安森美 (ON) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ON Semiconductor first quarter earnings call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session, and instructions will follow at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded.

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

Mr. Rizvi, you may begin.

Thank you, Matt.

Good afternoon and thank you for joining ON Semiconductor's first quarter 2006 conference call.

I am 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 first quarter of 2006.

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 Credit Suisse Semiconductor Conference on May 2nd; the Baird Growth Conference on May 9th; the J.P.

Morgan Technology Conference on May 23rd; the FBR Growth Conference and the Cowen Technology Conference on May 31st; and the Citigroup Semiconductor Conference on June 1st.

We will also be hosting our 2006 Analyst Day on May 5th in Scottsdale, Arizona, which will be webcast on the Investor Relations section of our website.

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 "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 fourth quarter and 2005 results.

Donald?

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

ON Semiconductor Corporation today announced that total revenues in the first quarter of 2006 were $334 million, a decrease of approximately 2% from the fourth quarter of 2005.

During the first quarter of 2006, the company reported net income of $40.4 million.

Fully diluted earnings per share for the first quarter of 2006 were $0.12 per share.

First quarter 2006 results included approximately $1.9 million associated with stock-based compensation expense due to our adoption of FAS 123-R share-based payment, and a $2.3 million investment gain shown in other income.

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 deemed dividend charge of approximately $0.06 per share associated with a noncash premium in the form of inducements here for the conversion of the Series A cumulative preferred stock into common stock.

On a mixed-adjusted basis, average selling prices in the first quarter of 2006 were down approximately 1% from the fourth quarter of 2005.

The company's gross margin was 35.2%, up approximately 20 basis points compared to the fourth quarter of 2005.

EBITDA for the first quarter of 2006 was $76.9 million compared to EBITDA for the fourth quarter of 2005 of $76.8 million, which included a $0.8 million restructuring asset impairment and other benefit.

During the first quarter of 2006 the company grew cash and cash equivalents by approximately $18 million from the end of the fourth quarter of 2005 to $251.3 million.

At the end of the first quarter, day sales outstanding increased to 49 days primarily due to increased shipments in March.

As anticipated, total inventories increased slightly with internal inventories at 74 days and distribution inventories increasing slightly but the remaining before 11 weeks -- [in all] 11 weeks.

Cash capital expenditures during the first quarter were approximately $32 million.

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

Thanks, Don.

As previously expected during the first quarter of 2006, we saw some modest revenue seasonality in the consumer-driven end markets.

On a percent-of-sales basis, however, the consumer end market remained at approximately 24% of our first quarter sales compared to the fourth quarter of 2005 and computing at approximately 21% of sales.

Wireless was relatively flat on a dollar basis in the first quarter and increased by approximately 100 basis points to 19% of first quarter sales.

Automotive remained at approximately 17% of sales in the first quarter, and Networking at approximately 7% of sales.

Industrial fell slightly to 12% in the first quarter sales primarily due to a slowdown in sales in Japan in areas such as automated test equipment market.

During the first quarter, sales to our largest OEM customer, Motorola, remained at approximately 10% of sales.

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

On a geographic basis our contribution this quarter for sales in Asia excluding Japan decreased by 100 basis points to approximately 57% of sales.

Sales in the Americas and Europe each increased by 100 basis points to approximately 23% and 16% of sales respectively, and sales in Japan fell by approximately 100 basis points to 4% of sales.

Looking across the channels, sales to the distribution channel decreased by approximately 100 basis points to 47% of sales.

Direct sales to OEMs increased by 100 basis points to approximately 41% of sales, and the EMS channel remained flat at approximately 12% of sales.

We also estimate that approximately 20% of sales through the distribution channel were for third-party logistical services.

During the first quarter, revenues broken out by our historic product line categories were as follows -- power management and standard analog represented approximately 30% of sales;

MOS power devices represented approximately 19% of sales; high-frequency clock and data management represented approximately 6% of sales; and standard components represented approximately 45% of sales.

Revenue broken out by our two divisions were as follows -- our analog products group represented approximately 46% of sales; and our integrated power group represented approximately 54% of sales.

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

During the first quarter we introduced two new members of our GreenPoint family of high-efficiency power supply reference designs.

Faced with regulatory and market demands, designers are looking to companies like ON Semiconductor to help them develop power-efficient solutions that reduce power consumption while maintaining optimal performance.

Last quarter we discussed our industry-first GreenPoint ATX reference design that provides a viable solution to the 80% efficiency initiative for the computing power efficiency standards.

We have now also introduced a reference design for notebook computing power adapters that provide 90% energy efficiency while still achieving low standby power and compliance with the CEC, EnergyStar, and European Code of Conduct, or COC, requirements.

We also introduced a third GreenPoint reference design for CRT TV power supplies that deliver standby power of less than 1 watt.

The design utilizes a number of ON Semiconductor's advanced power management devices and also draws from the company's industry-leading discrete component portfolio.

In the computing end market we continue to help solve customer problems through innovative design solutions.

By using devices from our SMART HotPlug family of products designers can implement a reliable feature packed solution for HotSwap applications such as enterprise-class hard drives.

Prior to the introduction of this device, designers had to implement a discrete solution that included up to 11 different components.

We also continue to deliver on our commitment to provide leading-edge, power-efficient solutions to the market.

Our µCool family of leading-edge MOSFET products satisfy the industry need for smaller, thinner, faster, cooler, and more reliable products for the portable market space.

These devices provide designer leading-edge performance and flexibility in a small, thermally enhanced package to optimize board space.

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

Our family of light LED drivers was selected as one of the top products by ECN magazine and has won several significant design wins.

As many of you know, in April we announced a definitive agreement to purchase LSI Logic Corporation's Gresham wafer fabrication facility.

We anticipate completing the purchase of LSI Logic's Gresham, Oregon, wafer fabrication facility in May, as stated in our April 6th press release and believe the Gresham facility is another step in our efforts to provide our customers with state-of-the-art, high-performance analog and digital power solutions.

In April the company successfully raised approximately $75 million, net of expenses, through a common stock offering of approximately 11 million shares to pay a portion of the purchase price of the Gresham facility.

Even with the cash outlays associated with this purchase, we currently anticipate that throughout 2006 we will continue to grow our cash and cash equivalents.

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

Donald?

Thank you, Keith.

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

Not including any increased revenue associated with completing the purchase of the Gresham facility, and based upon booking trends by all levels and estimated tons levels, we anticipate that total revenues will be approximately $350 million to $355 million in the second quarter of 2006.

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

Backlog represented well over 90% of our anticipated second quarter revenues.

We expect that average selling prices in the second quarter will be flat to slightly up sequentially.

We also expect gross margins will continue to grow by between 50 to 100 basis points.

To prepare for normal second-half demand, and in response to specific ON Semiconductor design wins with OEMs that are expected to ramp in the fourth quarter of 2006, we anticipate distributors will increase inventories slightly in the second quarter to approximately 11 to 11.5 weeks, well within our model range.

As mentioned, a large portion of the increase is related to third-party logistical services provided by distributors as they prepare for specific OEM customer builds.

ON has been designed into at which ramp in the third quarter.

For the second quarter and not including any impact associated with completing the purchase of the Gresham facility, we expect cash capital expenditures of approximately $35 million.

For the second 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 at approximately 7% of sales.

We anticipate that net interest expense will be approximately $11.5 million for the second quarter of 2006.

Beginning in the first quarter of 2006, we were required to expand 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 $2.5 million in the second quarter of 2006, and this expense is included in our guidance.

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

We expect our fully diluted share count to be approximately $358 million in the second quarter of 2006, which includes approximately $323 million of common stock, approximately 27 million shares associated with our convertible, and approximately 8 million shares related to auctions.

Further details on share count and EPS calculations are provided regularly in our 10-Q's and 10-K's.

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

[OPERATOR INSTRUCTIONS] Michael Masdea, Credit Suisse.

Hi, this is [Ed Tye] for Michael.

Congratulations on a good quarter, guys.

Thanks.

One question we have is deferred income to distributors.

They're up about 17% quarter-over-quarter, and yet I think the percentage of sales to disties was down.

I was wondering if you guys can help us reconcile that a little bit?

Sure, it's Donald here.

You know, obviously, over half of that is directly identified with the increase that we allowed over distribution inventory and exactly in line with our plan.

Another factor that influenced it is that prices have been increasing on our products, which is the major reason why this deferred income has increased.

That takes time to cycle through.

So we expect to get the benefit of the price increases through a distribution channel fully in the second half of this year.

Another two important items -- we have been reserving for weighted products in our distribution channel.

That's included in there as well, and also a third point is that the mix of product that distribution has been taking, particularly some of ECL product has a higher margin than the average of our product.

So when we look at these three factors across the underlying small inventory increase, we reconcile the numbers exactly to what you see on the balance sheet.

Did you provide an update on lead times and, as pricing has gone up, are you getting any indication that your customers are pretty concerned about supply at all?

This is Keith.

So lead times continue to stretch slightly, exceeding 12 weeks now for many of the families, and certainly the prices, as Donald explained shortly ago, are going up, and we'll be seeing that as we go through the second quarter and beyond.

Relative to seeing the impact on the customer level, the demand continues quite strong.

We have had many, many dialogs on assurance of supply.

That is certainly a high concern for many of our customers, and we are working with them to make sure we can satisfy their needs.

And one follow-up on that, Keith.

If lead times are so stretching in a seasonally down period, is there an expectation for them to stretch a little bit further throughout the year, particularly in the second half when seasonality ramps stronger?

You know, again, we've got a fairly aggressive capital plan, as you heard us talk about earlier.

Front loading, if you will, the capacity expansion of this year, so we really expect them to not extend as we get into the second half, and we believe we've comprehended the growth in the second half appropriately.

So we actually are hoping that we can get that number to be under 12 weeks by the time we get to the third quarter.

Chris Caso, Friedman Billings.

I just wonder, Keith, if you'd clarify something you said.

I think the price increases that you're expecting for 2Q are based on stuff that you sold in distribution channel last quarter.

Can you talk about new business that you're booking into Q2?

What's the direction of pricing, and what's the magnitude of price increases for that business?

In general, as we've discussed before, prices started strengthening in the fourth quarter.

As we entered the first quarter, it was largely booked, and so you didn't see the impact of that yet.

As we enter the second quarter, again, a significant amount of that backlog is in place, so we expect to be flat to slightly up and really not until Q3 do you see a significant bump from the ASPs.

Without giving precise numbers, that's -- the direction is upward now through at least Q3.

In terms of what you guys consider significant -- low single digits, I guess?

Yes, low single digits.

It's reasonable to expect that you can get to a situation like we had in 2003 and 2004 where the numbers start going up 1%, 2% a quarter.

It will never be a substantial number for quarter-on-quarter.

With regard to capacity constraints, could you talk about what has the lead times up at the over 12-week level now and what's changed since last quarter that's caused the lead times to go a little higher at this point?

Yes, primarily the constraint in the industry and for us, as well, is in packaging and test.

Basically under-investment there for several years by the industry has led to some constraints.

That is where most of the capital is going to relieve those constraints and, again, mostly driven by cell phones and consumer business, you know, is the significant portion of that.

Craig Ellis, Citigroup.

Thanks.

Keith and Don, good job in the quarter.

I don't know if you mentioned this in the prepared comments, I just hopped on, but the quarter came in a little bit stronger, and the outlook was a little bit stronger than the pre-announced results.

What accounts for the incremental strength either geographically or by specific applications?

We are actually seeing some continued strength in the handset business, and the backlog continues to firm there.

And in several areas around consumer we're seeing a stronger second quarter than we saw in the first quarter -- so a little pickup there.

The rest of the markets -- computing normally doesn't have a significant pickup in Q2 but that's also firming for us.

So, really, we're seeing a continued firming in the second quarter, but we believe the third quarter is shaping up quite nicely for growth, as you would expect in the consumer and computing areas.

Given some of the reports we've seen out of distributors so far in the quarter, are you concerned at all that order intensity is getting a little bit overheated, or do you remain comfortable with the pace of orders relative to the end demand you can see out there?

We continue to use a model that is a sell-through model, and so we work with our distribution partners to make sure they have the appropriate amount of inventory.

So that's a very nice way of saying we work to make sure we don't get out of control on an inventory.

I'm sure many of them would love to get more product than they're getting, but with the work we do together, we're able to keep that well under our model.

So the simple answer is I can't speak for all of distribution, but for at least us, we look at the backlog trends they've got, the resale rates they've got, and are very comfortable with the orders that we're shipping.

Steve Smigie, Raymond James.

Something you could comment a little bit on what you think the impact of foundry revenue might be in the quarter in terms of revenue and gross margin assuming it gets completed in May and then what it might look like for subsequent quarters?

It's Donald here, Steve.

We probably shouldn't go into that detail because we're still shooting to close the deal mid-May.

But that could be how certain [unintelligible] each has our approval and things like that, and it could result in minor delays.

There's a lot of complex things we need to do.

We need to look at the cost, how we allocate it between operating expense and [cogs], what the run rates of expenses are.

And also, for the first two quarters, our agreement with the seller, LSI, is that we will charge them for completion of the work rather than deliver finished wafers under the supply agreement.

The completion of the work is included in the $200 million sole supply agreement.

So it's a little more complex.

I think that we need to get accountants customer, we need to be able to take control of the facility, and run the numbers.

So I think that we will not, certainly, be in a position to give the detail that will required for that by mid-May.

But what we do stick to is that what we said was this will be EPS-neutral this year and should be EPS-positive next year, and we're still comfortable with that, and we're very comfortable with this acquisition, which we are confident will fit in very well into our strategy, going forward.

If I could ask another question -- I've seen mentioned some better pricing coming through the mix and all that coming in Q3.

What does that imply about gross margin gains for Q3 and into Q4?

When you're in that [unintelligible] you only recognize it when you printed it, and the question was specific for what was giving rise to the greater-than-expected increase on the deferred income part of the balance sheet, and as a good soldier I was explaining precisely what was causing that.

Normally, that should cycle through the middle of the year, certainly in the second half.

But there's other factors that impact margin in the second half, and it's our habit to give [gauges] from one quarter out, and we don't intend to do that.

You can draw your own conclusions what that will do for the second half, but there can be other factors that can impact the gross margin in the second half.

And what can be said is it's good to have a large deferred income on the balance sheet.

That's something that should be positive as we are going forward.

Mark Edelstone, Morgan Stanley.

Nice quarter.

Thanks, Mark.

I have two questions for you, Keith.

The first one was -- you mentioned that the Japanese market was weak because of the ATE, and that just surprised me, given the fact that things are so tight on the back end.

Any color you can share on that?

Yes, I don't know if you remember -- we talked about the industrial market being a bit up more than normal in the fourth quarter.

My guess there, Mark, is they actually did some forward ordering on components in Q4 and are now absorbing those.

So that's really not a comment on their end markets but more a comment on their order patterns on us.

I certainly appreciate the discussion you provided on order activity and how that compares to end demand, but certainly there seems to be a lot of evidence that there is over-ordering going on in the industry at large.

Maybe you guys can really control it and not over-ship at the end of the day, but if you had to venture to guess today, do you have a sense for how much over-ordering you might be seeing or how much you are trying to hold back on shipments to prevent an inventory [plan] from happening similar to what took place in 2004?

Again, this is not precise, but it is an estimation of what I see going on in the overall marketplace.

I believe if the industry was able to ship everything that the distributors would want today, inventories would probably be growing another week, week and a half over what I think is appropriate for the market growth.

Richard Grasfeder, Janney Montgomery.

I was wondering if you could break out any of the gross margins or at least tell how they're trending for your different segments -- the standard analog MOSFET ECL?

Donald here -- we generally don't go to great detail, but I think it's obvious that the ECL is a small business where there's very high margins, there's well over 50%.

The corporate average is around 35%, and the standard components under that, and the analog business is over that.

I think the standard components goes up to 30%, and the analog business approximately 40%.

So that's the kind of color we give on gross margins.

And on your GreenPoint reference designs, can you comment what you're seeing both from customers and out in the marketplace as far as preference for power management systems for either discretes and integrated solutions?

Yes, there are definitely transitions going on out there today.

The traditional approach of discretes is very comfortable for a lot of the power supply designers, but they're not able to get the efficiencies they need, reduce the size the way they would like and, frankly, get some of the heat out of the system with those traditional approaches.

So there is transition going on.

It will not happen as fast as we would like, of course, but that transition is definitely happening, and so we are seeing the big companies pick up on these new architectures and approaches, and I would really expect to see an acceleration of that as we exit this year and get into next.

Romit Shah, Lehman Brothers.

It looks like some of the strong cyclical trends that you guys are seeing today are offsetting some of the seasonal weakness that you typically see in the first half of the year.

Keith, has your mix profile changed materially or should we still think about the second half of the year accelerating over the first half?

I would think we would still see a stronger second half than the first.

If you just look at the profile I gave you earlier, we really don't expect cell phones to accelerate half-on-half.

We think that it's going to be a more steady growth market there, but the consumer piece will still have a very strong first-half, second-half seasonality as it usually does, and we believe computing will also display that this year.

So really not a significant change if you're looking one quarter at a time, but half-to-half, we still think that the computing and consumer segments will have the normal seasonality.

This is Donald here -- you know, all of us have got a lot of questions coming in about the level of business, the level of orders.

I think it's fair to say that we correctly stated that there would be some seasonality in the first quarter over the fourth quarter.

It was a little bit less, as you mentioned.

We were only there 2% instead of 3 or so that we thought we could be.

The number that we're showing is approximately 5% growth Q2 over Q1.

We are very comfortable that that is totally sustainable by the underlying demand from the market, as Keith mentioned, and particular some of the consumer products are growing -- the demand is growing for them in the second quarter.

So we believe that our guidance is totally supported by the underlying business trends that we have identified in the market, and that there is still good reason to believe that our business will continue to grow in the second half over the second quarter.

Keith, your comment about the disties wanting more inventory is interesting, because on their conference calls they're saying the suppliers would like us to carry more inventory, and it makes things interesting.

Is there anything you guys are doing differently in terms of managing or scrubbing your backlog for real orders?

Yes, we do a couple of things.

One, we're working pretty close with our key partners there to understand their backlog, and what portions of that are committed to the major OEM contracts where we have design wins that are identified.

We also work with them very closely, since we're on a sell-through basis, to understand their weeks on hand, and so that they don't get overstocked on any one item.

So we've got a lot of line items, and there's a lot of very intensive IT tools being used to kind of keep everything in check.

So I do feel pretty good that we work with them close enough that this can be managed and certainly believe, as we told you, this quarter it turned out the way we thought it would.

I think we can continue to have a reasonable prediction capability going forward.

Chris Danely from J.P. Morgan.

This is [Famee Poro] for Chris Danely.

A couple of questions.

First, could you comment on the blended utilization rates?

How did they track from the fourth quarter to the first quarter?

They were up a bit quarter-on-quarter.

Let me pull some more precise numbers here and say that in Q1 we believe we're pretty close to a blended 90%.

Could you put some color on where do you expect the utilization rates to be in the second quarter assuming you also have the Gresham Fab under ON Semi?

Excluding the Gresham Fab, we would expect them to be very similar to the first quarter, and in the Gresham Fab, again, until we've closed that, I'm not sure I can give any kind of predictions.

Ramesh Misra, C.E. Unterberg.

In early April when your Gresham Fab deal was announced, you had suggested that you would expect a gross margin hit on account of the Gresham Fab.

When do you expect that to happen?

Is that Q3, Q4 kind of timeframe or potentially later?

We said "modest," and, again, we will be giving fuller color on that.

I think the word we gave you was "modest" for this year.

I think that's the key word that we would hold by.

Obviously, it's a dynamic world; there's other things happening.

There's a compensating positive out there that could theoretically come.

It also depends on the allocation to operating expense because we will be doing extensive R&D work in the Gresham facility.

We will reorganize our whole process technology R&D to focus around Gresham.

So there's a lot of moving parts in there, Ramesh, and that's why we will take time to figure out where they're going to fall, but I think you've got to understand the over-reaching principle as it will be EPS-neutral, and if any impact on gross margin, it should be no more than a modest hit -- so just to restate what we previously stated, but it may take us some time to completely get comfortable and get our auditors comfortable with the allocation of costs and give a detailed, updated guidance.

Okay, so I totally understand you don't wish to incorporate contribution from Gresham at this point, but could revenues from there really be zero in Q2?

No, revenues will be positive.

If we close the deal in Q3, revenues will be zero in Q2.

But as we see today, as we stated in our earnings, walking towards closure in May, we will have additional revenues in Q2.

But these revenues will be slightly under the normal run rate as for the first few months we complete the existing work in process and what we would count in revenue would be the completion fee of the work in process rather than the total foundry manufacturing agreement.

This is all part of the deal we have with LSI.

I am sorry to bore you or bug you with so much details, but I hope you get some color on why I can't give you a specific number at this moment in time.

Our final question comes from Craig Berger, Wedbush Morgan.

Good afternoon, this is actually Jim Schneider for Craig.

Sorry if I missed this before, I just hopped on the call, but, Keith, can you give any commentary on the status of any design wins you have in the gaming consoles, either handheld or the consoles themselves and what the dollar content is?

Yes, we've been giving content in the gaming consoles.

One of the ones that is up and running today is close to $7 per console.

We are, of course, present in the portable game stations as well.

That content tends to be something less than $2 per unit and, of course, we're anticipating ramp at Sony in the second half but numbers are a little too early to sign there.

We do believe we've got some great analog wins, but at this point we're going to hold off until all of that gets frozen.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may all disconnect, have a great day.