bit conservative, Romit.

Clearly, we’re going to be doing everything we can to ship the maximum amount of product out and ensure that it gets into the end user’s hands.

But, at this point, we just don’t have enough visibility on that sell-through portion in the pipeline to the distributors to be any more bullish.

And my follow-up question is on the margins. 35% is higher than I was expecting.

Thinking about 2006, should we think about the ramp in gross margin as being weighted more towards the second half of the year in line with seasonality, or are there some potential cost reductions or potentially better pricing that could help margins in the first half of the year?

Well, on the margin story, the algorithm was we presented at the Analyst Day called for plan to get to 400 million on the top line and 40% gross margin.

And at that time, we were just over 300 on the top line and about 31% gross margin or so.

So, I think [printing] a quarter like fourth quarter, we are ahead of our plan, and our guidance for the first quarter, 330 million on the top line and 35% gross margin, is ahead of our plan.

So, we feel confident in our margins, and we feel confident that, as the top line progresses, especially in the second half, which is proving to be seasonally strong due to the strong consumer-based demand for our products, we will be able to grow the gross margin.

And I would add that we are giving you ASP guidance as well.

The pressures have been lessening.

The focus is clearly much more on supply right now than pricing, and I would expect that would give us more opportunity for margin expansion in the second quarter and onward.

Michael Masdea of Credit Suisse.

Thanks a lot.

I just want to commend you guys on your candor about the view on modest inventory build

I guess really following on that, how do you keep it at a modest inventory build?

What’s the customer mentality, and how do you keep them from really building too much?

Is it just the supply constraints, or something else?

Yes.

Actually, we’ve been working real hard, Michael, last year to get much more information exchange going between us and our customers, and also as well the distribution channel, so that we can do a better job of reflecting their needs as the market dynamics show, and not building that inventory.

We’ve also -- about 48% of our business goes through distribution, so it’s a very substantial portion, and all of our key distributors have been working very closely with us to come up with new methods to basically provide the service that we expect on less inventory than they have traditionally had.

So, a lot of cooperation, a lot of work back and forth, and a lot of information exchanging going on to ensure we don’t let that get out of whack.

Of course, there is always the tendency to try and over-inflate when things are perceived in shortages, but I think we’re much better equipped to minimize that at this point than we were even a year ago.

And do you look at the same sort of metrics of lead times and inventory and everything else that you looked at in the past, or, given that kind of environment, is there something else you’re looking for as a warning sign?

Yes.

We look at all those things in the past because those certainly have kind of historical benchmarks that we can pull out.

But again, I think one of the more important things to us now is getting an advanced look on the new product ramps.

As our new product content has been going up on these platforms, it’s become more important to get an early look into the customer ramps and, again, that’s an area of data interchange that we’ve been improving on significantly.

Let me just follow that up.

Are we giving you enough credit, or how do we think about your last quarter’s growth in terms of new product ramps and where you think you’re taking share versus kind of the strength of the cycle and the demand that everybody’s talking about?

Yes.

You know, we look at that a lot, and so kind of two comments.

One, I think we’re fairly early still in our acceleration on the new product front.

I think you saw equivalently -- in an 8-cylinder engine, I think you saw a couple of the cylinders really hitting in Q4 in the consumer area, and we’re expecting to see that continue to operate strongly into 2006, but also add to that some real acceleration in the computing space.

So, I think you’re seeing us have the opportunity to significantly set ourselves apart from the overall market growth as we get into 2006.

Great.

Last quick one, just M&A and divestitures.

In this type of environment, do you think that’s going to slow down, or do you think there’s opportunities that will pop up, given the pricing environment, etc.?

I think there’s always opportunities and, frankly, I don’t know even how to speculate whether they’ll be going up or down.

But, certainly there’s some strong markets right now, which should reflect in the equity markets and change some of the dynamics relative to M&A that I would say certainly would be more favorable rather than less favorable.

Craig Berger of Wedbush Morgan.

Good afternoon, and congratulations on a strong print.

I wanted to [hone] in on the gross margin guidance a little bit.

I understand you guys are guiding revenues down, so lower revenues equals lower margin.

You’re also saying that ASPs are going to be about a point better sequentially, so maybe that offsets the seasonality.

Can you discuss where we are in terms of gross margin savings with respect to the Rhode Island and Malaysia consolidations?

How much savings do you expect in ’06 and when those kick in?

Craig, we did actually guide to ASPs falling in the first quarter on our 330 million revenue number, so the ASPs actually are not helping us.

It’s the rate of decline that’s coming down, so there’s still a little bit of pressure there.

But, we are seeing the full benefits now of the Rhode Island closure.

Remember on previous calls we had mentioned that we had to eliminate some of the bridge inventory, the high-cost bridge inventory that we had from there, so that will be eliminated.

There is additional other cost savings that will kick in.

We’re saving a little bit also on depreciation, we’re saving a bit in standards, changes, reserves, etc.

In the fourth quarter, we also had a hit, a little bit hit on the -- an additional small accrual for, for instance, the Delphi bankruptcy, so that won’t be recurring in the first quarter.

So, we’ve done our homework, and we are comfortable that the gross margin gains in [inaudible] and gives a very strong platform on which we can grow our gross margin as we grow our revenues throughout the year.

As far as the facility in Malaysia is concerned, that we announced some time ago, and the plan of record was that it would close in the third quarter of this year.

The savings from this are approximately 2 to 3 million a quarter, and the plan was that we would consolidate all that manufacturing in an existing facility that had spare capacity.

Right now, we are re-examining the rationale for that in face of the very strong demand that Keith mentioned.

It’s something that we may postpone if the market demand remains as strong as it is today.

But, that was never intended to increase gross margin in the first quarter.

It was a second half story.

OK, thank you.

And then, with respect to the general kind of inventory building going on out there, are you seeing that your OEM customers are also building inventory, or are you just planning on replenishing some channel inventory in the first quarter?

Yes, this is Keith.

I’ll answer that one.

We don’t really see any inventory building in OEMs right now at all.

We’re spending a great deal of energy making sure we keep up with their demand, and are really not in a position to allow that inventory to grow.

With respect to the small build and distribution, a lot of that is more about timing as we are increasing our capacities here in Q1, and accelerating our ship-in versus how fast they can ship out.

So, it’s not clear to us at this point even how much inventory will be able to be built in distribution.

And [I think] bit of color on that is just a supposition based upon historical trends.

It’s not scientific.

We may prove to have been conservative in that, but we won’t know till the end of the quarter, and I think it’s always prudent to give reasonable guidance, taking into account everything that could possibly happen.

Just from a point of information, a few years ago our distribution weeks of inventory was over 20 weeks.

Previously, we thought that a minimum of 12 or 13 weeks was as low as it could go.

We got to a record low of distribution inventory at the end of last quarter, less than 10 weeks, so that’s why we thought it was prudent to at least anticipate a modest replenishment.

But, it may not happen and, as Keith said, maybe the distributors will prove to be able to function on these much lower levels of inventory.

But clearly, from the backlog they’re putting on us, they want to stock up some more parts, and that may be motivated by another thing that Keith mentioned, which is that they fear that the prices are rising for our parts, and they want to stock up ahead of any price increase.

John Barton of Wachovia Securities.

Keith, more of an elaboration on a previous answer that you gave.

If you look at the consumer business being up 40% sequentially in the December quarter, can you get us down to some numbers?

Of that 40% growth, how much of that came from recently introduced products?

What does that mean to the gross margin mix, those types of things, to the extent that you can, please?

Yes, I’m not sure that I can give you any kind of accuracy on that.

I do know that, in those recent wins, there is a mix of existing products and new.

I suspect that the new portion was maybe a third of the total, but I certainly don’t have the specific numbers in front of me.

So, there certainly should have been some mix improvement that occurred from that and, as you know, we definitely -- as Donald mentioned, running ahead of our model on gross margin, and I think that’s a piece of that equation.

And then Donald, back to your last response, in your prepared statement you talked about the fact that you’d actually [manufacture] more parts in the March quarter over the December quarter, but you’re not sure you’ll be able to recognize them as revenues because you look at things on a sell-through basis, and you don’t think -- the parts potentially make it to distribution but don’t make it to customers.

I guess where my line of questioning comes from, I’ve never known [disbues] to really walk away from an order if they could ship the product, with the exception of the speculation of pricing, which was kind of woven into your last response.

Is that the main thing you’re concerned about, that they actually “hoard” parts in an effort to exploit that rising ASP?

A little bit of that.

I know for just the fact that they were not comfortable with such low levels, and we have seen strain in our supply chain, and we believe that it doesn’t take much.

I mean, you’re only talking about a few days’ difference in distribution inventory.

Half a week to a week can make the difference between flat revenues and 330 million revenues.

So, it’s pretty sensitive to just a small movement.

And again, we got to record low levels, less than 10 weeks.

Most of our competition is much more than that so, if they have a model that is the average of our competition and they move towards it, then there won’t be a replenishment.

So, that’s basically the only thing that was making us make that judgment [turn].

Chris Caso of Friedman, Billings, Ramsey.

Hi, guys, thank you.

I just wanted to -- if you could quantify where you guys are in terms of your average lead times, and where the capacity utilization is for you guys in terms of front-end and back-end.

OK.

The lead times right now are approximately 12 weeks across a pretty broad spectrum of packages.

Most tight, if you will, on things that will go in the portable digital consumer arena, so the very tiniest package tends to be the most constraining for us.

The average factory utilization in the fourth quarter was actually in the low 80s on a blended average.

With the assembly test portion being in the low 90s and the wafer fabs being in the low 70s, so kind of averages out to the low to mid 80s.

OK.

And in terms of some of these constraints, and it sounds like what you guys are saying is pretty consistent with what we’re hearing from a lot of the guys in the group, where it’s the back-end is where the bottleneck is, what’s your outlook over the next couple months or couple of quarters about how that gets resolved, and perhaps how long these shortages may persist?

Yes, you may have heard Donald talk about our capital expenditures earlier in the call, and we have greatly accelerated the investments that we’ve been making in the assembly test arena to add capacity in these constrained areas.

That increase in capacity, some of it will be realized in Q1, and then a significant portion of that in Q2.

So, at this point, we would expect the second quarter to be an opportunity for us to kind of catch up with demand in the marketplace.

And we had ordered this stuff at the end of last year. there’s approximately a six-month overall cycle time between ordering, receiving, installing and starting to ship.

So, we think we should be able to hit the sweet spot of satisfying the increased unit demand in the second half, the seasonally stronger demand in the second half.

Chris Danely of JP Morgan.

Thanks, guys, great quarter and great year.

Hey, can you give us the gross margins and the OpEx for Q1 without options expense?

Yes, but I need to go and work on that.

But, I think you could see from what we gave, it was not a big cost for us.

So, if I can just give you a rough split, it’s probably one-third of the 2 million is coming from COGS, Cost Of Goods Sold, and two-thirds is coming from OpEx expense.

That would be a rough split.

I can finalize that afterwards, but I think it’s more than half is coming from operating expense.

One point I did make as well is that we don’t get any tax benefit on our option expense.

Most companies actually take the expense after tax, but ours is pre- and post-tax is the same because we are not in a taxpaying situation.

We’re over $1 billion of NOLs, and we have a variable tax charge.

So, we can’t take the tax credit on the option expense.

Now, what do you guys expect the tax rate to be for the rest of the year, then?

I think you could put in nominal, something like $2.5 million per quarter is roughly what we think will be the cost.

OK.

And then, you guys mentioned your front-end utilization rates were in the low 70s, and I guess, given lead times extended like they are, why wouldn’t they be a little bit higher than that, or why wouldn’t you be ramping them up to -- on a mid or high 80s or something?

Yes, some of them -- the problem with blended averages is you sometimes miss some of the trends.

Certainly, we have some of the wafer fabs that are constrained at this moment, and we’re putting out all we can and increasing capacity, and others just through the mix, that have some spare room.

So again, looking at those constraints, I think the second quarter is also appropriate to start catching up with demand in the total marketplace.

Quinn Bolton of Needham.

Good afternoon, gentlemen.

I’ll echo that -- comments about the nice quarter and the nice year.

Just wanted to sort of circle back to some of these questions about sort of the capacity utilization rates and the increased unit output.

I mean, it would seem to me that I know you’ve got some constraints but, generally, it looks like your units and the factory utilizations in Q1 are probably going higher as you try and fill some of this channel demand and replenish some of the stock either at [disti] or at the OEMs.

And certainly, the outlook looks pretty strong for continued unit output in Q2.

So, seems to me that the fabs are going to be ramping up, which probably leads to lower cost of inventory.

I’m just wondering if you could give us a sense, sort of the cost of product going into inventory, looks like it should be coming down pretty nicely just given the unit output.

Is that a fair assessment?

We will have higher unit activity, but I don’t see any major unit cost reductions. [One of our] costs, raw material costs coming in, we’ve got gold, which I don’t know if you’ve noticed, has gone up in price.

You’ve also got a lot of oil-based products, as well, freight and things like that are going up.

Yes, we do have a better efficiency because of higher activity, but we are not predicting big unit cost reductions, just more efficiency.

And as Keith mentioned, the constraint is still the back-end.

And although we will ship more in the first quarter, we still are constrained and running at a very high, above 90 percent, capacity utilization in the back-end.

OK.

Second question is you sort of referenced the CapEx budget for ’06, with a good amount of that in the first quarter.

Can you give us a sense how the depreciation is looking for first quarter, as well as the entire year?

Yes.

We would expect first quarter depreciation coming in something like $24 million.

And you think it trends up over the year a little bit?

No, it should eventually, because we were spending more a few years ago, it should actually trend down.

Craig Ellis of Citigroup.

Thank you, and congratulations on the gross margin progress this year, guys.

First question, I think last year we were looking at seasonality that would show about up 10% in units in the back half of the year.

Is that still a reasonable way to look at seasonality, or have some of the constraints, as well as some of the new pilot programs, given you a [inaudible question - background noise] second half seasonality profile this year?

Yes, I’ll address that one for you, Craig.

We actually have seen some slight shifts in the pattern of activity, but it’s still definitely a second half story.

I think that 10% or more growth in the second half is very plausible, with a roughly flat kind of first half looking to be like a new type of pattern.

On our side, we think we’ve got the capacities going in with the capital plan to put us ahead of that second half kind of growth story in preparation of some market share gains that we see from our new product design wins in the new platform.

So, we’re feeling pretty good about the plan this year, and definitely would continue to expect, the second half, to see acceleration over the first.

One thing that will help it [inaudible question - background noise].

Compared to when we were simulating 2005 is, in 2005 we were still under some pretty reasonable price pressure, [best part] of 3% price erosion the third quarter, for instance, over the second quarter.

If you look at the trend of the price erosion now, we are seeing it approaching zero.

We said we anticipate about 1% for the first quarter, but the trend is down, very small decrease in price.

And so, compare that to some historical quarters, it looks like we are building momentum for prices to move in the positive direction, and I think that’s something that’s echoed by other players in our industry.

And one thing that we have said and it is proving to be a wise analysis is that there is a shortage of assembly and test capacity, and we’re not finding that any of that is readily available from subcontractors.

The assembly test model from subcontractors is not being proven to work very well, and they have been modest in their investment, so there’s not much capacity available.

So, we are confident that the tightness in capacity, the strong unit demand -- remember, we shipped record units in the fourth quarter -- are certainly the building blocks for positive movement in prices that can only help the revenue growth as the units increase in the second half.

...

Don.

Can you just also provide some color on what you’d expect from the relative strength of your end markets in the first quarter?

Yes.

Relative strength in the end markets, we have seen some very minor let-off from the Q4 pace in the consumer digital arena, but no let-up at all in the rest of the consumer marketplace and, in fact, continued ramp in areas like hard disk drives feeding the consumer businesses.

And the two of those pretty much offset.

So, really on a quarter-on-quarter basis, we’re not seeing any other weakening other than some of that portable digital space that I just mentioned, and the rest of the markets appear to be strengthening.

Tristan Gerra of Robert W. Baird.

Hi, guys.

You mentioned that your shipments would be up quarter to quarter, but you’re suggesting that distributor resales would be down sequentially.

Does that mean that, really, the constraints that you’re seeing are for shipments to OEMs versus distributor sales?

No, actually the absolute mix on the OEM side I think remains fairly healthy.

It really is all about distribution.

So, the only question mark we have is that resale piece.

OEM is pretty solid.

So, you mentioned that your shipments are going to be up, and what will cause the guidance to be constrained for Q1?

And because of your limitation in assembly and testing, shouldn’t we see instead inventory levels at [distis] pretty much flat versus Q4 and up slightly sequentially? [Inaudible - highly accented language] I’m trying to get at is what are you seeing in terms of end demand versus normal seasonality at [distis], and why should we see inventory replenishment if demand continues to be up and if your backlog is up for Q1?

Yes, I understand what you’re asking.

The dynamic there, Tristan, is hard for us to call, is we are ramping our capacities and shipments as we go through the quarter.

And so, there is a cycle time of transit and distributor order patterns, if you will, their supply chain, that have to be taken into account.

So, while we will definitely ship more product quarter on quarter, the question is how much of that actually makes it to the end customer, how much of that delta.

And the concern we have is that it’s not so much the end markets that would allow them to ship less out, but more just the supply chain itself that kind of has to fill up some of the buffers before you can get ahead of the game.

So, that’s the supposition.

It’s something that we won’t have answers to till the end of the quarter.

But, right now, again, we have no indication that their sell-through rates are going to be dropping Q1 over Q4.

Ramesh Misra of C.E.

Unterberg, Towbin.

OK, good afternoon, gentlemen, and congratulations on that 90% sequential increase in net income and strong EPS performance.

Hope you make a habit of it.

My question was, in terms of capacity, the longer-term capacity additions, and would you be looking to make fab acquisitions in order to support and enhance your longer-term demand?

Yes.

We have some room in our existing fabs and, certainly with some modest increases in capital, we can expand quite nicely inside our existing four walls.

Any acquisition of fabs is really going to be driven more by a new technology node for us than it is for raw capacity.

So, we are increasing our content of sub-micron types of devices each and every year and, at some point in time, we will need to look at that as a strategic move.

But, right now, we have more than enough four-wall capability, with very modest used equipment purchases in the capital market, to expand sales.

OK.

Can you talk about the ASPs by your different product segments?

If I got it correct, you had a 2% decline in ASPs on a blended basis.

What about by the different segments?

You know, I don’t think I have any data that says they’re dramatically different segment to segment.

They’re very similar.

I mean, there might be a few decimal points difference.

They’re -- pretty much the market has become efficient across the various marketplaces from a pricing perspective.

Vern Essi of Janney Montgomery Scott.

Thank you.

Wanted to just dive in one last time into the capacity constraint question.

Is there any particular product category that seems to be more constrained than any other?

Yes.

The most constrained is really our packaging for the tiniest of packages, the things that are going to be going in the cell phones, MP3 players, and other portable entertainment devices is clearly the most constrained package for us.

OK.

And then maybe as sort of follow-on to the last question but, if you can, give us an idea of the market breakout.

Sometimes you’ve given us some pretty good information in terms of the products themselves between -- the split between analog, standard, MOS.

OK.

Yes, we typically do provide you that.

I’ve got it here, actually.

OK, he’s got it.

It’s pretty similar to what -- you asked that question, if I remember right, the last time, as well.

And [as other one], the answer is roughly the same.

Analog’s about 30%, ECL is about 6%, the standard components is 46%, and the MOS power, the MOS space is 18%.

Steve Smigi of Raymond James.

Great, thank you.

I was hoping you could just comment on product areas where you may be seeing design win strengths.

I guess the part I’m specifically trying to get at, you know, progress on trench MOSFET, and I apologize if you’ve already discussed that.

Yes, I think you’ve hit it on the head, and I did allude to it earlier in the conversation.

I think the computing sector is one of the markets that will allow us to gain share and significantly grow in 2006, and that is both the trench MOSFET arena, where we are getting quite a few designs right now where we haven’t previously played, in places like notebook computers, with our MOSFETs.

And also as well in the whole power control arena on the analog side, V-Core, DVR and system power.

Great.

And again, sorry if you already answered this, but could you talk a little bit about paying down debt going forward, as well?

Well, we’ve cleaned out so much debt, there’s not much more to pay off.

But, we have the debt now concentrated in a couple of areas, a couple of converts, which are -- one is at zero interest and the other is at 1.875%, so there’s no rush to pay these off.

So, we’ve now got a bank facility, which is approximately $640 million, and that’s our most expensive debt, approximately 6, 7% it’s costing us.

So, part of our strategy is, as we generate cash, we will apply that against our bank facility.

And as you know, you can pay that off, you can reimburse the bank facility at no penalty.

So, that’s what our strategy will be going forward.

If you look at what our EBITDA was, just under 80 million in the fourth quarter, do the math on what our cash/capital expenditures will be, you can see that we’re still online for our strategic plan model, which is to throw off approximately 100 million of cash or more, and that cash we can apply against our debt.

So, if we pay off debt, if it’s costing us 7%, 100 million, 7%, so, $7 million saving, or approximately $0.02 built into our model as we pay off our debt from operating cash flow.

Ladies and gentlemen, thank you for your participation in today’s conference.

This concludes the program.

You may now disconnect.

Good day.