安森美 (ON) 2008 Q4 法說會逐字稿

Good afternoon.

At this time, I'd like to welcome everyone to the ON Semiconductor fourth quarter earnings conference call.

(Operator Instructions).

Thank you Mr.

Rizvi.

You may begin your conference.

Thank you.

Good afternoon, and thank you for joining ON Semiconductor's fourth 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 fourth quarter of 2008.

The script for today's call is posted on our website and will be furnished via Form 8-K filing.

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

Reconciliations of these non-GAAP financial measures to the most direct comparables under GAAP are in our earnings release and posted separately on our website in the Investor Relations section.

In the upcoming quarter we'll present at the Morgan Stanley Technology Conference on March 4th.

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-Q, and other filings with the SEC.

The Company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other factors.

Now let's hear from Donald Colvin, our CFO, who will provide an overview of the fourth quarter and 2008 annual results.

Donald?

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

ON Semiconductor Corporation today announced that total revenues in the fourth quarter of 2008 were $488.7 million, a decrease of approximately 16% from a third quarter of 2008.

During the fourth quarter of 2008, the Company reported GAAP net loss of $519.6 million or $1.27 per share.

The fourth quarter 2008 GAAP net loss included net charges of $581.6 million, or $1.42 per share from special items which are detailed in schedules to our earnings release.

The largest special item of $557.4 million arises from an annual goodwill impairment testing, and is an estimate that will be finalized with the filing of our 10-K.

Fourth quarter 2008 non-GAAP net income was $62 million or $0.15 per share on a fully diluted basis.

On a mix adjusted basis, average selling prices in the fourth quarter of 2008, were approximately flat with the third quarter of 2008.

The companies GAAP gross margin in the fourth quarter was 38%, non-GAAP gross margin in the fourth quarter was 39.9%.

Adjusted EBITDA for the fourth quarter of 2008 was $102.9 million.

We exited the fourth quarter of 2008 with record cash and equivalents of approximately $458.7 million, or approximately $41 million more than the third quarter, and approximately $184 million greater than fiscal year 2007 end.

We also exited the fourth quarter with the lowest debt position, and the net debt position in the companies history as a public Company.

During the fourth quarter, the Company used $49.4 million of cash to retire $60.9 million of its zero convertible senior subordinated notes.

At the end of the fourth quarter, total day sales outstanding were approximately 35 days.

ON Semiconductor total inventory was $335.5 million on approximately 101 days.

This is up from the third quarter of 2008, where it was 309.4.

Included in our total inventory is approximately $28 million of inventory, which includes inventory write up to fair value related to the acquisition of Catalyst Semiconductor which closed in the fourth quarter of 2008.

Also included in our fourth quarter inventory is approximately $6 million to $8 million of bridge inventory, related to the acceleration of the three fab closures previously announced.

Also included in our overall inventory in the fourth quarter, is approximately $14 million of inventory associated with the write up to fair value from the AMI S and Catalyst Semiconductor acquisitions.

This is up approximately $2 million from the third quarter of 2008 where its due to the Catalyst acquisition.

Distribution inventories were approximately 12 weeks at the end of the fourth quarter.

On a dollar basis, they decreased by approximately $13 million but the weeks increased as a result of lower overall sales.

Cash capital expenditures during the fourth quarter of 2008 were approximately $20 million, and total cash capital expenditures for the year were approximately $95 million.

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

Thanks, Don.

Now for an overview of our end markets.

During the fourth quarter of 2008, our end market splits were as follows: The computing end market represented approximately 23% of fourth quarter 2008 sales.

The communications end market which includes wireless and networking represented approximately 20% of sales.

The automotive end market represented approximately 16% of fourth quarter sales.

The consumer electronics end market represented approximately 16% of sales, Industrial, military and aerospace represented approximately 19% of sales, and medical represented approximately 6% of sales.

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

Our top five OEM customers were Continental Automotive systems, Delta, LG Electronics, Motorola and Samsung.

On a geographic basis, excluding ON Semiconductor's historical manufacturing services revenue, our contributions from sales in Asia represented approximately 59% of revenue.

Our sales in the Americas represented approximately 22% of revenue, and Europe represented approximately 19% of revenue during the quarter.

Looking across the channels, sales of distribution channel were approximately 41% of fourth quarter revenue.

Direct sales to OEMs represented approximately 48% of revenue and EMS channel represented approximately 11% of revenue.

During the fourth quarter, ON Semiconductor revenue broken out by our divisions were as follows: The Custom and Foundry group represented 30% of fourth 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 8% of sales.

In addition, ON Semiconductor recognized approximately $8 million of revenue during the quarter from the acquisition of Catalyst Semiconductor.

We will publish the annual revenue, gross margin and operating margin break out of these divisions in our Form 10-K filing for this period.

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

2008 was a year of solid revenue growth for the Company.

We recorded approximately $2.1 billion of total revenues for 2008, and generated approximately $390 million -- $394 million in cash flow from operating activities.

During the year we closed two acquisitions which have furthered the successful transformation of ON Semiconductor into an analog and power solutions leader.

These acquisitions coupled with ON Semiconductors global footprint, effective channels of distribution, and top tier customer relationships will allow a broader and deeper penetration of the automotive, computer, industrial, medical and wireless markets in years to come.

The end of 2008 and the beginning of 2009 have been a challenging time for the semiconductor industry.

Sales came down dramatically in the fourth quarter of 2008 and we are expecting further declines in the first quarter of 2009.

We are uncertain as to the depth or duration of the current recession.

To prepare for this uncertainty, we announced a number of proactive cost savings actions on January 7th, that once completed should take revenues required for cash breakeven down to approximately $340 million.

Today, we also announced plans to close an additional wafer facility.

This closure is consistent with the companies ongoing manufacturing consolidation strategy and cost saving measures.

The fab we've decided to close the remaining Phoenix wafer fab.

This closure is expected to result in a total cash charge of approximately $8 million to $10 million beginning in the first quarter of 2009.

We expect to eliminate approximately 350 jobs at this fab between now and early 2010.

As a result of the fab closure, the Company expects to save a total of approximately $9 million per quarter compared to the third quarter of 2008 with the full benefits seen in the second quarter of 2010.

In the computing end market we are positioned as the leader for desktop power management, and our notebook presence continues to grow.

In the current desktop platform we increased our penetration by over 50% from the prior platform, having secured over 25 design wins.

On the notebook segment, we are able to increase our position by over 20% having secured over 10 design wins.

We believe we are well positioned and have the momentum to continue our success on the next generation of desktop and notebook platforms.

In addition to our Vcore expertise, we are also developing a broad system power portfolio to further strengthen our value proposition in notebooks and desktops.

We continue to see penetration of our controllers, drivers, audio amplifiers and MOSFET products, in both notebook and server applications.

In addition, we are seeing new opportunities from our Catalyst acquisition to gain share with our e2 PROM product line in the computing market.

When overall unit demand returns to the computing end market, we believe our computing business should see above market growth as a result of our recent share platform gains.

In the medical market we saw strong sequential growth in the fourth quarter of over 20%.

Our previous design wins and ASIC development activities continue to make this a profitable and growing end market for ON Semiconductor.

Our audio DSP products are gaining traction in both North America and Asia for hearing aid, as well as additional non-medical specific wireless applications.

As anticipated, we experienced continued slowing in our overall automotive business in the fourth quarter.

Given the continued global tightening of credit for large ticket items such as automotive, we anticipate a continued slow period of sales to last at least through the first half of 2009.

Once the economic environment stabilizes, we believe we are strongly positioned with the leading automotive OEMs through our design, sales, and supply chain resources along with our broad portfolio of ASIC, Canon LINN products, motor control products, drivers, MOSFET and Discrete Devices.

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

Donald?

Thank you, Keith.

First Quarter 2009 outlook.

Over the last few months, we have seen considerable uncertainty and volatility in the global markets.

As a result the normal data utilized for our guidance purpose is not as reliable as in the past.

We have updated our guidance to accommodate our best view to date.

In a normal environment, our customers place longer term orders with ON Semiconductor.

However given our customers limited visibility, we have reduced their longer term orders with semiconductor suppliers.

As such, we believe the semiconductor industry will move towards the higher terms environment.

In addition, we currently expect our distribution partners to reduce their inventory during the first quarter of 2009.

With our sell-thru revenue recognition policy for this channel, this reduction is expected to result in incremental revenue above our beginning backlog levels.

In the last few weeks prior to Chinese New Year, we saw a stabilization for backlog, as well as some positive terms activity with our 13 week book-to-bill greater than one in January.

Based upon current product booking trends, backlog levels, manufacturing service revenues and estimated terms, we anticipate that total revenues will be approximately $340 million to $380 million in the first quarter of 2009.

Backlog levels at the beginning of the first quarter of 2009 were down, from backlog levels at the beginning of the fourth quarter of 2008, and represent approximately 80% to 90% of our anticipated first quarter 2009 revenues.

We expect that the average selling price for the first quarter of 2009 will be down approximately 2% sequentially.

We expect cash capital expenditures of approximately $20 million to $25 million in the first quarter of 2009.

Total capital expenditures for the total year of approximately $55 million to $60 million.

For the first quarter, we expect GAAP gross margin of approximately 29% to 31%.

Our GAAP gross margin in the first quarter will be negatively impacted from among other things expensing of appraised inventory fair market value step-up, associated with the acquisitions of AMIS and Catalyst Semiconductor, we expect non-GAAP gross margin of approximately 31% to 33%.

Non-GAAP gross margin includes special items of approximately $7 million to $8 million.

For the first quarter we also expect total GAAP operating expenses of approximately $146 million to $148 million.

Our GAAP operating expenses include the amortization of intangibles, stock based compensation expense, restructuring, asset impairments and other charges which total approximately $31 million to $33 million.

We also expect total non-GAAP operating expenses of approximately $114 million to $116 million.

We anticipate that net interest expense and other expenses will be approximately $21 million for the first quarter of 2009.

This includes a non-cash interest expense of approximately $9 million from the adoption of FASB stock position Number APB14/1, relating to a convertible senior subordinated notes.

Cash taxes are expected to be approximately $3 million.

We also expect stock based compensation expense of approximately $12 to $13 million in the first quarter of 2009.

This number could fluctuate based on the issuance of our yearly stock awards scheduled this quarter.

Our current share count is approximately 413 million shares based on the current stock price.

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

As previously stated, management is committed to deliver positive operating cash flow under all circumstances.

It is obvious that the industry is currently shipping under the end market consumption of finished products.

We believe the industry should hit the bottom of the current correction in the first half of 2009.

We also believe that the second half of this year should see a measurable recovery in our business.

Managements longer term strategic objective remains achieving 45% gross margin, 22% operating income.

As previously stated, we are prepared to take additional cost reductions, if required to achieve the strategic objective.

With that, I would like to start the question and answer session.

(Operator Instructions).

Our first question comes from Chris Danely from JPMorgan.

Your line is now open, sir.

Hi, guys, this is Scott Jones calling in for Chris.

I had a first question on OpEx trends and gross margin going over the course of the year.

How do you expect it to tic down, given the cost reductions in the out quarters, and then on a gross margin, could you tell me how you expect that to trend up to the target of 45%?

And kind of how would the plans now with the fab closures help you get there over time?

Thanks.

Hi, this is Donald.

Well two questions there.

One is on operating expense and the other is on gross margin.

I think it's obvious the industry has seen a dramatic fall in its revenue, and we are currently shipping under consumption, so gross margin for us is very much predicated upon the level of revenues.

The faster the recovery of the revenue, the faster the recovery of the gross margin, and so right now, I think we're in a bit of a holding pattern.

We don't want to start projecting rosey sky numbers.

And so with the relatively modest outlook we gave, we think we can probably grow our gross margin in the mid single digit range.

But we don't have enough certainty on the exit revenue for the year, to give anymore color to that.

And as a Company, we always just give gross margin and revenue guidance one quarter at a time.

And especially in these most uncertain times, we don't think it's appropriate to stick our necks out any further than normal.

And as far as operating expense is concerned, we've taken a lot of actions on operating expense, salary reductions, bonus cancellations, headcount reductions, discretionary expense reductions, etc.

And we would like to make some of these like salary reductions only temporary.

So again, a lot depends on the outlook for our business.

And as I stated and Keith stated, we are constantly reviewing our P&L structure so again I can't give you a specific answer.

I think the number if you look in the first quarter for operating expense, if you look at that compared to the third quarter of last year, it is down on an apples for apples basis by more than $20 million in a quarter.

So when I look at other companies, that's pure cash OpEx expense saving, and I think there we are certainly taking strong actions.

If we are required to take additional actions we will not hesitate to take them.

Okay, thanks.

If I could ask a quick question on the end markets.

Do you guys have any color at all for on outside of automotive where you saw the most weakness.

and obviously medical seems to have held up a little better, so any color on which one is under performed or out performed?

Well the simple answer to that one is Medical is the only market which it actually grew for us quite strongly, but it's the only market that was up.

Everything else was down, and they were all down fairly substantially.

That 16% down overall quarter-on-quarter, actually spread pretty well between all of the markets.

So there is really nowhere that was a safe haven, and other than automotive, nowhere that stands out as being particularly weak.

Your next question comes from John Pitzer from Credit Suisse.

Your line is now open.

Yes, guys, thanks for taking the question.

First Donald, you talked a little bit about pricing in December and what you expect for March.

I guess I'm trying to understand as units start to pick up, and we actually get into the recovery phase of the cycle, what's your expectation on ASPs and pricing in general?

Well, we stated, John, ASPs were relatively flat in the fourth quarter.

We did get some benefit there from currency which moved in our favor.

We don't have that currency benefit in the first quarter, and we've also got some longer term pricing contracts kick in in Q1, so that's why we stated 2% price erosion.

Now as far as inventories are concerned, I gave a very detailed explanation on inventories, basically the core inventories went down.

We had to build some bridge and we got some mark to fair market value inventories from the AMI and Catalyst acquisitions.

So if you like, stuff we could really take our action on we actually reduced, we plan to continue to reduce our inventories in the first quarter.

And as we stated in the prepared remarks, John, we anticipate that our distributer partners will also continue to reduce their inventories in the first quarter.

We haven't given any specific guidance on the second quarter but we did State that we expect that there will be a meaningful recovery in the second half.

So as far as an increased demand having a positive impact on ASPs, I think that's more of a second half story.

I guess Donald, are you at all concerned given where utilization levels are going to trough for the industry?

Pricing never seems to be the first casualty of a downturn.

It always seems to get more aggressive as unit demand starts to pick up.

And you're kind of indicating that a pick up in demand might be positive in pricing, and I'm just trying to figure out why you wouldn't be more worried about ASPs as demand starts to pick up.

Well, I mean, we remain vigilant on ASPs.

John I would be a foolish man to say that we have complete control over a huge market.

But I -- in our models that we project, we have always told the street that we take a 1% to 2% ASP reduction per quarter.

So the second half of the year we have not turned away from that for modeling purposes.

So we are not modeling an ASP increase in the second half.

We remain vigilant, but we will not be the instigator in the price war, as we believe we are in a relatively inelastic end market demand situation.

Yes, John, I would adhere really from a gross margin perspective that there may be some more pressures on ASPs, as the market starts to recover in the second half when there is some demand to go after.

But really, the gross margins are going to be mostly moved, just by the volumes that we've got in utilization rates.

If you look at what we've guided you to in Q1, we're having a substantial reduction in distribution revenue -- inventories.

And since we're sell-through, that won't roll through to the revenue line worse.

But it will mean that our factories are significantly underloaded, and we are reducing our own inventories at the same time, in a low demand market.

So utilization rates which were kind of mid 60's in Q4, will go to mid 40s in Q1.

And I think that that is an overwhelming impact on gross margins as you get to the second half versus any ASP impacts you may have.

Thanks guys.

Very helpful.

Your next question comes from John Barton from Cowen.

Your line is now open.

Thank you.

Keith just a follow-up on your last response.

40% utilization in March, what would that utilization figure be if the Phoenix fab were closed as of January 1 for the quarter?

Okay, that's a good question.

So that factory, yes, between 5% and 10% of the volumes in the number, so you could get the impact of that, into the number.

And in a previous response you were talking about or Donald was talking about the temporary cost savings, embargoes on bonuses, non-paid time off, etc.

How are you thinking about bringing that back in?

I mean how long can you stay in that scenario if revenue doesn't come back?

What type of revenue return would you have to see, until you start to bring that back?

What are the basic parameters the way you think about it going forward?

Well again basically the way we're managing business is no different.

We've been telling folks we're managing it for generating cash.

So as the business recovers to a point where our cash generation allows us to start returning some benefits, we're going to absolutely get on that.

To the extent that that doesn't happen in the near term, then we'll figure out what other alternatives are out there for us, John.

Last question if I could, in terms of design activity, the current environment that we're seeing at end customers.

Is it changing their design activity meaning are they accelerating to new projects to get design in because they are trying to hit lower price points?

Are they holding up on newer designs because they are trying to get new life out of R&D spend?

How do you see customers react?

You know, we see them react in all manners.

It really does differ by customer.

What I will say is we're seeing a larger percentage put energy into cost reducing existing platforms than we traditionally see.

You see some people who are accelerating new platforms.

You see some of them who are delaying new platforms, but the only real change in the last three or four months, has been more people putting more energy into cost reducing existing platforms.

Your next question comes Craig Berger from FBR Capital Markets.

Hi, guys.

So you've got three fabs closing in the first half of this year, and then Phoenix a little further out.

How do we think about that impacting the overall margin structure?

So it's actually going to be for the first three quarters of the year.

You'll get three fabs this year.

We won't get all of them out in the first half.

There will be some trickling into the third quarter.

From a gross margin perspective, again, just look at the -- maybe the simplest way to look at life -- is the volumes that those factories represent of the total.

And of course it is wafer fab, not wafer fab and back end.

So there is a factor of dilution if you will in the total GM.

But those three factories, when added together are going to be somewhere in the 20% to 20% plus percentage of the total volumes that will come out of the system.

So is it 20% of half of your COGS?

Is that the right way to think about that then?

That's not too far off.

Okay and then on the OpEx--

Again on the COGS, it's not the variable portion which is materials, it's the fixed portion.

I think the struggle we have with this, Craig, is that you've got a baseline something so if you baseline our Q3 activity, a fab closure and the ones we have announced are roughly on average $10 million, $8 million to $10 million a quarter savings.

That's based upon Q3 activity levels.

And that would give us an approximate 1.5% gross margin improvement.

But since the activity levels were guided to in the first quarter are 40% down on Q3, a lot of these savings are less going forward.

So that's why going forward, the gross margin expansion, isn't so much a fab closure story, as a revenue return to growth story.

And that's what we have to fight in our models.

Okay, thank you.

We can also see and compared to the Q3 run rates, Keith mentioned fixed costs.

We have taken $30 million, we're projecting $30 million of fixed cost reductions from the fab closures in our base, compared to a base Q3 run rate.

So again, as we made in our pre-announcement at the beginning of January, these actions were taken would be $30 million on fixed, $20 million on operating expense.

And in addition to that, additional cost savings from the closure we announced today, which would be approximately $8 million to $9 million savings, compared to the Q3 run rate.

And again, all this, Craig is we're not beating around the bush.

The reality is we have such a small fixed cost base relative to the total COGS.

You get a very big drop and so when you're trying to calculate percentages, it really, the revenue level is the most determinant factor.

Your next question comes from Tristan Gerra from Robert W.

Baird.

Your line is now open.

Hi, guys.

Following the shut downs in January, are Disty's seeing sell-through coming back in February?

And what would be your sell-in in Q1 sequentially?

So the early reports we're getting from Asia right now, Tristan, indicate a favorable bias post Chinese New Year.

We're hearing that some of the consumption rates were a little higher than they were planning on.

And therefore we're starting to see some more orders.

But I want to emphasize, we're talking a couple of days back now, from Chinese New Year.

So I don't want to declare victory and move on yet.

But it does seem like we're seeing a little better sell-through, and January was not as bad as we feared.

We mentioned earlier kind of one-to-one, if that includes our sell-through there.

So it actually was pretty reasonable other than of course the Chinese New Year week which goes down dramatically.

From a sell-in, sell-through perspective, our estimate is that we'll do approximately $25 million or so lesson sell-in than sell-through.

In other words, there will be a bleed of inventory of that kind of magnitude.

Of course we don't know that yet.

All of the orders aren't in from Disty, but that would be our best estimate as of today.

Great.

And also, where are you in terms of outsourcing right now as a percentage of revenues?

And what would be your target by end of year if this has changed from what you previously said?

Yes, so it's a little over 20% for us, including the acquisitions which were higher percentages of outsource.

We are moving aggressively to get more of that inside.

And based on the Catalyst piece and the AMI piece I would say that we have a chance of moving that model down 300 or 400 basis points by the end of the year.

Great, thank you.

Your next question comes from Parag Agarwal from UBS.

Your line is open.

Thanks for taking my question.

Just a question on your manufacturing consolidation.

Just wondering, where are we in the process, and in the sense, that how much is done?

And how much remains to be done?

And if you could provide a road map as to how we should think about it?

Sure, so the four inch line that we have in Europe, should be closed around the end of March time frame.

We've got a six inch line in Europe, that should be closed somewhere around July.

And then we have a five inch line here in the US that should be certainly by September see closure on that.

And then as we mentioned today the last factory, which is our six inch factory here in Phoenix, would be into the first quarter in 2010.

Okay, and second question is about your gross margin assumptions for the March quarter.

Just wondering what are the moving parts there?

Is it just utilization or is there anything else?

Well again, prices were not a significant factor.

We have been offsetting those with our normal cost reduction activities.

It's really utilization, we're pulling back very, very hard to get the inventories down, both in the distribution channel and internally, plus the lower end demand.

So it's really going to a mid 40s kind of utilization rate that has 90% of the impact.

Okay, thank you.

Your next question comes from Steve Smigie from Raymond James.

Great, thank you.

I was just wondering if you could give some color on inventory in the channel.

Not so much in terms of weeks or days of inventory, but so much as on a unit basis.

Is it to a level where kind of it surprised you how low it is?

Are your distributors being reasonable relative to the current demand?

I actually think they are being very reasonable and if anything, Steve, they have surprised me at how much inventory they are still keeping.

This could have ballooned a lot more than it has.

They've actually kept up fairly well, but it was clear in the fourth quarter, they weren't reacting quick enough.

I think now in the first quarter looking at their orders on us, they have done very appropriate actions to get us back into that 11-13 weeks of their model, but back toward the lower end of the model.

So in general, just surprised they haven't reacted more strongly in getting the inventory out.

Okay, and Donald, you mentioned some hope for measurable recovery I think were your words in the back half.

Is that just related to the fact that you think you're undershipping demand?

Or is there something else making you feel a little bit better about that?

Well I think it's exactly the first point.

We look at the down trend quarter on quarter for the major end market segments like PCs, handsets, consumer goods and even automotive.

And it certainly would appear to us from reconciling that that the consumption of semiconductors is still behind the consumption of finished products.

And we think that certainly will be -- will support a meaningful second half recovery.

Okay, thank you.

Your next question comes from Kevin Cassidy from Thomas Weisel Partners.

Your line is now open.

Thank you.

I wonder if we could shift gears a little bit and talk about the notebook position.

You said you're improving by 20%.

I wonder if you could put some framework around that?

Well, we of course measure ourselves by the number of what we'll call major board platforms that we win, pardon me, at the key manufacturers of notebooks, largely in Taiwan.

And so just kind of generation on generation, we've got about 20% more of those platforms and again, I think that itself-explanatory.

Okay.

So what I can't tell you is how many notebooks are going to sell.

So that's the reason we're giving you the data the way we are.

Right.

Any new customers or are they the same customers and just deeper penetration?

Deeper penetration for the most part.

And do you have an ASP?

That I don't have a single ASP because again it's blended.

Everything from the little low end books to the high end books, and it definitely varies by platform dramatically.

Okay, thank you.

Okay.

Your next question comes from Patrick Wang from Wedbush Morgan.

Your line is now open.

Great.

Thanks for taking my question.

The first one, is I know you guys talked about closing that six inch fab in Phoenix, and a $9 million quarterly impact.

Could you help remind us some of the ongoing programs you've got going on right now that permanently lower OpEx over the next year or so?

Okay, so we've got three other wafer fabs, a four inch, a five inch and a six inch that are being closed in 2009.

And I think Donald already gave you some numbers of approximate impact of $8 million to $10 million per quarter each.

And I've already given timing on that earlier in the call.

So those are factory closures on a permanent basis.

We've also had significant leaning out from a head count perspective looking across the Company for ways to get more efficiency.

And we announced that again there was over 10% reduction in headcount, before the latest announcement for the factory.

We -- again everything we've put in writing, it's salary reductions right now of the equivalent of two weeks per quarter across the Company, and elimination of bonuses across the Company.

No merit increases this year for anyone in the Company.

What am I missing, Donald?

Discretionary actions as well.

And so as Keith said, if you look at our non-GAAP operating expense in the third quarter, the reason why I say that is because it takes out the amortization of intangibles, non-cash based stock and things.

It was $131 million in the third quarter of last year, which is our reference point.

And we have about a $5 million of operating expense that we acquired through CAT, so adjusted it becomes $136 million.

And if you look at the mid point of the guidance, we gave for the first quarter, it's $115 million.

So again, that is a substantial reduction.

Now as I stated some of the actions we've taken, we hope will only be temporary like salary reductions.

And they give us approximately $8 million a quarter of savings.

So the idea will be as other economies kick in because some of the people haven't had the full benefit of the headcount reductions, we're going to eliminate an SAP system which will give us cost savings by the second quarter.

As these things kick in we are hoping that we will be able to restore some of the takeaways on the salary.

That's the current model, so we're not seeing any dramatic incremental savings going forward.

Marginal savings yes, big ones no, on operating expense.

But we remain vigilant as we stated, and that's all predicated on a meaningful second half recovery.

And if necessary, we will take other actions if not recovery is not there.

Okay, so I mean, if we think about OpEx over the course of the rest of the year, and I'm clearly not asking guys to provide any guidance here.

But directionally, is it something that we should think about trending downwards slightly?

Marginally downwards, yes.

Marginally downwards?

Not dramatically but marginally.

Got it.

And then second question here is in terms of utilization, I know you said that kind of mid 40s expected here in Q1.

If we think about going forward here based on what we do know about Q2 and such here, is Q1 likely going to be the trough for utilizations?

You know, right now the data would point to Q1, most likely being the trough.

Obviously its predicated on whether the end markets weaken further or not.

But at least with the look we have right now, because we're doing such a dramatic inventory reduction in distribution, it will probably be the trough.

Your next call comes from Craig Berger from FBR Capital Markets with a follow-up.

Hi, guys, just a housekeeping here.

You know First Call has you including stock comp expense, and so the numbers you lay out in your pro forma recon can't match our pro forma numbers.

You're aware of that, right?

Well, we give all of the different elements, Craig.

But I hear what you say, and we try to make things as explicit as possible.

So we have given all of the different ingredients, including our estimate of the non-cash based stock compensation going forward.

Any plans to stop excluding that as a pro forma charge?

We're going to look at that when we do next quarters results.

Thanks for the follow-up.

There are no further questions in queue.

Okay, thank you.

Thank you very much.

This concludes today's conference call.

You may now disconnect.