使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day, ladies and gentlemen and welcome to the ON Semiconductor First Quarter Earnings Conference Call.
(OPERATOR INSTRUCTIONS).
As a reminder this conference call is being recorded.
I would now like to introduce your host, Mr.
Ken Rizvi, Director of Investor Relations.
Sir, you may begin.
Ken Rizvi - IR Director
Thank you, Matt.
Good afternoon and thank you for joining ON Semiconductor's First Quarter, 2007, 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 first quarter of 2007.
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.
In the upcoming quarter we will present at the Baird Growth Stock Conference on May 8th and the JP Morgan Technology Conference on May 22nd.
We will also be hosting our Analyst's Day on May 4th in Scottsdale, Arizona, which will be webcast on our website at www.onsemi.com.
During the course of this conference call we will make projections or other forward-looking statements regarding the 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, changed assumptions, or other factors.
Now let's hear from Donald Colvin, our CFO, who will provide an overview of the first quarter of 2007.
Donald.
Donald Colvin - CFO
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 2007 were $374.2 million, as anticipated, a decrease of approximately 7% from the fourth quarter of 2006.
Total revenues during the quarter included approximately $347.8 million of product revenues and approximately $26.4 million of manufacturing services revenue.
During the first quarter of 2007 the Company reported net income of $54 million, or $0.18 per share on a fully-diluted basis.
First quarter, 2007, results also included approximately $3.3 million associated with stock-based compensation expense.
During the fourth quarter of 2006 the Company reported net income of $87.4 million, or $0.27 per share on a fully-diluted basis.
On a mix-adjusted basis, average selling prices in the first quarter of 2007 were down approximately 2% compared to the fourth quarter of 2006.
The Company's gross margin was 36.5%, down approximately 280 basis points compared to the fourth quarter of 2006.
This was due to lower capacity utilization associated with manufacturing services and lower pricing.
Product margins were 39.9% during the first quarter of 2007 compared to 42.1% during the fourth quarter of 2006.
At the end of the first quarter the sales outstanding were approximately 42 days.
Internal inventories increased slightly on a days basis to approximately 82 days and distribution inventories in dollar terms remained relatively flat at approximately 11.5 weeks.
Cash Capital expenditures during the first quarter were approximately $49 million.
During the first quarter of 2007 the Company refinanced its senior secured bank facility, which reduces the interest rate associated with the facility by 50 basis points.
It also extended the maturity to 2013, and this increases the Company's financial flexibility, enabling over $400 million for restricted payments such as stock repurchases.
Now, I would like to turn it over to Keith Jackson for additional comments on the business environment.
Keith?
Keith Jackson - CEO
Thanks, Donald.
Now for an overview of our end markets.
During the first quarter of 2007 we saw sequential revenue growth in our automotive, industrial, and networking end markets, in line with seasonality.
Automotive grew by approximately 8% on a dollar basis and represented approximately 17% of our first quarter, 2007, product sales.
The industrial end market represented approximately 14% percent of our product sales during the first quarter of 2007, up approximately 4% sequentially on a dollar basis.
And the networking end market represented approximately 7% of the first quarter product sales, up approximately 11% sequentially on a dollar basis.
Our consumer-driven end markets of computing, consumer electronics, and wireless saw some seasonal headwinds in the first quarter, as anticipated.
Our computing end market represented approximately 22% of the first quarter, 2007, product sales, while the computing end market was down sequentially; it was up by approximately 16% from the first quarter a year ago.
As we look at the remainder of 2007 we are expecting to see strong growth from this end market as our VCORE and MOSFET design wins begin to ramp.
Our consumer electronics end market represented approximately 21% of the first quarter product sales and was down sequentially, primarily due to a slower build of game consoles and MP3 players during the first quarter.
The wireless end market represented approximately 19% of our product sales during the quarter, and was down sequentially, as a few of our customers reduced their build plans in the first quarter to be more in line with the end consumption of handsets.
During the first quarter, on a direct billing basis, no product OEM customer was more than 5% of product sales, and our top five product OEM customers were Continental, Delphi, Delta, Motorola, and Siemens.
Our top manufacturing services customers was LSI, as anticipated.
On a geographic basis, on contribution this quarter from product sales in Asia, excluding Japan, were down 200 basis points and represented approximately 58% of product sales.
In line with the seasonality we saw with our automotive and industrial end markets, our product sales in the Americas increased by approximately 300 basis points and represented approximately 22% of the first quarter product sales.
And product sales in Europe increased by 100 basis points to represent approximately 17% of product sales during the quarter.
Sales in Japan were down 200 basis points, or 3% of product sales.
Looking across our channels, sales to the distribution channel increased by approximately 100 basis points, to approximately 52% of product sales.
Direct sales to OEMs increased by approximately 200 basis points to approximately 39% of product sales and the EMS channel decreased by approximately 300 basis points to 9% of product sales, primarily due to a slowdown in game console and handset builds during the quarter.
We also estimate that approximately 20% of the sales to the distribution channel were third-party logistical services for the EMS channel.
During the first quarter product revenues, broken out by our divisions were as follows.
The Standard Products Group represented approximately 30% of product sales.
The Automotive and Power Regulation Group represented approximately 34% of product sales.
The Computing Products Group represented approximately 23% of product sales.
And the Digital and Consumer Products Group represented approximately 13% of product sales.
We will publish the quarterly revenue, gross margin, and operating margin breakout of these divisions in our 10-Q filings.
Now I'd like to provide you with some details on the progress we've made.
In the Automotive End Market we're beginning to see traction with our R&D efforts, specifically in the infotainment and safety arena.
We recently began production on two key programs in the first quarter of 2007 centered on our audio amplifiers, MOSFETs and filter products for GPS navigation systems, and our [XX] drivers for automotive lighting.
We believe these design lines have the potential for over $20 million of revenue over the next few years.
While we saw some seasonality in our consumer end market in the first quarter, related to fewer post-holiday game console builds, we continue to expand our content in the overall game console market.
In the first quarter we began shipping, in volume, our full-featured, integrated, multiphase controllers for this market.
We are expecting this product to continue ramping into the back half of 2007, in line with our expectations for back to school and holiday game console builds.
In the wireless end market, we continue to expand our product portfolio and account penetration.
New products in audio application and log switching, MOSFETs, USB, and battery protection continue to gain traction at four of the five major cell phone manufacturers.
These new products accounted for over 15% of our wireless end market revenues during the first quarter of 2007.
Another new product that should continue ramping throughout 2007 is our AC/DC Over Voltage Protection IC, which has been designed into platforms for three major cell phone manufacturers.
In Computing end market, we continue to see strong growth of our Power MOSFETs, Pulse Width Modulators, Power Factor Controllers, and Multiphase Controllers.
We've recently expanded our product portfolio for the server market and introduced two new dual edge multiphase controllers for servers and for VR10, VR11, and parallel VID-based desktop personal computers.
These devices join our existing portfolio of dual edge controller solutions we introduced in 2006 and enable more energy efficient and compact VCORE power solutions.
Our GreenPoint energy efficient power supply solutions and our GreenLine energy efficient power products continue to meet and exceed the emerging global standards for power efficiency.
We recently released four GreenLine Power Factor Correction Devices that expand our leadership position of the highly efficient power products.
We also introduced our GreenPoint 40 Watt Printer Power Supply Reference design that provides exceptionally low standby power and active mode efficiency.
Our GreenPoint Power Supply solutions continue to gain traction with our customers due to their high power efficiency, ease of implementation, and lower total design cost.
Now I'd like to turn it back over to Donald for our other forward-looking guidance.
Donald Colvin - CFO
Thank you, Keith.
Second quarter, 2007, output.
Over the last two months we have seen a modest strengthening in our bookings rate and believe that this points to the first quarter of 2007 representing the bottom of the current cycle.
Based upon product booking trends, backlog levels, anticipated manufacturing services revenue and estimated turns levels, we anticipate that total revenues will be approximately $375 million to $385 million in the second quarter of 2007.
We also anticipate that approximately $25 million of our total revenues will come from manufacturing services during the second quarter.
While backlog levels at the beginning of the second quarter were slightly down from backlog levels at the beginning of the first quarter, they still represent approximately 85% of our anticipated second quarter, 2007, revenues.
We expect that average selling prices for the second quarter of 2007 will be down approximately 1% to 2% sequentially.
We expect a product gross margin in the second quarter to be approximately flat with the first quarter of 2007, and also expect our manufacturing services gross margin to be similar to the first quarter of 2007.
For the second quarter we expect Cash Capital Expenditures of approximately $40 million.
For the second quarter we also expect Total Operating Expenses of approximately 19% to 20%, with SG&A Expenses of approximately 11% to 12% of Sales, and R&D Expenses of approximately 8% of Sales.
And we anticipate that Net Interest Expense will be approximately $7 million for the second quarter of 2007 and Taxes to be approximately $2.5 million.
We currently expect Stock-Based Compensation Expense on a pre- and post-tax basis to be between $3 million and $4 million in the second quarter of 2007 and this expense is included in our guidance.
Based on the stock price as of the end of the first quarter our fully-diluted share count would be approximately 301 million shares in the second quarter of 2007, which includes approximately 290 million of common stock and approximately 11 million shares related to options and our convertibles.
The fully-diluted share count can change, based upon a change in our stock price.
Further details on share count and EPS calculations are provided regularly in our 10-Qs and 10-Ks.
We will also post a table outlining potential fully-diluted share count changes on our website in our Investor Relations section, based on various stock price assumptions.
With that, I would like to start the Q&A session.
Operator
Thank you, sir.
(Operator Instructions)
Our first question comes from Michael Masdea of Credit Suisse.
Your question please?
Amit Suraf - Analyst
Good afternoon.
This is Amit Suraf calling in for Michael Masdea.
I was wondering if you could give us your turns for the last quarter and then also comments on what kind of turns you have baked in for your 2Q guidance or how that is relative to what you achieved in the first quarter?
Keith Jackson - CEO
So, Amit, Keith Jackson.
Our turns, as we mentioned there, would need to be approximately 15% for the second quarter.
We actually have had a very strong April and have booked the majority of that prior to this conference call; so actually feeling there's very good momentum to allow that to happen.
Typically, we need more like 10%.
It's a little higher this time, but, again, I think it was very much about the inventory corrections going on in Q1, and at this point about 15 is good news.
Amit Suraf - Analyst
Okay.
That sounds good.
And then can you just talk about overall customer mentality, especially during the last month of March, where it sounds like you had a little bit of a pick up?
And then specifically comments on the wireless end market and what gives you confidence that might come back in the second quarter and second half?
Keith Jackson - CEO
Yes, we did see building backlogs during March.
Specifically the bookings did pick up from prior in the first quarter, and then we've seen that actually pick up even further here, in April.
That is pretty much a broad-spectrum look, not just wireless, but it is also true in most of our wireless customers.
There are still a few that are not showing signs of pick up, but I would say, in aggregate, that sector is starting to book more materials.
As we look specifically into Q3, our bookings rate into Q3 are significantly ahead of where we would expect them at this point in time.
So, again, I think people are changing the mentality from reducing their internal buffer stocks and using very short lead time orders, to starting to plan for their new platforms in Q3, and that's beginning to show up in our order patterns.
Amit Suraf - Analyst
Sounds great.
Thanks.
Operator
Our next question comes from Chris Caso of Friedman, Billings.
Your question please?
Chris Caso - Analyst
Hi.
Thanks.
I wonder if you can talk a little bit about gross margins and perhaps what was the makeup of the change in gross margin for the last quarter and what your expectations are for this quarter.
It looked like the incremental gross margins were pretty strong in the first quarter, but it doesn't look like that'll be the case in the second quarter.
Could you give come color on that?
Keith Jackson - CEO
Yeah, I'll give some color.
Second quarter, if you look at the first quarter/second quarter transition, our factory utilization really doesn't change that much.
Even with a little bit more sales, when you net out from an activity basis there's not a dramatic change.
So, in essence, our cost reductions are having to offset the ASP erosion that's going on in the marketplace.
We, of course, give guidance looking at the range of revenues and the range of ASP degradation, and so in that formula, if you will, it leads us to at least at this point guide kind of flat-ish, because there's just not a major driver in any direction, Chris.
Chris Caso - Analyst
Okay, that's fair.
And then I guess, as you go into the third quarter then -- typical seasonality, do you expect to start ramping the fabs as you go into the third quarter then?
Keith Jackson - CEO
Yeah, we would -- I mean we're still expecting significant in sales in the second half, that will lead to significant changes in the factory loadings.
And so, at that point, we would expect the margins accelerate again; very, very similar to what was experienced the last time we went through these cycles.
Chris Caso - Analyst
Okay, and if you could just comment a little bit about the ASPs right now.
What are you seeing with regard to pricing, and I guess there's a lot of noise our there with regard to pricing in different segments.
Are you seeing anything out of the ordinary?
And if so, could you give some color on that?
Keith Jackson - CEO
No, we actually have seen, clearly as people were reducing inventories in Q1 that it was a little more competitive than we saw back in Q4.
But now that we've entered April, it seems that the pressure's not quite as strong as it was in the first quarter, and hence our guidance for erosion is a little less.
So, again, I think we're seeing pretty normal behavior.
The closer we get to an upturn the less pressure there is on the pricing.
Chris Caso - Analyst
Okay, great.
Thank you.
Donald Colvin - CFO
And just a -- and Chris, Donald here -- a little bit more color on a few points I think that are of note.
One is that we came in slightly ahead of our guidance in gross margin.
Our mix has been good.
If you look at year-over-year on our core business, our gross margin is up nearly 500 basis points, and that has been driven by mix.
And so we see a pretty health gross margin situation now as we head into the stronger second half.
So, yes, it has come down a little bit over the fourth quarter, but we anticipated this, we gave you to that on the last call.
And it also is significantly up on a year-over-year basis.
Chris Caso - Analyst
Okay.
It's good color.
Thank you, Don.
Operator
Our next question's from Chris Danely of JP Morgan.
Your question, please?
Chris Danely - Analyst
Hey, thanks, guys.
Just to peer into the second half a little bit.
What -- can you get any more specific on what sort of typical sales growth and margin growth we should be expecting?
And also, do you expect your SG&A and R&D to remain in those same percentage ranges?
Keith Jackson - CEO
So -- from a sales perspective, Chris, we typically see something like 10% unit growth second half over first half.
And, again, I see no reason to believe that won't be happening this year.
We've got some very good program designs that'll be ramping in the third quarter.
So I do think this will be another good year for kind of half on half consumer driven behaviors.
From a margin perspective, I may let Donald opine a bit there, but again, as we look at historically that margin -- the factory utilization does have a significant impact in as well as the sales rise the ASP erosion tends to decline.
And the net of those things typically is somewhere between a two and four point rise in a half.
I'll let Donald talk about that.
Donald Colvin - CFO
I think that's about on with what I would think, Keith.
I know some analysts have been skeptical about the negative impact of pricing on our margins, but I think we've found that we're able to meet or even beat our own guidance.
And that's why I was specific to remind Chris Caso, his last question that year-over-year we're up just over 500 basis points on our core business.
And our core business we came in just under 40% in Q1 and we're guiding to 40% in Q2.
So we have, as Keith mentioned, built a good foundation and as we grow our revenue in the seasonally stronger second half, the fall through from that addition revenue will help increase our gross margin in way in which Keith mentioned, certainly 200 to 400 basis points is the range I would expect.
And also we do not expect to increase our Operating Expense in line with the increase in revenue.
So we should expect a pretty nice acceleration in APS as go into a stronger second half.
Chris Danely - Analyst
All good news there.
And then, Donald, on the inventory, should we expect days to remain flat-ish in Q2 and then go down in the second half as sales accelerate.
Donald Colvin - CFO
We are not planning to grown our inventory in the second quarter, Chris.
Our inventories were essentially flat in the first quarter as we adjusted our manufacturing activity in line with the business outlook.
And as we grow our revenue in the second half you should expect for days to be flat and coming down.
Chris Danely - Analyst
And, last question, between the various end markets, which do you think would grow the most, relatively, in the second half?
Keith Jackson - CEO
Well.
Boy, that's tough.
I mean we're going to see basically computing and consumer, I believe, outpace the wireless sector this year in second half growth.
I expect all three to grow, but if you're looking for the strongest, I would expect those two to be showing the most strength.
And, of course, part of that is the computing business has been down a bit longer and we do some -- some of the impacts, with new model changes, et cetera, having a bigger impact on that sector rather than some of the others.
Chris Danely - Analyst
Okay.
Thanks, guys.
Operator
Our next question's from Ramesh Misra of C.E.
Unterberg, Towbin.
Your question, please?
Ramesh Misra - Analyst
Good afternoon, guys, and thanks for taking my question.
My first question was in regards to gross margins, where you've actually done a pretty remarkable job.
Now, looking longer term, where do you see leverage over there coming from?
I mean other than just slightly improved factory loadings?
So I guess what I'm kind of getting at is -- I mean is the 40% kind of range pretty much the top on your product portfolio--?
Keith Jackson - CEO
Yeah, Ramesh, a couple of pieces of color there.
You know there's a continuous bottle -- battle between our cost reductions and ASP erosions, and I think we've demonstrated we can control that fairly well.
As Donald mentioned earlier, the real gains comes with our mix changes, and so that will continue to be a fairly strong factor.
So if you look at it peak to peak, trough to trough, the difference that we've been able to drive in the business the last few years has been in -- in increasing our mix of the higher margin analog products, as a percent of our total.
And I see that continuing.
We talked a lot over the last couple of years about our 40% model, and we're now working to kind of a 45% model for the business, and it's really a mix driven change.
As we get more and more of our designs into these high efficient, power applications, they use more analog content and less discrete content.
Ramesh Misra - Analyst
Okay great.
In regards to your long-term debt -- now clearly, with the refinancing and all that's there's really no pressure on you to pay it back -- but all the same, where does -- where does that debt repayment kind of fall in your list of things to do?
Donald Colvin - CFO
I think we raised additional convertible debt in the fourth quarter and we used that to buy back stock.
We have a debt gross there of just over $1.1 billion net -- just under $1 billion.
I think it's fair to say that we are relatively comfortable with the convert.
We have a little bit of bank debt, $175 million, costing us approximately 7%, so that's obviously a rich target of opportunity.
We've got flexibility in our bank facility.
The company generates cash, and so we will look at different options.
Clearly we have bought back stock, that's something that we will consider, if it makes sense.
Or we will pay down bank debt at 7% interest if that makes sense.
So we have, I think, been very dynamic and decisive in buying back stock, increasing debt, and refinancing the balance sheet.
So we will continue to do that.
With the opportunities we're looking at being primarily pay off the bank debt, like we did in the first quarter, or buy back stock, like we did in the fourth quarter.
Ramesh Misra - Analyst
Okay, so where I was actually trying to get on that, Donald, was while clearly your valuations are quite a bit lower than some of your peers, and I wanted to get your sense on whether that's because of that debt?
I mean--?
Donald Colvin - CFO
I think the investors in banks have told me that we should look at ourselves not just on our market account basis, but on an enterprise value basis.
And that makes a lot of sense.
The average interest rate on the converts is 2%.
So there's a good Arbitrage if you buy back top dollar than pay off convertibles with premiums required to take them out.
So we will generate cash and I mentioned we will use it in the most stockholder-friendly manner possible.
But I think there's still lots of usage for it in the near-term in the ways I say, either buying back stock or in paying down expensive bank debt.
Ramesh Misra - Analyst
Okay.
All right, thanks, guys.
Operator
Our next question is from John Barton from Cowen and Company.
Your question, please?
John Barton - Analyst
Thank you very much.
Keith, if you could, just a bit of update on where you stand with respect to the Gresham Fab, as far as moving your wafers in-house, how that's going?
Are you happy with it?
Overly happy with it?
And then just an update if, indeed, out on the horizon there is another partner to put wafers through the fab, please?
Keith Jackson - CEO
Okay.
We are actually quite pleased with the progress being made in installing our processes in the factory.
That is -- we knew when we bought it -- the long lead item to getting it ramped.
I think we've mentioned before that we brought up our Trench MOSFET processes very quickly, and are ramping those to about 1,000 wafers a week as we speak.
And I see that number coming up pretty much as we planned, as we go through the second quarter.
So actually very good performance from the factory there.
The next big hurdle for us is our analog process installation.
That is, indeed, coming along very well as -- in addition to the Trench MOSFETs.
And, again, we had planned on ramping those analog processes there at the end of this year, and that still looks like it's on target.
So, overall, I think the factory is executing quite well.
The variables relative to total loading, with the external partners that we've got in there we continue to look.
We have landed a couple of good pieces of business that will start ramping toward August/September, but from a significant announcement, we still are not prepared to make one.
John Barton - Analyst
On the topic of backlog coverage, you kind of went to the metrics, 85% covered versus I guess your historic norm of about 90%.
And then you also commented that Q3 of this year is already filling in backlog better than typically, two quarters out.
Help me, if I could, just understand those dynamics.
Is the higher turns component this quarter just a function of shorter lead times and customers not needing to put the backlog out.
But Q3 being a ramp of new products for the customers, as well as yourself, and wanted to give you visibility?
I mean how do I trade them off?
Keith Jackson - CEO
Yeah, I think -- I mean you've analyzed it correctly.
So what there in Q1 is when availability is perceived to be readily there, people are going to hold off their orders to see if they can get better prices.
So they're going to continue to try and squeeze the market for better prices, they'll place short lead time orders.
The other phenomenon, though, is for our consumer-driven markets, they all have new platforms that ramp in the third quarter for that seasonality.
And those new platforms, they are very concerned about this environment continuing; i.e.
they don't think it will continue, so they're starting to put orders on us out much further than we normally experience.
So on one end you've got very short lead time orders being placed, and at the other end you've also got them placing orders kind of further out.
It's kind of left this middle couple of months without a lot of activity here, so we continue to believe that this will be a great turns quarter.
And then, by the time we get to Q3, we'll probably have most of that in place.
John Barton - Analyst
A final question, if I could, on the topic of ASPs, down 1% to 2% couple of quarters in a row.
Am I fair in assessing that as a normal pricing environment and do you can consistently offset that in costs, the way it appears as though you have with gross margins tracking flat at constant run rates?
Keith Jackson - CEO
Yeah, hitting 2% in the first quarter actually is pretty good.
That is when all the annual negotiations are done and they come through.
So that tends to have a bigger than normal quarterly impact.
So, we do feel it's kind of normal.
And then that does taper off again as the markets pick up in volume.
So we think -- again, we track these pretty carefully -- we've got the opportunity to be at a more ASP neutral zone toward the end of the year, when the demand is back up again.
So, overall, it's been a fairly healthy ASP environment.
John Barton - Analyst
Thank you.
Operator
The next question is from [Kevin Cassidy] of Piper Jaffray.
Your question, please?
Kevin Cassidy - Analyst
Thank you for taking my question.
In the computing market, as you expect that to grow in second half '07, can you give some more granularity, is it desktop or notebook?
Keith Jackson - CEO
Well, both.
I do expect growth in both of those areas.
From a company specific perspective we now have notebook product offerings that we did not have last year.
And those design wins are ongoing, and so we do expect some growth there, in notebooks.
But on the desktop side, as well, as that mix continues to the new platforms we expect to see a pick up there.
So the answer is both for us.
Kevin Cassidy - Analyst
Okay.
Thank you.
Operator
Our next question is from Louis Gerhardy of Morgan Stanley.
Your question, please?
Louis Gerhardy - Analyst
Say, on the improved visibility in the second half, do you have a 12-month backlog number you can share with us?
Keith Jackson - CEO
No.
We actually don't even track 12-month backlogs.
Louis Gerhardy - Analyst
Okay, just on the VCORE products you mentioned.
Can you give us a sense of what type of market share you might have and how it -- when it starts to ramp?
Keith Jackson - CEO
That's a dynamic number.
We think we're gaining on a quarter by quarter basis.
What we do know is from a design win and platform basis, we should have a significant jump in Q3 as some of the current models start phasing out and the new ones gain dominance in the manufacturing of our motherboard customers.
So, I'd be looking for that piece of the business to go up at least $5 million quarter-on-quarter as we get to Q3.
Louis Gerhardy - Analyst
Okay.
Great.
And then if I could just ask you about the cost savings you'll get from Gresham, and maybe if we use the Trench MOSFETs you mentioned.
How much can you reduce your costs by moving the products there?
Donald Colvin - CFO
Hi, this is Donald, Louis.
I think there's four legs to the table for Gresham, and I'll answer your question in a 'round about way, but we are obviously very focused on -- on filling Gresham and working toward it, as Keith mentioned.
But we've four sources of revenue or cost.
One is the existing foundry business.
They take a (pay) foundry business with LSI, which lasts until the middle of next year.
Two is the introduction of new processes that Keith mentioned, the analog process and the filter processes that we're doing.
Three is the transfer in there of stuff we're sub-contracting, which we're continuing to do.
And four is the cost reductions we have in our overall manufacturing base that we can facilitate because of the Gresham capability.
So Gresham is integrated into our manufacturing base and because we have the opportunity to develop of run advanced MOSFETs there, for instance, we can save costs elsewhere, because Gresham is the most advanced facility in our manufacturing infrastructure.
So, we have models to do that.
We will be going into more details, but we are encouraged and excited about the progress we're making on all four of these fronts.
Louis Gerhardy - Analyst
Thank you.
Operator
Our final question is from Steve Smigie of Raymond James.
Your question, please?
Eason Lynn - Analyst
Hi, this is Eason Lynn calling in for Steve Smigie.
My first question is on utilization rates.
I might have missed this, but were they roughly flat during the quarter?
Keith Jackson - CEO
Yes, they're roughly flat from last quarter, in the low to mid 80s.
Eason Lynn - Analyst
So, okay, low to mid 80s.
And we see this going up maybe into the higher 80s in Q2?
Keith Jackson - CEO
Actually, going to be fairly close to that level, as well.
Not much change in Q2.
The big change will be in Q3.
Eason Lynn - Analyst
Okay, great.
And I know we talked a little bit about lead time (inaudible).
What exactly were they last quarter and in Q1?
Keith Jackson - CEO
I'm not sure that they've changed dramatically.
Something in the eight (inaudible).
The problem is it's a product dependent thing and so on a mix basis it's really not changed in the last quarter or so.
Eason Lynn - Analyst
Okay.
And my last question is on the networking market -- end market.
It looks like it's growing quite a bit this quarter.
If you could talk a little bit more about the growth and if you've any significant design wins coming out for that market?
Keith Jackson - CEO
Yes, well, that is a seasonal basis.
We normally expect it to come up in the first quarter.
I think what's driving some of those numbers for us now is we've actually picked up some good position in some of the China-based communications companies.
And those numbers are starting to flow through.
So we are seeing some strength in Asia in that networking segment.
Eason Lynn - Analyst
Okay, great.
Thank you.
Operator
Our next question is from Romit Shah of Lehman Brothers.
Your question, please?
Romit Shah - Analyst
Thanks.
Sorry, guys, if you've asked this question.
But, Keith, can you just give us a sense of your game station business and what type of visibility you have in the PS3 and X-Box heading into the summer.
Keith Jackson - CEO
Yes, without getting specific on any of my customers individually, I will say that the gaming builds here in the second quarter will be down from the gaming builds in the first quarter, if you look at that market in aggregate.
So I think there's very little question that they are burning off some inventory.
They're all doing revs of their first generation platforms, and so they want to kind of clean the shelves out before they start ramping the new developments in the third quarter.
So, again, our expectation at this point is for a fairly weak second quarter of builds, followed by a significant pick up in Q3.
Romit Shah - Analyst
And -- and based on -- I guess -- what you're saying, would you expect your -- your higher content program to come back a little faster than the other one, or (inaudible)?
Keith Jackson - CEO
That one's really tough to tell, to be honest with you.
The real story, as you know, has been the quick adoption on the Nintendo platform, which we've been able to get into their -- their AC/DC supply, which we were not in at the initial release.
So I'm actually expecting our biggest pick up to maybe come from the third supplier.
But of those two, I don't know which one will pick up the most, but I think they both will, indeed, pick up nicely in Q3.
Donald Colvin - CFO
I'm sorry, this is just one point.
We all hope to see you all at the Analyst's Meeting, but let me ask you -- you put your finger on a good point and that is we've had some pretty significant headwinds at the beginning of the year.
And especially in some of the handset business and the gaming business, and despite that we're still able to produce 40% margin in our core business.
So we are actually encouraged because these headwinds will shortly probably become tailwinds, as Keith said, as the gaming starts to build in the second half and the other activity picks up.
We've managed to produce what we think is pretty respectable results despite what hasn't been the most supportive end market environment.
Sorry to interject there.
Romit Shah - Analyst
Yeah, thanks for that, Don.
Just -- last question.
I know you guys were sampling some new notebook products earlier in the year and late last year.
Should we expect any sort of contribution in the second half, assuming seasonality holds true to historical form?
Keith Jackson - CEO
Yes, we should start seeing revenues in those kind of late Q3.
Romit Shah - Analyst
Okay.
Okay, great.
Thank you.
Operator
Ladies and gentlemen, this concludes the question and answer session.
Thank you for participating in today's conference.
You may now disconnect.
Good day.