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 morning.
My name is Cynthia, and I will be your conference operator today.
At this time, I would like to welcome everyone to the ON Semiconductor Second Quarter Earnings Release Conference Call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
(OPERATOR INSTRUCTIONS.)
Thank you.
I would now like to turn today's call over to Ken Rizvi.
Please go ahead, sir.
Ken Rizvi - IR, Director
Thank you, Cynthia.
Good morning, and thank you for joining ON Semiconductor's Second Quarter 2008 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 following this conference call, along with our earnings release for the second quarter of 2008.
The script for today's call is posted on our website and will be furnished via a Form 8-K filing.
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 separately on our Website in the Investor Relations section.
In the upcoming quarter, we will present at the Morgan Stanley Conference on August 26th and the CitiGroup Technology Conference on September 3rd.
During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the Company.
The words "believe", "estimate", "anticipate", "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, Form 10-Qs 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 second quarter 2008 results.
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 second quarter of 2008 were a record $562.7 million, an increase of approximately 33% from the first quarter of 2008.
During the second quarter of 2008, the Company reported GAAP net income of $44.6 million, or $0.11 per share on a fully diluted basis.
Second quarter 2008 GAAP net income included net charges of $50.5 million, or $0.12 per share on a fully diluted basis, from special items.
Second quarter 2008 non-GAAP net income was $95.1 million or $0.23 per share on a fully diluted basis.
On a mix-adjusted basis, average selling prices in the second quarter of 2008 were down approximately 2% from the first quarter of 2008.
The Company's gross margin in the second quarter including special items was 34.1%.
Non-GAAP gross margin in the second quarter of 2008 was 41.4%.
While we beat our revenue guidance for the second quarter, our revenues were negatively impacted by approximately $2 million and cost of sales was reduced by approximately $5 million for a net gross margin benefit of approximately $3 million from the alignment of AMIS into ON Semiconductor's accounting policies.
This cost reclassification was due to ASIC development costs which have been classified into operating expenses following ON Semiconductor's accounting policies.
As a result, our second quarter 2008 operating expenses were slightly higher than our May guidance by approximately $5 million.
Adjusted EBITDA for the second quarter of 2008 was a record $133.7 million.
We exited the second quarter with cash and equivalents of approximately $321 million.
At the end of the second quarter, total days sales outstanding were approximately 42 days.
ON Semiconductor total inventory was approximately $328 million or approximately 81 days.
Included in our overall inventory is approximately $27 million of inventory associated with the write-up to fair value from our recent AMIS acquisition.
Distribution inventories were down to approximately 10 weeks at the end of the second quarter.
Cash capital expenditures during the second quarter were approximately $29 million.
Now, I would like to turn it over to Keith Jackson for additional comments on the business environment.
Keith?
Keith Jackson - CEO
Thanks Don.
Now, for an overview of our end markets.
During the second quarter of 2008, our end market splits were as follows: Computing represented approximately 23% of second quarter 2008 sales.
Automotive represented approximately 21% of second quarter sales.
Consumer Electronics represented approximately 15% of sales.
Industrial, Military and Aerospace represented approximately 18% of sales.
Medical represented approximately 4% of sales.
Communications, which includes wireless and networking, represented approximately 19% of sales.
Overall, sequential sales growth and end market splits were impacted by our recent acquisition of AMIS.
We did, however, see sequential strength in ON Semiconductor's historical Automotive, Computing, Wireless and Industrial end markets.
The strong sequential growth in the Computing and Wireless end markets was driven by continued penetration of our Vcore controllers with key computing OEMs and ODMs, and increased penetration of our protection devices and audio amps with four of the industry's five major wireless customers.
During the second quarter on a direct billings basis, no ON Semiconductor product OEM customer represented more than 6% of sales.
Our top 5 stand-alone product OEM customers were Continental Automotive Systems, Delta, Hella, Motorola and Sony-Ericsson.
On a geographic basis, excluding ON Semiconductor's historical manufacturing services revenue, our contribution from sales in Asia represented approximately 57% of sales.
Our sales in the Americas, approximately 22% of sales, and Europe represented approximately 21% of sales during the quarter.
Looking across the channels, excluding ON Semiconductor's historical manufacturing services revenues, sales to the distribution channel were approximately 37% of second quarter sales.
Direct sales to OEMs represented approximately 52% of sales and the EMS channel represented approximately 11% of sales.
During the second quarter, ON Semiconductor revenues broken out by our divisions were as follows.
The Custom and Foundry Product Group represented approximately 30% of second quarter sales.
The Standard Products Group represented approximately 23% of sales.
The Automotive and Power Regulation Group represented approximately 20% of sales.
The Computing Products Group represented approximately 19% of sales.
And the Digital and Consumer Products Group represented approximately 8% of sales.
We will publish the quarterly revenue, gross margin and operating margin break-out of these divisions in our Form 10-Q filing for this quarterly period.
Now, I would like to provide you with some details of other progress we've made.
In the second quarter of 2008, we achieved record quarterly revenues and adjusted EBITDA.
The integration of AMIS and the CPU Voltage and Thermal Products Group from Analog Devices continues to move ahead positively.
In addition to our recently closed acquisitions, we announced the signing of a definitive merger agreement to acquire Catalyst Semiconductor in an all-stock transaction.
By leveraging ON Semiconductor's world-class operational capabilities and supply chain, we believe these acquisitions will help enable ON Semiconductor to continue delivering increased value to our shareholders, customers and employees.
From a Computing end market perspective, our acquisition of Analog Devices' CPU Voltage and PC Thermal Monitoring business significantly expanded our SAM opportunities, and we are beginning to see the incremental revenue leverage to our business.
As the latest generation of notebook and desktop computers begin to ramp for the back-to-school and holiday season, we continue to see strong booking and backlog trends for our efficient products and solutions for desktop and notebook computing.
Our beginning backlog for the computing end market in the third quarter was strongly ahead of normal seasonality, driven by our continued penetration of key accounts with our controllers, audio amplifiers and MOSFET products.
We believe the Computing end market represents the largest opportunity for sequential growth for the Company.
We believe we have the leadership position for desktop controllers and have set our sights on growing our share in the notebook controller market.
While many North American auto manufacturers struggled, our overall automotive business performed well in the second quarter of 2008.
We continue to gain traction with wins in telematics and infotainment applications, and the AMIS acquisition strengthens and balances our position in the automotive market globally.
In the second quarter, we experienced strong automotive growth in China and Europe which offset slower sales in North America.
While the Automotive design cycles can be very lengthy, we are beginning to see strong interest from leading automotive customers who now understand the value we deliver with our unique capabilities to offer a broad portfolio of products including motor control, sensor, MOSFETS, discretes, ASICs and CAN/LIN products.
The Communications end market, which includes the Wireless end market and the Networking end market, was fueled primarily by the growth of our wireless products.
In particular, we saw strong penetration of our over-voltage and ESD protection devices during the second quarter and expect to see continued strength in these products in the third quarter.
New design wins for MOSFETs, audio amps, filters and analog switches also remain strong.
In the recent launch of the leading next generation multimedia smartphone, we averaged approximately $1 per device.
In the Consumer end market, we are expecting to see sequential growth from gaming consoles as our customers ramp production for back-to-school and the holidays.
We currently have approximately $4 to $5 and $1 to $2 of content, respectively, on two of the three major game console platforms.
Our products and solutions continue to win awards within the industry.
EE-Times Magazine readers recently awarded our PureEdge low jitter clock management device with the Ultimate Product of the Quarter Award for its capabilities as a crystal oscillator clock module replacement.
We also recently won the Green Power Product Award from a leading Chinese Electronics Magazine.
A leading Chinese Mobile Phone Manufacturer also awarded us the Best Supplier Award for the second year in a row.
Now, I would like to turn it back over to Donald for other comments and our forward-looking guidance.
Donald?
Donald Colvin - CFO
Thank you, Keith.
The third quarter 2008 outlook.
Based upon product booking trends, backlog levels, manufacturing services revenues and estimated turns levels, we anticipate that total revenues will be approximately $570 million to $585 million in the third quarter of 2008, an increase of approximately 1% to 4% from the second quarter of 2008.
Backlog levels at the beginning of the third quarter of 2008 were up from backlog levels at the beginning of the second quarter of 2008 and represent over 90% of our anticipated third quarter 2008 revenues.
We expect that average selling prices for the third quarter of 2008 will be down approximately 2% sequentially.
We expect cash capital expenditures of approximately $40 million in the third quarter and total cash capital expenditures for 2008 of approximately $120 million to $130 million.
For the third quarter, we expect GAAP gross margin of approximately 37.5% to 38.5%.
Our GAAP gross margin in the third quarter will be impacted from, among others, expensing of appraised inventory fair market value step-up associated with the acquisition of AMIS.
We also expect non-GAAP gross margin of approximately 41.5% to 42.5%.
Non-GAAP gross margin excludes special items of approximately $23 million.
For the third quarter we also expect total GAAP operating expenses of approximately $150 million to $156 million, with GAAP SG&A expenses at approximately 12% of sales and GAAP R&D expenses of approximately 12% of sales.
Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges which total approximately 2% of sales.
We also expect total non-GAAP operating expenses of approximately $130 million to $136 million, or approximately 23% of sales.
Non-GAAP operating expenses exclude special items such as the amortization of intangibles, restructuring, asset impairments, stock-based compensation expense and other charges of approximately $20 million.
We anticipate that net interest expense and other expenses will be approximately $10 million for the third quarter of 2008 and cash taxes to be approximately $2 million.
In the second quarter, we received a benefit to cash taxes from refunds and reduced cash payments which improved second quarter non-GAAP earnings by approximately $3 million or approximately $0.01 per fully diluted share versus our May guidance.
As a reminder, we have over $800 million of net operating losses in the US and expect our cash taxes to average approximately $3 million to $4 million a quarter for the next two years.
Taking into account the build-up of our global cash balances over time and potential cash repatriation, our projected long-term effective tax rate should be approximately 10%.
Our current fully diluted share count is approximately 410 million shares based on stock prices below $10, which includes approximately 397 million of common stock and approximately 13 million shares related to options, convertibles and RSUs.
Further details on share count and EPS calculations are provided regularly in our 10Qs and Ks.
With that, I would like to start the Q&A session.
Operator
(OPERATOR INSTRUCTIONS.) Craig Ellis, Citi.
Craig Ellis - Analyst
Congratulations, guys.
Keith, can you just go into a little bit more detail in terms of where you think the Company is with respect to notebook and desktop market shares you transitioned over to Montevina.
Keith Jackson - CEO
So, we have a very strong position in the desktop arena; I would say that the dominant market share at this point.
On the notebooks, as they go into the Montevina, we are expecting significant gains.
We've had design wins with many of the leading Asian manufacturers there.
So, at this point, certainly not a majority share but, again, growing very, very rapidly in the late third and fourth quarter as that starts to ramp.
Craig Ellis - Analyst
Okay.
And then, can you also just recap some of the milestones that we should be looking at in the back half of the year with respect to the AMI integration and the manufacturing operations?
Keith Jackson - CEO
Okay.
We will continue, obviously, in progress, if you will, and integration.
We did an early start, if you will, from a savings perspective, moving very quickly.
The rate of change will not accelerate in the second half but, again, we are expecting to be in that-- leaving the year in that $50 million a year range of synergies.
The bulk of the activities, frankly, from a manufacturing perspective, the next tranche of all of that, again I'll remind you, is in factory closedowns which will be ongoing through 2009.
Craig Ellis - Analyst
Okay.
And then, switching over to Don.
Don, at the analyst day, you talked about a target gross margin model of around 45%.
Obviously, we've got an uncertain backdrop, but the Company seems to be tracking well towards that.
Can you talk about your competence in hitting that by the end of next year?
Donald Colvin - CFO
Hey, Craig.
Good morning.
Everything we said at the analyst day still stands, remember with the 45% gross margin, something like that, 22% or so operating income.
What we have been very public on is starting in the first quarter of this year, we were faced with some very serious economic headwinds-- currency depreciations of an unparallel nature, big inflation in commodity costs like oil.
All of that has now been absorbed in our business model, and I think we have been very vocal and public in saying that's cost us a lot, something in the 300 basis points of margin.
When I look into the second half, Craig, I don't see the same headwinds.
So, included in our second quarter actuals is the absorption of these headwinds.
So, there is no relief from that.
The currencies are now moving slightly positively and, as we all know, oil is heading in the right direction as are other commodity prices.
So, it's now we don't have these headwinds, and we can now go back to working on our business ourselves.
Obviously, there's some macroeconomic issues, but we still maintain that that 45% gross margin and a 22% operating income is the targets that we're marching towards.
And we're now happy that we don't have that horrible economic depreciating currency, high inflation and commodity.
That's absorbed, and we can now look forward to working on it and growing our revenues to make it happen.
Craig Ellis - Analyst
Thanks, guys.
I'll jump back in the queue.
Operator
Tristan Gerra, Robert W.
Baird.
Tristan Gerra - Analyst
I think you mentioned on the call that DC sales were about 37% which will be, I think, a five-year low for you at least.
Could you talk about the dynamics there and, in particular, relative to the previous quarter and compare that with the activities at OEMs?
Keith Jackson - CEO
Sure.
So, actually, our DC sales continued nice sequential growth and that's buried a little bit in the percentages.
The difference is our AMIS business is largely OEM.
In fact, the majority of it is.
There's very little distribution business, so our mix has changed as in an overall company.
So, it's really not reflective of a slowing [disti] presence; quite the contrary.
But, it does reflect the new mix of the Company with the predominantly OEM basis from AMIS.
Tristan Gerra - Analyst
Okay.
And what would be the expectation of utilization rates at Gresham, let's say in Q1 of next year when your foundry business potentially winds down?
And also, do you have any comment regarding potential migration to Gresham from outsourced manufacturing in the second half?
Keith Jackson - CEO
So, we actually would not expect to see any decrease in Gresham utilization as the LSI contract expire going into next year.
We are offsetting all of those decreases with ON Semiconductor manufacturing growth.
So, I would expect utilization rates in Q1 to be equal or greater than where we're headed here in Q4, which is up from Q2 and Q3.
Relative to other things coming in, we are now qualified with several of our high-running devices from outside foundries, and that ramp is underway.
And so, again, it'll continue on a quarterly basis going forward.
So, I mean, I think the message is pretty much what we've been giving you all along, a nice continued ramp of the internal products, offsetting any drop in the LSI.
Tristan Gerra - Analyst
Okay, great.
And then, just a quick last one.
Given the ramp that you've talked about in notebooks, what is your expectation in terms of notebook as a percent of PC revenues by year-end?
Keith Jackson - CEO
I don't have an exact number, Tristan.
My guess is that our mix will move from a very dominant position, say 80% plus desktop to something in the 70% desktop range, possibly a little less than that.
It wouldn't be 65%, but it'll still be a moving target by the fourth quarter.
It's really '09, I think, when you'll get the bigger change.
Tristan Gerra - Analyst
Great.
Thank you.
Operator
Romit Shah, Lehman Brothers.
Romit Shah - Analyst
A good quarter, guys.
Could you provide a breakdown of the revenues by the core ON, foundry and AMI?
Donald Colvin - CFO
Sure.
I think what we stated is AMI revenues run something like $150 million, and the foundry business runs about $13 million.
Romit Shah - Analyst
Okay.
And Don, do you expect the LSI foundry revenue to go to zero starting next year?
Donald Colvin - CFO
No, no.
I think we've had a great working relationship with LSI.
And we did anticipate that that business would go down, but it certainly will not go to zero.
And we are very happy to continue to support them at still a meaningful level per quarter.
Their business is on a kind of portal for this year, running at approximately $10 million per quarter range.
And I can emphasize the point that Keith made, that we are doing other things in the other business that is ramping in Gresham.
Next year, we expect that $10 million to go down to a number that is probably more in the mid-single digits, but I don't have much more information on that.
But, we will continue to supply LSI, I'm sure, for several years, and we've been very happy with the relationship there.
Romit Shah - Analyst
Okay.
And then, if I could, just lastly on the cash balance.
It looks like your cash balance could improve quite significantly in the second half.
Is it conceivable to assume that the cash balance could be north of $500 million exiting the year?
And can you talk about some of the priorities at this valuation?
Donald Colvin - CFO
Now, $500 million is maybe a little bit of a stretch.
But, when you can turn in $130 million or so EBITDA, you take off $40 million for CapEx and maybe another $10 million for interest expense, you can generate $70 million to $80 million per quarter.
So, two times that's $150 million, plus $330 million is $480 million.
So, I mean, I think between $450 million and $500 million rather than north of $500 million for the year-end is something that looks like a reasonable basis.
But, as you know, we don't give forecasts.
But, I mean, everyone can calculate from an EBITDA perspective what cash we generate.
The use of that cash, we're still debating.
And I think we have clearly stated that these are uncertain macroeconomic times, so we're a little bit more conservative because you don't really have access to many alternative sources of financing once you've spent your cash.
But, we have been warming to the idea of paying down some of the bank debt, and that certainly would be accretive from an earnings perspective and also give us, from a corporate finance perspective, a lot more flexibility and allow us to consider other shareholder-friendly actions like dividends.
And so, these are the kind of things we're studying.
Also, we continue to have a share buyback program, but talking to investors, it looks like the kind of the feedback we've had over the last several months has been more in telling us to look more in the debt pay down area rather than aggressively pursue share buybacks.
So, that's the kind of things we're thinking about.
No decision has been made, and we continue to have an active discussion with our Board on these matters.
Romit Shah - Analyst
Thank you.
Operator
Chris Danely, J.P.
Morgan.
Chris Danely - Analyst
Thanks, guys.
Hey, Donald, can you talk about your GAAP gross margin trends for the next few quarters as some of these charges start to roll off?
Donald Colvin - CFO
Sure.
But, it gets very complex.
I've got to similarly when we work on those old inventories-- remember that the step-up of inventory, that's the biggest delta between our GAAP and non-GAAP, Chris.
But, we do expect to see-- just like I showed on the non-GAAP, we do expect to see the GAAP improving, and indeed it will improve any more as we go forward.
And so, if you look at the trends, certainly we should be comfortably in the 40s, in the 41% type range, as we roll off the step-up in inventory.
But, again, it's difficult for me to be more specific because I don't have a perfect algorithm to tell me when this inventory step-up will finally roll off.
Hopefully, at the end of the third quarter, we will have expensed most of it, and the main difference between GAAP and non-GAAP will be the non-cash base stock.
And we will update at next quarter's earnings something that will allow us to get a better handle on that.
So, I apologize, but it's just one of these complexities that we're faced with when you do an acquisition.
Chris Danely - Analyst
Sure.
But, the inventory should be definitely gone by Q1 of '09?
Donald Colvin - CFO
I think it's like nuclear waste.
I think there will be a long half-life.
So, I wouldn't be surprised if we've still got some by the middle of next year.
It's just the nature of things.
But, it will start to become immaterial by the first quarter of '09, Chris.
Chris Danely - Analyst
Great.
And then, how about options expense, the trending up?
Can you-- do you think it-- or do you expect it to continue to trend up, or will it plateau at a certain level?
Donald Colvin - CFO
An excellent question.
We have a relatively modest expense, but it has increased, and we put in place several programs to identify certain actions to facilitate the integration of AMI.
And that has resulted in a temporary increase in non-cash base stock compensation.
So, we see a one-off bump in Q3.
And from then on, it will go down in Q4, and we don't see any other major catalysts to drive it up.
So, we came in about $8 million of expense in the second quarter.
It will probably rise to something like $11 million in the third, and then go back down to something like $9 in the fourth.
And so, it's currently a little bit negatively impacted by lots of activity that Keith referred to, related to the AMI integration.
Indeed, I would just, one aside, that right now we have a lot of efforts going on, hundreds of people in the Company working on this integration.
So, that's something that is negatively impacting our costs until we get a harmonized fusion over IT systems planned for the first quarter of next year.
Chris Danely - Analyst
And believe me, I know all about integration over here.
Last question, can you or Keith just comment on your overall thoughts on the end markets out there and the general semiconductor environment?
Keith Jackson - CEO
Sure.
We continue to see a pretty good PC environment driven by evermore affordable low-end models which, from our perspective, drives more units and that's a pretty significant thing for us.
It's really a unit-based economy that we've got in the consumer realm.
Handsets, again, continue to look stronger as we get into the third quarter.
And of course, the gaming boxes are going to be much stronger as we get into the third quarter versus the second.
So, those three areas continue very strong.
Automotive, our content continues to go up, and we've performed quite well.
We do think the end markets will continue to see more softening on a global basis.
But, again, the wild card there is the rate of change on the content that we've got.
From our perspective there, from a Company perspective, we will continue to see some pretty good performance.
But, market-wise, we're expecting more softening.
Chris Danely - Analyst
Great.
Thanks, guys.
Keith Jackson - CEO
Okay.
Operator
Steve Smigie, Raymond James.
Steve Smigie - Analyst
Great, thank you.
On your comments about your dominant position on the desktop core power regulation, is that-- by that do you mean you think have more share than the second largest person, or you have over 51% and--?
Keith Jackson - CEO
--Yes.
No, it's just largest share.
Steve Smigie - Analyst
Okay.
Keith Jackson - CEO
I'm not giving any specific percentages, but it's-- we do think we're the largest share there at this point.
Steve Smigie - Analyst
And how do you measure that?
You just look at your units shipped based on overall industry--?
Keith Jackson - CEO
--Yes.
Steve Smigie - Analyst
Okay.
And then, any comments on what you think about position in [Cappella]?
Keith Jackson - CEO
I mean, we've got a pretty reasonable position there.
And again, everything we've got from a design win perspective says we will be picking up share in all of the active platforms.
Steve Smigie - Analyst
Okay.
And then, lastly, just on the strong computing outlook that you have.
Is that mostly the fact of all the share that you've been capturing?
You also mentioned that the smaller or less offensive units you've got taken off.
How much of it is that versus maybe some seasonal trends?
Are you seeing basically seasonal demand, or is it just talking--?
Keith Jackson - CEO
--Yes.
No, we're seeing much stronger than seasonal, Steve, and that's what we're basing the share gains on.
Certainly, computing has been strong this year.
I think it will remain strong in the third quarter.
But, the trend we're seeing there are much stronger than seasonal.
Steve Smigie - Analyst
Congratulations on the nice numbers.
Keith Jackson - CEO
Okay, thanks.
Operator
John Pitzer, Credit Suisse.
John Pitzer - Analyst
Yes.
Good morning, guys.
Congratulations.
A couple of questions.
Donald, first, 90% booked for the September quarter.
What is the usual sort of backlog coverage going into the quarter?
How does that compare?
Donald Colvin - CFO
We've obviously got three elements in there.
You've got your AMI business.
You've got your manufacturing services, and you've got your core ON, which is the historical business including the ADI.
And so, I think it's fair to say the core ON is actually very strong.
It's actually higher than we had in previous quarters.
And the AMI business, there's still some turns there, and that's actually performing well.
And then, the manufacturing services is usually 100% or so covered.
So, I would say that looking at all the different elements, it's actually stronger than we would normally expect.
John Pitzer - Analyst
And then, Keith, I just want to understand--.
Donald Colvin - CFO
--On the other hand, these are times when things are-- some things can change.
And so, it's a couple of things.
I wouldn't read anything special into that.
It's just that maybe customers are being a bit slow in placing orders and place more orders a bit later or whatever.
So, I wouldn't see that as a precursor of any fantastic news.
I just think it's just an observation that it's strong.
John Pitzer - Analyst
And then, Keith, just to get some clarification on your PC comments.
The area of biggest sequential growth in the September, it sounds like that's more desktop-related than notebook, and that the Montevina is really a late Q3 going into Q4 event for you guys?
Is that fair?
Keith Jackson - CEO
I think that's true.
I mean, obviously, there's some ramps, but we're seeing the major volumes trending later in the quarter on the Montevina rather than earlier.
John Pitzer - Analyst
And then, just relative the tradeoff between desktop and notebook for either dollar content or margins, and then conversely if PCs continue to be the growth driver, as PCs grows a percent of the overall business, is there a mix improvement or a margin improvement because of that?
Keith Jackson - CEO
We do have a little better margins on the notebook side, although our desktop margins, again, are at or above corporate averages.
So, there are certainly no negatives with increased desktop business.
So, yes, the mix going to notebooks will improve the overall numbers, but we don't degrade corporate performance with increased desktop.
John Pitzer - Analyst
And then, PC is strong.
Handsets, it sounds like they're picking up in September.
Where are the offset?
Is it more the industrial type end markets where the second half normally slows, or what's showing up sequentially down to the--?
Keith Jackson - CEO
--Well, we're expecting-- yes, we're expecting to see, as I mentioned earlier, a little deceleration in the automotive market.
And again, I can't quantify that completely on a Company basis because our content's been going up.
But, market-wise, we definitely are expecting more than seasonal slowing in automotive.
But, they do seasonally slow in the third quarter as they do model changeovers, but we think this will be more than seasonal on a global basis this year.
And so, I'd say that's one of the biggest negative headwinds.
John Pitzer - Analyst
And then, the last question.
Donald, as you look at these charges coming over the next few quarters, are these predominantly non-cash charges, or are there any cash charges that are lingering out there?
Donald Colvin - CFO
Mainly like things like step-up in inventory and, obviously, non-cash base stock, amortization of intangibles, these are all non-cash, and we spell these out in much detail.
We published our Q, too, this morning as well, so you'd get full visibility.
There is some residual cash charges, but these are mainly in the low single-digit millions.
And our anticipation is that we don't see any big cash charges above the current level for the next few quarters.
John Pitzer - Analyst
Perfect.
Thanks, guys.
Congratulations.
Operator
Ramesh Misra, Collins Stewart.
Ramesh Misra - Analyst
Good morning, guys.
The first question is in regards to your utilization level at Gresham, and what are the near-term trends over there?
Keith Jackson - CEO
Again, we're continuing to trend upwards.
We're still less than 50% at this point, but expect to be crossing over that in the near future.
But, again, they're continuing to trend up, I would say on a sequential basis something like a percent or two here in the third quarter and fourth quarter, and then accelerating as you get into '09.
Ramesh Misra - Analyst
Okay.
In regards to your non-GAAP gross margin improvement last quarter, can you give us a sense of where that improvement came from?
How much of it was organic?
How much was it from ADI or AMI?
Donald Colvin - CFO
I think, again we spelled out, we got benefits from the AMI gross margin which is, as we know, much higher than ON's.
They're doing first on [Axis] and enjoy much higher gross margins.
We also an unexpected benefit which we spelled out due to the reclassification of some of their costs because we harmonized our accounting policies.
So, I think it came in roughly in line with what we thought, and we got a little uplift from reclassification.
So, that's now all incorporated in our model.
And also, last quarter, we still had some currency negatives and cost negatives, which we also incorporated in our model.
So, right now, that looks like it's stable.
No more reclassification.
Currency and costs look like they're stabilizing.
And so, the main driver as we go forward is just the top-line growth and mix changes.
And so, hopefully, we can get a much cleaner perspective on a go-forward basis, and we'll try our best to simplify that.
Hopefully, we won't have the same-- as I said to Chris Danely, the same amortization or the step-up of inventory going into the fourth quarter, and we'll have a cleaner outlook, a much closer GAAP and non-GAAP gross margin guidance when we go into the fourth quarter at the end of this quarter.
Ramesh Misra - Analyst
Good.
In regards to your Catalyst acquisition, one, I wanted to ask you about your commentary about it being EPS-positive in about a year, even though Catalyst has been profitable.
And then, the other thing was what other synergies or what are some of the reasons that drove to acquire Catalyst?
Donald Colvin - CFO
Well, obviously, the deal is not done, so we don't want to comment too much.
But, it just kind of fits with our overall portfolio expansion.
We have purchased two businesses recently, and it's fair to say that we're very happy with how those performed.
And they have been very accretive to our market penetration and our results, even on gross margins shows.
And so, we see this business as being another one that can integrate well into our infrastructure.
We'd rather not comment too much on the specifics because the deal is anticipated to close at the beginning of the fourth quarter.
And from our experience, we know that we can get some traction on revenue and we can save on costs, particularly in the back end and the front end costs.
And a lot of their products will fit into our factories, in general, and Gresham in particular.
I don't know if you want to add anything, Keith.
Keith Jackson - CEO
No.
I mean, I think that is very true.
I'll let you guys again look at some of the earnings side relative to when it's going to break even.
Certainly, you need to comprehend the cash impact for the Company as well.
So, net/net, we don't want to comment more at this time, but we do think it will be very similar to the add-in models we did with our power business from ADI.
Donald Colvin - CFO
And I think the key thing as well is we're not talking anything like the same size of acquisition as AMI.
I mean, you're talking about much, much smaller that represents in that 2% of enterprise value for ON.
And so, I mean, it's a great thing, but it's not a huge acquisition for ON.
And so, it doesn't take too much to get that earnings mutual and stock to become positive.
Ramesh Misra - Analyst
Got it.
A final question from me.
In regards to pricing, can you give some qualitative commentary as to what segments were worse or better overall?
Keith Jackson - CEO
Well, there's not a lot of difference between the segments.
There's enormous pressure on all of our customers and on us, as you know, with increasing inflation and currency movements.
And so, the pressure has been steady.
It's not unreasonable.
It's been kind of flat at the 2% per quarter range for some time now.
So, I'd say there's no real delta vectors that we've seen yet.
But, frankly, there's no sector that's immune and no sector that's worse than the others.
Ramesh Misra - Analyst
Okay, great.
Thanks very much, guys.
Operator
Kevin Cassidy, Thomas Weisel Partners.
Kevin Cassidy - Analyst
Hi, thank you.
With-- just the inventories dropped again this quarter.
I wondered if you could comment on that and compare that to your lead times?
Keith Jackson - CEO
Yes.
So, our lead times have moved up a little bit, but they're still well inside our targeted range, if you will, of less than 10 weeks.
But, we are seeing a little stretching.
We usually do see a little stretching going into the third quarter which tends to be a little more active if you look at total units shipped.
We are a bit leaner in the disti channel than we normally would be in the second quarter.
That is reflective of the distribution model now getting more sensitive to inventories, and they're doing a little bit better planning job.
But, it's also representative of the fact that, quite frankly, we have managed that a lot tighter.
So, a simple answer is we're a lot leaner.
I think it benefits the overall model.
And it has not dramatically distorted our lead time picture.
Kevin Cassidy - Analyst
Okay.
And no concerns of not being able to react to a market uptick?
Keith Jackson - CEO
I have no concerns of that at all.
I would welcome a market uptick to challenge us.
Kevin Cassidy - Analyst
Okay, thank you.
Operator
(OPERATOR INSTRUCTIONS.) Craig Berger, FBR Capital Market.
Craig Berger - Analyst
Hey, guys, a nice job.
Thanks for taking the questions.
Can you just remind us, with your new company profile, what's your typical 4Q seasonality look like?
Keith Jackson - CEO
I don't know that I'm going to be able to exactly give you a number, but we typically have been kind of flattish.
The acquisitions we made appear to be kind of flattish.
So, again, we give guidance one quarter at a time, Craig.
But, I don't have any reason to believe the profile has changed dramatically.
Craig Berger - Analyst
Okay.
When does the ADI business get brought in-house?
Keith Jackson - CEO
Okay.
So, it is being brought in-house right now.
Much of the assembly test is now inside our factories going into Q3.
And from a wafer fab perspective, again, we pretty much purchased the '08 wafers we need from our agreement with ADI, and it'll be beginning of '09 that you'll see the ramp in the ON supply chain.
Craig Berger - Analyst
And so, that's going to drive a utilization boost aggression--?
Keith Jackson - CEO
--Yes--.
Craig Berger - Analyst
--In the first quarter?
Keith Jackson - CEO
Yes, it'll help-- I don't know how much in the first quarter because, again, I don't know all of the inventory profiles that we've got there that have to be burned off, but certainly by the second quarter.
Craig Berger - Analyst
With respect to operating expenses, should we be thinking about are there cost opportunities from your Q3 guidance levels?
Should be thinking flat, up or down, as we move through time?
Donald Colvin - CFO
I think I've given some comments on that.
As we move through time, we don't expect it to increase.
And we've got some additional cost now related with the integration.
We've had to bring in consultants and the fusion of our IT systems.
These costs will go down.
So, we have given our long-term model, which is 22%.
Obviously, it's a function of the revenue, but that's a model we're working for.
And we're running higher than that now.
We haven't added any OpEx.
It's just that there's been certain-- as I mean, the currencies in the second quarter didn't help.
The reclassification helped our gross margin, but increased our OpEx.
So, we're just digesting these things.
So, you shouldn't expect it to rise as a percent, and we will work to get it down to the targets that we exposed at the analyst day.
Craig Berger - Analyst
How much is the quarterly run rate on those incremental systems spends?
Donald Colvin - CFO
I think we're looking at-- and these are just approximate numbers.
We've probably got like $2 million or $3 million.
Craig Berger - Analyst
Can you talk about share buyback?
Where are you?
What are your plans?
Donald Colvin - CFO
I mentioned that talking to investors-- and we try to listen, and we get very positive feedback-- is that that's not as top a priority, they tell us, and that they have encouraged us to look more at debt reduction and consider things like dividends.
So, that's where our actions are.
But, we haven't made no definitive-- a decision, and we will obviously listen to what investors tell us and discuss with our Board.
But, that's the direction.
I'd say Ken and I had some very frank inputs from investors, and they were certainly leaning more towards pay down of debt and deleveraging the balance sheet, and consider instituting a dividend, and encouraging us to look in that area rather than aggressively pursue a share buyback.
Craig Berger - Analyst
The last question, can you just remind us about your plans to close or consolidate facilities?
How many facilities over the next, say, year and kind of when?
Donald Colvin - CFO
Well, we continue to do that, and we invoked that at the analyst day.
And so, in parallel with the ramp in Gresham, we are saving costs by rationalizing our sub-skill facilities.
We closed a facility last week here in Phoenix, COM 1, which we've had for 20 years.
And so, these are long, but painful exercises.
We have a facility that we purchased with AMI, Fab 9, and we've already announced that that will be consolidated into Fab 10 at the end of next year.
And we've also announced a peer-standing facility will close at the end of next year.
So, we have an active program of site rationalization as we ramp a lot of our activities in Gresham and move R&D activities mainly towards Gresham.
So, all these things are continuing, and we will get the benefit of these as we outlined in the analyst day.
Operator
Patrick Wang, Wedbush Morgan.
Patrick Wang - Analyst
Hey, guys.
Good morning.
Just a quick question on that Fab 9 consolidation into Fab 10.
When is that supposed to happen?
Keith Jackson - CEO
So, Fab 9 we're targeting to close by the end of next year.
And so, it isn't one of these things where everything runs fine, and then it just disappears one day.
There is a ramp and cutover plan.
So, we'll see savings in advance of that, but the full closure end of '09.
Patrick Wang - Analyst
Ballpark in cost savings on that?
Donald Colvin - CFO
I think every time you close a facility, what happens is you get some savings upfront, and you're usually talking in the $2 million or $3 million range per quarter for a small facility like Fab 9 and something in the $4 million-ish per quarter range for a bigger facility like [Pirestani].
Patrick Wang - Analyst
And I think last quarter, I mean, you guys were talking about a target inventory to be under 85 days this quarter.
I think you guys are just ahead of that.
Is that just a function of the shift in inventory from your disti to your balance sheet?
Keith Jackson - CEO
No, actually not at all.
I mean, basically, again, we're-- inventory down, and the 81 days we talked about earlier includes all of the inventory write-ups.
So, we're actually quite a bit leaner than we were.
Donald Colvin - CFO
The way we only count our revenue on a sell-through basis, and so-- on balance sheet actions with disti.
We look at our internal inventory, which Keith mentioned, and they're-- on an apples-for-apples basis, we've reduced it.
But, also what is encouraging (inaudible) and that's something that puts us in a very good position because they haven't built up a lot of inventory in the third quarter.
Operator
Sergei De Silva, Coffman Brothers.
Sergei De Silva - Analyst
Good morning, Keith, Don.
A good job on the quarter.
So, in terms of the linearity of the orders, can you talk about the orders placed on you as you saw through 3Q and into 4Q, whether they were as expected, or were there any trends you saw?
Keith Jackson - CEO
Yes, there's no-- they're as expected.
They're pretty typical for our 3Qs and relatively linear.
Sergei De Silva - Analyst
And flowing into 4Q, it's progressing as expected as well?
Keith Jackson - CEO
And right now, 4Q is projecting as expected.
Sergei De Silva - Analyst
Great.
And then, on gross margins, Don, perhaps, do you expect a steady track toward the target if revenue kind of holds up, or is there some inflection point given some of the restructuring activities you're doing?
Donald Colvin - CFO
I don't think nothing is ever steady in this business.
I mean, you can think one quarter at a time, and a quarter is a history in itself.
So, it's just keep at it.
There's obviously seasons, and we have seasonality in our business.
And so, it's not a smooth and steady progress, but I think what's nice now is that at least these currency headwinds and costs and all that, that seems to be abating dramatically looking into the third quarter.
And so, it's just up to us to run our business, which basically means grow our top-line and keep our expenses under control.
And that's something we can do, and we know how to impact.
We don't-- it's not easy for us if you've got 20% currency appreciations and doubling in oil prices and freight costs overnight.
That makes it very difficult.
So, these elements are now incorporated in a model and behind us.
But, I mean, it's going to be a bumpy road because of the seasonality, but we're still confident we can get to the target.
Operator
Gus Richard, Piper Jaffray.
Gus Richard - Analyst
Yes, thanks for taking my question.
Just quickly, how do we think about R&D and SG&A for the current quarter?
Is the increase split between the two, or any guidance there?
Donald Colvin - CFO
We give guidance of 12% for each of them in the script.
Gus Richard - Analyst
Okay.
And then, thinking about the reclassification of ASIC expenses, is that sort of an ongoing $5 million a quarter from cost of goods to R&D?
Donald Colvin - CFO
No, that's-- no, these are-- that was just a one-off harmonization--.
Gus Richard - Analyst
--Um-hmm--.
Donald Colvin - CFO
--So, it was explaining why our OpEx were a bit higher and our gross margin was at the high end.
And we give the details.
It was a $3 million gross margin impact, but a $5 million cost impact.
So, that's now all incorporated in our guidance going forward, so that's built into our base model.
It was just a harmonization of accounting policies.
Gus Richard - Analyst
Okay.
But, it's a reclassification of NRE?
Is that the way to think about?
Donald Colvin - CFO
Correct, yes.
Gus Richard - Analyst
Okay, all right.
Thanks so much.
Operator
Ladies and gentlemen, thank you for participating in today's ON Semiconductor Second Quarter Earnings Release Conference Call.
That does conclude today's conference.
You may now disconnect your line.