安森美 (ON) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the ON Semiconductor Fourth Quarter Earnings 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 call over to Mr.

Ken Rizvi to begin.

Please go ahead, sir.

Thank you, Nicole.

Good morning and thank you for joining ON Semiconductor's Fourth Quarter and 2010 Annual Results 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 onsemi.com, and a replay will be available for approximately 30 days following this conference call, along with our Earnings Release for the fourth quarter and the year ended 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 on our website in the Investor Relations section.

In the upcoming quarter, we will be attending the Goldman Sachs Technology and Internet conference on February 15 and presenting at the Morgan Stanley Technology, Media, and Telecom conference on March 3.

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 the fourth quarter and 2010 results.

Donald?

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

ON Semiconductor Corporation today announced that total revenues in the fourth quarter of 2010 were approximately $579 million, a decrease of approximately 4% from the third quarter of 2010.

During the fourth quarter of 2010, the Company reported GAAP net income of $61 million or $0.14 per fully diluted share.

The fourth quarter 2010 GAAP net income included net charges of $38.2 million, or $0.09 per fully diluted share, from special items which are detailed in schedules included in our earnings press release.

GAAP gross margin in the fourth quarter was 41%.

Non-GAAP gross margin in the fourth quarter was 41.2%.

Fourth quarter 2010 non-GAAP net income was $99.2 million, or $0.22 per share, on a fully diluted basis including stock-based compensation expense.

We exited the fourth quarter with cash, cash equivalents, and restricted cash of approximately $765 million, an increase of approximately $203 million from the previous quarter.

We also exited the quarter with the lowest net debt position in the Company's history, at approximately $123 million.

At the end of the fourth quarter, total days sales outstanding were approximately 46 days, down approximately two days compared with the third quarter of 2010.

ON Semiconductor's internal inventory increased slightly from third quarter levels, on a day basis to 96 days.

Included in our total internal inventory is approximately [$16] million of bridge inventory related to our announced quarter of front end manufacturing lines.

Net of the bridge inventory, our inventory days would have been approximately 92 days at the end of the fourth quarter.

As expected, distribution inventories increased slightly to approximately 10 weeks exiting the fourth quarter.

Cash capital expenditures during the fourth quarter were approximately $43 million, bringing 2010 capital expenditures to approximately $189 million.

We currently anticipate total capital expenditures for 2011 of approximately $250 million.

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

Thanks, Don.

Now for an overview of our end markets.

During the fourth quarter, of 2010 our end market splits were as follows.

The Computing end market represented approximately 23% of fourth quarter sales.

The Automotive end market represented approximately 22% of fourth quarter sales.

The Industrial, Military, and Aerospace end market represented approximately 19% of sales.

The Consumer end market represented approximately 16% of sales.

The Communications end market, which includes Wireless and Networking, represented approximately 16% of sales and the Medical end market represented approximately 4% of sales.

On a direct billing basis, no individual ON Semiconductor product OEM customer represented more than 6% of fourth quarter sales.

Our top five product OEM customers during the fourth quarter were Continental Automotive Systems, Delta, Pella, 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 OEMs represented approximately 45% of fourth quarter 2010 revenue.

Sales to the distribution channel were approximately 45% of fourth quarter revenue and the EMS channel represented approximately 10% of revenue.

During the fourth quarter, ON Semiconductor revenues broken out by our product groups were as follows -- the Standard Products Group represented approximately 34% of sales.

The Automotive and Power Group represented approximately 23% of sales.

The Computing and Consumer Group represented approximately 23% of sales.

And the Digital and Mixed-Signal Product Group represented approximately 20% of sales.

We will publish our quarterly and yearly revenue, gross margin, and operating margin breakout of these segments in our Form 10-K filings for the year ended December 31, 2010.

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

Following the fourth quarter of 2010, we closed on the acquisition of SANYO Semiconductor.

The addition of SANYO Semiconductor expands both our product portfolio and our global market reach into Japan.

The SANYO Semiconductor portfolio also adds new capabilities to our offerings, ranging from microcontrollers and custom ASICs to integrated power modules and motor control devices for the Consumer, Automotive, and Industrial end markets.

We began our initial dialogue with SANYO Semiconductor approximately one year ago.

Since then, we have finalized overall manufacturing, operational, and cross-selling strategies with their team and are in the execution phase of the integration, which will take place over the next 18 to 24 months.

Last week, we also signed a definitive agreement to acquire the CMOS Image Sensor Business Unit from Cypress Semiconductor.

We expect this acquisition to solidify our position as a leading supplier of CMOS image sensor products.

In particular, the two-dimensional high speed CMOS image sensors acquired from Cypress should significantly strengthen and complement ON Semiconductor's existing image sensor products for the Industrial, Medical, Computing and Military Aerospace markets.

We expect to complete this acquisition during the first quarter of 2011.

Now I'd like to turn to our end market and product line results.

The Automotive end market achieved record sales in the fourth quarter, as well as record annual sales in 2010.

Fourth quarter Automotive end market sales were up approximately 11%, while annual sales expanded approximately 48% from 2009.

In 2010, growth in the Automotive market was fueled by overall unit growth, as well as a continued proliferation of electronics into automobiles, ranging from entry level to luxury models.

This has driven strong demand for our powertrain, automotive body and safety solutions.

In the fourth quarter, we also saw continued adoption of our ASICs for parking assistance and position sensors.

In addition, during the quarter, we received the Semiconductor Supplier of the Year award from Yanfeng Visteon, the largest automotive electronic supplier in China.

We are starting to see the early benefits from the opening of our Automotive Solutions Engineering Center in China.

Looking into the first quarter, we believe we will continue to see strength from this end market.

Revenues in the Industrial, Military, and Aerospace end market grew sequentially in the fourth quarter by approximately 2% and annual sales grew by approximately 35% to record levels in 2010.

During the year, we saw growth from heavy industrial applications such as factory automation, as well as circuit breaking and motor control devices.

As we enter 2011, we expect to see continued growth in applications such as smart metering, energy efficient building management products, such as lighting control and HVAC, and in-building networks such as security systems and fire protection systems.

In the fourth quarter, the Communications end market, which includes both wireless and networking, experienced revenue declines of approximately 4% when compared to the third quarter of 2010.

In the Wireless segment, revenue decreased as expected primarily due to lower overall unit sales during the quarter.

We believe as we enter 2011, we are well-positioned with multiple products for the next generation of smartphone applications.

In the fourth quarter, we began shipping new power and thermal management products for the smartphone market as well as our first micro USB integrated circuits for this segment.

We can now support up to $3.50 per smartphone with a full suite of products including our protection and filtering devices, audio amplifiers, LED drivers, DC/DC converters, USB switches, MOSFETs, and medium scale subsystem IC integration devices.

In the Networking segment, quarterly revenues were down slightly compared to the third quarter of 2010.

As we look into 2011, we expect to see increased penetration of our custom ASICs and an array of precision clock and timing products, as well as the ongoing buildout of networking infrastructure in China and India.

In the Computing end market, as expected, we saw fourth quarter revenues down sequentially by 11%.

Annual revenues in 2010, however, grew by approximately 28% to record levels driven by our continued proliferation of our products, such as our energy efficient power management solutions, buck and boost converters, MOSFETs, audio amplifiers, protection devices, thermal products, and standard products.

We can now support up to $2.50 per tablet, up to $8 per notebook, and more than $10 of content for high end desktop computers with our full suite of products.

While we experienced a subseasonal decline during the back half of 2010 for this segment, we are optimistic that the Computing end market-related inventory correction is behind us, and we expect to see revenues stabilize in the first quarter of 2011.

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

Donald?

Thank you, Keith.

First quarter 2011 outlook.

Based upon booking trends, backlog levels, and estimated turns levels, we anticipate that historical ON Semiconductor revenues, which exclude revenues from SANYO Semiconductor, will be approximately $570 million to $590 million in the first quarter of 2011.

This revenue guidance is better than normal seasonality and is supported by the backlog entering the quarter.

Backlog levels at the beginning of the first quarter represent over 90% of our anticipated first quarter revenues.

In addition, based on current trends, we anticipate that backlog levels at the beginning of the second quarter of 2011 will be higher than those at the beginning of the first quarter.

We expect that average selling prices for the first quarter will be down approximately 1% to 2%, compared to the fourth quarter of 2010.

We expect total cash capital expenditures of approximately $70 million to $80 million in the first quarter of 2011, of which approximately $10 million to $20 million is related to carry forwards from 2010.

For the first quarter of 2011, we expect GAAP and non-GAAP gross margin of approximately 40% to 41%.

We also expect total GAAP operating expenses of approximately $137 million to $141 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 $127 million to $131 million.

We anticipate GAAP net interest expense and other expenses will be approximately $19 million for the first quarter of 2011.

This includes noncash interest expense of approximately $9 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 approximately $3 million.

We also expect stock-based compensation expense of approximately $11 million to $13 million in the first quarter, of which, $3 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 460 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 10-Q and Form 10-K.

In addition to our normal guidance for historical ON Semiconductor, which includes the expected results from SANYO Semiconductor, we anticipate that SANYO Semiconductor will add approximately $260 million to $285 million of incremental revenue to ON Semiconductor's revenue guidance outlined before.

We currently anticipate that SANYO Semiconductor business will generate GAAP operating losses in the first quarter due to, among other things, purchase accounting and acquisition related costs.

We anticipate that the SANYO Semiconductor business will generate non-GAAP operating profits in the range of zero to 5% of SANYO Semiconductor sales in the first quarter of 2011.

Given the recent quarter of the SANYO Semiconductor transaction, we are still finalizing the purchasing accounting associated with this transaction.

We should be in a position to provide more details regarding the financials of SANYO Semiconductor on our next call.

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

Thank you.

(Operator Instructions)Callers are limited to one question and one follow-up question.

The first question is from Terence Whalen of Citi.

Mr.

Whalen, your line is open to speak.

There is no response from that line.

Our first question is from James Schneider of Goldman Sachs.

Good morning and thanks for taking my question.

Beginning on the SANYO business, how should we think about the revenue profile of that business as we head throughout the year?

Specifically, is there any share loss that you would assume or business that's lower margin that you might walk away from that would cause that revenue to depart from normal seasonality as we head through this year?

Thanks.

We would expect normal seasonality.

Over half their business is consumer, which means your first quarter should be the lowest quarter of the year and business should build from there, kind of capping out flattish in the fourth quarter.

So, very similar to that seasonality.

We are not expecting to have any business walk-aways in the first half.

We're working very closely with the customers.

We're still looking at the portfolio, et cetera, so I would not expect to see any leakage due to decisions on the Company's part in the first half.

And based on discussions with customers, I would not expect leakage based on relationships there.

Great.

That's helpful.

Thank you.

And then a follow-up.

On the organic Automotive and Power segment in the Q4, it looks like that was down sequentially and most of your competitors have reported a little stronger revenue trends in that category.

Could you explain what may be going on there?

So the Automotive portion was up over 11%, and 48% on the year.

That segment includes our MOSFET business and we, quite frankly, moved some of that capacity away from the MOSFETs so that we could support our business in other sectors during the fourth quarter.

So, all of the decline from the MOSFET side was offset by increases in the Automotive part.

So that was all in discretes?

All in discretes.

Thank you.

The next question is from Chris Danely of JPMorgan.

Hello.

Thanks, guys.

Keith, can you just run us through your end market outlook for Q1 and for the rest of the year?

And also, your reasons why you expect some end markets to be better or some end markets to not be better.

You bet.

So, I'll start with Automotive.

We were just talking Automotive.

I expect that, that will continue to grow throughout 2011.

We are seeing very strong demand from our customer base and a quite optimistic outlook for the year, both in number of cars built compared to last year and in the content.

So, we think that will probably be, again, our strongest growth story in the Company.

We're also expecting to see Computing pick back up.

As we talked about earlier, we were kind of sub-seasonal performance in the second half of last year.

But we do think, both with content from ON Semiconductor and the business cycle this year, that we should also see that growing as we go through Q1, Q2, and Q3.

So, we're seeing a little better situation here in Q1 than normal seasonality and I would expect strengthening in the rest of the year.

For the Industrial markets, we see those are flattening out a bit, not expecting significantly strong growth there, but they should be up year on year, but fairly steady.

In the Wireless business, we would expect to see growth due to smartphones, but total phones not growing at a very brisk pace.

So, seeing some improvement as you go through the year.

Great.

And then for my follow-up, can you just run us through the margin profile for SANYO as it stands right now in terms of gross and operating margins?

And then, how do you expect the ON margin profile and the SANYO margin profile to trend throughout this year?

Hi, Chris.

As far as the SANYO margin, we closed the deal the first of January.

So, prior to closing the deal we didn't have access to lots of information, particularly those concerning prices.

So, we're just getting our arms around that and as you know from acquisitions, you've got complexities like fair market value step-up of inventories and things, so that's why we didn't give the usual granularity we give in our guidance.

And so we are pretty comfortable in the parameters we gave you on operating income, excluding nonrecurring costs.

So, that's about the best we can do while we bring the [J GAAP] accounts of SANYO into US GAAP and purchase accounting during the first quarter.

But I think it's fair to say that, as Keith mentioned in his script, we believe that these are good products and that over time, should migrate to operating incomes in the teens level and gross margins in the plus 30% to 40% level.

So, that's something that still looks to be very doable, but will be subject to the completion of the restructuring plans that we have advanced for SANYO Semiconductor.

And as far as the core ON is concerned, I think as Keith mentioned, we are driving more volume and more content, so our manufacturing investments that we've made over the last few quarters will bring fruit throughout the year.

And we are encouraged by the backlog trend, as I mentioned in the script, for the second quarter.

So, I think you can expect to see gross margins improving from the first quarter level as we go into the stronger second and third quarters this year.

The exact amount of improvement I'm not really going to determine, but we have given you some algorithms.

Higher sales revenues certainly will generate higher gross margins as we go throughout the year.

Great.

Thanks.

The next question is from Ross Seymore of Deutsche Bank.

Good morning, guys.

Keith, can you just talk a little bit about lead times, both internally and what you're seeing from your competitors?Have they finally started to flatten out or are we still seeing some adjustments out there?

So, each competitor is slightly different and each market is different.

I think in the discrete domain, lead times tend to be a little longer across the industry than they are in the integrated circuit part.

Overall, we're operating around 12 weeks for lead times right now, which is the lowest we've been in over a year.

Don't know that, that will go down dramatically in the next couple of months, but it should be easing its way back down to sub-10 as we go through Q1.

And I think that's similar to where the average part in the industry is from a discrete basis.

ICs tend to be a little shorter and we've seen in the marketplace something that's sub-10 already, and that should be stable at least through the first quarter of the year.

And then on the inventory side of things, you talked about them, the channel building inventory in the fourth quarter.

What do you expect the channel to do in the first quarter?

Is there different end markets that have some of the same sort of inventory issues that Computing had or are they kind of all clean at this point?

We think we'll exit the first quarter in relatively good shape.

There is expected to be a build in revenues across the industry in the second quarter, so I would expect some slight building of inventory in distribution across the markets, but not significant.

But I think that's just needed to support the Q2 revenue increases.

And is there any end markets that needs to take some medicine like Computing did or is that something that was specific to that vertical?

We haven't seen any other market that's in that shape right now.

In other words, we think everything else is in relatively good shape.

Got you.

Thank you.

The next question is from Steve Smigie of Raymond James.

Great.

Thanks a lot and congratulations, guys, on getting the acquisition done.

You guys got a lot done this year in getting to your best net debt position ever.

And on that net debt position, I was hoping you guys could talk a little bit about what you guys will plan to do with the cash.

Are you going to try to actually pay down some of that debt?

Or you're okay with the debt position, you want to have cash available for other activities?

If you could talk about that a little bit, I'd appreciate it.

Sure.

I think up until now, especially going through 2008, it was our plan to pay down debt and make debt less toxic.

We got rid of the bank facility, all of the covenants and anything that went with it.

But, we're now very comfortable.

Our debt is approaching zero.

But, you'll have to bear in mind we did assume a seller note from SANYO, so we will have more debt at the end of the first quarter.

But we believe that the SANYO business should generate reasonable cash flows going forward.

We will look carefully at how that business develops, what capital investment it requires, and many investors have indicated to us that, as an analog company, many of our competitors are paying dividends and that's something that we are actively considering as a priority for the debt.

So, a little bit premature to give any specifics on that because clearly an acquisition of the size of SANYO, we have to get very comfortable with what investment it requires there.

We're confident that it will be reasonable and that with the cash balances we have, we can start to consider the institution of a dividend that many similar companies in our domain already have.

I think also an acquisition of that size, even though we did complement that with a small sensors division acquisition, you can assume that we're not building up a big war chest to imminently strike out and buy other things.

The sensor acquisition was a small one, complemented an existing activity that wasn't really implicated in the SANYO acquisition, but in general, most of the Company is going to be tied up with SANYO.

So, that will preclude any major actions in that domain this year.

Okay.

Thank you.

If you could comment a little bit on pricing.

It seems like it's been better than normal for quite a while and in your guidance, it seems like it's still better than normal.

But maybe not -- it's starting to get less good, if you will, but maybe I'm reading too much into what you said.

So, if you could comment on that.

If I could just squeeze one last one in.

It seems like you're saying SANYO's going to sort of generally be seasonal, in line with about the same as the rest of ON and that makes sense to me, sounds like you're not going to walk away from anything really, at least in the near term.

So should we just assume SANYO's going to have normal growth rates over the next two years, as we might expect for the ON proper?

Or is there something else that could happen one way or another that might change that in a significant manner relative to what you might normally think?

Let me handle those separately.

You snuck it in, but --

Sorry.

Those are good questions.

ASP-wise, the way I would characterize that, Steve, is over the past few quarters, there have been very little turns activities available.

The products were being consumed by OEMs and by customers that had plans and arrangements on pricing.

As we look in the first quarter, I do think the industry's freeing up small amount of capacity and I would expect those turns to be under pressure on pricing, rather than in an area of strength.

But I do want to emphasize, I think it's a very small amount of business going that way and you can see that in our -- reflected in our forecast.

So, maybe a little less strong environment here in Q1.

We have not seen enough capacity on for it to tip over to being a strong buyers' market at this stage, and so we're expecting relatively muted cycle here in 2011.

As to the growth rates going forward, it is still early.

We're not going to commit to any growth rates at this stage.

What I will say is, we've been very comfortable talking with the customers about the position that SANYO Semiconductor has and we're not seeing any significant leakage.

And then on the growth side, we're seeing opportunities for cross-selling of products which we think are very, very exciting and most probably would offset any kind of weakness otherwise.

So, we're, in general, expecting to see growth, although our experience tells us in the early part of an acquisition, it's probably not going to be substantial in the first part.

Just -- I would completely echo, obviously, what Keith says there.

So, think of SANYO as a maintenance stabilizing and margin improving exercise for the next two years on our revenue that will seasonally improve from the first quarter.

But we wouldn't expect to see big year-over-year increases there, until we get it fully integrated within our manufacturing infrastructure and that's going to be the best part of two years.

As Keith said, our experience has shown that preservation, maintenance of revenue takes a year to two before you start to get growth.

So, I don't think it would be appropriate to suggest any basic organic growth for SANYO, but certainly seasonally improving from the first quarter levels is totally achievable.

Great.

Thanks, guys.

The next question is from John Barton of Cowen.

Thanks.

Keith, maybe if you could elaborate on the cross-selling potential, and I understand Donald's comments, doesn't happen overnight.

But, when you're meeting with the Japanese customers, the historic SANYO customers, how receptive do you believe they are to ON's traditional product lines and support thereof.

I was actually quite excited.

I've been there two different times now talking to their large customers and in both cases, they were embracing the opportunity to expand the purchases through SANYO.

ON, and many of the other Western suppliers in Japan, are handicapped by the support infrastructures that they expect in Japan, on a service basis, et cetera.

And so, they do not tend to buy as much from foreign companies as they do local companies.

This completely changes that perspective in Japan.

They now know and love their local SANYO sales team and service team and so they're looking forward to getting access to ON products through that network.

And so they've, frankly, opened up opportunities at each of the accounts I went to, to see if they could buy more ON products in Japan.

The other side of that equation is outside of Japan, SANYO had very little infrastructure and service, particularly on the technical support side, to proliferate their sales outside of Asia.

We've got that infrastructure at ON.

They've got some very, very interesting products in motor control and power modules that we are anxiously preparing ourselves to expand outside of the Asia market.

So, we think there's opportunities in both directions and, again, just from an expectation setting perspective, even with all the enthusiasm, it will take the better part of a year to see any significant flows.

So, to elaborate on one of your earlier statements, you perceive Western suppliers' lack of success in Japan primarily due to lack of the service base as opposed to a true cultural barrier?

And you believe if you keep that service base intact, you'll be able to get undue representation in there's as a Western supplier, so-to-speak?

Yes.

If you'd asked me that question in the '80s, I would have told you that there is a cultural barrier.

Both the experience we're having and the direct comments from the customers there now says that they're through the cultural barrier.

They want to complete on a global basis and they know to do that they've got to expand their base.

And so, I think it really is infrastructure.

They had round numbers 10 times the support infrastructure, on a people basis, that Western companies can afford to carry there with the revenue levels they have.

Thank you.

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

Thanks, guys.

Good morning.

Just wanted to follow up, Keith, on the Automotive comments.

Can you talk a little bit about where you would expect to see the growth this year?

Is it fairly equal geographically or do you expect one of your geographies, whether it be China which you mentioned or Europe or the US, to outgrow the others?

So, I would still expect Asia to outgrow on number of automobiles sold.

So, from a number of cars built and sold, I would expect that to be strongest, the Americas to kind of come in second place and Europe to be trailing on number of cars built.

But if you look at what goes into the cars, we sell to the module makers and those, geographically, are actually much stronger in Europe than they are in Asia.

So, they actually buy their materials in Europe and then ship them over to Asia from there.

So, on a sales from ON perspective, I would expect to see some very strong performance in Europe, probably second behind China.

So, it's a little different geography on whether you're talking about the end car sales or where we actually deliver product.

Okay.

That makes sense.

And then looking at the PC business, what happens with ON as we go to Sandy Bridge from a dollar content standpoint and then a market share standpoint as you look at the notebook and desktop business?

So, we're expecting market share gains and we are expecting dollar content gains.

Do we have a specific number on that yet?

Yes, okay.

So, my statistician here is telling me that we'll have to stick with $8 content now for notebooks as an overall number.

I don't actually have that transition number for you today.

Okay.

Thanks, guys.

Yes.

Your next question is from Suji De Silva of ThinkEquity.

Good morning, guys.

Nice job on the quarter.

Couple of questions on the guidance.

You're one of the first companies to report after Intel talked about their product issues.

Is there any impact or any anecdotal insight from that, or is it still too early?

Well, I think it's earlier.

There's some -- a lot of dynamics going on there.

We anticipate that any outcome is likely to be positive for us in the short term.

If they have to recall boards or rebuild boards, et cetera, et cetera, it generally means we have to provide new parts.

They don't typically un-solder things any longer in that marketplace.

So, it usually ends up being scrap and they have to rebuild.

So, generally I would say would be a positive sign for us.

And any signs from that in the channel that products are being -- purchases are being delayed or any impact on [one key] demand you can see?

It's too early to tell on that.

Okay.

Again, the -- our customers there have choices.

They can continue building the existing model platforms a little longer.

They can choose to just rebuild with the new fixed parts the same quantities they originally planned.

That's just way too early to call.

Okay.

One other question on guidance.

The CMOS image sensor business, what's your expectation for the full year and is there any of that in the first quarter guidance?

Hi.

The deal's not going to close until the end of the quarter, so you can assume it's included in there because we're talking about de minimis amount.

And for an annualized basis, we think the business is slightly north of $30 million annualized.

That's the kind of revenue run rate that we would expect.

So, full quarter revenue, something in the $8 million range.

So, it's not in the first quarter, Don, right?

No.

Well, the deal will not --

Okay.

We don't actually know when the deal closes, but it will be so minimum this quarter --

Right.

-- you can just assume it's included.

Excellent.

Thank you.

The next question is from Parag Agarwal of UBS.

Hi, guys.

Thanks for taking my question.

The first question is about CapEx.

It seems that your CapEx spending accelerating in 2011.

Just wondering where that CapEx is going and how does this relate to the capacity that is being acquired from SANYO?

I think that the capital expenditures, we account for them on a cash basis.

So, we did actually put in place capital at the end of last year, particularly meeting requirements of the Automotive and Computing areas.

So, the cash [outlies] for these, as we mentioned in our call, some of that was delayed, just the natural working capital management.

So, it was about $20 million or so of this year's numbers were a carry-forward from last year.

But I would say it's fair to say that we're putting a reasonable amount into front ends to meet requirements in the Automotive and Computing markets and in the back end, more assembly and test capacity.

So, I don't have the exact split, but I think you can assume you take off buildings and some infrastructure, it's probably split equally between the front end and the back end.

But I mean, that's what happens when you have a strong demand from your customers and the lead times remain stretched.

I'm sure our customers listening to the call will be satisfied to see that we hear them and we are putting in place the necessary capital to service them.

Okay.

Very good.

Secondly, about the SANYO operating margin guidance of zero to 5% in Q1, looks like you're tracking way ahead of your target of 10% in (inaudible) of this quarter.

So, any update on that trend would be very helpful.

Sure.

But the initial deal when we announced it in July, we talked about six quarters out and then we worked with the seller to get support from the seller to get competitive costs, as we call it manufacturing support, but the seller will help us get competitive costs much sooner.

And so, we announced that restructured deal at the end of the fourth quarter of last year.

So, essentially what you're seeing now in our guidance is the benefits of the restructured deal where we will get more competitive manufacturing costs much sooner than the originally scheduled deal.

So, we looked at the numbers many different ways, but we feel this is a reasonable guidance bearing in mind the addition of the seller support to competitive manufacturing costs.

Thank you very much.

The next question is from Craig Berger of FBR capital markets.

Hello, guys.

Thanks for taking my question.

First on the gross margins, this is -- well, you guys did towards the lower end of the range after last quarter's hiccup.

Is there anything going on?

What's the gross margin pressure and/or is 41 just where the business does right now?

I think we're in a wee bit of a transition phase.

The question was the capital expenditures that we have been making and end of last year, the beginning of this year, having an increase in our depreciation expense and that's the revenues -- the extra revenues that this generate, this capital will generate are not really going to happen in the first quarter, they're more second and third quarter.

As Keith mentioned, we've got some content gain and we've got some volume gain as the markets recover.

So, I think you would expect -- I think, [Christine] we asked a question before on the gross margins.

You would expect the gross margins to move upwards as our revenue strengthens in the seasonally stronger middle of the year.

We've always said that we believe our core business is a 45% gross margin.

The business certain -- that requires certain factory closures.

I think it's fair to say that in the (inaudible) environment, we have more prudent about factory closures and we've delayed them, Craig.

I think it's also fair to say that we will not be accelerating them until we see very stable market conditions.

But you would expect our gross margin to move up in the direction of our corporate 45% model on our core business as our revenue gets stronger in the second and third quarter.

Thank you.

And just as part of that, what's the fab utilization rate at Gresham?

For -- I think our Gresham fab rate -- all of our fabs are at approximately 90% capacity utilization.

I didn't look at what Gresham is instantly, but I think it's close to that.

Clearly, we've seen all of our fabs filled up and we are continuing to make more investment into not only our Gresham facility, but our other eight inch facility in Idaho, which also is running over 90%.

That's a fab 10 in Idaho.

So, we're seeing very good utilizations in both our eight inch facilities, Gresham and Idaho.

Great.

And then, just one last one.

Thomson First Call makes us put out a model with SANYO.

And you guys are being a little vague even on the pro forma impacts and so, I'm just a little worried that everybody's models are going to be all over the place.

And so, is there a SANYO pro forma OpEx number you can give us for Q1 or the year?

And also, how do you think about CapEx for the year?

Thank you.

Well, I think the -- we hesitated long when we gave the guidance and so the P&L geographies are difficult to determine because we just got ahold of the Company on the first of January.

So, that was only a few weeks ago and we've been working to map their accounting to US GAAP accounting and it's fair to say that, that exercise is not complete.

So, it wouldn't be appropriate for me, with the accounting conventions that we have to obey, to give a guidance in detail for things that I don't have certainty of.

I would love to do it, but I have to be honest.

There's not many precedents of a US Company buying a Japanese Company of the size and sophistication of SANYO.

And it takes -- it's going to take us more than a few weeks to get to the level of details that are required to be comfortable in a P&L geography.

But you're all clever people.

We said in the past that we believe the gross margins of SANYO should be in the 30% to 40% range.

We've given you what we think operating income is.

So, I know that someone as clever as yourself will come up with a pretty good guesstimate of what the model should be.

So it's hard to call?

(inaudible) OpEx was $80 million.

So, and then, as far as the capital expenditures, again, we're still in a position of finalizing that.

As Keith mentioned, there's some really excellent opportunities with their products, particularly making marginal investments to increase share in some of their products because they've been starved of capital.

I think the rough number we're looking at now is something like $50 million for the year, but we haven't finalized that yet.

That number has not been engaged, but that's a kind of rough number for capital for SANYO that we've thought about.

What about the overall Company for capital?

I think we stated that the core ON will be something in the $250 million range.

So $300 million, all-in?

Maybe.

But again, the $50 million or so for the SANYO is not something we have nailed down yet.

We haven't committed to anything like that.

Once again, we had good contact as far as planning is concerned, but lots of access to the company prior to closure was limited.

And so, we're -- especially access to things like prices, the anti-competition, the pro-competition rules, dictate you can't jump the gun and so, it's only recently we're seeing what prices are and margins and been able to direct our capital expenditures to areas that will give a high return.

So, we should be able, as I said in the script, to give much more details on our next call.

Thank you so much and congrats on a strong 2010.

Thanks.

The next question is from John Vinh of Collins Stewart.

Hi.

Thanks for taking my question.

Can you give us what the SANYO Q4 revenues were and what the revenues for 2010 were?

The -- again, I don't know what the disclosure requirements are, but I think you can assume that the Q4 revenues were approximately in line with the guidance we gave for the first quarter.

That's an approximation.

And sorry, what was the second question?

Yes, and then you talked about Consumer being over 50% of the business.

Can you give us the vertical breakout for the other segments?

And is there any color you can talk about in terms of how those segments are trending at this point in time?

Okay.

Yes, let me give you the breakouts first there.

The Automotive segment would be about 17%, Industrial, about 7%, Computing, 12%, and then Communications, about 14%.

They are, again, if you're looking at totals, Consumer being half the business is certainly going to set the profile.

Their Automotive, like ours, is quite strong.

Industrial has been improving and Computing reflected the same trends we saw at ON, which is basically sub-seasonal second half of last year.

And the same thing with Wireless in the fourth quarter, looks very similar.

So, frankly, the trends we saw on a quarter basis last year look very, very similar to the overall market.

Great.

Thank you.

The next question is from Kevin Cassidy of Stifel Nicolaus.

Good morning.

Thanks.

On the CMOS Image Sensor Business, any plans of taking that outside of the Industrial Medical markets?

No.

The technologies we just picked up fit those markets very well.

They complement our existing customer base there with the other sensor work that we do and we think there's some very substantial growth opportunities for us in that area.

Trying to enter the mass markets we don't think is appropriate for that specific set of technologies, but we do think there's some very good growth opportunities and margin opportunities for us there.

Okay.

And where will that product be manufactured?

We have not made any determination on future manufacturing homes, so right now we're going to keep the manufacturing stable until we make those determinations at its current locations.

Just a little add-on to that.

One thing that kind of makes me happy when I look at some of these acquisitions is that we haven't brought a lot of these products inside and we are using external suppliers, especially for the front end.

So, one of the challenges for semiconductor companies is to keep the factories loaded and so it's quite comforting for me to look at some of these acquisitions.

They make a lot of good financial sense by using external foundries and it gives us the option downstream to get better productivity and margin contribution by bringing them inside, but yet, as Keith said, we haven't yet made that determination.

But it's an upside potential or protection that we have for the future.

Okay.

So you have the process technology for the CMOS image sensors?

Yes, we have the capabilities internally, but they're using a set of foundries today and we plan on continuing to do that until we've analyzed, a little more fully, the overall situation.

All right.

Great.

Thank you.

The next question comes from Ramesh Misra of Brigantine Advisors.

Hi.

Good morning, everyone.

My first question is in regards to the acquisition.

How much did it end up costing?

How much was debt?

How much was cash?

Well, just on that, when we closed the deal on the first of January, we gave them approximately $130 million cash, which we disclosed in the Earnings Release, was restricted cash.

But we got back from them something like $110 million cash, on their balance sheet.

So, the net cash out was approximately $20 million and we have assumed a note, a seven year note at LIBOR plus 175% for just under $400 million from SANYO Electric, the seller.

So, that's the basic main elements in your cash and assumption of debt, Ramesh.

Okay.

In regards to the fab consolidation, can you just update us on the plans over there, Donald?

The basic manufacturing infrastructure in Japan has three fabs and an assembly and test facility.

And we will be consolidating into one major fab and a reduced assembly and test facility.

That is the main drive of the manufacturing consolidation.

Okay.

I guess my question was more about (inaudible), but I guess that was a little bonus.

So, the plans for shutting down your own fabs right now?

So, this is Keith Jackson.

We do intend on still closing our Phoenix wafer fab.

We have delayed that several times based on business conditions being extraordinarily strong.

We've actually put that off yet another quarter because we're going to be consolidating some of the SANYO product into our consolidating Malaysia fab.

And so we want to make sure we've got ample spare capacity in that factory before we make any cut-overs, and of course, ample coverage of inventory to make the transition smooth for our customers.

So, simply said, the Phoenix fab will close.

It's going to be closed later than we expected due to strong business and the SANYO acquisition.

We don't have any other announced ON factory closures for 2010.

Okay.

2011.

That is it, Keith and Donald.

Thanks very much.

Great.

Thanks.

The next question is from Tristan Gerra of Robert Baird.

Hi, good morning.

Could you talk about the percentage capacity growth that you expect to put in place X-SANYO for this year?

And also, once you consolidate the three fabs at SANYO, would you expect that remaining fab at SANYO to be close to full capacity if you look at just current floating rates?

So, on the SANYO question, we would expect to fill that one up to the 85% range to 90% range.

So, when the consolidations are complete, we would indeed expect that to be operating fairly close to full.

We're also using our Malaysia and Gresham factories for consolidating some of the SANYO factories.

The specific change on capacities for the overall Company with CapEx, it's going to be 15% plus.I don't have a detailed breakdown on that, but it'll be in that range from our exit velocity in Q4 of 2010.

Great.

And then last question, if you could remind us of the exposure you have to Malaysia and the Philippines in terms of percentage of your cost from a currency standpoint?

So, the Philippines does most of our analog IC assembly and test, and so that's -- the amount that's done there is less than one-third of our assembly test and then our Malaysian wafer fab will do mostly discrete products.

So again, it's -- from a wafer fab perspective, less than one-third of the Company's wafers.

Great.

Thank you.

The final question is from Patrick Wang of Wedbush Securities.

Thanks for getting me in.

Just one question here, you guys have always done a great job on streamlining new businesses that you guys acquire.

Can you give us an update maybe as to when you think you can, perhaps, hit a 10% operating margin for the SANYO semi business?

Or maybe another way to look at it is, to actually hit that $30 million of pretax income?Thanks so much.

Well, I think that's a question that was asked kind of a different way before.

We said when we first announced the deal that we thought we could get to the 10% within six quarters.

Someone mentioned we've hit the ground running faster because of the support from the seller.

So, it will be less than six quarters but you can extrapolate, it wouldn't be the first quarter, but it will be less than six quarters.

So, define somewhere in between.

Okay.

So, is it fair to think that it's possible to hit that this year, the second half of this year at some point?

Sure.

Yes?

Okay.

Great.

Thanks so much.

Thank you.

This concludes today's Q&A session.

I would like to thank you for your participation and ask that you disconnect your lines at this time.