安森美 (ON) 2009 Q1 法說會逐字稿

Good afternoon.

My name is Marcello and I will be your conference operator today.

At this time I would like to welcome everyone to the ON Semiconductor first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer session.

(Operator Instructions).

I will now turn the call over to Mr.

Ken Rizvi.

Sir, you may begin your conference.

Thank you, Marcello.

Good afternoon and thank you for joining ON Semiconductor Corporation's first quarter 2009 conference call.

I'm joined today by Keith Jackson, our president and 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 first quarter of 2009.

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

Our earnings release in this presentation includes 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 JP Morgan Technology Conference on May 18th and the UBS Technology Conference on June 8th.

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 results or events 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 10K, Form 10Qs 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 first quarter results.

Donald?

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

ON Semiconductor Corporation today announced that total revenues in the first quarter of 2009 were $379.1 million, a decrease of approximately 22% from the fourth quarter of 2008.

During the first quarter of 2009, the Company reported a GAAP net loss of $33.9 million or $0.08 per fully diluted share.

The first quarter 2009 GAAP net loss included net charges of $47.6 million, or $0.11 per share from special items which are detailed in schedules to our earnings release.

First quarter 2009 non GAAP net income was $13.7 million or $0.03 per share on a fully diluted basis.

We exited the first quarter of 2009 with cash and equivalents of $402.4 million.

This was down approximately $56 million versus the fourth quarter of 2008.

During the first quarter of 2009 we reduced our debt by approximately $79 million, which represented just under $100 million in face value.

We also exited the quarter with the lowest net debt position in the Company's history as a public company of approximately $529 million.

At the end of the first quarter, total day sales outstanding increased towards historical norms at approximately 46 days.

ON Semiconductor total inventory was down approximately $36.3 million to $299.2 million or approximately 102 days.

Included in our total inventory is approximately $10 million of inventory written up for fair value related to our acquisitions and approximately $10 million of bridge inventory built during the quarter in preparation for our announced factory for our announced closures of four front end manufacturing lines.

Distribution inventories came down by approximately $28 million in the first quarter at just under 13 weeks.

Cash capital expenditures during the first quarter of 2009 were approximately $23 million.

The majority of the first quarter capital expenditures were related to capital equipment received in 2008 and paid for in the first quarter of 2009.

We still anticipate 2009 total capital expenditures of approximately $60 million.

During the first quarter, R&D and SG&A expenses were lower than expected due to aggressive cost control measures as well as the benefits from the settlement of intellectual property infringement cases of approximately $15 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 first quarter of 2009 our end market splits were as follows.

The computing end market represented approximately 24% of first quarter 2009 sales.

Industrial, military and aerospace represented approximately 20% of sales.

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

The automotive end market represented approximately 17% of first quarter sales.

The consumer electronics end market represented approximately 14% of sales and medical represented approximately 5% of sales.

During the first quarter on a direct billings basis, no ON Semiconductor product OEM customer represented more than 5% of sales.

Our top five product OEM customers were Continental Automotive Systems, Delta, LG electronics, Motorola and Samsung.

On a geographic basis our contribution from sales in Asia represented approximately 56% of revenue.

Our sales in the Americas represented approximately 23% of revenue and Europe represented approximately 21% of revenue during the quarter.

Looking across the channels direct sales to OEMs represented approximately 54% of first quarter 2009 revenue.

Sales through the distribution channel were approximately 34% of first quarter revenue and the EMS channel represented approximately 12% of revenue.

During the first quarter ON Semiconductor revenues broken out by our new segments were as follows.

Standard Products Group represented approximately 31% of sales.

The Digital and Mixed Signal Product group represented approximately 24% of first quarter sales.

The Computing and Consumer Group represented approximately 23% of sales and the Automotive and Power Group represented approximately 22% of sales.

We will publish the quarterly revenue, gross margin and operating margin break out of these segments in our Form 10Q filing for this period.

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

In the first quarter of 2009 we reduced our internal inventories substantially and believe there was a further leaning of inventory levels throughout the supply chain.

As an industry we believe we shipped fewer products than the end market consumed.

Since January, we have also seen a stabilization in our overall business as well as continued progression in order activity for the second quarter of 2009.

Our book to bill remains comfortably above one.

While there is still great uncertainty in the macro economy which can potentially dampen the recovery for semiconductors, we are cautiously optimistic that we have passed the bottom of the current semiconductor cycle.

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

We believe we can grow our market share in next generation notebook power management from the teens to over 20% exiting the year.

Our overall product portfolio which includes controllers, MOSFETs, audio amplifiers, protection devices, thermal management and standard products continue to position ON Semiconductor as a leading supplier of power management products to the computing end market.

We have also recently introduced a SenseFET, which combines our capabilities in thermal and power management.

This product is winning designs with a key leading notebook manufacturer.

In the netbook market we have secured design wins with two of the top three netbook suppliers for our power management products.

We are also developing products and solutions specifically designed to meet the needs of the netbook market which should expand our netbook SAM to above $3 per unit.

Looking into the second quarter, we have seen positive booking trends for the computing end market as our customers prepare for a seasonal second half uptick in sales of computing products.

In the wireless end market after a decline of over 20% when compared to the fourth quarter of 2008, we are beginning to see stabilization in the order patterns from our customers.

Along with new design wins for analog switches, audio amplifiers and protection devices we continue to see new design activity for our BelaSigna DSP products with Korean and indigenous Chinese handset manufacturers.

The BelaSigna product family comes from our acquisition of AMI Semiconductor.

In addition, we are winning new designs for the handset market based on the image sensor products acquired from AMI Semiconductor focusing on ambient light and proximity sensor applications for the wireless end markets.

These designs are scheduled for 2010 production ramps.

Similar to the computing end market we continue to see positive booking trends in the wireless end market as customers resume order activity and prepare for second half seasonality.

In the first quarter of 2009 we further invested in our technology capabilities by announcing a license and IP agreement whereby ON Semiconductor is now able to internally produce and offer mid range digital products.

This agreement enables a further extension of our digital capabilities to support next generation military/aerospace, communications, industrial and computing end market needs for customers.

We are also seeing expansion opportunities from the recent acquisition of Catalyst Semiconductor.

With our strong customer presence with leading distributors, EMS and OEM customers and cost effective manufacturing capabilities we believe we can significantly grow the revenues associated with this business over the next 18 months.

In the first quarter we continued to win awards from our customers.

We were named "Best Global Partner" by Chicony Power, formerly Hipro Electronics, as a leading notebook and desktop computing power supply manufacturer for our products and solutions supporting energy efficient ATX power supplies and notebook power adapters.

In addition, ZTE Corporation, a leading global provider of telecommunications equipment and network solutions awarded us their "Best Global Partner" award for the fourth consecutive year for our energy and cost efficient products and solutions and our outstanding customer support.

Now, I would like to turn it back over to Donald for other comments and for other forward looking guidance.

Donald?

Thank you, Keith.

Second quarter 2009 outlook.

Based upon current product booking trends, backlog levels, manufacturing services revenues and estimated turn levels we anticipate that total revenues will be approximately $395 million to $410 million in the second quarter of 2009.

Backlog levels at the beginning of the second quarter of 2009 were up from backlog levels at the beginning of the first quarter of 2009 and represent approximately 80% of our anticipated second quarter 2009 revenues.

We expect that average selling prices for the second quarter of 2009 will be down approximately 1% to 2% sequentially.

We expect cash capital expenditures of approximately $20 million in the second quarter of 2009.

For the second quarter, we expect GAAP gross margin of approximately 31.5% to 32.5%.

Our GAAP gross margin in the second quarter will be negatively impacted from, among others, expensing of appraised inventory fair market value step up associated with our acquisitions.

We expect non GAAP gross margin of approximately 33.5% to 34.5%.

Non GAAP gross margins exclude special items, which we expect to be approximately $7 million to $8 million.

For the second quarter we also expect total GAAP operating expenses of approximately $130 million to $135 million.

Our GAAP operating expenses include the amortization of intangibles, stock based compensation expense, restructuring, asset impairment and other charges which total approximately $25 million.

We also expect total non GAAP operating expenses of approximately $105 million to $110 million.

We anticipate interest and other expenses will be approximately $11 million for the second quarter of 2009.

We also anticipate non cash interest expense of approximately $9 million from the adoption of FASB Staff Position Number APB 14 1 relating to our convertible senior subordinated notes.

GAAP taxes are expected to be approximately $4 million and cash taxes are expected to be approximately $3 million.

We also expect total expect stock based compensation expense of approximately $15 million to $16 million in the second quarter of 2009.

This is up from the first quarter of 2009 based on our annual 2009 awards.

We currently expect stock based compensation expense to decline from second quarter levels in the back half of 2009.

Our current share count is approximately 425 million shares based on the current stock price.

Further details on share count and EPS calculations are provided regularly in our quarterly and annual reports on Form 10Q and Form 10K.

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

(Operator Instructions).

Our first question is from the line of Tristan Gerra with Robert Baird.

Please go ahead with your question.

Hi.

Good afternoon.

Your revenue guidance for Q2 implies about 30% decline year over year.

Based on customer feedback is it fair to assume that current levels of real demand reflect less than this decline including any lasting effect of inventory reduction?

And also, what would be your sell in sequential growth estimate in Q2?

So, Tristan, we believe we will continue to have a slight drain of inventory in the supply chain in the channel in Q2.

So, to answer your question, I do believe semiconductors will get a little bit leaner in Q2 than they were in Q1 indicating a further demand constriction over the end consumption.

So, that's the generic answer.

And then relative to a sequential on a sell in basis our sell in will go up, but less than the end demand because, again, we'll be burning some off.

So, that number would probably be closer to 10 plus% then what you see in the sequential sell through.

Okay.

And also your ASP guidance for Q2 is for a lower decline than normal trends and also in Q1, which is counter intuitive given the excess inventories in the whole food chain earlier in the year and the low utilization rate.

What's making this cycle decent and would you expect this trend to continue?

I'll speak quickly and then let Donald add in.

First of all, our first quarter normally sees our largest declines because we do our annual contract pricing in the first quarter of every year.

So, actually that is traditionally our biggest decline in any given set of quarters for a year.

So, just to set that part of it straight we typically do see the biggest declines because of the annual contracts we renew every year in the first quarter.

We also saw some pressures in the first quarter.

We did a high amount of turns in Asia and certainly on some of the commodity products the market squeezed us a little more than we expected.

So, the just under 3% for Q1 I think is definable between the annual contracts and a little extra pressure in a very, very slow season.

As we get to Q2 we don't have the annual contract impact.

The numbers we see there are less than 2% as you can see from our guidance and we're very comfortable right now in the turns market that we're seeing that that pressure actually is not as strong as it was in the first quarter.

So, all of that adds up to what we think will be less significant in Q2.

Great.

Thank you.

Our next question is from the line of Steve Smigie with Raymond James.

Please go ahead with your question.

Great.

Thank you.

I was hoping you could give us a little update on what the timing of the closure of the facilities look like.

Not the specific time, which I know you didn't put out in your press release, but what the expense drop-off would look like?

Is that going to still have some big step downs if those facilities come off line or is it going to be a more gradual impact on gross margin there and COGS on the factory closings?

Thanks.

Well, I think we've always said that the step function is not everything at the last minute.

We have announced closure of four facilities, which are ongoing.

This is why we built some bridge inventory, so our inventories would have gone down by an additional $10 million if we didn't have these special customer bridge builds in the first quarter.

So, there's a positive on building some bridge inventory, but we have been winding down the activities in several of our factories prior to closure.

So, we have seen some savings.

Now, what is fair to say is that we should see other additional savings in a meaningful manner in the fourth quarter of this year on a sequential basis and also in the second quarter of next year on a sequential basis.

So, what are these numbers?

They're probably in the $5 million to $10 million savings per quarter in COGS compared to the current run rate.

So, that's the kind of benefit we are simulating.

In addition to that we also run our factories very, very low in the first quarter; just over 40% for the front end and we are now stepping up our manufacturing activity.

So, that will help gross margin particularly going forward in the year.

So, I think you can see that Keith mentioned first quarter was a bottom.

Every indicator and there's some certain times suggest that and we have a lot of goodness to go forward as we close down the factories completely and as we ramp up production in the remaining factories.

Okay.

Great.

And just on the order patterns can you talk about how that went month by month throughout the quarter into April?

And I'm just curious; obviously, you guys had some pretty nice guidance and came in pretty solid Q1.

I realize your sell through, but was there some sort of pick up in OEM orders that allowed you to ship better revenues than anticipated and how that worked out.

Thanks.

So, order patterns, Steve, did pick up nicely after Chinese New Year and just basically continued to grow.

April was a very strong month setting us up not just for Q2, but actually starting to see some visibility into the third quarter.

So, simple answer is it's been a building year with January being the weakest and months strengthening from there.

Relative to OEM versus distribution interestingly enough those numbers actually tracked fairly closely.

We haven't seen a divergent pattern there, so our sell through on this, Steve, looks very similar to the trends on our OEM sell through.

So, there's really no pattern to look for other than it looks like the entire supply chain got a little bit too lean and definitely started ordering more.

Okay.

Great.

Thank you.

Our next question is from the line of John Barton with Cowen and Company.

Please go ahead with your question.

Thank you.

Keith, if we could go back to pricing for second.

You explained the reason for the pricing in March annual contracts, et cetera if it's a benign pricing environments you're looking at for the June quarter.

As you look into the back half of this year, if we assume that we have seen the bottom for the semiconductor industry, is there any reason to think that pricing would be out of the norm for the back half or how do you expect your competitors to act in the back half?

Well, again, I don't see anything out there that would make it an abnormal pattern.

We have seen capacity come offline.

We do believe, as I've said in earlier conferences, that this year will be down from 2008, but I think folks have taken some pretty appropriate actions across the industry to get their cost structures in line with that.

So, I guess I really don't see anything that's going to prompt an abnormal reaction.

In the press release you highlighted the fact that the June quarter backlog is stronger than the March quarter backlog because customers are feeling more comfortable with the current demand environment, et cetera.

Are we at a point where they're actually starting to book into the September quarter at all?

Are you getting any increased visibility out further in time?

Yes, we are and as I mentioned earlier we are actually seeing some orders being placed outside of our lead times which means our lead times are still fairly short, but they're placing orders in July and August anyway.

So, we're definitely seeing that.

And at least as of today the order pattern would be strengthening for Q3 over Q2.

Last question if I could, Donald.

There are some temporary cost savings within your OpEx in particular forced times off, et cetera.

How should we think about those costs potentially coming back into the model?

Excellent question and totally related to the uncertainty of the future.

We only give guidance one quarter at a time for valid reasons.

Those of you who have been along for the ride in the last few quarters will understand that our record at the end of last year wasn't great.

So, we're very humbled by that and you're right.

We have temporary savings, particularly on the salary front.

You can estimate them to be in the region of $10 million a quarter or so.

I think what could be fair to say is that we are trending positively to get some of that back in the second half, but we are not sure of that because we have to get a little bit of visibility on the third and fourth quarter backlog.

That's the question neither of us are going to take a bet on now.

So, I think what you could assume is a modest increase sequentially depending on how strong your top line revenue growth is.

If you see revenue growing seasonally, which I would say would be 5% plus in your model, then you can assume a $2 million to $3 million per quarter increase in the [subs] and the fourth quarter sequentially.

Something like that is probably the best modeling.

But I will repeat we do not know what the September quarter is going to be and I remember not so long ago sitting in the same room thinking that Q4 revenues of last year would be flat over Q3.

That did not happen, so we have been humbled by the decline in our business.

As someone mentioned, Tristan actually, 30% year over year.

So, we are going to be careful in announcing dramatic outcome in the second half.

Understood.

Thank you.

Our next question is from the line of John Pitzer with Credit Suisse.

Please go ahead with your question.

Good afternoon, guys.

Thanks and congratulations.

Donald, you talk about utilization of 40% in March quarter and ticking up.

Any guidance for the June quarter and I guess the implications for your own inventories?

Do you feel like June they decline again?

Are you at the right level or do you need to build some here?

This is Keith.

We'll be declining internal and most likely distribution inventories again in the second quarter.

Although we've been bringing them down pretty dramatically they're still higher than we like on a days basis, so we will be bringing them down.

I would expect our utilization to be closer to 50% than 40%, which in the first quarter is around 40%.

And then, Keith, just relative to end markets going into the June quarter.

Are you seeing sequential growth across all end markets or can you help me characterize which are growing, which aren't growing?

And then specifically as you start seeing some visibility build into the September quarter is there any end market specifics surrounding that or is that just a general statement?

So, the generality part of that is that the consumer markets are doing consumer related markets so, computing, communication, the handset market, the game boxes, etc.

Those are doing preparatory orders for a somewhat seasonal year.

So, we're seeing those orders come in first.

The large capital equipment markets, the industrial, the automotive piece of the equation continues to play that very close to the chest and those orders are not accelerating above and beyond the consumption rate.

Keith, would you expect the industrial autos to be down again sequentially in the June quarter?

I don't know yet.

Typically they are down in the third quarter, not the second quarter.

At this stage I would not be looking for a significant decline in the second quarter, but I don't know whether it will be up or down yet.

And then my last question, guys.

Donald, just given some of the rhetoric coming out of Washington about foreign tax jurisdictions and what not, given your effective tax rate relative to your peers is significantly lower.

I know some of that is NOL based, but some of it is kind of your tax structure.

How do we think longer term relative to what could happen out of Washington realizing that it's probably premature to figure out what exactly the proposals out of Washington might be?

Well, a lot of people are asking questions, John, and I think you're right.

I think the [flying kite] too early to tell and no matter what is enacted I don't believe will be applicable until 2011.

So, it's not exactly for tomorrow or next week.

But if you take the worst case scenario where we enact everything that is said then clearly that's going to be more taxes for all companies including ourselves, the difference being between cash taxes and P&L taxes.

So, if you take the worst case every company in America will probably go to something like a 40% tax rate as far as the P&L is concerned.

As far as cash is concerned after they enact it we will have well over $1 billion of NOLs, which should protect us for something like four or five years after the 2011.

So, that is a very simplistic analysis and subject to full disclosures.

We don't know, but that's a worst case.

Our interpretation is that there will be some hybrid version of the worst case.

So, it's certainly not something that I'm losing any sleep over, but I certainly hope that Congress wishes to reason and doesn't penalize all North American resident companies with what would be probably the highest corporate tax rates in the world.

Great guys.

Appreciate it.

Thank you.

Our next question is from the line of Chris Danely with JP Morgan.

Please go ahead with your question.

Hey, guys.

Good afternoon.

This is [Svinc Nattamini] calling for Chris Danely.

Just a clarification on your comment about inventory levels.

You did mention that inventory levels would go down above distribution and internally for the quarter.

Do you get a sense for which of the end markets have worse inventory problems than the others.

For example, is the computing inventory level much better than it is wireless?

I don't know if you can add some color on that.

I would say that I would expect to see some decline in the automotive and industrial portions of the business from a channel and an internal inventory levels.

I don't think you'll see much of a decline in computing and I would be surprised at a decline in the wireless handset business.

So, really it's really the markets that have not yet picked up which will be driving that decline.

Okay.

That's helpful.

And then a comment on gross margin.

You said utilization rates should go up from about 40% this quarter to 50%.

Why wouldn't gross margins go up dramatically more than what you're forecasting for the upcoming quarter?

Well, I think the gross margin if you look at [stripping out] all the step up inventories and all the rest we came in about 31% just over 31% in the first quarter and we'll go to 34% in the second quarter.

So, I think that's quite a nice uptick.

So, I don't think there's any padding there.

That's a nice improvement, 300 basis point improvement in gross margin is, I think, totally supported by the increase in revenue and activity.

Okay.

Great.

Thank you.

Very helpful.

Our next question is from a line of Craig Berger with FBR Capital Markets.

Please go ahead with your question.

Thanks for taking my question, guys and nice job on the numbers.

Can you help me understand with all these [stag] closures going on, I think you said $5 million to $10 million of COGS savings in Q4 and another $5 million to $10 million step up in which quarter?

The second quarter of 2010.

Okay.

These savings would be incremental to the run rates we have today, so you can add those together.

And so with that type of plan where do you see revenues needing to be to get to a 40% gross margin?

Well, a lot of people are asking these questions and I gave my speech on how uncertain the future is and how our recent past record has not been great.

What I can say is that we had published just a year ago when we had an Analyst Day here in May of last year our corporate model was $600 million and 45% gross margin.

We have not republished that model, but what we can see is that our internal simulation suggests that the 45% gross margin will be significantly less than the $600 million that was our previous number.

I'm not going to give a big heavy disclosure on that now.

We'll be planning another Analyst Day in November and we want to keep some surprises and some good news for that.

But the cost reductions that we have accelerated will bring it down materially from the $600 million we previously announced.

And so then, at the 45% we just have to extrapolate between the midpoint of a range for the second quarter what your progression in revenue is going to be.

And the faster revenue grows, the faster our gross margin will get to 40%.

As we mentioned our second quarter, our June quarter guidance is 30% approximate year over year decline.

If we get to a situation where we've got 20% year over year decline in the September quarter that will do great wonders for our gross margin.

So, again, we have no idea how that September quarter is going to turn out but it's all to do with the progression in revenue and we'll let you guys do your simulations.

But as I said we have been chastened by the recent past.

Can you comment on a few things?

One, what are you seeing with the lead times?

Are you seeing any lead time expansion that could cause customers to replenish?

And also can you comment on why the stock comp expense is going up so much?

Is that $15 million to $16 million this quarter?

On the lead times, Craig, we're running approximately six on our highest volume lines.

In some of the areas that's starting to extend a bit.

I can certainly see those reaching eight weeks during this quarter for a lot of those lines.

But it's nothing like what we ran even a year ago, which were kind of the eight to 10 weeks.

So, that's kind of the range on the ASP side.

On the stock comp, one of the elements is we issued or are planning to issue we haven't issued any some performance based RSUs, restricted stock.

The way the accounting treatment goes for these is similar to a double decline in depreciation.

There's a lot of up front expenses.

So, that peaks out in the second quarter of this year and will materially decline as we reach next year.

And so, that's the element that explains the increase in the non cash based stock compensation.

Last one.

Can you update us on Catalyst?

How's the integration?

What's the revenue growth opportunities look like?

Thank you.

So, catalyst integration moves along for us.

We won't have them fully in our systems for a few more months, so the IT work continues.

But the sales force is completely up to speed.

They're out selling.

The manufacturing teams are well along their way in qualifying our internal factories for that.

So all that is progressing pretty well.

We do expect to see expansion significant expansion in the second half of this year in the revenues based on all of the customer qualifications that have been going on for the last four or five months.

So, really looking for a nice, nice acceleration in the September and December quarters.

Our next question is from the line of from Romit Shah with Barclays Capital.

Please go ahead with your question.

Good afternoon.

Thanks for taking my question.

TO the best that you can could you guys just help us understand the difference between you and Fairchild?

Keith, you mentioned that you expect sell in rates to be less then sell through in Q2.

If I look at the guidance between the two companies, Fairchild guided revenues up I think 15% to 20% sequentially.

They've recognized on sell in.

I'm just struggling to reconcile that versus your outlook of mid single digit growth.

Does it have to do with end market exposure?

Are there some market share shifts we should be thinking about?

Thanks a lot.

I don't think there's any market share implied in any of those numbers.

I think we have different distribution models in what appropriate stocking is, et cetera.

So, I think most of the difference between the two numbers is all about how much inventory you stick in the distribution.

I don't think there's any end market implications.

Okay.

That's helpful.

And then Don, can you give us the how stock comp splits this quarter between cost of goods sold and OpEx?

Yes.

It's usually about one third, two third; one third COGS and two thirds OpEx.

Okay.

Thank you.

Our next question is from the line of Parag Agarwal with UBS.

Please go ahead with your question.

Yes, nice quarter.

Question on the computing market.

Could you guys comment on how the competition is shaping out especially in the notebook market and are you guys getting share in that market?

We do believe we're gaining share and in my commentary I actually kind of gave you some forward guidance there with appropriate disclaimers.

But we think we're going to kind of go from low to mid teens of market share in power management to the over 20% during the year.

So, we think exiting the year we will have picked up quite a bit of share.

And it is all based on design wins we've got in the new platforms and in the netbooks.

So, we're actually seeing some pretty good momentum there.

Okay.

My next question.

What is your target inventory level?

So, we like to keep something south of 90 days internally and around 13 weeks in distribution in normal times, whatever normal times are.

And then there's transition periods that seem to constantly be going on that impact that.

But that's kind of the targets.

Okay.

Thank you.

Our next question is from the line of Terence Whalen with Citi.

Please go ahead with your question.

Great.

Thank you for taking my question.

The first one relates to some of the commentary on order patterns.

It sounds like orders build strength month to month throughout the first quarter and I think you alluded to a very strong April month as well.

I guess my question is if 1Q were sort of back end loaded with orders would you expect 2Q to be a little bit front end loaded in terms of the order strength or a little bit more linear?

So, again, I'll go to typical seasonal patterns.

We actually have it back end loaded not front end loaded because most of the consumer builds take place in September/October of the year and typically you have kind of eight week lead times.

So, normally seasonally what we would see is the strongest month would actually be June in the April/May/June time frame.

Okay.

So, you anticipate orders could actually strengthen from here into August/September?

I actually don't know that.

As Donald said, we're being very cautious on predicting the future.

All I can tell you is that so far it started off quite well and we'll have to wait till June gets here to know the answer to that question.

Seasonally, that happens normally.

Thank you.

My follow up would be let's see.

I guess you cited some interesting share gain in PC.

What would be an area outside of PC that you think you guys are also gaining share; another area that we could look at?

Thanks.

We continue to have, we believe, more dollar content in the various mobile devices arena.

And whether those are PC lights or cell phone heavies I'm not sure what you want to call those, but that continues to be a very big a growing market for us with the more fuller featured mobile devices.

And that's quite strong.

And even though the market is still in decline in automotive I would expect significant share improvement.

Our next question is from the line of Ramesh Misra with Brigantine Advisors.

Please go ahead with your question.

Thanks guys and good job on the numbers.

In terms of the order patterns, again, from what you're seeing right now would you anticipate the second half versus first half normal seasonality trends to persist or do you see that being meaningfully different partly because of the environment and also partly because of the acquisitions?

I believe that I guess if you're asking for our best guess right now we don't see anything that would make a dramatic shift to normal seasonal patterns.

The inventory over corrected as it always does when there's a market move in the first half, which would give you some comfort in the second half being stronger, but that is the normal seasonality is the second half strong by roughly 5% sequentially as you go into Q3 and Q4.

So, we're not seeing anything that suggests anything dramatically different than normal seasonality.

Okay.

In regards to your current business it seems like Q1 came in a little stronger than expected.

Are you beginning to see some customers' concern of extremely low inventories and kind of scrambling a little bit?

Yes.

We spend a lot of dialogue now with customers who are very concerned.

They know they're not placing orders and they are concerned that they're going to have to, but they don't want to place orders.

And so, there's a lot of dialogue on how confident should I be that you guys will have material for me if I need it?

And that's a very different dialogue then you had in the December quarter.

So, it's definitely moving around.

People are starting to pay attention to their supply chain.

I believe it also will be reflected in the ASPs as we talked about earlier with a little lessening of the pressure.

But in general the answer is there's a lot more attention being paid now and concern to the September quarter than we've seen in the past.

Okay.

That's very helpful.

And then a final question for Don.

Can you just go through the moving parts in your long term debt, Donald?

It obviously came down quite substantially.

You bought some repurchased some of it back.

Can you just itemize the different ?

The long term debt has mainly got converts in there.

We have taken the face value down off our zero coupon by $130 million, so we've got just over $600 million of converts, but about $175 million of a bank facility.

So, the total of converts and bank facility is about $800 million and then there was a lot of miscellaneous stuff for their small leases, equipment leases and things like that.

Our strategy has been opportunistic both in the fourth quarter and in the first quarter.

We paid down near term zero coupon converter.

The reason for that being it's an out of the money convert that we expect to be put to us in April of next year and that's why we have paid down over the two quarters approximately 50% of that convert or approximately $130 million of face value.

We will continue to be opportunistic in the future.

There are certain legal constraints on how you go about buying back debt or paying down debt.

I think our track record has shown that we can be imaginative and take advantage of dysfunctions and prices in the market.

We will continue to explore these opportunities.

But what I can say is our overall strategy still remains strengthen the balance sheet by driving the business to generate cash and use that cash to pay down the debt.

That's what we've been doing since last summer and we will continue to pursue that strategy.

Our next question is from the line of John Vinh with Collins Stewart.

Please go ahead with your question.

Great.

Thank you.

Hey, Donald, just a real quick question on OpEx.

Can you clarify the increase in OpEx in Q2?

Is that primarily because of the IP settlement gain of $15 million in Q1?

Is that why we're seeing the increase in OpEx there?

This was an unpredictable gain.

We are still pursuing other avenues there.

We may have other gains in the future, but it's very unpredictable; therefore, we are not forecasting that in the second quarter.

So, if I X that out it looks like OpEx is kind of flat to up.

Can you also clarify how we should be thinking about OpEx for the rest of the year?

We give only one quarter guidance and I don't want to get into giving guidance for the third and fourth quarters.

I just remind you that I was asked a question on some of the temporary cost reduction measures and I was saying as long as the revenue grows sequentially in the second half by 5% then you can add in another couple of million of expenses per quarter.

And so, that would be an OpEx.

So, I'm just repeating what I said and guiding you through the maze.

But as I said we only give guidance one quarter at a time for good reason.

Okay.

And just one more follow up question on pricing.

Some of your peers have talked about pricing pressures in the computing segment that they expect to continue in Q2.

Are there still areas where you still see some pricing issues in Q2 or has pricing largely stabilized at this point?

Each market and product category has a little different sets of pressures in them.

So, what we give you, of course, is a corporate aggregate number.

That doesn't mean that there isn't any pressure anywhere.

So, the answer to your question is or very well could be certain areas that still see some pressure.

Computing is quite large for us, however, and I'm actually not seeing anything that would indicate to me that that is a segment which will see increased pressure over Q1.

And really nothing in computing that says it's in fact, I think it's improving over Q1.

So, not seeing the same trends that you're reporting.

Okay.

And then just one more follow up question on the Catalyst integration.

Can you talk about maybe what you think the incremental revenue contribution in the second half is as you start to see the acceleration there?

Is there a gross margin incremental benefit from the integration into your [Gresham] there?

Thank you.

Definitely an impact.

I actually don't have the gross margin calculated, so I actually can't give you those numbers.

I haven't calculated it that way.

But definitely getting things into Gresham and into our Philippine factories will have a positive on the Corporation's gross margin overall and we believe the business is going to grow in the second half.

So, it should be a good story, but just keep it in perspective it's something like 5% of sales.

So, it's not going to double our gross margins.

Our next question is from the line of Mark Lapacis with Morgan Stanley.

Please go ahead with your question.

Great.

Thanks for taking my question.

Keith, question for you.

I may have heard you wrong, so please correct me if I did.

In the earlier part of the script I think you said that you expected a drain in the supply in the channel inventories, but I think later on you said something like the supply chain became too lean and then started ordering again.

So, I was just trying to reconcile that.

If you could help I'd appreciate it.

I guess if you look at the entire supply chain there's us as suppliers, then we have our intermediaries, which are distributors and then we have the end users.

What I believe is still too lean is the end users.

So, I think they had to start placing more orders and, of course, that kind of ripples back through.

But having said all of that there are still pieces of the market that are not growing like the consumer driven pieces and I think in those areas we will continue to lean out the channel.

And so, the net for us as a company is going to be a slight drain in both internal inventories and distribution inventories in Q2.

Okay.

Thank you.

Very helpful.

Our next question is from the line of Kevin Cassidy with Thomas Weisel Partners.

Please go ahead with your question.

Thank you for taking my questions.

In the automotive can you give a little more detail on what your exposures are for Europe and North America and Asia?

So, our exposure in now over half our business is in Europe and something less than 10% is in Asia and the balance is in North America.

So, from just a pure mathematical perspective that's where it goes.

The percentages I would expect to continue to increase in Europe and Asia and decrease in North America based on what we're seeing with those end marketplaces.

So, I think I give you kind of a snapshot, but the point is I think it will continue to be more and more non North American over time.

Okay.

Great.

There's another market segment in notebooks, the consumer ultra Low voltage notebook.

Do you have an idea?

Do you see that market as anything different than the standard notebook?

You've got netbooks on one end and you've got full feature notebooks on the other end and you've got this low voltage thing kind of in the middle.

I'm afraid time will have to tell how that really shakes out for us.

We are well positioned for all three of those at this point.

Okay.

Do you think your dollar content is any different?

The dollar content on the low voltage notebooks is higher than the netbooks and lower than the full feature notebooks.

Okay.

So it does just fit right in the middle?

It fits right in the middle.

Okay.

Great.

Thank you.

Our next question is from the line of Patrick Wang with Wedbush Morgan.

Please go ahead with your question, sir.

Thanks a lot.

Just a couple questions.

Based on what you know today is it fair to assume that your inventory drain ends next quarter?

I would believe that would be our plan.

We would be looking at being more neutral in the second half.

Okay.

Got you.

And then just on the ASP here.

If you could talk about some of the ASP erosions you're seeing between I guess your variety of analog parts versus your discreets.

It is most severe.

The ASP declines are most severe on the discreets pardon me; least severe on our complex analog and it's not quite a continuous gradation in between, but to a first approximation that's what it looks like.

Okay.

On the analog side can you ballpark that?

Is that kind of 3% to 5% erosion on average or is it a little better or worse than that that?

So, we had less than 3% for the entire quarter company average, and so, the analog piece of that would be much less than 3%; probably closer to 1%, 1.5%.

Okay.

And last question for Donald.

If you can give us an update regarding your thinking behind how you use the cash and maybe perhaps your plans for paying down debt for the rest of this year.

I think I've answered that question, but again, I say the strategy is to run the business so that under all circumstances we generate cash.

I think we proved that in the first quarter and use the cash generation to pay down debt.

We've paid down just under $100 million of face value of debt in the first quarter.

We paid down $66 million I believe in the fourth quarter of last year.

And so, that is the strategy we have launched since last summer.

We will continue to drive the business to generate cash to pay down debt.

And so, that's what we'll do and we'll be opportunistic on how we time that to take advantage of any pricing dysfunction in the market and any bargains that can become available.

Okay.

But no guidance in terms of how much you're going to pay down the rest of this year?

No.

For a variety of reasons, I think, we have some maturities which I believe are on the order of $60 million to $70 million, which we are obliged to pay down.

Next year it's on the order of 200 $160 million, so couple these two together you get about $250 million over this year and next year.

So, we're obliged to pay that off and the timing of that we will keep our options open and any additional payoffs or pay downs we will keep our options open as well.

Okay.

Thanks so much and great job with the numbers.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

This does bring us to the end of today's conference call.

We would like to thank you for joining us and for your participation.

You may now disconnect.