安森美 (ON) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the ON Semiconductor second quarter earnings call.

(Operator instructions) Thank you.

I would now like to turn the conference over to Mr.

Ken Rizvi.

Sir, please go ahead.

Good afternoon and thank you for joining ON Semiconductor Corporation's second 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 second quarter of 2009.

The script for today's call is posted on our website and will be furnished via a Form 8-K 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 Piper Jaffray Semiconductor Conference on August 25th and the Citigroup's Global Technology Conference on September 9th and 10th.

During the course of this conference call we will make projections or other forward-looking statements regarding future events or the future financial performance of the Company.

The words believe, estimate, anticipate, intend, expect, plan or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business, including factors that could cause actual results to differ from our forward looking statements, are described in our Form 10-K, Form 10-Qs and other filings with the SEC.

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

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

Donald.

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

ON Semiconductor Corporation today announced that total revenues in the second quarter of 2009 were $419.8 million, an increase of approximately 11% from the first quarter of 2009.

During the second quarter of 2009, the Company reported a GAAP net loss of $3 million or $0.01 per fully diluted share.

The second quarter 2009 GAAP net loss included net charges of $41.7 million, or $0.10 per fully diluted share from special items, which are detailed in schedules to our earnings release.

Second quarter 2009 non-GAAP net income was $38.7 million or $0.09 per share on a fully diluted basis.

We exited the second quarter of 2009 with cash and equivalence of $403.4 million.

During the second quarter of 2009 we reduced our total debt by approximately $27 million.

We also exited the quarter with the lowest net debt position in the Company's history as a public Company of approximately $501 million.

At the end of the second quarter, total day sales outstanding increased to approximately 55 days.

Day sales outstanding increased from the first quarter due to a sharp increase in revenues during the last month of the quarter as well as a discontinuing of asset-backed financing secured by offshore receivables.

ON Semiconductor total inventory was down approximately $30 million to $269.5 million or approximately 87 days.

Included in our total inventory is approximately $8 million of inventory written up to fair value related to our acquisitions and approximately $5 million to $10 million of bridge inventory built during the quarter in preparation for our announced closures of front end manufacturing facilities.

Distribution inventories came down by approximately $8 million in the second quarter and are approximately 11 weeks.

This is at the lower end of our historical range.

Cash capital expenditures during the second quarter were approximately $15 million.

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

During the second quarter, R&D and SG&A expenses were lower than expected due to continued aggressive cost control measures.

We have reduced R&D and SG&A expenses, excluding stock based comp, and adjusted for the capital as acquisition by approximately 30% compared to the third quarter of 2008 through the hard work and effort made by all our employees.

This has enabled us to come through this difficult economic period with continued strong cash flow generation.

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

Thanks, Don.

Thanks, Don.

Now for an overview of our end markets.

During the second quarter of 2009 our end market splits were as follows.

The computing end market represented approximately 27% of second quarter 2009 sales.

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

Industrial, military, and aerospace represented approximately 18% of sales.

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

The consumer electronics end market represented approximately 13% of sales and medical represented approximately 5% of sales.

During the second quarter on a direct billings basis, no ON Semiconductor product OEM customer represented more than 4% 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 62% of revenue.

Our sales in the Americas represented approximately 23% of revenue and Europe represented approximately 15% of revenue during the quarter.

Looking across the channels, direct sales to OEMs represented approximately 47% of second quarter 2009 revenue.

Sales through the distribution channel were approximately 42% of second quarter revenue and the EMS channel represented approximately 11% of revenue.

During the second quarter, ON Semiconductor revenues broken out by our segments were as follows.

Standard Products Group represented approximately 32% of sales.

The Digital and Mixed Signal Product Group represented approximately 24% of second quarter sales.

The Computing and Consumer Group represented approximately 22% 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 10-Q filing for this period.

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

After a very challenging period for the industry and ON Semiconductor, we are beginning to see stabilization in each of our end markets and a resumption of seasonal growth patterns in our consumer oriented end markets.

The aggressive actions the Company has taken to reduce our overall cost structure, including the rationalization of our manufacturing network, puts ON Semiconductor in a favorable position when the industry fully recovers from the current economic downturn.

These actions also further improve our leadership position in manufacturing efficiency within the industry.

During the second quarter, we continued to rationalize our inventory levels.

Over the last two quarters, we have reduced internal inventories by approximately 20% or $66 million.

In addition, inventories in the distribution channel have come down approximately $33 million in the last two quarters.

While there is still great uncertainty on the trajectory of the economic recovery, we believe the worst of the crisis is behind us.

In the computing end market we saw growth of approximately 25% from the first quarter of 2009.

After two consecutive quarters of inventory depletion, we saw a resumption of orders and strong demand for our products.

In the newest generation of desktop platforms, expected to ramp in the back half of this year, we have content exceeding $4 per box with a top three global desktop supplier.

During the quarter, we also made significant inroads with one of the top two high-end graphics cards manufacturers.

We recently won a 6-phase VR11.1 controller, three additional controller wins, as well as numerous MOSFET wins with this customer.

Product from these wins will begin in the third quarter of 2009.

We continue to expand our presence in the notebook controller segment, having penetrated a new top five notebook supplier.

With this customer, we also have won additional sockets in LED lighting, regulators, custom ASICs and SenseFETs, which combine thermal capabilities required from analog devices along with our MOSFET technology.

We have also recently introduced our next generation of MOSFETs for desktops, notebooks, and netbooks that utilize our trench 3 process, enabling increased efficiency and faster switching performance in a smaller die.

We are expecting to see strong demand for this product in the back half of this year and into 2010.

In the wireless end market, we are beginning to rebound from the market lows of the first quarter of 2009.

In the second quarter of 2009, our handset revenue increased by more than 10% sequentially.

We also continue to make progress with our handset OEM customers.

During the quarter, we secured new design wins that more than double our content in all next generation multi-media phones of a top five global handset OEM.

In the second quarter of 2009, we also saw a rebound of sales into the automotive end market of approximately 8% from the first quarter 2009 levels.

While there is still great uncertainty as to the rate of recovery for the automotive segment and normally the third quarter is seasonally down, we believe the automotive end market will show improvement in the third quarter of 2009 as production rates continue to increase at many global automotive manufacturers.

We continue to expand our presence with Chinese auto manufacturers, having recently won new designs in audio and dashboard power supplies.

We are also winning designs for infotainment and driver experience enhancement applications with our BelaSigna audio DSPs, switching regulators, and protection devices that are expected to go into production at the end of this year.

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

We received the First Quarter Support Award from [Huawei] for our outstanding service.

And we also received the Pinnacle Award from Delphi for our commitment to quality, value, and cost performance.

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

Donald?

Thank you, Keith.

Third quarter 2009 outlook.

Based upon current product booking trends, backlog levels, and estimated turn levels, we anticipate that total revenues will be approximately $445 million to $455 million in the third quarter of 2009.

Backlog levels at the beginning of the third quarter were up from backlog levels at the beginning of the second quarter and represent approximately 90% of our anticipated third quarter 2009 revenues.

We expect that average selling prices for the third quarter will be down approximately 1% sequentially.

We expect cash capital expenditures of between $10 million and $15 million in the third quarter of 2009.

For the third quarter, we expect GAAP gross margin of approximately 35% to 36%.

Our GAAP gross margin in the third quarter will be negatively impacted from among others things, expensing of appraised inventory fair market value step up associated with our acquisitions of between $3 million and $4 million and stock based compensation expense of approximately $3 million.

We expect non-GAAP gross margin of approximately 36.5% to 37.5%.

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

For the third quarter we also expect total GAAP operating expenses of between $120 million and $125 million.

Our GAAP operating expenses include the amortization of intangibles, stock based compensation expense, restructuring, asset impairment, and other charges, which total approximately $20 million.

We also expect total non-GAAP operating expenses of approximately $100 million to $105 million.

We anticipate interest and other expenses will be between $10 million and $11 million for the third quarter.

We also anticipate non-cash interest expense of approximately $8 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 $3 million.

We also expect total expect stock based compensation expense of approximately $13 million to $14 million in the third quarter.

Our current fully diluted share count is approximately 435 million shares based on the current stock price.

This includes the full impact from performance based restricted stock units that should rest over a three-year period based upon meeting certain financial hurdles.

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

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

Can you open the lines for the Q&A session please?

(Operator instructions) Your first question comes from Romit Shah of Barclays Capital.

Hi guys.

Thanks for taking the question.

Last quarter, if I remember correctly, you had guided with 80% backlog coverage in this quarter year.

You're guiding with 90% backlog coverage.

Could you just give us a feel for why you're being more conservative with the outlook for the third quarter?

Well, two things.

10% is our more normal fill rate, Romit, if you look at our long-term trends.

And so, we normally do go in that amount.

In the second quarter, we knew that things had been depleted and had heard from customers that they were going to be doing more turns.

I think Q3 will be a more normal pattern for us.

And so again, we're back into that 10% range.

And then secondly, again just looking at how these order patterns have come in, we do believe that there was some concern in our customer base for supply during the seasonal up Q3.

And a lot of those orders came in earlier than they would have on a comparable quarter in Q2.

And in terms of what's driving your business in Q3 is it similar to what we saw in Q2 with computing sort of leading the way?

Certainly computing will be a strong piece of that as well as the other consumer areas like the gaming and consumer communications devices.

So, really it is a consumer-led increase and that was indeed very similar to Q2.

Okay.

And then just my last question on operating expenses.

Donald, you said in the past that you had about $10 million in temporary savings.

Are we seeing any of that come back here in the third quarter?

Not really.

You're right.

I think it's fairly fair to say that we were very, very pleased with our operating expense performance in the third quarter.

We have been guiding much higher than the numbers that came in.

We've been guiding something like $108 million.

We came in just under $100 million.

And so the guidance for the third quarter on a non-GAAP basis will be a little bit backed, maybe a couple of million, but not anything substantial give back albeit of a much lower base then we had previously guided.

So, I think we're seeing the additional benefit of the strong cost reduction actions.

And as I mentioned in the formal part of the script, we are [bearing] approximately 30% in our operating expenses compared to the third quarter of last year on an apples-for-apples basis, excluding non-cash based stock comp for revenue that's down less than that.

So, we're actually seeing some leverage from very aggressive and fruitful operating expense control.

Would you expect adjustments like to salary to rollback in Q4?

Is it too early to tell?

We don't give guidance for Q4, but obviously we are open to restore things as business conditions improve.

And so, that's something that's not off the table.

Thank you.

Your next question comes from Craig Berger of FBR Capital Market.

Hey guys.

Thank you for taking my question.

I guess one of the things I'd like to understand better is how much -- I know you guys have recently closed of fabs, you're working on a couple more.

How much gross margin benefit have we already seen from closing and consolidating your fab capacity?

And how much more might still be ahead of us?

Well, at this stage, we really only have one fab that was fully closed during the quarter.

It was closed at the end of Q1.

So, you probably saw something that was approximately $3 million of impact in Q2.

We're expecting the second fab to be closed here this -- early this quarter so you won't get full benefit, but again another $3 million or so will come out of that.

And then again, the last factory, which will be in the fourth quarter at this stage, another $3 million.

And then in 2010 you're going to have the fourth factory, which will actually be bigger than all of those transactions.

So, simply put, it is kind of layering in a bit at a time.

And it is with closure rates.

We had hoped earlier in the year to accelerate closure of some of these factories.

As it turns out, the business has picked up much stronger than we anticipated and so we aren't going to be closing them quite as quick as we thought.

Thank you.

Next question is on the -- on your CapEx.

What do you view as your sustainable ongoing level of investment?

And how does that compare to the depreciation that we're seeing, excluding amortization?

Well, the -- we haven't changed the method as fully there.

Our depreciation excluding amortization's about $32 million per quarter.

We had historically been running at $30 million to $35 million of capital expenditures.

Recently, we're running at $10 million to $15 million.

We probably think as business picks up we may ratchet that up to $20 million to $25 million per quarter.

So, we were running at $30 million to $35 million.

Currently $10 million to $15 million, and if business picks up, we'll go to $20 million to $25 million a quarter.

So, under [cold] circumstances, we will be running more than we have been running historically.

And that's primarily because we see no need to invest as much as we did in the front end.

In addition to that, it takes about nine months to empty the CapEx pipeline.

And we're still paying for stuff that we ordered last year.

So, even as we fill the pipe up, we will still benefit from the cash flow dividend of filling up the pipeline.

So, even if we uptake a little bit capital expenditures, which is not really on the cards for this year, it will be about six to nine months before it hits the cash negatively.

Thank you.

Last question.

Can you just talk about the fab utilization rates at Gresham and across your network?

And how your gross margins might improve as utilizations come up and as you sell products manufactured with higher utilizations in coming quarters?

Thank you and congrats on the quarter.

Certainly, yes.

Love to do that, Craig.

We had utilization rates in the 60% range for the second quarter.

I do expect that will start closing in on the 70% range for Q3.

And that's kind of a global number for us on utilization rates.

I think you saw about $0.66 on the $1.00 of additional revenue fall through in Q2.

That number could approach as much as $0.70 on the $1.00 as we get into Q3.

And really that's the impact of better utilization to a first approximation.

So, just picking up from Keith's point.

We had told you guys that we'd reset a corporate objective to $525 million of revenue per quarter where we thought we could do something in the 43% gross margin, 43% to 44%.

20% to 21% operating income.

So, again in a $525 million quarter we'd expect our gross margin to be comfortably north of 40% when you forecast these things out.

Your next question comes from Chris Danely of JPMorgan.

Hi, this is Roy Kim for Chris Danely.

I just had a couple of questions.

Are you seeing any lead times stretch out for any of your products?

Our lead times have been moving out.

They're in the eight- to 10-week range now, which is what we would call a more normal range as opposed to the shortened lead times we had in the first quarter.

Great.

And just wanted to ask about impact on your auto business from the Cash for Clunkers from the government.

It isn't just our government.

The folks in Germany had done it earlier in the year and all of this seems to be stimulating the auto manufacturers to increase production.

As I mentioned in my commentary, normally Q3 sees a reduction in our automotive sales as they change model years and do some ramp down.

This year we are seeing stronger demand and more manufacturing activity coming our way.

So, simply put, I think the global efforts on getting automotive kick started are starting to have an impact.

Great.

Do you guys share how much of your auto business comes from US versus others globally?

It is greater than 50% in Europe.

And the balance is split between the Americas and Asia, and Asia at this point is approximately 5% to 10%.

Great.

Thank you.

Your next question is from Craig Ellis of Caris & Company.

Thanks for taking the question and good job in the quarter, guys.

Keith, first question.

As you look at your end markets, where at this point do you feel like orders are really back to end consumption levels?

And where do you think orders have yet to catch back up with end consumption?

I believe that we are approaching on a sell through basis in consumption rates in Q3.

So, I think we're actually getting pretty close to that.

I also believe the distributors are trying to do some additional stocking in general.

So, if you're looking at the absolute demand on the semiconductor system, I think the activity probably is actually starting to exceed end demand in Q3.

But for us, we think it's going to be pretty close to consumption in Q3.

So, we're expecting kind of neutral inventory changes with our guidance both internally and in our distribution channel for Q3.

Okay.

And then there's a follow-up.

Switching gears onto the pricing side.

Pricing down a percent in the quarter, down a percent in the outlook.

That's very benign given what's happened with the global economy.

Have you been surprised with the way pricing's behaved?

And are there any signs that pricing's heating up there at all?

There are no signs at this point of a heating up of pricing pressures.

They are always there.

In our industry it's something you just live with.

But right now there's no catalyst that is taking those to a more severe area.

And quite frankly as demand picks up that normally lessens the pressure as opposed to when demand eases.

Your next question is from John Barton of Cowen.

Thanks.

Keith, maybe just a follow-up on a statement.

Lead times are stretching; the fabs are getting a little more loaded.

Do you think there's any chance in the coming quarter that prices head up as opposed to down marginally?

I am not anticipating prices heading up.

I don't think -- and again, just looking at the macro environment, our industry is down over 20% year-on-year.

Capacities are not that constrained on an equipment basis.

They may be on a manned basis, but not an equipment basis.

So, the temptation is always there to be quite competitive.

So, I really don't see enough demand out there to start pushing them upward.

Your comments about end markets.

You made comments about auto end market; you made comments about the various consumer oriented end markets.

I don't think I heard you say anything about the kind of the traditional industrial end market.

What are you seeing out of that currently?

What do you expect in the coming quarters?

Yes, normally our industrial market is in the building and capital equipment sectors of the economy.

So, driven by the activity in building new buildings, whether that's housing or office space, and then into the capital equipment.

Our experience continues to be that that market is still sluggish.

There have been some signs of pick up there, but not appreciable.

So, I think we can safely say it's kind of stopped going down at this stage, but we're not seeing an inflection upward.

Your next question is from Tristan Gerra with Robert Baird.

Hi, good afternoon.

Following on your commentary regarding sell through expected to be about in line with end demand in Q3, is your revenue guidance embedding normal seasonality for OEM revenues sequentially?

Or about seasonal?

It's about seasonal.

It's slightly stronger because we do know, for example, I mentioned automotive.

We do know that their supply chain has gotten skinny.

We're doing a lot of expedites right now.

So, there might be a bit more going on there.

But in general, it's going to look pretty seasonal.

Okay.

And also in the previous call you had mentioned that you had orders outside of your lead times for July, August.

That was three months ago.

Are those orders still holding?

And are you still seeing that trend into Q4?

Yes, the orders are still holding and at least at this point in time, Q4 actually is looking more robust in our early orders for the quarter.

So, the trend would be continuing into Q4 from our look right now.

And when you say more robust do you mean sequentially or versus --?

Meaning at the same time in Q2 versus Q3 we have more orders on the books for the next quarter in Q3 than we did in Q2.

Great.

Thank you.

Your next question is from Steve Smigie of Raymond James.

Great, thank you.

I was hoping you could talk a little bit about the cash levels and debt levels as we go forward.

Of the payments you have to make sort of over the next 12 months.

It seems like you kept cash here around 400.

Will it dip down below that number as you make payments or is cash flow, as best you guess, going to be able to offset that?

I think that's what's important is that the business is generating cash.

And if you look at the guidance we gave for the third quarter and take a midpoint with the depreciation numbers, then we should be generating $40 million to $50 million of free cash flow in the third quarter.

And so, what's our debt?

We had a big amortization of a zero coupon due in April of 2010, $260 million.

And since the fourth quarter of last year, we have paid off about $200 million of that.

So, there remains about $66 million or so -- or sorry.

$100 million.

$160 million.

I was getting my numbers inversed.

$100 million remaining.

And so, the total amount of debt amortization between now and the end of next year, including the $100 million is about $200 million.

So, if you look at the cash we have available and the cash we're generating, you see we have a very comfortable balance sheet.

And also again this quarter, as we continue to generate cash each quarter we have a record net debt situation.

So, if you look on the balance sheet, it's just over $500 million.

Right.

And sort of looking at that going forward, even just -- even this quarter doing $50 million cash flow, that could be -- should be at least $200 million next year.

You're already at net debt $500 million, so that goes to something like 300, probably something better than that.

How much of that goes to paying down debt do you think versus other uses?

Well, I think what we did recently especially going through this recent crisis is a privilege in paying off debt.

And so, we have about $200 million of debt amortization, so we'll have to pay that with no choice.

So, obviously if you look at a large part of the cash we will generate will be used to pay down debt.

And we've also taken advantage on an opportunistic manner of any discontinuities in the market.

We -- for instance, the pricing of our converts were a bargain.

And we'll continue to look in an opportunistic manner on how to use that to enhance our earnings.

Use the cash to enhance our earnings by -- and improve our liquidity as we did by buying the zero coupons back at a discount.

But essentially there's no -- there's -- it's just generate cash and pay down debt as it comes due, Steve.

Your next question comes from Parag Agarwal with UBS.

Thanks for taking my question.

I just wanted to circle back to a question about Gresham.

Can you please update us on that transition -- manufacturing transition for Catalyst, ADI, and AMI.

And then you would just say how much is this and how much is that?

Okay, certainly.

So, I'll start with the ADI portion of that.

That's the first acquisition we made.

We have largely got the products transitioned into that factory at this stage.

And they have been ramping during the second quarter and into the third quarter.

So, we expect to see again continued growth there, but the products have all been moved from that particular transaction.

From AMI we are still moving some of those things in.

There's a lot of ASIC codes, a lot of devices, if you will, per dollar of revenue.

That will -- process will continue into next year.

But again, largely the bulk of the work is behind us.

On Catalyst, we are now in production.

We just started production here in the last week and expect to start ramping that quite hard in Q4 and Q1 of this year.

So, largely making great progress there.

And so, the combination there of how fast we ramp it is what's going on in the marketplace, plus how long it takes us to burn off the buffer inventories that were built prior to moving.

As a follow-up, how should we think about the gross margin impact as the products transition to Gresham?

We have seen a substantial product-by-product improvement in gross margin.

It does depend which of those things we just referred to.

But certainly on a product basis, you should be getting improvements for the things that run from where they used to be run anywhere from 15% to 25% or 30%.

And that's basis points I should say there.

So, you're moving quite a bit.

And where you see the visibility of that is if you look at what I said on gross margin looking forward.

Our corporate objective.

I said on a $525 million revenue, something like 43%.

And if you looked where we were historically last year, we were just under $600 million with a gross margin of 41%.

So, that translates to the point that Keith makes.

We see ourself being able to generate superior gross margins at lower revenue levels through a combination of factory closures and intensive use of the Gresham facility.

Your next question comes from John Vinh of Collins Stewart.

Good afternoon.

Thanks for taking my question.

First question is can you give us a sense of how kind of bookings trended on a month-over-month basis in Q2?

And how is that trend looking heading into -- through July at this point?

We have seen bookings continue to strengthen throughout the year.

Traditionally, the second quarter is more back end loaded than the third quarter.

The third quarter tends to be more front end loaded.

You may have heard my conversation earlier on turns rates.

Typically in Q3 folks are pretty well booked before they get there.

So, our expectation is that Q3 will be more front end loaded than Q2 was, i.e.

July and early August will be where the bulk of that comes in.

And it'll taper off as we get towards September.

Okay.

And at this point, do you guys have a sense of how we should be thinking about Q4 at this point?

We really don't give guidance for Q4.

The one data point that I did share earlier is that at this time of the quarter we have a stronger backlog built for Q4 than we did at the same time in Q2 for Q3.

Your next question comes from Ramesh Misra of Brigantine Advisors.

Hi guys.

Good afternoon.

First a quick question for you, Donald.

What was the change in headcount in the quarter?

I think the headcount was pretty flattish in the quarter, Ramesh.

Flattish we probably hired a little bit of operators and there were some people who left at the beginning of the quarter.

But pretty much flattish.

Okay, so the cost savings isn't coming really from --

The cost savings in OpEx, Ramesh, were coming from two elements.

One, we had -- three things.

One, we moved onto a new integrated IT system at the end of the first quarter where we fully integrated via the [EXEMI] into our Oracle system.

And through the first quarter we had expenses associated with that integration that we had zero for in the second quarter.

The second thing is we had people who left in the first quarter and they still had expense in the first quarter that was zero in the second quarter.

And the third thing that helped the OpEx was as we forced salary reductions and time off, the employees rallied to the cause and cut the discretionary expense to the bone.

So, these three elements resulted in a very good operating performance as I explained.

Operating expense performance.

Okay.

That sounds good.

In regards to the fab consolidation, are you moving more and more -- and how should I think about moving production to Gresham versus outsourcing some of the production out of your older fabs?

Yes, so the factories we've been closing are all moving into other ON Semiconductor facilities.

There's no outsourcing involved.

But it's not just Gresham.

Our older technologies in the IC domain have been going into the Czech Republic.

And our discretes have been going into Malaysia.

So, it's -- Gresham is getting the advance products, the older products and the ICs go to Eastern Europe.

And then all the discretes are going to Malaysia.

Your next question comes from Patrick Wang of Wedbush.

Yes, thanks for taking my question.

Most of them have been answered, but just a couple here.

Just on the fourth quarter, I know you guys don't want to say too much, but with some visibility here, some better bookings, what is your -- what do you typically see for I guess a seasonal sequential change in the fourth quarter?

So, typically our Q4s are kind of flattish.

They might be plus or minus 2% depending on what's going on in the macro cycles.

So, if you're asking what is quote typical end quote, it'd be kind of flattish.

Okay.

And then I think is it fair to also say that based on what you're seeing right now we're off to a better start than we usually are?

We are off to a good, strong start at this point.

And a lot of that is being led by again some markets like the automotive piece of it that got too lean and the folks are now looking to ramp production in response to the increased demand they're seeing.

So, simple answer is, is this going to be typical?

I don't know yet.

But all we can tell you is right now we've got a stronger backlog and typically it's flattish.

Got you.

The areas that you're seeing the stronger backlog, is that our typical computing and consumer stuff into the end of the year?

Or does that also extend into the industrial, auto side of things?

It definitely extends beyond consumer to the automotive and medical areas.

It does not necessarily extend to industrial yet.

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

Hi.

Thanks for taking my question and congratulations on the quarter.

You mentioned on the notebook side that you've got a new top five notebook supplier.

Can you say -- was it related to the transition from Montevina platform to Acapella?

Definitely as we mentioned before, our product offerings favor the new platforms.

And so, we are picking up there.

In this particular case the new engagement does come in the new platforms.

And do you have an ASP for just in general on the new platform versus the old platform?

Well again, it does vary by customer and how many of our products they put into the boards.

But it could be anywhere from $1.50 to $4.00 or $5.00 at this stage, depending on which customer you're talking about.

And if I could ask one more about the mix.

Are you seeing a still heavily weighted towards a netbook and maybe a lower ASP mix going into the third quarter?

I mean again, I think you can look at the end market sales.

Certainly the netbooks have picked up a lot of share, but we don't see -- we still see notebooks as being stronger than netbooks in total manufacturing and demand.

Your next question from Gus Richard with Piper Jaffray.

Yes, thanks for taking my question.

Quickly on pricing, you mentioned blended it's down about 1%.

Could you just handicap across standard product mix signal, et cetera, what you're seeing in the market today?

There is not one area that is dramatically different than another at this stage.

They're all pretty similar in that range.

Again, within a standard deviation, they're all pretty close.

Okay.

And then last quarter you had mentioned that I think the end OEMs, et cetera down at the end of the food chain had pretty lean inventories.

At this point, there's a lot of material going through the supply chain.

Are the OEMs beginning to feel a little bit more comfortable that they're catching up?

Or -- and how much longer do you think it will take before they get to a point where they're comfortable?

I guess again I can't fully answer that.

But I can say just in reference to another comment I made, I think the end consumption and the -- what we're shipping are getting really close at this point, which would indicate to me that they should be getting very comfortable.

We're in an industry that doesn't normally -- doesn't always behave rationally, so I can't answer it completely, but I think we're pretty close to equilibrium.

Got it.

Okay, thanks so much.

Your next question comes from Suji De Silva of Kaufman Brothers.

Hi Keith, hi Donald.

So, first a housekeeping question.

Do you have the stock comp broken up by R&D and SG&A?

Let me think.

For what period?

Well, for the second quarter.

For the second quarter I think it's actually in the release.

(Inaudible) the details of it.

But most of the stock comp actually goes to -- most of it goes to operating expense and the COGS portion is about $3 million, $4 million.

And the SG&A portion is about two-thirds of the total operating expense mix.

Perfect.

And then on the gross margin, you guys put out a target there versus where you are.

What's between here and there?

Is it really the [nation] coming back and the manufacturing restructuring?

Is there some mix shift involved in these to get this?

There's not really any mix assumption in there.

That's something that we can't really model.

And also we don't have things we're assuming like pretty stable currencies and costs as well.

So, it's basically all driven by better utilization and better top line driving that utilization and rationalizing our manufacturing base.

And I think if you look at how we have progressed since the beginning of the year, I mean we obviously started off the year with revenue down dramatically from where it was in the middle of last year.

But our gross margin, although it came down, it was still well above 30%.

And you see that's improved to just under 35% in the second quarter.

The midpoint of guidance is 37% for the third quarter.

So, I think if you chart that line to the $525 million and the 43% or so gross margin, I think you see we are pretty close to the line and we're making good progress.

And the key point as well there is that this gross margin is superior to what we achieved last year at revenue that was pushing on $600 million per quarter.

And that's the benefit of the factory shutdowns that Keith mentioned.

Your final question is a follow-up question from Ramesh Misra of Brigantine Advisors.

Hi guys.

Just a quick question in regards to acquisitions.

Your just I think two pretty large acquisitions and as the market's beginning to perk up, where would you be looking to, as you look forward in your acquisition pipeline and thinking strategically?

Well, I think what we've been saying -- we get asked that question whenever we have a meeting -- is we're currently not planning any large acquisitions.

We don't have anything material that we're working on.

We're always looking at small things that can add to our revenue.

When I say small, I'm talking about less than $5 million a quarter type revenue.

So, that's where we currently stand.

And we understand that the -- our investors place a high (inaudible) of financial diligence on any acquisition that we would consider.

And so, right now there's not really all that many sellers.

I would add to that just to try to give you an idea of the strategy there though.

We -- as we look at our portfolio, we're looking for technologies and business access to complement where we have segment opportunities for growth.

And right now that would be in more of the communications type sector, as we feel very comfortable in computing with our position there.

And we're very comfortable in automotive.

Okay.

Thanks, guys.

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