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Operator
My name is Julie Ann 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 speakers remarks, there will be a question-and-answer session.
(Operator Instructions) Thank you, I would now like to turn the conference over to Mr.
Ken Rizvi.
Please go ahead, sir.
- IR
Thank you.
Good afternoon and thank you for joining ON Semiconductor's first quarter 2010 conference call.
I am 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 onsemi.com and will be available for approximately 30 days following this conference call, along with our earnings release for the first quarter of 2010.
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 include certain non-GAAP financial measures.
Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release and posted separately on our website in the Investor Relations section.
In the upcoming quarter, we will be hosting our Annual Stockholders Meeting on May 18.
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, change assumptions or other factors.
Now, let's hear from Donald Colvin, who will provide an overview of first quarter results.
Donald?
- CFO
Thank you, Ken, and thanks to everyone joining us today.
ON Semiconductor Corporation today announced that total revenues in the first quarter of 2010 were $550.2 million, an increase of approximately 11% from the fourth quarter of 2009.
During the first quarter of 2010, the Company reported GAAP net income of $63.0 million or approximately $0.14 per fully diluted share.
The first quarter of 2010 GAAP net income included net charges of $22.3 million, or $0.05 per fully diluted share, from special items, which are detailed in schedules to our earnings release.
First quarter 2010 non-GAAP net income was $85.3 million or $0.19 per share on a fully diluted basis and includes stock based compensation expense.
As anticipated, in the first quarter of 2010, we did not see the approximately $0.03 per fully diluted share benefit from the receipt of research and development grants and an actuarial gain on our overseas pension plans that we benefited from in the fourth quarter of 2009.
In the first quarter, we closed the acquisition of California Micro Devices for approximately $113 million.
As of the transaction close, CMD had approximately $43 million of cash and cash equivalents on its balance sheet.
Due to the transaction closing within the quarter and acquisition-related accounting, we recognized approximately $6 million to $7 million in revenue from CMD.
On a GAAP basis, net income was negatively impacted in the first quarter by approximately $9 million or $0.02 per fully diluted share due to acquisition related costs such as restructuring, transaction related legal and investment banking costs, expensing of appraised inventory fair market value step up and amortization of intangibles.
On a non-GAAP basis, net income was negatively impacted by approximately $3 million or approximately $0.01 per fully diluted share primarily related to deal related expenses such as legal and banking fees which negatively impacted operating expenses during the quarter.
We exited the first quarter of 2010 with cash and cash equivalents of approximately $560 million.
This was down slightly from the fourth quarter of 2009 due to the cash purchase of CMD.
Our Board of Directors approved the prepayment of approximately $170 million of our Senior Secured Credit Facility, which will occur in the second quarter of 2010.
This is a significant milestone for the Company as this facility, through various amendments, has remained with the Company since the original LBO more than a decade ago.
Based on current LIBOR rates, this prepayment will save the Company approximately $3.4 million per year in cash interest expense.
At the end of the first quarter, total days sales outstanding increased from the fourth quarter by approximately 2 days to approximately 50 days.
ON Semiconductor's internal inventory increased slightly from fourth quarter levels on a days basis to approximately 84 days.
Included in our total inventory, our internal inventory is approximately $2 million of inventory written-up to fair value related to our acquisitions.
And, approximately $5 million of inventory from our acquisition of CMD and $21 million of bridge inventory related to our announced closures of front-end manufacturing lines.
Net of the bridge inventory, CMD and written up to fair value inventory, days would have been approximately 76 days at the end of the quarter.
Distribution inventories were at the lowest level in the Company's history exiting the first quarter on a weeks basis at less than 8 weeks.
Cash capital expenditures during the quarter were $41 million.
We currently anticipate spending approximately $130 million to $160 million in cash capital expenditures related to equipment for 2010.
This is an increase from prior estimates based on our customers strong demand expectations for the second half of 2010.
In addition, we plan on spending approximately $30 million of capital for buildings to enable office consolidations in the Bay area and assembly and test consolidation from two locations to one in the Philippines.
Now, I would like to turn it over to Keith Jackson for additional comments on the business environment.
- CEO
Thanks, Don.
Now for an overview of our end-markets.
During the first quarter of 2010, our end market splits were as follows.
The Computing end-market represented approximately 26% of first quarter 2010 sales.
The Automotive end-market represented approximately 19% of first quarter sales.
The Industrial, Military and Aerospace end-market represented approximately 19% of sales.
The Consumer Electronics end-market represented approximately 16% of sales.
The Communications end-market, which includes wireless and networking, represented approximately 16% of sales and Medical represented approximately 4% of sales.
During the fourth quarter on a direct billings basis, no individual ON Semiconductor product OEM customer represented more than 6% of sales.
Our top 5 product OEM customers were--Continental Automotive Systems, Delta, Hella, 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 21% of revenue and Europe represented approximately 17% of revenue during the quarter.
Looking across the channels, direct sales to OEMs represented approximately 43% of first quarter 2010 revenue.
Sales through the distribution channel were approximately 48% of first quarter revenue and the EMS channel represented approximately 9% of revenue.
During the first quarter, ON Semiconductor revenues broken out by our segments were as follows.
The Standard Product Group represented approximately 32% of sales.
The Computing and Consumer Group represented approximately 23% of first quarter sales.
The Automotive and Power Group represented approximately 23% of sales, and the Digital Mixed-Signal Product 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 for this period.
Now, I would like to provide you with some details of other progress we have made.
In the Computing end market we continue to see strong demand from key customers in both desktops and notebooks for our energy efficient power management solutions, audio amplifiers, protection devices, thermal management and standard products.
The Computing end-market experienced 11% sequential growth from the fourth quarter of 2009 due to a combination of platform ramps by key customers and power management market share gains.
In addition, the first quarter represented the strongest computing end-market revenue in the Company's history at over $140 million.
During the quarter we saw major design wins on two new commercial desktop programs with a top 5 manufacturer and made in roads with multiple design wins into next generation notebooks, tablet PCs and desktops with key manufacturers driven by our buck-boost converters, SENSFET and MOSFET products.
We anticipate further growth from this end-market in the second quarter of 2010.
The Automotive end-market grew by approximately 10% versus the fourth quarter of 2009 and revenues in this end-market have finally returned close to pre-recession levels.
Sales in this end-market remain strong driven by end unit sales growth and working capital replenishment by the automotive supply chain after the global credit crisis.
We currently expect the second quarter of 2010 will be the first quarter Automotive end-market sales will surpass historical highs.
We continue to invest in the success of our customers and expect to see traction with next generation solutions for parking assistance, motor controls for lighting, safety, infotainment, fuel efficiency and pollution reduction sensor applications.
In addition, we recently opened our newest Automotive Solutions Engineering Center in Shanghai to focus on the growing needs of the Chinese automotive market.
The Industrial and Mil/Aero end-market represented the strongest sequential growth of all of our end-markets in the first quarter of 2010 on a dollar basis and grew by over 16% sequentially.
Similar to the Automotive end-market, the Industrial & Mil/Aero end-market returned to prior peak levels for ON Semiconductor in the first quarter of 2010.
During the quarter, we saw growth in the custom analog, mixed signal and ASIC products for this end-market.
In addition, we are experiencing stronger demand for products related to factory automation tools and imaging equipment.
We continue to develop innovative power efficient solutions for our customers that help them get their products off the bench and into production faster and with improved performance.
We recently released a new single output power supply, GreenPoint Reference Design for an All-In-One computer, which offers greater than 91% efficiency.
We also released an ENERGY STAR compliant, TRIAC dimmable GreenPoint reference design specifically targeted for residential and commercial LED downlight applications.
Now, I would like to turn it back over to Donald for further comments and our other forward-looking guidance.
Donald?
- CFO
Thank you, Keith.
Based upon current product booking trends, backlog levels and estimated turns levels, we anticipate that total revenues will be approximately $565 million to $580 million in the second quarter of 2010.
I also remind the listeners that ON Semiconductor recognizes revenue on a sell-through basis not on a sell-in basis.
Backlog levels at the beginning of the second quarter of 2010 were up from backlog levels at the beginning of the first quarter of 2010 and represent over 90% of our anticipated second quarter revenues.
We expect that average selling prices for the second quarter will be down approximately 1%, sequentially.
We expect cash capital expenditures of approximately $45 million to $55 million.
For the second quarter, we expect GAAP gross margin of approximately 41.5% to 42.5%.
Our GAAP gross margin in the second quarter will be negatively impacted from -- among other things from, expensing of appraised inventory fair market value step up associated with our acquisitions of approximately $3 million.
We expect non-GAAP gross margin of approximately 42% to 43%.
We also expect total GAAP operating expenses of approximately $138 million to $142 million.
Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges which total approximately $10 million.
We also expect total non-GAAP operating expenses of approximately $128 million to $132 million.
We anticipate GAAP net interest expense and other expenses will be approximately $17 million for the second quarter which includes non-cash interest expense of approximately $7 million.
We anticipate our non-GAAP net interest expense and other expenses will be approximately $10 million.
GAAP taxes are expected to be approximately $4 million and cash taxes, $3 million.
We also expect stock based compensation of approximately $13 million to $14 million of which approximately $3 million to $4 million is expected to be in cost of goods sold and the remaining in operating expenses.
This expense is included in our non-GAAP financial measures.
Our current fully diluted share count is approximately 445 million shares based upon the current stock price.
Further details of our 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.
- CFO
Thank you.
(Operator Instructions) Your first question is from the line of Tristan Gerra with Robert W.
Baird.
- Analyst
Hi, good afternoon.
I think you previously said you had over $600 million in (inaudible) capacity.
As your revenue guidance gets you closer to the run rate what are your plans for new capacity versus efficiencies.
And also do you have you plans to move to .13-micron and how many times, then?
Okay.
- CEO
Tristan, on the capacity front we certainly have tha.
Actually it exceeds that number if you fully load Greshham and use our external network.
That number we've really given you is really a internal number.
We have been investing capital in all of our front ends this year with the exception of one.
And that capacity has been coming on a little bit each quarter and will continue to expand through the third of this year.
That capacity is expanding as we go forward.
Relative to the line widths in Greshham, we do have a process.
Actually it's 110 nano meter process that is now being made for ASIC products but the bulk of that material running in the factory today is at .35-micron or .25-micron.
- Analyst
Great.
And could you remind us what the utilization rates are at the (inaudible) for the over all Company and also for Greshham?
- CEO
Overall utilization for the Company is about mid-90s for first quarter.
And again, I expect it will remain in that range as the capacities coming in and the revenues ramping up should be fairly close in nature.
Great.
Thank you.
- Analyst
Thanks for taking my question.
Operator
Your next question comes from the line of Parag Agarol with UBS.
- Analyst
Good afternoon men.
Thanks for taking my call.
First question is about your lead times.
Can you give us more color as to where do your lead times stand and what are (inaudible) in capacity in your back hand capacity you are seeing right now?
- CEO
Yes, our lead times have extended from the fourth of 2009 as the order patterns continue to strengthen and be quite strong.
The lead times we normally quote are now out close to 18 weeks.
But I would remind those that are following us that most of our customer base something like 80% of our customer base has special logistical and supply chain programs which is not subject to those lead times.
So, really those are for those that do not have specific logistics programs set up for them.
- Analyst
Okay.
Secondly, you alluded to a strong second half.
So, could you comment on the seasonality of second half as we we could expect this year versus previous years?
- CEO
So, our backlog as we look at this time of the quarter in to Q3, continues to show positive progression.
At this stage certainly is too early to call the half but the third quarter at this stage at least is showing the normal patterns of being up from the second quarter on a backlog basis.
So, were not going to give forecast for a second half but we have no indication that this year will be much different than other years.
- Analyst
Okay my last question.
What could be the potential impact of ASP dollar on your business.
- CEO
So we are already seeing some of the impact in our asp numbers that we report.
As the Euro weakens it does look like there is a little bit of ASP weakening that happens with or business there in Europe.
And but at the same time, our expenses in Europe should be coming down as well.
At the bottom line we don't really expect significant impact but within the various lines ASP would show an impact with a strengthening dollar on the ASP's and then the expenses hopefully well not hopefully but we should be offset by expenses coming down.
- CFO
We have two major manufacturing sites in Europe, design centers.
And as Keith mentioned European sales are I think 17% or something of total revenue of which half of that is invoiced in to Euros.
An actual net-net is probably slightly positive and more savings in expense offsetting a slight reduction in revenue.
.
- Analyst
Thank you very much.
Operator
Your next question is from the line of John Pitzer with Credit Suisse.
- Analyst
Good afternoon, guys.
You said in prepared comments that distribution inventory is at all time lows.
I'm just kind of curious given how tight things are and how strong demand appears to be why aren't the distribution companies trying to build more inventory?
What is your expectation for that channel as we move in to the June quarter?
And then I have a follow up.
- CEO
Okay.
I believe they would like to build more inventory.
I've had dialogues with each of them.
Think are not fully able to support the demand that they see at the level of industry is supporting.
But quite frankly is capacity is not there to build inventories with the end demands being as strong as they are.
So, there was slight distribution gain for us in total dollars in Q2 but from a weeks it went down.
So, the demand is ramping faster than we can ramp is the simple answer to the question.
- Analyst
How comfortable are you when you move one phase ahead of the distribution channel that there is not a burning inventory issue.
And then on a similar vain you talked about pricing on the last question and pricing on a mix aid just basis was down in March you ex-et cetera it to be down in June.
I guess the question to you is with utilization rates in the 90s why not be a little bit more aggressive trying to price higher as a way one to get more value and two maybe shake out double ordering and or potential inventory building.
- CEO
We are taking up prices and on anything that is not under contract, the prices have been going up.
And that's built in to the forecast.
We do have annual contracts with many of the large customers and quarterly with others.
What you are seeing there in our forecast does have a lot of assumption on currency changes.
We are seeing the dollar strengthening, so that's built in to the forecast.
But also just a matter of again how many contracts can you move how quickly.
So, we are definitely seeing strengthening environment.
We are definitely taking our prices up.
Specifically through distribution those prices have been going up steadily ever few months
- Analyst
Then last quick one in.
Donald, I missed your dollar amount for CMD in the quarter.
And I guess as we think about June how much revenue contribution will you get from that acquisition?
- CFO
We mentioned $6 million to $7 million from CMD.
And then, June quarter, we are expecting about $13 million to $14 million and the contribution from that will be minimal simply because it's going to take us time to integrate it in to our system.
Just a quick follow on to Keith's comment on the ASP, I mean historically, it's like a super tanker.
It takes time for to it turn around.
You got inventory, you got the contracts.
So basically once you start the actions it's usually the Q3 out 6 months away before you see the full benefits.
Whey would remain is that the rate of the decline has come down this quarter.
I personally think it will be under 1%.
We should start to see benefits of what Keith mentioned and you asked starting in the third quarter.
- Analyst
Thanks guys that's really helpful and congratulations.
Operator
Your next question is from the line of James Schneider with Goldman Sachs.
- Analyst
Good afternoon and thanks for taking my question.
I guess maybe to return to the topic of lead times for a second.
Obviously, they are extended out a little further.
When you expect to you would be able to bringing those back in.
Do you think this quarter or do you think it maybe out further in the back half of the year?
- CEO
Unfortunately, that requires me to guess what the order rates will be in the back half of the year.
But if we see the current levels of demand as we get as we are seeing today in the second half, I would expect to start bringing them in slightly before the end of the year.
- Analyst
Thanks.
That's helpful.
Follow up, related to end market exposure auto industrial have been strong over the past couple of quarters.
Do you expect that as we get in to what is typically seasonally softer back half of the year we could see some softening there or does that continue to be strong for you in the back half?
It continues to be strong.
- CEO
What we are seeing there in both of those markets are new designs focus energy efficiency, displacing older designs.
Those have more semi conductor content and specifically content from on.
So, everything we are hearing from our customers in both of those segments indicates that they should remain strong even in the second half where those sectors typically weaken a bit.
- Analyst
Great.
Thanks very much.
Operator
Your next question the from the line of John Barton with Cowen.
- Analyst
Thank you.
Keith and Donald, I heard both your comments about ASP trends and going up and forward, the lag time, etc.
Could you quantify what type of appreciation you think we could see in ASP's?
And the root of the question is we did not see collapse in the downturn of ASP.
My assumption would be it would not bounce back at the same magnitude or appreciate the same magnitude as previous cycles and I would be interested in our thoughts on that.
- CEO
I think that's a fair statement.
To move something of the magnitude we got with 16,000 products and 9 billion units a quarter.
Those just don't jump a lot.
But what we experienced in the past, probably the peak quarter on quarter changes were about 2% to 3% in either direction, sequentially.
But specifically I don't think we ever turned in more than 3% up in a quarter.
- Analyst
Can you comment on lead time expending to 18 weeks for customers that weren't on logistic programs I assume in consign hubbing, etc., for those customers that are in those programs, how quickly can you respond or have you been responding to up ticks?
What is their lead time?
Second part of the question is, if some of your competitor has less the quarter with delinquent backlogs, have you been able to take advantage of that as far as gaining share of customers?
- CEO
Yes, Unfortunately, our capacities are finite and we are not able to pick up as much as we like on that, John.
What I would say is that for the folks even the folks that are on the special programs, you still have the factory cycles.
So really our lead times to them would look like factory cycles in depending on product that's anywhere from 8 to 15 weeks.
- Analyst
Thank you.
Operator
Your next question is from the line of Craig Berger with FBR Capital Market.
- Analyst
Hey guys.
Nice job on the quarter.
Thanks for the questions.
I guess first, can you just remind us where you are in integrating CMD in terms of operating expenses?
What kind of savings do we we expect from here?
And also, can you reminds us why Op Ex jumped up so much in the first quarter?
And then I have a follow up.
- CFO
Well, let me handle the last one, first, Craig, Op Ex in the first quarter, we had a benefit of about $0.03 in the fourth quarter, as we told you on the script from a pension and R&D grants which we didn't recur in the first quarter.
And then we restored salaries.
Then didn't force any vacation because we were running it full speed in the first quarter.
So, there was a very big step function.
And in addition to that we had another $5 million to $6 million of expense related to the CMD acquisition, legal fees, Op Ex, et cetera.
I will remind the listeners, that we are now applying the new accounting rules where you do not capitalize for instance the deal costs that used to happen in prior years.
So, we expensed them in the first quarter.
So, if you put all that out, we actually did perform reasonably okay in line with expectations and above guidance.
And also if you look at our trained in to this quarter, you see we get very little growth next pieces and have a lot of fall through from the delta revenue to the bottom line.
So, that was just basically a one off transition quarter.
As far as the operating expense from California micro devices, I would expect that we will benefit from savings there starting in the second half and mainly in the fourth quarter.
Because it does take time especially when you are running the other activities at full steam and to do that integration.
There will be a nominal contribution and it will be accretive very marginal.
So, in the bottom line in the second quarter but the real benefits will be in the later part of this year.
- Analyst
So flattish to slightly up Op Ex in the back half, just to clarify?
- CFO
I would think in the back half of the year, on a apples-to-apples basis, you see very minor increase in Op Ex.
I think seeing the big step function increase and think very very minor $1 million to $2 million increase sequentially.
No more than that, a million increase when you look to the second half sequentially over the first half.
- Analyst
Great.
Just the follow up, can you remind us where you are on your fab consolidation plan I think you still had one closure left to go perhaps you are rethinking that.
If not, what's the timing magnitude of any factory rework savings out there.
Thanks.
- CEO
So we still have the factory in Phoenix that we are planning to close.
Due to the strong demand we delayed that, but we are not rethinking the plan to close it.
We should have that closed before the end of the year.
We are targeting sometime in early fourth quarter, but before the end of the year.
And I should remind you that should be worth approximately $8 million a quarter in cost reductions.
- Analyst
Cash or depreciation?
- CEO
Total.
Mainly cash .
- CFO
(inaudible) that makes a low depreciation.
So, essentially, all cash.
- Analyst
Thank you,.
Operator
Your next question is from the line of John Vin with Collin Stewart.
- Analyst
Great, thanks for taking my questions.
Just a follow up to that.
Obviously, at this point you guys are spitting distance to your new target model on 45% gross margins.
Do you need to close the Phoenix fab closures to get to 45% gross margins although this point?
- CEO
I think that's an excellent introduction there.
- CFO
Yes, we do.
We are within spitting distance especially if you consider sell in revenue even this quarter.
But sequential growth, as you say was spitting distance of that objective.
But structurally we are still running the Phoenix factory, which Keith mentioned is making $8 million of cash saving which is is approximately 1.5% of gross margin.
That is how you should model it.
The 45% model works with the closure of the, it's 43.5% if (inaudible) is still terming.
- Analyst
Great.
And also, given the tightness that you guys are still seeing can you talk about what sort of visibility you have to Q3?
And, if you look in to our Q3 backlog at this point what are the markets that are better represented in that mix at this point?
- CFO
Unfortunately, or fortunately, however you want to look at it, all of the markets continue very strong in to Q3.
We don't see anything that is lightening up.
And the traditional consumer push is there as well.
So, on a sequential change, consumer clearly will be up the most in Q3, but every market we have is showing more backlog at this stage for Q3 than we had going into Q2.
- Analyst
Great, thank you.
Operator
Your next question is from the line of Chris Stanley with JPMorgan.
- Analyst
Hey, thanks guys.
So, it sounds like the lead times are continuing to stretch out.
Some of your competitors have positive that because their lead times are shorter they might be able to gain share.
Is there any thoughts as to maybe ramping capacity a little bit more aggressively to try to bring down those lead times?
ie, are they starting to develop in to a negative?
- CEO
I don't believe they are.
We look at results and I think we have been outgrowing the competition including the previous quarter.
And on the sell through basis we believe we can continue that pace.
Lead times are very misleading indicator.
They just indicate how long you think it's going to take you to deliver the next one including all assumptions you made in what you are going to be starting for the next multiple numbers of weeks.
So, to the extent we continue to expand capacity on par, or ahead of our competition, the lead times are ir relevant data.
It really just means we are keeping basically demand ahead of the capacity expansions.
- Analyst
When was the last time they were this far out?
- CEO
2006 probably was the last time we saw this.
- Analyst
Okay.
Great.
As my follow up.
So it sounds like your auto and industrial revenue is getting back or should be above the previous peak this quarter.
However if we look at the end markets they are pretty far aways from being back to their previous peak.
So, how do you explain that discrepancy?
- CEO
We are seeing big model changes with focus on energy efficiency.
That use more semi conductors and specifically we've got some very very strong design positions with proprietary products in both of those areas for more efficient products.
So, I think we are seeing a benefit of some acceleration in model changes which quite frankly replaces older discreet and passive implementations.
- Analyst
Got it, thanks a lot, guys.
Operator
Your next question is from the line of Terrence Whalen with Citi.
- Analyst
Hi.
Can you hear me?
- CEO
Yes, we can.
- Analyst
This one is on Cap Ex, looking at your expectation for $15 million Cap Ex next quarter.
Then if I were to think forward the next couple of quarters and look at your $130 million to $160 million Cap Ex range that implies meaningful decline in cap ex sequentially in the third and fourth quarter.
you help me understand with the tart of 130 to 160 how much capacity is brought on line?
And also how are lead times tools affecting the conversion from cash to capacity?
Thanks.
- CFO
Donald here.
$130 million to $160 million was for equipment.
In addition to that there is additional $25 million or so, $30 million of buildings, and basically building?
San Jose to consolidate what is property and a building extension in the Philippines to consolidate to test facilities.
So you got to add that when you come to $180 million to $190 million .
But, we like to split the buildings out so you can see what we are really spending on specific capacity to increase production capacity.
As far as impact, I will let Keith address what what he believes the impact git of that will be on a week
- CEO
From a impact of the Company again sequentially, you should be able to with the investments we are making, increase capacity at more than 5% per quarter.
It is not always an even investment.
All the money is not equal.
So, I'm not going to be able to give you a exact breakout.
Should be more than 5% per quarter at those investment rates or more from a capacity perspective.
- Analyst
Okay.
Great.
As a follow up I guess, one big competitor said actually they recently got their lead times in in the first quarter seems like from pretty lofty levels.
To what degree is there sort of a race to contract lead times to remain competitive based on some lead times actually coming in while others are going out?
Thanks.
- CFO
I don't have an answer to that.
We don't run the business based on lead times.
We base it on or customers demands.
And we continue to take orders when they request them from us.
So it's not really an index that we chase competitively.
- Analyst
Okay.
That's helpful, thank you.
Operator
Your next question is from the line of Steve Smigie with Raymond James.
- Analyst
Great.
Thanks a lot.
Congratulations on nice numbers here.
And congratulations on the debt paid down you talked about or the term debt pay down here.
So, if I were to look at that excluding other events in the quarter does that mean that debt drops to something like $765 million in cash or drop to $390 million, something like that.
- CFO
That's a good approximation.
I think that's a fair approximation, yes.
- Analyst
Okay.
Then just thoughts on continue use of the cash flow there, continue to work that debt down a little bit.
Maybe leave $600 million debt on the books going forward if you can get it down that low is that a way to think about it or rest goes to acquisitions or buy back.
- CFO
Not planning to spend all the cash on acquisitions.
I think I made that clear we are not acquisition junkies.
What we are trying to do is increase shareholder value added.
So I think we do want to get off debt particularly at identifying debt with the bank facility that has a lot of nasty performance requirements with them compliance requirements.
So it makes a lot easier to get rid of that
So, basically, as we explained on the Analyst Day, we continue to be opportunistic.
If we see good things that we can tuck in, we will work at it.
But we are not obliged to it.
And we want to operate the Company on a shareholder friendly way.
And if we can get shareholders happier with a debit end or going forward or buy back we will consider that.
Right now I think our choice has been pay down the bank facility and invest a little bit more in equipment to get a terms in and capacity up and revenue up.
These priorities change in this industry quite rapidly.
So that's the game plan.
- Analyst
Great, if I could sneak in one more.
Hoping you could talk a little bit about based on R&D investment what you think the future would look like in terms of growth for your various product segments.
I guess what I'm getting at, would you drive standard products as much others?
Or would you expect that to decline and just asp one more time if standard products shrink as a percentage of revenue does that drive up ASP or part of what helps ASP going forward?
- CEO
I'll address that a bit.
Is investments we are making clearly will favor the analog and mixed signal products as opposed to standard products.
That's true relative to R&D and true relative to our capacity expansions.
So like the last several years, I do expect to see continued growth in standard products.
However I expect to see much more growth on a percentage basis coming from the analog and mixed signal products.
That is positive for ASP's.
That is, we don't need much more of a shift.
In fact we don't need my of a shift as we talked about recaller to hit our model.
We just need to get the Phoenix fab closed so we will have to update the model with higher numbers looking at that shift in the out years.
- CFO
We did hit a record gross margin this quarter.
If you take midpoint of guidance it will be a new record next quarter.
So, step by step, we are on the way.
- Analyst
Yes.
They are great numbers.
Thanks a lot.
Operator
(Operator Instructions) Your next question is from the line of Ramesh Misra with Brigantine Advisors.
- Analyst
Hi.
Good afternoon folks.
In regards to your formally acquired businesses, from ADI and AMI, where are revenues relative to their prior historical peaks?
- CEO
So in the ADI case, we are exceeding those prior cases.
That is difficult to us for us to breakout because now the teams have been together and working on joint projects for two years.
But overall the net affect of that is well ahead of what we purchased.
On the AMI side we should be approaching those peaks coming up here in the next quarter.
- Analyst
Okay.
Thanks for that, Keith.
In regards to the basic tightness of availability, do you have any estimate on how much business you are leaving on the table at this point?
- CEO
That's really hard to estimate.
A lot of the demand we see that is in excess of supply is in to the distribution channel.
And there is really no way for us to know how much of that would sell through in the quarter or how much of that would be inventory build.
So, I guess the simple answer is we have no way of knowing.
- Analyst
Fair enough.
In regards to your (inaudible) supply Is you bringing on, for the front end and back end, how much of your production, in wafer starts or some ore metric is being done outside?
And how much do you ex-be that's correct to ramp up over the next ?
- CEO
At this stage in Q1 that was approximately 28% of sales which is actually a high point for us in recent history.
I don't expect that it will grow dramatically more but it could reach something like 30% of sales if we can get as much as we would like.
- Analyst
Okay.
If I may just squeeze in one more.
In regards to your computing business, obviously it is unseasonably strong in Q1.
Any key drivers for that?
And do you expect consequently the second half ramp in the computing business to be somewhat more muted due to the strength?
- CEO
I've heard the theories and we are actually not expecting more muted second half.
We do think there will be more enterprise upgrades in the second half than you saw in the first half.
So we are el not looking for a more muted response at this stage.
And we are preparing ourselves for a more normal scenario.
- Analyst
Okay.
Thanks very much, congratulations on the strong results.
- CEO
Thanks.
Operator
Your next question is from the line of Gus Richard with Piper Jaffray.
- Analyst
Yes, thanks for taking my question.
It looks like you had a pretty good strong up tick in structure related things.
And in talking to companies I gather a lot of demand is pent up in the industrial sector.
And there is upgrade cycle driven by energy efficiency.
A,are you guys seeing that do you believe it?
And B, how long historically have the industrial cycles gone?
And do you think it's will this be in line with them?
- CEO
So we have seen it.
We do believe it.
We are experiencing it as we speak.
Again, as I mentioned I think the biggest driver for us specifically is the shift to more semi conductor control and power delivery types of products which gives us an unfair growth advantage within that sector.
So, we do believe it.
We think it's going to stay strong.
As far as how long it goes, we are in no position the answer that.
It looks strong through all the backlog we have going forward in to the next quarters.
- Analyst
Do you think this drives in your business because you are so broad based, a mix shift to more industrial comments structure?
Could lower revenue per customer higher margin?
Is that something that could impact margins going forward here?
- CEO
Typically speaking industrial does strengthen our margins as does communications infrastructure.
And both of those are quite strong right now.
We are seeing a lot of 3G buildout around the globe and a lot of pent up demand for products nan that area.
Those typically are more positive things from a mixed perspective.
- Analyst
Just last quick one.
As we get in to the summer, would you expect a normal seasonal pause in the infrastructure or you just not seeing it?
You think you are going to blow through it this year?
- CEO
Again, no way for us to tell at this point.
- Analyst
Thanks.
Operator
Your next question is from the line of Patrick Wang with Wedbush Securities.
- Analyst
Great.
Thanks, congrats on the great quarter as well.
First question, Keith.
You talked about anticipated strength in the automotive end market.
And I guess you also offer the comments that you expect past historical peak from before?
Can you give us a little bit more detail about what you are seeing and what gives you the confidence and growth?
- CEO
We are seeing several things.
One clearly the North American market has been more robust than was expected.
We see China continuing to ramp.
And Europe was not expected to do much but frankly they are holding up quite well.
Part of that of course is that they sell in to the China market with European automobiles.
But so frankly, the end demand piece still looks strong.
Further strengthening us specifically, however, is we saw a lot of shifts in the sub assemblies that we play in using our newest proprietary products, add new features to the cars, which gives us more electronic content per vehicle boost.
And so that combination for us looks like a very very strong year.
- Analyst
Your exposure to China, the growth in the China market.
Is that the primary primary drivers there?
In directly, directly and indirectly the fastest growing segment.
In the indirectly comment is there is a lot of components coming from Europe and North American customers that are being used by the China auto makers.
And so we see the orders coming from not just China but from our western world customers that are supplying to China.
Okay that's helpful.
Then for my follow up, Don, if you could help us maybe just summerize the moving parts on gross margin just once.
And for all, I guess one of the things that a lot of, ask about is some of the drivers to get margins even higher above your record margins that you just reported and guided to.
So my help there would be great.
- CEO
Well, we would like to do that too.
I think as Keith mention we get one and a half points if we close.
We are not plan for the near term, later a at the end of the year beginning next year before we get the benefit of that.
If you look at what we announced a at the Analyst Day with 45%, take that down 43.5%, within spitting distance.
I think It's safe to say if we can get prices moving that would be positive.
That's more of a second half story than next quarter story.
And then also right now we got inefficiencies, we are running supply chain, expedite.
Seven extra freight costs costs associated with the volcano in Iceland and expedites and freight with that, all costs running hotter.
And that should come down over time.
So, there is hope we could get above the 45% gross margin.
But I think that the part is going to be a slow relevant instant gratification.
One point I would like to emphasize is that the midpoint of operating expense is also falling this quarter.
Because we have nonrecurring expenses like deal costs and all the rest are not going to happen again in Q2.
So the net-net is we see ourselves generating significant consequential improvement in our earnings.
So, steady as she goes.
But it's fair to say, we do have certain inefficiencies because of the way we are running our factories and as we add more capacity that should help the margin in the second half.
- Analyst
Okay.
Terrific thanks so much, guys.
Operator
And there are no further questions at this time.
We would like to thank you all for joining today's ON Semiconductor Q1 earnings conference call.
Please disconnect your lines at this time and have a great evening.