安森美 (ON) 2008 Q3 法說會逐字稿

完整原文

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 afternoon.

  • My name is Jodie, and I will be your conference operator today.

  • At this time, I would like to welcome everyone to the ON Semiconductor third quarter earnings 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).

  • I would now like to turn the call over to Mr.

  • Ken Rizvi.

  • Please go ahead, sir.

  • Ken Rizvi - IR, Director

  • Thank you, Jodie.

  • Good afternoon, and thank you for joining ON Semiconductor's third quarter 2008 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 following this conference call, along with our earnings release for the third 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 Credit Suisse Technology Conference on December 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" or "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 third 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 third quarter of 2008 were a record $581.5 million, an increase of approximately 3% from the second quarter of 2008.

  • During the third quarter of 2008, the Company reported GAAP net income of $61.2 million, or $0.15 per share on a fully diluted basis.

  • Third quarter 2008 GAAP net income included net charges of $39.2 million, or $0.10 per share on a fully diluted basis, from special items, which are detailed in schedules to our earnings release.

  • Third quarter 2008 non-GAAP net income was $100.4 million, or $0.25 per share on a fully diluted basis.

  • On a mix-adjusted basis, average selling prices in the third quarter were down approximately 2% from the second quarter of 2008.

  • The Company's gross margin in the third quarter, including special items, was 38.1%.

  • Non-GAAP gross margin in the third quarter was 41.5%

  • Adjusted EBITDA for the third quarter was a record $140.9 million.

  • We exited the third quarter of 2008 with cash and equivalent of approximately $418 million, or approximately $97 million more than the second quarter.

  • At the end of the third quarter, total sales outstanding were approximately 44 days.

  • ON Semiconductor total inventory was approximately $309 million, or 78 days, which were down approximately 3 days from the second quarter.

  • Included in our overall inventory is approximately $12 million of inventory associated with the write up to fair value from the recent AMIS acquisition.

  • Subsequent to the close of the quarter, we completed the acquisition of Catalyst Semiconductor.

  • The acquisition is expected to add approximately $24 million of inventory, which includes approximately $7 million of inventory associated with the write up to fair value.

  • Distribution inventories were approximately 11 weeks at the end of the third quarter.

  • Cash capital expenditures during the third quarter of 2008 were approximately $31 million.

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

  • Keith Jackson - CEO

  • Thanks, Don.

  • Now, for an overview of our end markets.

  • During the third quarter of 2008, our end market splits were as follows.

  • The Computing end market represented approximately 23% of third quarter 2008 sales.

  • The Communications end market, which includes wireless and networking, represented approximately 21% of sales.

  • The Automotive end market represented 17% of third quarter sales.

  • The Consumer Electronics end market represented approximately 18% of sales.

  • Industrial, Military and Aerospace represented approximately 17% of sales.

  • And Medical represented approximately 4% of sales.

  • During the third quarter, on a direct billing basis, no ON Semiconductor product OEM customer represented more than 4% of sales.

  • Our top five 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 60% of revenue.

  • Our sales in the Americas represented approximately 21% of revenue, and Europe represented approximately 19% of sales during the quarter.

  • Looking across the channels, sales and distribution channel were approximately 36% of the third quarter revenue.

  • Direct sales to OEMs represented approximately 52% of revenue, and the EMS channel represented approximately 12% of revenue.

  • During the third quarter, ON Semiconductor revenue as broken out by our divisions were as follows.

  • The Custom and Foundry Product Group represented approximately 29% of third quarter sales.

  • The Standard Products Group represented approximately 22% of sales.

  • The Automotive and Power Regulation Group represented approximately 20% of sales.

  • The Computing Products Group represented approximately 20% of sales.

  • And the Digital and Consumer Products Group represented approximately 9% of sales.

  • We will publish the quarterly revenue, gross margin and operating margin breakout 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.

  • Subsequent to the end of the third quarter of 2008, we closed the acquisition of Catalyst Semiconductor.

  • With the combination of ON Semiconductor's global footprint, effective channels of distribution and top-tier customer relationships, we expect to be able to support a broader and deeper penetration of Catalyst's overall product portfolio.

  • In the Computing end market, we continue to see penetration of our controllers, audio amplifiers and MOSFET products.

  • After seeing double-digit growth in the second quarter of 2008, we saw approximately 3% sequential growth in the third quarter.

  • We believe we continue to gain traction and share with our analog products at both the desktop and notebook markets.

  • In a normal environment, we would expect this to enable continued growth of our computing business in the fourth quarter.

  • Unfortunately, our penetration of products in the desktop and notebook end markets have been more than offset by the slowdown of build rates from our customers due to the overall economic slowdown.

  • While it is unclear when this end market will recover, we believe we remain solidly positioned as a leading supplier of power management chipsets and computing.

  • In the Consumer end market, we saw strong sequential growth of over 25% from the second quarter of 2008.

  • This growth was largely driven by the game console builds for the holiday period.

  • We have a variety of products ranging from controllers, MOSFETs to discrete devices to service the challenging power management requirement to this end market and continue to maintain a solid market share position with two of the three leading game console manufacturers.

  • The Communications end market, which includes the wireless end market and the networking end market, saw strong sequential growth in the third quarter of 2008, fueled primarily by the growth of our wireless products.

  • We had record handset revenues during the quarter driven by continued penetration with four of the five leading handset OEMs as well as strong growth from the leading Smartphone manufacturer.

  • Our portfolio of over-voltage ESD protection devices, switches and audio amplifiers saw strong demand from our customers during the third quarter.

  • We continue to see benefits from the acquisition of AMIS.

  • In the third quarter, we won our first design with a leading Asian handset vendor using our BelaSigna 250 product with noise cancellation capabilities.

  • This product is a complete low-power programmable audio processing system that enhances the sound quality in embedded portable digital audio devices, and it's getting strong design momentum with our customer base.

  • As anticipated, we saw a slowdown in our overall automotive business in the third quarter driven primarily by more than seasonal decline of automotive sales.

  • Given the continued global tightening of credit for large ticket items such as autos, we currently anticipate a continued slow period of sales to the Automotive end market in the fourth quarter.

  • The appreciation of the dollar is also expected to negatively impact our European automotive revenue in the fourth quarter.

  • Once the economic environment stabilizes, we believe we are strongly positioned with the leading automotive OEMs through the design, sales and supply chain resources, along with our broad portfolio of ASICs, [Canon Linn] products, motor control products, MOSFETs and discrete devices.

  • The industry and our customers continue to recognize our position as a leader in energy efficient products and solutions.

  • Our GreenPoint reference designs, along with our industry-leading supply chain, enable our customers to deliver energy efficient solutions while also shortening their time to market.

  • Electronic Products China magazine presented us with a Top-10 DC-DC 2008 reward for our family of integrated switching regulators that are designed to deliver high efficiency and increased power density, enabling customers to provide power management, reduce their costs and simplify embedded designs.

  • This is the sixth consecutive year that ON Semiconductor has won this award.

  • Samsung electronical -- mechanical also honored ON Semiconductor as a Tier One Best Supplier for our outstanding achievement in meeting their challenging requirements in product quality, energy efficient technology and supply chain efficiency.

  • We also received the 3 Star Excellence Award from Raytheon Network Centric Systems, and the 2008 Customer Satisfaction Award from Raytheon Missile Systems.

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

  • Donald?

  • Donald Colvin - CFO

  • Thank you, Keith.

  • Fourth quarter of 2008 outlook.

  • Our September actual ending backlog plus normal fourth quarter seasonal turn should have pointed towards flattish revenue in the fourth quarter of 2008 versus the third quarter of 2008.

  • However, for the rest of the month of October, we have seen our business conditions deteriorate for the fourth quarter.

  • Turns activity has dried up.

  • Our distributor resales have slowed down, and some backlog has been rescheduled from the fourth quarter of 2008 into the first quarter of 2009.

  • Based upon current product booking trends, backlog levels, manufacturing service revenues and estimated turns, we now anticipate that total revenues will be approximately $500 million to $550 million in the fourth quarter of 2008.

  • Over the last several weeks, we have seen a dramatic appreciation of the U.S.

  • dollar.

  • This change in currency negatively impacts our revenue in the fourth quarter by approximately $10 million sequentially, or approximately 2%, and is already embedded in our overall revenue guidance.

  • Backlog levels at the beginning of the fourth quarter of 2008 were down from backlog levels at the beginning of the third quarter of 2008 and now represent over 95% of our anticipated fourth quarter revenues.

  • We expect that average selling prices in the fourth quarter will be down approximately 2% sequentially.

  • We expect cash capital expenditures of approximately $30 million in the fourth quarter, total cash capital expenditures of approximately $105 million for 2008.

  • This is down from our previous guidance for capital expenditures of approximately $120 million to $130 million for 2008.

  • Given the current macro-environment, we currently anticipate reducing our capital expenditures further in 2009.

  • For the fourth quarter, we expect GAAP gross margin of approximately 37% to 38%.

  • Our GAAP gross margin in the fourth quarter will be impacted from, among others, expensing of appraised inventory fair market value step up associated with the acquisition of AMIS and Catalyst Semiconductor.

  • We also expect non-GAAP gross margin of approximately 39.5% to 40.5%.

  • ON GAAP gross margin excludes special items of approximately $13 million.

  • For the fourth quarter, we also expect total GAAP operating expenses of approximately $160 million to $164 million with GAAP SG&A expenses of approximately 13% to 14% of sales and GAAP R&D expenses of approximately 13% of sales.

  • Our GAAP operating expenses include in-process research and development associated with the Catalyst acquisition, the amortization of intangible stock-based compensation expense, restructuring, asset impairment and other charges which totaled approximately 6% of sales.

  • Beginning in the fourth quarter, GAAP operating expenses also include the additional operating expense from Catalyst Semiconductor of approximately $5 million.

  • We also expect total non-GAAP operating expenses of approximately $130 to $134 million, or approximately 25% of sales.

  • Non-GAAP operating expenses exclude special items such as end process research and development associated with the Catalyst acquisition, the amortization of intangibles, restructuring, asset impairment, stock-based compensation expense and other charges of approximately $30 million.

  • We anticipate that net interest expense and other expenses will be approximately $10 million to $11 million for the fourth quarter of 2008, and cash taxes to be approximately $2.5 million to $3.5 million.

  • We also expect stock-based compensation expense of approximately $9 million to $10 million in the fourth quarter of 2008.

  • Our current fully-diluted share count is approximately 415 million shares based on the current stock price, which includes approximately 410 million of common stock and approximately 5 million shares related to options, convertibles and RSUs.

  • Our current fully diluted share count also includes approximately 13 million shares associated with the Catalyst acquisition.

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

  • Over the last month, we have seen an impact on our business from the current economic headwinds and global credit tightening.

  • Our customers have expressed more caution on their business outlook, and we have adjusted our forecast to reflect the current order [prints].

  • Given the macroeconomic uncertainty, we remain focused and committed to generating strong cash flows by continuing to execute our manufacturing and operational cost reduction productions and disciplined approach to capital expenditures.

  • Even in this challenging environment, we believe we will generate north of $50 million of free cash flow in the fourth quarter.

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

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Your first question comes from the Chris Danely with JPMorgan.

  • Chris Danely - Analyst

  • Guys, can you just talk a little bit about general OpEx and gross margin trends going into next year?

  • Keith Jackson - CEO

  • So, on the OpEx trends, we would expect them, in raw dollars, to come down as we enter next year, kind of reflecting the lower run rates that we've had since Q3.

  • And so, again, we'll keep that prudent and continue to manage that in a downward fashion.

  • On the gross margins, we're going to have less capacity utilization in Q1.

  • We will be doing the appropriate factory closures for the appropriate amount of time.

  • We'll be accelerating the factory exits that we announced last year and taking other measures to try and preserve as much as of the gross margin as can be.

  • So, Donald, I don't know if you have other things to add.

  • Donald Colvin - CFO

  • Sure.

  • Obviously we are in a challenging environment, as we cannot rely on historical backlog numbers, et cetera, for predicting the future.

  • I tried to explain in our notes and our observations that the month of October has been very atypical, and indeed, if you look at companies announcing toward the end, their guidance was much more negative sequentially than those who announced at the beginning.

  • So, clearly our business conditions are deteriorating, and that gives a big uncertainty on the outlook for next year.

  • So, it's really too early to tell.

  • The gross margin is going to be a function of the revenue.

  • But we are taking all necessary actions to ensure that we don't grow our inventories.

  • You probably noticed last quarter we didn't -- we reduced our inventories.

  • Our distribution inventory is well at the low end of the range.

  • Our internal inventories came down by around three days.

  • And so, we are continuing to manage our business in a tight way, and so that, I think, will allow us to have the best gross margin profile going forward.

  • And as I said on concluding remarks, we still believe we will generate very healthy cash flow, both in the fourth quarter and also in the first quarter.

  • But we cannot quite put our finger on what the revenue will be in the first quarter, and that's going to be the biggest variable in determining the gross margin, Chris.

  • Chris Danely - Analyst

  • Sure, Donald, and as my follow-up on the cash, you guys are generating plenty, and you have over $400 million of cash on the balance sheet.

  • And now that your buddies at Atmel have said, "Thanks, but no thanks," what can we expect you to do as far as your cash goes?

  • Are you guys looking at more share buybacks given the death and destruction in semis?

  • Could we expect some debt pay down?

  • Or will you just hold it and look to build cash?

  • Donald Colvin - CFO

  • Well, we don't want to become a bank, even though banks are getting cheaper every day.

  • Chris Danely - Analyst

  • (inaudible)

  • Donald Colvin - CFO

  • But let me just say that we always try and run the business in a shareholder-friendly manner, and we have obviously a lot of options to do with our cash, and we don't want to hoard it indefinitely.

  • But yes we heard, unfortunately, that Atmel doesn't want to talk.

  • We're considering our options, so I won't comment on that.

  • But I would say that one thing -- the whole premise of the Atmel deal was that it would be accretive to earnings, and so this is something that we still believe is possible.

  • The final form of that deal has clearly not been determined, and we clearly cannot go forward this year, as they have refused to talk with us.

  • But we haven't determined what our way forward will be, and so I'm not in a position to announce any spectacular stock buybacks or anything like that at this moment in time.

  • Chris Danely - Analyst

  • Okay, thanks.

  • Operator

  • Your next question comes from the line John Pitzer with Credit Suisse.

  • John Pitzer - Analyst

  • Thanks, guys.

  • Thanks for taking the questions.

  • Donald, first question for me, when you look at the new December guidance, what's the expectation for turns in the quarter?

  • Donald Colvin - CFO

  • Well, basically, from now on, none.

  • John Pitzer - Analyst

  • I'm sorry.

  • You said none?

  • Donald Colvin - CFO

  • None.

  • John Pitzer - Analyst

  • And then, Donald, if you X out the currency impact for the quarter, you're still doing better than the peer group, albeit it's still down sequentially.

  • How much of that is just catalyst quarter-to-quarter, and how much of that do you think is some shared gains in some of the other businesses you're running right now?

  • Donald Colvin - CFO

  • Well, I'll let Keith talk about the share gains.

  • The Catalyst numbers are not all that high because we don't have a full quarter of Catalyst, and we also have to take some of these accounting adjustments that we adjust the Catalyst revenue.

  • So, if you want to think, John, simply, basically the currency offsets more or less the Catalyst plus.

  • So, net-net, they kind of offset each other.

  • So, that's a way to look at it.

  • So, one offsets the other.

  • Currency is offsetting catalyst.

  • But Keith, do you want to talk about the share gain?

  • Keith Jackson - CEO

  • Yes.

  • Share gain is something we've done steadily every quarter.

  • We never know in any market conditions exactly what's going on on a daily basis, but I would expect we would show to continue to gain share when the quarter's over as well.

  • These acquisitions we've done this year have actually improved our customer relationships and their perception of ON as a long-term supplier and survivor of this market.

  • So, quite frankly, we're feeling pretty good about the relative position, and again, everybody's forecasts are what they are.

  • We'll see at the end of the quarter just how much share was gained.

  • John Pitzer - Analyst

  • And then, guys, this is the last question from me.

  • Donald, relative to your statement about the Atmel acquisition being accretive, given how fluid the overall macro-environment is, how comfortable are you making that statement relative to the valuation and price that you Microchip threw out there?

  • Donald Colvin - CFO

  • Well, remember, for what we were paying no specific price.

  • It was an amount up to that amount based upon (inaudible) functions.

  • Microchip put out a price of $5, which was refused.

  • So, we always maintained that the businesses that we were interested in would fit very well into the ON infrastructure, both its distribution infrastructure and its manufacturing infrastructure, and that the deal would only move forward if it was accretive.

  • We could not -- we can -- we have to persuade our board it's accretive, and we have to persuade our shareholders it's accretive.

  • And we do not need to rush out and borrow money tomorrow or yesterday to put that financing in place.

  • It's something that we will probably have to do or look at next year.

  • We are not committed to any one source of financing.

  • We have many multiple sources of financing, and we would only move forward on a deal if it is accretive and we can demonstrate that in a clear and unequivocal manner to our shareholders and to our board.

  • So, there's been a lot of [publis] out there on this deal.

  • I won't comment on why or where these rumors come from.

  • But some of this stuff has been purely ridiculous, suggesting that we were ready to borrow at ransom rates in order to satisfy our obligations.

  • So, this is a clear nonsense.

  • The deal was always determined as an accretive opportunity, and everything we know suggests it can be, and we will see how we can best move forward with that.

  • John Pitzer - Analyst

  • Perfect.

  • Very helpful.

  • Thanks, Kevin.

  • Operator

  • Your next question comes from the line of Tristan Gerra with Robert W.

  • Baird.

  • Tristan Gerra - Analyst

  • Can you give us an update on the migration of capacity to Gresham so far and whether that's going to -- what type of contribution utilization rates you think that's going to add by year-end, excluding, of course, the deterioration in end markets?

  • Keith Jackson - CEO

  • Yes, the deterioration in the markets, Tristan, has slowed down the ramp that we expected in Gresham, without question.

  • The products we're moving in there are moving relatively on schedule.

  • Since our last call, there's been nothing slipped.

  • We continue to qualify new products.

  • We continue to put new processes in, et cetera.

  • So, really what's changed is some of the end markets that we were hoping to fuel some of that growth have definitely slowed.

  • So, we're still at this point -- we're less than half full in Gresham.

  • We are continuing the work -- now that we have Catalyst, we have actually accelerated the work to get the EEPROM processes in there and other types of things for next generation products.

  • So, the full answer is we remain focused on that, but the market itself is definitely slowing down some of that progress.

  • Tristan Gerra - Analyst

  • Okay, and then, could you talk about Dynamex in those books and also on the non-dividend platform and provide an update on the ramp of products you've acquired to ADI?

  • And you've mentioned briefly on the call that market share, but any more specifics you could give us there?

  • Keith Jackson - CEO

  • I don't know about specifics on that.

  • We have done with ADI all that we hoped to do, but it's more than just ADI for Computing.

  • It's really the combination of the ON business with the ADI business that has given us a great position in both the desktops and the notebooks.

  • Those continue to grow.

  • We had record quarters in Q3.

  • Q4 may not be the same records, but they're still going to be represented, I believe, when the quarter's over.

  • Some nice share gains in that marketplace.

  • So, I can't give numbers, and I certainly can't project share as we get into 2009, but I do believe you're going to find that that share will continue to increase.

  • Tristan Gerra - Analyst

  • Great.

  • Thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Your next question comes from the line of John Barton with Cowen.

  • John Barton - Analyst

  • Thank you very much.

  • I was hoping to get a better feel for the gives and the takes of the revenue guidance of $500 million to $550 million.

  • And Donald and Keith, you mentioned that you're going into the quarter -- I think you said you're 95% booked, and as of today you're 100% booked.

  • Earlier in the call, you talked about some push outs of backlog from Q4 into Q1, the recent weakness, et cetera.

  • So, when you say you're 100% booked, so which end of the range, or the midpoint of the range, is that?

  • Or looked at another way, how much room do we have for potential further push outs?

  • And do you think -- that's a forecast.

  • Do you think you'll get them?

  • And again, the variance within that range, how are we thinking about it?

  • Keith Jackson - CEO

  • Hi.

  • So, obviously we give ranges, and this one is wider than we normally give for reason.

  • There is uncertainty out there.

  • When we gave the range, though, we factored in a very wide expectation on customer behavior.

  • We have certainly seen the entire supply chain starting to protect cash, which means lean it out as fast as they can.

  • And so, we have comprehended that in our guidance.

  • The midpoint of the guidance is something we always feel comfortable with.

  • You'll notice that we normally give you numbers that are like 90% booked to those numbers, and this is 95% this time.

  • So, perhaps we're being a little more cautious than we have in the past, but the point is it's anybody's guess just what may change in customer behavior over the next few months, and that's going to be dealing with macroeconomic factors, Christmas sell-through, et cetera, et cetera.

  • So, I guess the simple answer is we only give guidance we feel comfortable with.

  • Yes there's a wider range this time because we think there's wider external factors to impact that, but we're also still feeling as good as we do in any quarter about that range of guidance.

  • John Barton - Analyst

  • As my follow-up, you talked in your prepared remarks, Keith, about the design win for the BelaSigna 250 out of AMI.

  • I'm curious -- was that a design win that was well in the works when you acquitted the company, and this is just proof that customers aren't concerned with the change of ownership?

  • Or is it something that you were able to lever because of your historic involvement with this customer and now taking in new products and potentially how you see that going forward?

  • Keith Jackson - CEO

  • Actually, this is an example of the combination of the companies being much stronger.

  • We highlighted that particular one.

  • There's two other ones that have gone on in the notebook computing marketplace with the same platform here in the last few months as well.

  • So, really what's happened is we've taken the relationships that we have and the understanding of some of the consumer based markets that we have and started using the great technology we picked up from AMI.

  • John Barton - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Craig Ellis with Citi.

  • Craig Ellis - Analyst

  • Thanks for taking the question, guys.

  • The first question is on pricing.

  • It looks like from the quarter end from the guidance that pricing is behaving in a pretty normal way, but is that in fact what you're seeing?

  • And I think now is about the time you would typically go into your annual OEM pricing discussions.

  • As you get into those, what are you hearing from OEMs?

  • Keith Jackson - CEO

  • So, the quarter is pretty typically, but quite frankly, the numbers, Craig, for us are pretty much set as you enter a quarter.

  • Since we're not going to a lot of turns, we never have a lot of turns to make.

  • Those numbers are pretty stable, or at least predictable, I should say, within the range of reason.

  • So, I think that guidance is pretty conservative.

  • And I'll just point out quickly that between the currency at 2% and ESP at 2%, you start off in the hole even though your units haven't moved at all at this point.

  • So, the second part of your question, which is really about OEM contracts for next year, there's little question that our customers would love to see more price declines.

  • They are having a tough marketplace, which is being reflected back to us.

  • Frankly, we're going to do what needs to be done to maintain our position, but obviously there's -- with the macroeconomic environment, there's not a lot swap left for any of the suppliers in this marketplace either.

  • So, I'm not expecting dramatic changes from the rates that we've been seeing.

  • Craig Ellis - Analyst

  • Okay.

  • That's helpful, Keith.

  • And then, Don, you talked about CapEx perhaps going down next year versus this year.

  • Can you quantify how significantly that decline might be?

  • Donald Colvin - CFO

  • Well, I don't want to give an exact number because I still remain -- I still want to keep our level of optimism that the business will recover.

  • But capital expenditures is one of the brakes we can put on which have a major impact on cash preservation.

  • And just to repeat what I said in the prepared comments, we had previously guided for 2008 for something in $120 million to $130 million range with a midpoint of $125 million.

  • And we now see 2008 -- this is the current year accrete and capital expenditures -- at $105.

  • So, that's a saving of $20 million this year alone.

  • Now, normally next year would have been $130 million to $140 million, and I think it's fair to say, without limiting our capability, that we're currently planning on significantly less than $100 million.

  • And so, these are the kinds of buttons that we can push on to ensure that the Company generates healthy cash flows even in the most difficult of market conditions.

  • Craig Ellis - Analyst

  • That's helpful.

  • Thanks, Don.

  • Thanks, Keith.

  • Operator

  • Your next question comes from the line of Suji De Silva with Kaufman Brothers.

  • Suji De Silva - Analyst

  • Hi guys.

  • I'm trying to follow up, maybe follow up on the last question.

  • I'm trying to understand the defensibility of your gross margin through the '09 timeframe.

  • Can you talk about whether the product mix gives you some more pricing -- the ability that kind of resists pricing pressure?

  • And also, on the capacity side, what's your capacity growth going to be through the '09 environment?

  • Or what (inaudible)?

  • Keith Jackson - CEO

  • So, Suji, let me kind of start this, and then Donald could add as he wishes.

  • Suji De Silva - Analyst

  • Sure.

  • Keith Jackson - CEO

  • So, first of all, from a mix perspective, we've been adding to the Company's portfolio through acquisitions, and we've been spending all of our R&D on high-margin new products.

  • So, I would expect that mix will continue to be a favorable impact for us as we go forward, and that has been a favorable impact for us all through '08.

  • So, as each of these acquisitions we've been getting have opportunity for better than corporate margins, I would say that's something that ought to be a strong favorable for us.

  • I'm not going to be giving you forecasts for next year at this time, but I would expect that to be a good one.

  • The capacity utilization, we are -- as you just heard Donald say, we've been slowing down on the capital expenditures.

  • A goodly portion of those capital during 2008 were for cost reduction purposes and for new capabilities on the technology side.

  • So, the amount of actual capacity being added is relatively small.

  • And then, on top of that, we've previously announced we're going to be closing a 4-inch fab, a 5-inch fab and a 6-inch fab during 2009.

  • So, net-net, our utilization will get much better through the year because of reduced total capacity inside the Company.

  • So, I think we're doing the right things to manage that and keep the margins up as best as they can be in the environment, and with that, I don't know if Donald, if you have anything to add.

  • Donald Colvin - CFO

  • Well, I think, clearly, Keith, you put your finger right on the hotspot, and that is the successful acquisitions that were made this year have enhanced our growth margin, and clearly that's given us a wider range of higher margin products that have put us in a much better posture to face as this more challenging environment.

  • We'd just ask the analysts present on the call to look at the evolution of the Company year-over-year.

  • We have just completed a record quarter, a tremendous improvement in cash flow, something like 40% of EBITDA year-over-year.

  • So, we're not sitting on our waddles.

  • We're out there wrestling with the challenges of reducing capital expenditures and ensuring that the business is well positioned to face these challenging times going forward.

  • But the real gross margin is really going to be determined by revenue, and that is not a call that we're brave enough to make in this environment.

  • Suji De Silva - Analyst

  • Great.

  • Very helpful.

  • Thank you, guys.

  • Operator

  • Your next q comes from the line of Doug Rudisch with Brookside Capital.

  • Doug Rudisch - Analyst

  • Hey guys.

  • Thanks for taking the question.

  • Just circling back on the potential Atmel transaction, I continue to be fascinated in this day and age, especially after Yahoo!, that we have a company, a board of directors, turning down an offer for $5.00 a share for a company earning a nickel.

  • But relative to your point, that the deal was always structured as an option and would only be done if it would be accretive, I guess there's three questions there.

  • One is accretion can be the function of how you finance it, but it's also a function of how much you pay for it.

  • And then, secondarily, it's also a relative tradeoff versus other things you can do with that capital in terms of buying back your own stock.

  • And given you're not bound to close on this deal, if your Company earns somewhere in the range of a dollar on a mid-cycle basis and you're trading at five times earnings, wouldn't any deal for those Atmel assets have to be massively accretive for you guys to push forward relative to other potential uses of your capital?

  • Donald Colvin - CFO

  • Well, there's a lot of -- that's a complex question there, Doug, but I do remain optimistic that we will continue over the long term to trade at five times earnings, and we will get back to a more normalized business environment, and we have successfully implemented acquisitions, we believe, that makes us a much more attractive company to our customers and improves our financial performance and solidity, and that's why we are looking at this, and we will continue to be interested in this type of opportunity.

  • Clearly, there is temporary disruptions in the market because of macro-uncertainties, and so I don't think it would be fair and reasonable to price these continuing forever, but the clearly have made everything more challenging.

  • You are right.

  • But the silver lining on their refusal to talk is certainly that the next phase in this transaction is impossible before sometime next year, and by which time, hopefully, capital markets will allow a lower cost of capital hurdle, and basically using our normalized run rate, our numbers still show that this has the potential to be accretive as long as we get the capital markets to return to a more normalized basis.

  • As we are right now --

  • Doug Rudisch - Analyst

  • But the other part, though -- the other part of the delay until next year also means you get a further look at your own run rate, in terms of the economics you're generating, and the economics that business is generating, so is it reasonable to assume that you guys are reasonable people, and to the degree you would proceed, it's only, again, becomes a relative question of, A) whether or not it's accretive, and, B) whether or not it's better than other options for your capital?

  • Keith Jackson - CEO

  • So, Doug, I'm going to have to step in.

  • We're really not announcing what our next steps are or our specific plans at this point.

  • The only thing I will comment to is we are more than just reasonable people.

  • We've demonstrated that we only do things that create shareholder value, and I don't know why that would change in the future just because of the current environment.

  • Doug Rudisch - Analyst

  • Great.

  • Thanks, guys.

  • I appreciate it.

  • Operator

  • Your next question comes from the line of Craig Berger with FDR Capital Markets.

  • Craig Berger - Analyst

  • Hey, guys.

  • Thanks for taking the questions.

  • Can you comment on your Automotive exposure?

  • Where geographically is it?

  • What are you providing within the car, and what's kind of the outlook?

  • How depressed are things already and how much more depressed could they get from here?

  • Keith Jackson - CEO

  • So, kind of a wide range there.

  • First of all, from a geographic exposure, you've got today about -- exposure about half in North America, half in Europe and -- actually, 40%, 40%, and then the balance in Asia.

  • So, it's fairly well split as compared to a few years ago, but that's where our customers are, not where the end products go.

  • We've found that our customers now in Asia are making them for the other markets.

  • The guys in the U.S.

  • are making them for Europe.

  • The guys in Europe are making for the U.S.

  • So, I'm not sure you can conclude the end car sales from where we sell our products.

  • Relative to how bad is it, where are we used, we're used throughout the entire car.

  • We've got a pretty good balance between the engines, engine control, the motor controls in all of the body and then the infotainment.

  • The fastest growing portion has been infotainment, and we have seen that that segment is certainly continuing to grow even though the cars have gone down and stagnated because all the new models are using more electronics in that infotainment area.

  • So, net-net, we're not sure there's a lot more to give from an electronics perspective.

  • We think a lot of that's gotten taken out already in the Q3 and Q4 run rates.

  • So, I would be surprised if there was much deterioration as we get into 2009.

  • Craig Berger - Analyst

  • Next question.

  • A lot of your competitors are talking about increased turns environment, low visibility, low orders on the book, more turns being -- more turns driving the business.

  • Yet you guys are actually baking in less turns into the guidance, which seems contradictory relative to the environment.

  • Can you --?

  • Keith Jackson - CEO

  • So, we -- again, we have seen over the years that we have a little different profile on our backlog, but we normally don't get a lot of turns in Q4.

  • It's usually a single-digit millions kind of number.

  • What we're saying now is we think there's none.

  • And while I would agree with what you said about the competitors, talking about low visibility, which is a way to translate that our customers aren't sure, so they're not going to place orders till they have to have it.

  • I would be surprised if you saw anybody asking for orders today for delivery in December.

  • It is just -- just does not make sense from a macroeconomic perspective that if you don't need it already and you didn't know that, you're going to want it all of the sudden.

  • Craig Berger - Analyst

  • That's helpful.

  • Last question.

  • You're at the midpoint of the OpEx guidance, is up about $2 million.

  • What's the Catalyst impact, and what's the opportunities for reduction next year?

  • Keith Jackson - CEO

  • So, Catalyst is up $5 million.

  • That's the portion we'll get this quarter, is $5 million up.

  • So, net is reflecting about a $3 million reduction from previous quarter in our run rates.

  • We are certainly continuing to look at the rest of the quarter and responses there, so certainly I think we've given you a range that, if anything, is aggressive -- or conservative, I should say.

  • Craig Berger - Analyst

  • Can I get one more quick one?

  • What's the specific acceleration in manufacturing consolidations you're going to take next year?

  • Keith Jackson - CEO

  • Okay, so we had planned for three factory closures at the end of the year, and right now we are looking at how we can accelerate those.

  • I'm not prepared to give you a specific quarterized answer yet, but you can just imagine for a moment that we're trying to pull those into the first half.

  • Operator

  • Thank you.

  • Your next question comes from the line of John Vinh with Collin Stewart.

  • John Vinh - Analyst

  • Thank you for taking my question.

  • I guess a question on your operating model.

  • Obviously, given the macro-headwinds, it seems like you'd be challenged to get to your target model by the end of next year.

  • Can you maybe talk about how this changes, how you look at the parameters of the model going into the end of next year?

  • Can you maybe talk about some of the new metrics that we should be looking at instead of -- it sounds like $600 million, the top line might be a little challenged.

  • Gross margin's 45%.

  • Can you maybe address those?

  • Donald Colvin - CFO

  • Well, obviously, we're facing more difficult time than we did at the beginning of the year, but we still think the integrity of the model is logical.

  • We were pretty close in previous occasions to get to the 45% gross margin, and we will manage the operating expense in the low 20s.

  • So, we still believe that we should be able to run our business with more than 20% operating income.

  • And so, that still is our objective, and that would give well over $1.00 a share in earnings.

  • So, that's what management's committed to trying to deliver.

  • Clearly, that's the model that we exposed at the beginning of the year.

  • Conditions have changed, and so we don't really see that in the near term.

  • That's a surprise to no one.

  • But these cycles do reverse themselves, and as I said, we're not brave enough to give guidance for the first quarter, so certainly we don't want -- we're even less braver for the second half of next year.

  • But conditions will improve, and whatever it takes, we will structure our business, the actions that Keith mentioned.

  • Factory quarters.

  • We have also mentioned consolidation of ERP systems, elimination of duplication, control of our operating expense, all the different things that we know how to do, cut it by capital expenditures, all of these things which will -- save depreciation.

  • All these things will help improve our gross margin, and that's what we will continue to do so that when we come through this tough period, we'll be a fitter and a stronger company able to deliver the same objectives.

  • You don't change your strategy just because you have some difficulties.

  • Craig Berger - Analyst

  • Right.

  • And my second question is if you look at your guidance and you look at your end markets, it sounds like obviously Automotive is the most exposed.

  • Is it kind of a safe assumption to assume that all your end markets will be sequentially down next quarter?

  • And related to that, can you maybe talk about some of the end markets that seem to be a little more resilient than Automotive is to the economic downturn?

  • Keith Jackson - CEO

  • So, at this stage, I guess just to reiterate my comment on Automotive, I think it's basically flattish as we go forward from the drops we saw in Q3.

  • So, I'm really not seeing deterioration, per se, there.

  • The automotive manufacturers are taking a lot of shutdowns in Q4, but that's already reflected in the backlog and the guidance that we've given.

  • So, I'm really not seeing further deterioration there, just to reiterate that one.

  • So, yes, it softened in Q3.

  • It won't be getting better, but I don't see a lot worse in Automotive.

  • The other markets -- right now, the end market for handsets seems to be holding up fairly well.

  • I am seeing signs that the supply chain is trying to lean itself out, which means you're not going to be seeing component suppliers increasing here quarter-on-quarter, and normally Q1 for that's pretty soft.

  • So, I would not be looking for any great strength in handsets.

  • Computing seems pretty stable.

  • Not seeing major movements in any direction.

  • Down slightly probably in some of the desktop arenas.

  • But again, nothing that I would highlight as being extraordinary or out of the normal.

  • And then the Industrial and Medical and Mil-Aero are, again -- are not moving a lot.

  • So, the reductions -- a bit in Automotive, a bit in Computing, a bit in Handsets.

  • It's a global thing, and no segment is standing out right now in either direction.

  • Operator

  • Your next question comes from the line of Patrick Wang with Wedbush Morgan Securities.

  • Patrick Wang - Analyst

  • Hi, guys.

  • Yes, I wanted to talk real quick about inventory.

  • You guys -- it looks like you guys did a good job managing that into the third quarter with it coming down on your balance sheet, but I think you guys said the inventories were at 11 weeks last quarter.

  • Keith Jackson - CEO

  • Yes.

  • Patrick Wang - Analyst

  • And that's about up a week from the second quarter.

  • Can you talk a little bit about why it went up and how you think these two results are going to trend going forward?

  • Keith Jackson - CEO

  • Yes, that's pretty much rounding error.

  • It was slightly under 11 in Q2 and right at 11 in Q3.

  • It's really not up a day -- I mean, a week.

  • It was pretty much rounding.

  • What we see going on -- the distributors clearly have self-interest in maintaining their cash flow by minimizing just the inventory.

  • Eleven weeks is around the low end that we've ever operated.

  • We've gotten down to 10.5, I think, at the very lowest end.

  • And 13 was the normal model.

  • So, we're certainly not expecting to order more, and if there's a slowdown in resales as we suspect, they're going to be ordering less.

  • So, on a dollar basis, I would expect the answer is they'll start coming down in inventory.

  • On a day's basis, it will adjust itself within a quarter or two back into that 11 range.

  • Patrick Wang - Analyst

  • Okay, great.

  • And then -- thanks for that.

  • That was helpful.

  • And then, second, just in terms of utilization, can you talk about what general blended utilization was in the third quarter?

  • I think you mentioned that it's going to go down in the fourth and into first quarter here, but just any additional color you can provide there?

  • Keith Jackson - CEO

  • Yes, it's mid-80s as we finished Q3, and on a blended basis -- actually, more like high-80s, I should say.

  • I [missed that] a bit.

  • But I would expect that to sag into the mid-80s to lower 80s as we go forward, but not much worse than that.

  • Operator

  • Your next question comes from the line of Kevin Cassidy with Thomas Weisel Partners.

  • Kevin Cassidy - Analyst

  • Thank you.

  • Just comments on market share.

  • You mentioned that you're in four -- or having revenue growth at four of the five handset manufacturers.

  • I wonder if some day you'll be talking about five of the five.

  • Keith Jackson - CEO

  • Well, hope springs eternal.

  • We've got some pretty neat products and technologies that we continue to try to penetrate that fifth account with, and time will tell.

  • The energy is being expended.

  • We'll have to wait for the results.

  • Kevin Cassidy - Analyst

  • Oh, okay.

  • And same for game consoles, is two out of three?

  • Keith Jackson - CEO

  • I wouldn't set expectations a lot there.

  • We actually do have some design wins going on in the controller sections, the hand controllers, at the third one, and again, we'll see if those design wins turn into production wins here over the next quarter.

  • Kevin Cassidy - Analyst

  • Okay, thank you.

  • Operator

  • Your next question comes from the line of Romit Shah with Barclays Capital.

  • Romit Shah - Analyst

  • Yes, I hate to go back to the -- go back to Atmel, but, yes, Donald, on the last call I felt like your message was that, "Hey, we're in uncertain times, and as a result, ON's not going to have access to as many sources of financing, especially if the cash balance goes down." And so, the bias, therefore, is to do a debt pay down, and it's still not clear to me why you guys have decided to deviate from that strategy.

  • Donald Colvin - CFO

  • Well, there's multiple variables there, and everyone can look at it a different way, and I respect their judgment even if I don't necessarily agree with them.

  • I mean the fundamental premise is we believe -- and everything we have learned is that under normal financing conditions this deal has the potential to be accreted.

  • And as a previous questioner had outlined, there are multiple variables, alternative uses of money, cost of money, how much you pay, what you buy.

  • And so, there's a lot of variability.

  • We have executed transactions that we are very, very comfortable with, and I invite everyone to look into our third quarter actual results and see the benefit that these transactions have given to both cash generation and performance improvement and compare us compared to some of our competitors that haven't had acquisitions just to see how much better off we are.

  • So, there's multiple variables, Romit, to take into account.

  • We still believe there's a pony in there.

  • We are guys that have been working in the industry for more than 30 years.

  • We can recognize things that we can manufacturer in our factories and turn a very positive cash flow using things that we are expert at doing.

  • That's why we're in this industry.

  • That's why we're not doing something else.

  • But we won't pursue that blindly forever, and that's why we have emphasized that our primary motivation is accretion, and it's not based upon some nebulous share gain calculation.

  • It will be based, like we did with the acquisitions we made, on simple synergies and introducing the economies of scale that we have in our manufacturing and distribution network.

  • We still think that pony is there, and there are many variables on how much we have to pay, how we pay for it, when we have to pay for it.

  • So, it's still far too early to run away and hide.

  • Romit Shah - Analyst

  • If I could, that's definitely been the profile of your acquisitions -- AMI and then here with Atmel assets.

  • There's good expense leverage.

  • They're accretive.

  • But the other side of that is these businesses haven't really demonstrated any sort of growth, and I think given that the Atmel assets you see negative growth over the last couple of years, and I just -- just as a consequence to doing these deals, I'm just wondering if the Company is bringing down its long-term sales growth potential.

  • I don't know, Keith, if you want to comment on that.

  • Keith Jackson - CEO

  • Yes, I'll address that one.

  • Clearly a piece of it -- Donald mentioned that we're not looking to do a lot of magic on growing these assets to make them accretive, so that the criterion is you do them if you can get the accretion with your operational excellence.

  • But the expectation is that you're going to grow them with our supply chain skills and our customer access.

  • And so, with each of the acquisitions we've made, we've been out there growing the business at the accounts and seeing some good returns.

  • So, we haven't seen the traditional drop-off, if you will, in revenues with these.

  • So, from a growth rate perspective, in normal times I understand the postulate you just made.

  • I don't know what normal times are anymore, but certainly I think we have the opportunity with our global sales infrastructure to grow these businesses much more than they have been grown in the environment they're in.

  • You're talking about a company that does this for a living everyday and does an outstanding job of servicing our customers, gives them good pricing, gives them good delivery options, et cetera, et cetera.

  • And so, we do expect to grow these businesses faster than they're being grown as they are in the current state.

  • Donald Colvin - CFO

  • And when we talk of growth, our primary motivation in growth is not just to grow sales for the sake of sales.

  • It's to grow earnings, EPS, earnings per share, and as you heard me repeating, our model is to drive more than a dollar a share of earnings.

  • That is the model that we presented to you guys at the beginning of the year, and that's the one management is still committed to.

  • And acquisitions, we believe a reasonable price that can fit into a manufacturing infrastructure can help accelerate that process.

  • Operator

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

  • You may now disconnect.