安森美 (ON) 2013 Q1 法說會逐字稿

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  • Operator

  • Good afternoon.

  • My name is Kyle and I'll be your conference operator today.

  • At this time I'd like to welcome everyone to the first-quarter 2013 financial 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-session.

  • (Operator Instructions)

  • Thank you.

  • Mr. Agarwal, you may begin your conference.

  • Parag Agarwal - Sr. Director IR

  • Thank you, Kyle.

  • Good afternoon, and thank you for joining ON Semiconductor Corporation's first-quarter 2013 quarterly results conference call.

  • I'm joined today by Keith Jackson, our President and CEO, and Bernard Gutmann, our CFO.

  • This call is being webcast on the investor relations of our website at www.onsemi.com.

  • A replay will be available at our website approximately one hour following this live broadcast.

  • And will continue to be available for approximately 30 days following this conference call, along with our analysis for the first quarter of 2013.

  • The script for today's call is posted on our website.

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

  • Reconciliation of these non-GAAP financial measures to the most directly comparable measures in the GAAP are in our earnings release, which is posted separately on our website in the Investor Relations section.

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

  • The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should, 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 which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission.

  • Additional factors are described in our earnings release for the first quarter of 2013.

  • Our estimates may change.

  • And the Company assumes no obligation to update forward-looking statements to reflect actual results, changing circumstances or other factors.

  • In the upcoming quarter we will be attending the Bank of America conference on June 4 in San Francisco.

  • Now let me turn it over to Bernard Gutmann who will provide an overview of the first-quarter 2013 results.

  • Bernard?

  • Bernard Gutmann - CFO

  • Thank you, Parag, and thank you, everyone, for joining us today.

  • Let me begin by updating you on the progress we're making towards the financial objectives for the Company.

  • Let me start with our SANYO Semiconductor Products Group.

  • We have further lowered the revenue needed to achieve break even on a non-GAAP net income basis for SANYO Semiconductor to approximately $170 million per quarter, from an estimated $190 million per quarter.

  • With this lower breakeven level, we continue to be on track to achieve breakeven for our SANYO business by the third quarter of this year.

  • Rationalization of our SANYO business is the key driver for a lowered breakeven point.

  • Although the devaluation of the yen has been a contributing factor, as well.

  • Revenue for our SANYO business has continued to be below our expectations, primarily due to a combination of a weaker yen and softness in the Japanese consumer electronics manufacturers.

  • We do, however, believe that revenue for our SANYO business has bottomed and we should see improving revenue trends going forward.

  • Now, moving on to the ON legacy business.

  • Our design win momentum remains strong.

  • And we are targeting investments in faster growing end markets, such as wireless communications and automotive.

  • Our ON legacy business is well positioned to benefit from an improving demand environment.

  • Keith will provide more details on design win activity and business trends in his prepared remarks.

  • Our third area of focus is returning cash to stockholders.

  • This quarter we did not buy back any shares of our stock, but we do remain committed to opportunistic repurchase of our stock in a disciplined manner.

  • We did, however, use approximately $77.5 million of cash to retire our 1.875% senior subordinated convertible notes.

  • Now let me provide an update of our first-quarter 2013 results.

  • ON Semiconductor today announced that total revenue for the first quarter of 2013 was $661 million, a decrease of approximately 3% from the previous quarter, and 11% from the same quarter a year ago.

  • GAAP EPS for the quarter was $0.05.

  • Excluding the impact of amortization of intangibles and restructuring, and other special items, non-GAAP EPS for the quarter was $0.10.

  • Non-GAAP gross margin for the quarter was 32%, an increase of 100 bps quarter over quarter.

  • Higher utilization at our ON legacy operations was the primary driver of our improved gross margin.

  • We expect this trend to continue, driven by increased utilization not only for our ON legacy operations, but also for our SANYO Group.

  • Non-GAAP operating expenses for the quarter were approximately $158 million, down by approximately $8 million as compared to the prior quarter.

  • Favorable currency movements, selective headcount reductions and short-term tactical actions, such as mandatory time off, were among the key drivers of lowering operating expenses.

  • Average selling price during the first quarter declined by approximately 2% sequentially.

  • We exited the first quarter with cash, cash equivalents and short-term investments of approximately $614 million, a decline of $17 million over the last quarter.

  • Approximately $85 million of cash was provided by operations.

  • And we spent approximately $39 million of cash on purchase of capital equipment.

  • We used approximately $77.5 million to retire our 1.875% senior subordinated convertible notes, as mentioned earlier.

  • In March, we exchanged approximately $60 million in principal value of our 2.625% senior subordinated convertible notes due 2026, for $58.5 million of 2.625% senior subordinated convertible Series C notes due in 2006(sic).

  • This transaction extends the first put date of the exchange note from December, '13 to December, '16.

  • At the end of the first quarter ON Semiconductor days of inventory on hand were 114 days, up approximately 1 day from the prior quarter.

  • Included in our total inventory is about $43 million, or 9 days of bridge inventory, primarily related to the consolidation of certain factors.

  • Distribution inventory was down approximately $5 million quarter over quarter.

  • In terms of days, distributed inventory was approximately 10 weeks, flat as compared to the prior quarter.

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

  • Keith?

  • Keith Jackson - President & CEO

  • Thanks, Bernard.

  • Let me start with comments on the overall business environment, and then I will address various end markets.

  • In line with our peers, we have seen steady improvement in the business environment.

  • Our customers appear to be ordering to keep pace with a steady improvement in demand.

  • Yet they continue to maintain lean inventory levels.

  • We saw improving bookings throughout the first quarter.

  • And the bookings have continued to be strong thus far this quarter.

  • Key areas of strong bookings are wireless, automobiles and white goods end markets.

  • Our average lead time continues to expand, as well.

  • And is approximately nine weeks currently as compared to approximately seven weeks at the end of the fourth quarter.

  • We continue to make progress in improving the performance of our SANYO Group.

  • We are bolstering our overall sales efforts for SANYO products outside of Japan to drive design wins in the automotive, white goods and wireless end markets.

  • As Bernard indicated in his remarks earlier, we have lowered the quarterly revenue needed to achieve breakeven profitability on a non-GAAP net income basis for our SANYO Group to $170 million from $190 million.

  • We remain on track for achieving this breakeven target for our SANYO Group in the third quarter of the current year.

  • Along with our revenue growth driven by design wins, our highly efficient factory network should drive operating leverage and substantial gross margin expansion.

  • This meaningful upside to gross margin should come both from our ON legacy business and SANYO.

  • Our global fab utilization was approximately 80% for the March quarter, and should increase going forward.

  • Now I'll provide some details of the progress in our various end markets.

  • Automotive end market sales for the quarter represented 28% of revenue, up approximately 6% quarter over quarter.

  • Growth in this segment was driven by strength in both the North American and Chinese vehicle markets and worldwide luxury light vehicle sales.

  • We saw strong demand for our end vehicle networking products, including CAN and LIN transceivers.

  • Standard component sales alone into this end market increased by more than 12% quarter over quarter, driven by applications such as body electronics, safety systems, infotainment and power train.

  • Strong customer interest continued for our LED driver solutions for advanced front lighting systems, rear combination lamps, and cabin lighting.

  • Additionally, our interior and rear lighting products are gaining traction in production vehicles in North America, China and Korea.

  • Key design wins for the quarter included tuners and VICs for car navigation at a key Japanese audio customer.

  • And LDOs for tire pressure monitoring and power windows.

  • Our communications end market, which includes both wireless and networking, represented approximately 13% of revenue, and was down 9% quarter over quarter.

  • In addition to normal seasonality, platform transition at an OEM contributed to the decline during the quarter.

  • However, new design wins in upcoming smartphone models, which are ramping in the second quarter, should drive solid double-digit growth.

  • Key drivers for our smartphone revenue include optical image stabilizers auto focus ICs for smartphone cameras, battery chargers, and DC-DC power management ICs.

  • Our DC-DC converters have started ramping in devices based on reference designs of major baseband chip providers.

  • Our audio amplifier solution has been adopted by a leading smartphone customer in the Asia-Pacific region.

  • I'm excited to report a strong ramp for our tuneable RF components.

  • We have secured multiple significant wins for this product with key smartphone customers in North America and the Asia-Pacific region.

  • We are already seeing strong design win traction at other key smartphone customers for this tuneable RF components product line, which facilitates smaller volume antennas, reduces power consumption, and supports increasing mobile data demands for LTE-enabled mobile devices.

  • The consumer end market represented 21% of revenue, and was down 4% from the fourth quarter.

  • Within the consumer market, white goods were an area of strength, up double digits quarter over quarter.

  • Key drivers for the quarter include an increased adoption rate for our SANYO inverter HIC solutions, and intelligent power modules by a number of leading white goods manufacturers, and share gains for our HIC fan motor drivers.

  • The industrial end market, which also includes military, aerospace and medical, represented 20% of revenue, and was down 5% sequentially.

  • Customer orders were steady.

  • And design wins thus far this year have been strong, reflecting optimism in the market.

  • Orders for our switchgear and circuit breaking solutions are seeing slight increases, as residential and commercial building starts improve in the US and China.

  • Design wins for our latest KNX building automation device are gaining momentum.

  • Computing end market represented 18% of revenue, and was down 6% compared to the fourth quarter.

  • Significantly better than the computing market decline of 12% to 14%.

  • This strong relative performance was driven by share gains, which should accelerate with the ramp of the Haswell platform in the second half of the year.

  • While the overall industry news in this segment is not upbeat, we remain well positioned in this market with leadership positions in Vcore, power and notebook adapters.

  • We continue to secure design wins at leading computing customers with our VR 12.5 controllers, MOSFET drivers, and DDR system rail FETs, LDL regulators.

  • And a myriad of standard components, including ESD protection, CMF and standard logic.

  • We had a key win for tablet reference designs for our switching battery charger IC.

  • I'm pleased to report that ON Semiconductor has recently won some additional supplier awards.

  • ASUSTeK Computer, a leading supplier of computing, communications and consumer electronics, has honored with us their 2012 Best Supplier Award.

  • Additionally, we were the only semiconductor supplier to be honored by Yanfeng Visteon Group, a leading automotive component supplier in China, with their 2012 Best Project Collaboration Award for excellence in solution, technology, service, quality and delivery.

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

  • Bernard?

  • Bernard Gutmann - CFO

  • Thank you, Keith.

  • Based upon product booking trends, backlog levels and estimated turns levels, we anticipate the total ON Semiconductor revenues will be approximately $675 million to $715 million in the second quarter of 2013.

  • Backlog levels for the second quarter of 2013 represented approximately 80% to 85% of our anticipated second quarter 2013 revenues.

  • We expect average selling prices in the second quarter of 2013 will be down approximately 1% to 2% compared to the first quarter of 2013.

  • We have recently seen moderation in pricing pressure, and the pricing environment is becoming increasingly benign.

  • We expect inventory at distributors to rise slightly on a dollar basis in anticipation of a better demand environment.

  • We expect total capital expenditure of approximately $45 million to $55 million in the second quarter of 2013.

  • And total capital expenditures of approximately $170 million for 2013.

  • For the second quarter of 2013, we expect GAAP and non-GAAP gross margin of approximately 32.5% to 34.5%.

  • We also expect GAAP operating expenses of approximately $173 million to $183 million.

  • Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to be approximately $15 million.

  • We expect total non-GAAP operating expenses of approximately $158 million to $168 million.

  • A quick note on the yen.

  • Our guidance for the second quarter of 2013 is based on an average exchange rate of JPY97 per $1.

  • We had previously mentioned that we get a benefit of approximately 600,000 on a non-GAAP net income for every point that the yen devalues against the US dollar.

  • As we have significantly reduced our expenses for the SANYO operations, the benefit to non-GAAP net income for every point that the yen devalues against the US dollar is now expected to be approximately $400,000 to $500,000.

  • The weaker yen is expected to have a negative effect or negative impact of approximately $8 million on second-quarter revenues.

  • However, it should have a net positive impact of $0.01 on the second-quarter fully diluted EPS.

  • We anticipate GAAP net interest expense and other expenses will be approximately $11 million to $13 million for the second quarter of 2013.

  • Which includes non-cash interest expense of approximately $3 million.

  • We anticipate non-GAAP net interest expense and other expenses will be approximately $8 million to $10 million.

  • GAAP and cash taxes are expected to be approximately $2 million to $4 million.

  • We also expect stock-based compensation of approximately $10 million to $12 million in the second quarter of 2013.

  • Of which approximately $2 million is expected to be in costs of goods sold and the remaining in operating expenses.

  • This expense is included in our non-GAAP financial measures.

  • Our second-quarter fully diluted share count is expected to be approximately 455 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 Forms 10-Q and 10-K.

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

  • Thank you.

  • And, Kyle, please open up the lines for questions.

  • Operator

  • (Operator Instructions)

  • Ross Seymore from Deutsche Bank.

  • Ross Seymore - Analyst

  • For the question, first on the SANYO side of things.

  • Forgive me if I couldn't find it in the press release.

  • But did you give the product breakout in the three new segments that you have?

  • And most specifically what the SANYO revenues were in the quarter?

  • Bernard Gutmann - CFO

  • The SANYO revenues in the first quarter were $151 million.

  • Ross Seymore - Analyst

  • And, Keith, in your commentary where you talked about the first quarter being the bottom, do you believe that's a structural bottom?

  • Or is your confidence mainly driven by the fact that seasonality should be a tailwind for SANYO going forward?

  • Keith Jackson - President & CEO

  • No, it's a structural comment.

  • We were still, if you will, getting rid of some of the last-time buys from the Thailand flood.

  • And those last-time buys are largely exhausted at this point.

  • And so that had a decreasing value to the P&L each quarter.

  • That's all pretty much flushed.

  • And what we're seeing now is upticks in our wireless, white goods and automotive sectors.

  • At this stage we think it is a structural bottom and should see improvement.

  • Obviously not independent of the economy but certainly not counting on an improvement in the market.

  • Ross Seymore - Analyst

  • Great.

  • And my last question is just, in your guidance, any color you could give by your end market segments as to what would be growing faster or slower than the Company average, would be helpful.

  • Thank you.

  • Keith Jackson - President & CEO

  • Certainly.

  • Our automobile section should be up nicely.

  • Our communications sector, which the wireless piece is driving, up in double digits.

  • Consumer flat to up.

  • Computing very flattish.

  • And our industrial business, flattish, as well.

  • Ross Seymore - Analyst

  • Thank you.

  • Operator

  • Jim Schneider from Goldman Sachs.

  • Jim Schneider - Analyst

  • Good afternoon.

  • Thanks for taking my question.

  • I was wondering if you could maybe give us some more color on the bookings trends you're seeing so far this quarter.

  • And specifically, are you seeing any of your customers booking out longer in time with a longer-dated backlog?

  • And can you see anything in terms of bookings that stretch into Q3 at this point?

  • Keith Jackson - President & CEO

  • Very similar to what we had going into the current quarter and Q2, as well.

  • We definitely saw a trend starting in the fourth quarter of last year of placing more orders in the Q plus two.

  • And that trend continues.

  • So we're seeing some pretty robust numbers going out into Q3.

  • Jim Schneider - Analyst

  • That's helpful, thanks.

  • And then can you maybe quantify for us how much you expect utilization to potentially increase in the current quarter?

  • Keith Jackson - President & CEO

  • It should go somewhere from the 80% to 85% range in our wafer fabs this quarter.

  • Jim Schneider - Analyst

  • Got it.

  • And last one, if I can just sneak that in, can you maybe talk a little bit about the industrial segment?

  • And for you I think it was down in Q1 and that seems to be a little bit at odds with some of your peers.

  • Can you maybe talk about what was driving that and why you think you're different from some of your peers there?

  • Keith Jackson - President & CEO

  • Yes, there's a couple things there.

  • One of them is what we put in industrial category versus some of our peers.

  • Some of the peers put the white goods piece of the market in there.

  • We saw very substantial gains in our white goods market.

  • So air conditioners and so forth for buildings we would include in consumer rather than industrial.

  • And we did see very strong upticks there, but we include that in consumer as opposed to industrial.

  • Jim Schneider - Analyst

  • That's helpful.

  • Thank you so much.

  • Operator

  • Aashish Rao from Bank of America.

  • Aashish Rao - Analyst

  • Yes, hi, thanks for taking my question.

  • Any color on what the gross and operating margins were in the SANYO division?

  • And are there any specific design wins in there, like big game consoles, in which I'm guessing you guys have content, consumer electronics or auto, et cetera, that are better likely to drive sales back from the low $150 millions to the $170 million-plus revenue level in the back half of the year?

  • Keith Jackson - President & CEO

  • I'll address the market side of that and then let Bernard talk to the margins.

  • We do have major design-ins in the game consoles pretty much across the board as they recover in the second half.

  • We would expect to see increases there.

  • As you know, that market drops off pretty precipitous in Q1.

  • So certainly we'll see that pick up.

  • But, frankly, the big excitement there from a building of the revenue side is in the wireless market with the camera modules in the white goods, and building industries with the HIC modules.

  • And in the automotive arena where we participate both in the entertainment section and in the ignition portions of automobiles.

  • Bernard Gutmann - CFO

  • And on your question about SANYO financials, the non-GAAP gross margin for SANYO is just a tad bit above 10%.

  • And the EBIT is about 21% loss.

  • Aashish Rao - Analyst

  • Got it.

  • And then just could you provide some additional color on capacity utilization in SANYO and your legacy ON wafer fabs and back-end facilities?

  • And, Keith, are there any incremental actions you can take to be more efficient, especially in the back end?

  • You guys have consolidated front end wafer fabs from 3% to 1% for SANYO, but you still seem to have a lot of back-end facility.

  • So are there additional actions that you can take to get more costs out of your model?

  • Keith Jackson - President & CEO

  • Our model basically is a continuous rationalization of our factories.

  • Going for fewer larger factories has been a trend for us for many years.

  • We'll continue that.

  • There's nothing that will impact 2013 that's in the works right now.

  • But there's certainly opportunities, as you mentioned, in the back end specifically to get some more gains from that consolidation.

  • And utilization rates was the other thing you asked.

  • Again, it was about 80% for the first quarter.

  • And we're down to one wafer fab for SANYO.

  • And so you should see similar pickups from utilization gains on the gross margin contribution as we go forward.

  • Aashish Rao - Analyst

  • Okay, thank you.

  • Operator

  • Chris Danely from JPMorgan.

  • Chris Danely - Analyst

  • I know you said you expected improvement in SANYO in the second half.

  • And obviously if breakeven is $170 million, if you're expecting pretty decent improvement.

  • Let's say that we have this slow steady slog in the second half like we've had in the first half.

  • Would you, could you do anything to change the cost structure of SANYO to get it more in line with the overall Company cost structure?

  • Or what would be the plans there?

  • Keith Jackson - President & CEO

  • As I mentioned before, of course, on the bigger scale we're not going to announce anything larger right now.

  • And certainly won't impact second half.

  • The way we're bringing it down from $190 million to $170 million now is really getting at that sizing piece of the equation.

  • And so if there was any signs of continued weakening we certainly have more room to go there.

  • We've been giving guidance that we expect breakeven in the third quarter.

  • And I think we've got the flexibility to make that happen.

  • Chris Danely - Analyst

  • Okay, great.

  • And then, if we add all that together, after this quarter, assuming we get continued seasonal growth, what would your gross margin and operating margin trends for the overall Company, or at least your gross margin and OpEx trends for the overall Company, look like?

  • Bernard Gutmann - CFO

  • Again, we don't guide more than one quarter out.

  • But what we have said is we should see some good seasonal growth, if it spans out the normal way, in the 5% to 8% in the third quarter, and 2% to minus 2% in the fourth quarter.

  • Our fall-through on those incremental revenues should be in the 50% for regular business and 60% for SANYO.

  • And the contribution of all the actions we are making on the SANYO, including headcount reductions, pay cuts, as well as the harmonization of our systems, which should improve our inventory management, should give us some pretty good leverage on gross margin.

  • Chris Danely - Analyst

  • Great.

  • And then last question just on lead time.

  • It sounds like they've gone from seven to nine weeks so far this year.

  • Do you anticipate, or could they stretch out any further?

  • Or do you think they could come in this quarter?

  • And I think you guys and Microchip are the only two companies seeing that.

  • Would you anticipate other companies to start seeing their lead times stretch out over the summer?

  • Are you hearing of anybody else's lead times stretching out?

  • Keith Jackson - President & CEO

  • I think a lot of that really depends on what happens in the macro economy.

  • If we get to have normal seasonality, I would expect to see more stretching.

  • A big piece of our equation is we introduced a significant number of new products that have gone into designs in 2012.

  • And those are all ramping as we go through this year.

  • So it's really more of a making sure we manage our capacity expansions for some of the newest products that impact the lead times the most.

  • And I would expect they would be fairly stable through this quarter at those levels.

  • And based on our plans, they should not be expanding during the year or contracting during the year.

  • Chris Danely - Analyst

  • Great.

  • Thanks a lot, guys.

  • Operator

  • Terence Whalen from Citi.

  • Terence Whalen - Analyst

  • Hi.

  • Good afternoon.

  • Thanks for taking the question.

  • You did specify that you've seen some improvement in white goods within your consumer division.

  • Can you just give us an idea of how much white goods account within that business segment?

  • And also remind us what the seasonal profile that business would be, in the normal environment, into the second and third quarter.

  • Thank you.

  • Keith Jackson - President & CEO

  • From a seasonality, I'll start with that one, typically you do see a little stronger first half, if there is such a thing as a typical year.

  • But basically our expectation there is we've got a lot of design win traction.

  • So it may or may not be a typical year, but hopefully a little better than that.

  • From a percentage of our total consumer, it's now in the 6% to 8% range for the total Company.

  • And again that's been ramping pretty quickly from negligible rates in 2011.

  • Terence Whalen - Analyst

  • Okay.

  • Thanks, Keith.

  • And then the follow-up question is on gross margin perhaps for Bernard.

  • You're guiding gross margin up about 1.5 points.

  • Obviously utilization is probably the main driver of that.

  • You said, I think, it might go from 80% to 85%.

  • Can you just help elaborate on some other puts and takes?

  • It sounds like the SANYO gross margin actually might be a little bit of a headwind into the second quarter.

  • So can you just help us delineate those factors to understand the puts and takes in gross margin?

  • Thanks.

  • Bernard Gutmann - CFO

  • Definitely Terence, the utilization is the biggest key driver.

  • But we do continue with our headcount reduction plans at SANYO.

  • And we had a sizable amount of manufacturing people that left at the end of March that will contribute to a improved bottom line for the total Company.

  • Definitely there is a small effect on gross margin, much bigger effect on OpEx as a result of the yen devaluation.

  • Which the average rate in the first quarter was about 87 going to 97.

  • So pretty much the biggest driver is still factory utilization.

  • Terence Whalen - Analyst

  • Okay, terrific.

  • Thank you.

  • Operator

  • Steve Smigie from Raymond James.

  • Steve Smigie - Analyst

  • Great.

  • Thanks a lot.

  • Keith, you guys had a pretty significant jump in handset content.

  • I think you said $3 to $6 on your last call.

  • And you have a ton of parts out there that you're putting onto these phones now.

  • How should we think about growth for this business over the next couple years?

  • Is it continuing to add parts to that?

  • Or is the strategy to maybe do some integration to create higher value parts?

  • Does it go from $6 to $8 or something like that?

  • And how is that accomplished?

  • Keith Jackson - President & CEO

  • The answer is yes, we're continuing to invest there.

  • We are looking.

  • That market is a continuous integration and shrinking value profile.

  • And so we are continuing to invest in that.

  • We'll be doing more and more combination products.

  • And so those combination products typically get us a little better pricing leverage.

  • And so the content should just continue to move up each year.

  • We're not going to be doing the doubling in the content like we did in 2012.

  • But certainly a much more than market growth should be expected.

  • Steve Smigie - Analyst

  • Okay, great.

  • And then on the auto side you guys have done really well there.

  • That's the biggest percentage of your revenue at this point, I believe.

  • And I think within the coverage universe that I look at, most of the analog and street guys think you have the highest mix of anybody out there.

  • Just strategically do you continue to drive that up as a percentage of revenue?

  • Does that create a risk of exposure one market?

  • Do you view it as a pretty stable market, good visibility, high barriers to entry?

  • Just any thoughts on auto as a percentage of your mix.

  • Keith Jackson - President & CEO

  • We do consider automotive to be a very good place to be.

  • We continue to drive good margins with value-added technology.

  • It does tend to be quite stable.

  • And as we've mentioned many times, we think the electronic content is going to significantly outgrow most of the other marketplaces.

  • We don't really target a percentage of the Company.

  • However, we're certainly not uncomfortable in the 30% range or so.

  • I do expect the wireless piece to grow.

  • So those two should become the largest portions of the Company over the next three years.

  • Steve Smigie - Analyst

  • Okay.

  • Just one housekeeping item.

  • Sorry if I missed this.

  • But I think you typically provide geographic and channel breakout.

  • If you did not provide that, if you could.

  • Thanks.

  • Bernard Gutmann - CFO

  • On a geographic basis, the Americas represented 16%; Asia excluding Japan, 58%; Europe, 15%, and Japan 11%.

  • And on a channel split, OEM, 54%; the distributor channel, 39%; and the EMSI, 7%.

  • Steve Smigie - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Craig Ellis from B. Riley.

  • Craig Ellis - Analyst

  • Thanks for taking the questions, guys.

  • Bernard, first question on operating expense.

  • It sounds like you're making real good headway bringing down the cost structure at SANYO.

  • So I'm wondering what the drivers are for an increase in operating expense quarter over quarter?

  • What's going on in the ON business that would have that up?

  • Bernard Gutmann - CFO

  • There was a couple of things.

  • One is stock-based comp, which was around $5.8 million in the first quarter.

  • Goes up to $10 million to $12 million in the second quarter, mainly driven by the annual grant that we have this year.

  • And second one is we did have some one-off belt-tightening items that we implemented in Q4 and Q1, including forced vacation, that reduced the numbers by a good amount in those two quarters.

  • But cannot continue on a forever basis.

  • And third one, on the SANYO front it is going down.

  • It's mainly a headcount and currency.

  • Craig Ellis - Analyst

  • Okay.

  • That's helpful, thank you.

  • And then in your prepared remarks you indicated that pricing was actually firming up and was very benign.

  • Where are you seeing pricing improve?

  • And as you look in the backlog, what does the backlog pricing imply from a quarter-on-quarter percent change basis?

  • Bernard Gutmann - CFO

  • The quarter on quarter we're guiding is 1% to 2% and that's predicated on looking at that backlog.

  • Keith Jackson - President & CEO

  • The trends there, in essence, as I mentioned, we've got exposure to the standard products segment.

  • That's typically where you see most of the activity.

  • We have been driving, frankly, our product mix there in a very favorable direction.

  • And so we see a little less pricing pressure than some of our peers on their standard products business just in general.

  • But specifically, again, the demands have picked up in the wireless segment, which drives a tremendous number of units.

  • And in the automotive sector which, again, tends to be a more controlled environment.

  • Craig Ellis - Analyst

  • Thanks, guys.

  • Operator

  • Vijay Rakesh from Sterne, Agee.

  • Vijay Rakesh - Analyst

  • Just a couple of questions here.

  • On the OpEx side, I know you guys are upsliding to June.

  • How do you see it longer term once the effect of these options has gone down?

  • Bernard Gutmann - CFO

  • It pretty much should be fairly stable.

  • A smidge higher as we may introduce some variable comp associated with improved business results.

  • But in general fairly stable.

  • Vijay Rakesh - Analyst

  • So kind of flattish from this level?

  • Or is that how you look at the back half?

  • Bernard Gutmann - CFO

  • I would say flattish to a smidge up.

  • Vijay Rakesh - Analyst

  • Got it, okay.

  • And the same thing on the share count.

  • It looks like it's going up again, similar to what you just talked about.

  • How aggressive are you on the buyback?

  • And where do you see the longer-term share count go to?

  • Bernard Gutmann - CFO

  • We do have a $300 million program approved.

  • In this last quarter we did not buy any back.

  • We'll be opportunistic in buying them.

  • In the 455 guidance right now, there is nothing played in there, so anything that we do would reduce that number.

  • Vijay Rakesh - Analyst

  • Got it, thanks.

  • Operator

  • Aalok Shah from D.A. Davidson.

  • Aalok Shah - Analyst

  • Hi, guys.

  • If I could ask a couple quick questions.

  • Keith, I know at Analyst Day you mentioned Chinese New Year as a potential benefit, starting to ramp up again after inventories have been burned down.

  • Can you character what you're seeing out of China right now, by end market, even, if possible?

  • Keith Jackson - President & CEO

  • Yes, we did see the pickup post Chinese New Year, as we expect to generally each year, with Chinese New Year being pretty silent.

  • As I mentioned in my prepared remarks, we saw continued building after that point.

  • So I think it's very consistent.

  • From a perspective of markets, again, the white goods segment showed significant improvement.

  • So basically you're seeing a little more building activity going on there.

  • And the wireless segment saw very significant improvement.

  • Aalok Shah - Analyst

  • Okay.

  • Then on the tuneable RF front, it seems like you're pretty excited about that part of the business.

  • I'm trying to get a sense of how big we should be thinking about that part of the business getting to.

  • It sounds like you've got some major design wins ramping in the second half of the year.

  • Is that correct?

  • Keith Jackson - President & CEO

  • That is correct.

  • And we are expecting significant ramps.

  • We're in the early stages of that.

  • But we should be looking at several million dollars of improvement quarter on quarter as we go through the next couple of years.

  • Aalok Shah - Analyst

  • Okay.

  • And last question, Bernard, just in terms of CapEx trends, what should we be thinking about in 2013 and 2014?

  • Bernard Gutmann - CFO

  • Right now we're looking at about $170 million for the year for 2013.

  • 2014, in general it should be the 6% to 7% of revenue, which is our normal typical model.

  • Aalok Shah - Analyst

  • Okay.

  • And then do you get worried about being 80% capacity utilized?

  • And if things start to ramp, are you concerned that you won't have enough capacity at some point?

  • Keith Jackson - President & CEO

  • No.

  • Our sweet spot is about 85%.

  • At 85% we have, we believe, good flexibility for any market upswings in the near term, and enough time to address it with new capacity if it does grow very rapidly.

  • And we also get some pretty good fall-through on the gross margins at that stage.

  • So, really, the 85% point is where we'd love to see it operate all the time.

  • Bernard Gutmann - CFO

  • And we do have approximately, around 20% of our capacity that we are still outsourcing.

  • So there is still some flexibility there.

  • Aalok Shah - Analyst

  • Okay, great, thank you.

  • Operator

  • Ian Ing from Lazard Capital.

  • Tyler Radke - Analyst

  • This is Tyler Radke calling in for Ian.

  • Just wanted to touch on the comment with respect to the yen devaluation.

  • I think that you said for every point it used to be $600,000 of benefit and now it's changed to about $400,000 to $500,000 per point.

  • So just trying to understand if this is a function of maybe some of your hedging contracts.

  • And then if you could provide us some color on where your costs [versus] revenue stand on SANYO in terms of the denomination.

  • And then just how we should be thinking about that cost structure as it relates to lowering the breakeven revenues for SANYO.

  • Bernard Gutmann - CFO

  • Okay, Tyler, thank you.

  • The impact has nothing to do with hedging.

  • It is a function of -- the reduction is a function of us having taken significant actions to reduce yen-based costs.

  • Most of the cost reductions we have implemented are in Japan and are denominated in yen.

  • So that reduces the benefit as the yen devalues.

  • The split, we are still about the same as we communicated in the past.

  • Revenue of the SANYO business, approximately 40% is yen denominated.

  • The COGS is approximately 50% and the OpEx is in the 70%s.

  • Tyler Radke - Analyst

  • Okay.

  • So if the yen were to continue to devalue, would you think it would be possible -- would that be a tailwind in terms of reducing the SANYO breakeven revenue?

  • Bernard Gutmann - CFO

  • Definitely it does help.

  • Any time it goes down we see a tailwind, yes.

  • Tyler Radke - Analyst

  • Okay.

  • And then just switching gears real quickly, obviously you talked a lot about getting some nice design wins in smartphones.

  • Where would you characterize the market right now?

  • Are we in a relative pause mode?

  • And then what gives you some confidence, or what are you seeing in terms of second-half prospects?

  • Keith Jackson - President & CEO

  • I think the key thing for us is those design wins and the model changes.

  • You've got model changes there every six months or so.

  • And so the confidence we build is really our position in the next set of models that are coming out and ramping up.

  • Really not based on a change, if you will, in the total number of smartphones being built.

  • Tyler Radke - Analyst

  • Okay.

  • Thank you.

  • Operator

  • (Operator Instructions)

  • Steve Smigie from Raymond James.

  • Steve Smigie - Analyst

  • Great.

  • Thanks a lot for the follow-up.

  • And sorry if I missed this, too.

  • But did you provide breakout for revenue for APG and SPG and margin?

  • Bernard Gutmann - CFO

  • The revenue for APG was $265 million, and SPG, $245 million.

  • Wait, that's backwards.

  • It's $265 million for SPG and $245 million for APG.

  • Steve Smigie - Analyst

  • Okay, great.

  • And then with regard to the CapEx, I thought you were $160,000 to $170,000.

  • Now it sounds like you're $170,000, if I'm remembering that correctly.

  • Is that the higher side now because of the handsets ramping pretty nicely, and you're just adding extra capacity to support that?

  • Is that the right way to think about that?

  • Keith Jackson - President & CEO

  • That's exactly the right way to think about it.

  • We have done very well with those new smartphone designs.

  • They use some of our most advanced packages.

  • So most of that is going into ultra small packages for the wireless business.

  • Steve Smigie - Analyst

  • Okay.

  • And it may be difficult to really know, but could you talk a little bit about what your share might be on Haswell in, say, the desktop, notebook, and server categories?

  • Keith Jackson - President & CEO

  • I don't know that I can break them out that fine.

  • But I'll just say, in general, we tend to be 40% to 50% in the desktops, running about mid-30%s to 40% on the notebooks.

  • And what was your other category?

  • Servers?

  • Steve Smigie - Analyst

  • Server, yes.

  • Keith Jackson - President & CEO

  • Very small on servers, less than 5%.

  • Steve Smigie - Analyst

  • Okay.

  • And if I could sneak one more in.

  • Looking at your 10-K, you have some unallocated costs in the gross margin area.

  • How do you decide whether to put something, say, in SANYO versus legacy ON versus unallocated?

  • Bernard Gutmann - CFO

  • The identification to division in most cases is you have a direct line of sight of where the cost belongs.

  • There are certain costs that on a strategic basis we have decided to keep at the corporate level, for various different reasons.

  • But the majority is we directly identified there is, on the manufacturing side, very little that's allocated.

  • Steve Smigie - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Chris Caso from Susquehanna Financial Group.

  • Chris Caso - Analyst

  • Hi, thank you.

  • I'm wondering if you could talk a little bit about the PC market.

  • I think we probably have a good handle on what's going on there now.

  • But I'm even more interested on the expectations going into the second half.

  • You talked about some share gains, but you're obviously balancing that from what I think a lot of people have, a little more conservative estimates on the end market.

  • Where are you guys on that right now?

  • Keith Jackson - President & CEO

  • We actually are looking at the end markets fairly conservative, as well.

  • Certainly not expecting any pickup in the end markets in Q2.

  • In talking with our customers, the real hope I guess I'd give you that there might be some growth in the second half is all around less expensive ultrabooks with the touchscreens.

  • And the belief there is, if you get those to the right price point, you might actually reverse some of the declines that we've been experiencing in notebooks here for the last several quarters.

  • So, in general, I'd say we've got a fairly conservative outlook.

  • We're hopeful that the Haswell ultrabooks will be picking up in the second half.

  • But really it's all about getting appropriate models out there with the touchscreens at good price points.

  • Chris Caso - Analyst

  • Okay.

  • And just as a follow-up, then, with respect to SANYO, maybe you could talk a little bit about the extent to which the recovery of that business is dependent on some of the domestic Japanese business, which is historically some of the consumer electronics companies as opposed to selling those products outside Japan.

  • And how that goes into thinking of the proper revenue levels that you guys have targeted for that business.

  • Keith Jackson - President & CEO

  • The simple answer to that is we're counting on continued declines domestically in Japan.

  • So all of our growth that we've got factored in is in design wins outside of Japan.

  • Chris Caso - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Terence Whalen, Citi.

  • Terence Whalen - Analyst

  • Thanks for fitting me in for a follow up.

  • This question has to with the comment that distributor inventory declined in the first quarter, yet lead times expanded a couple weeks.

  • Can you help us reconcile the opposition of that?

  • And also, what are you doing now that lead times are expanding a bit?

  • Are you going to be bringing on more back-end assembly and test to help alleviate that?

  • Thank you.

  • Keith Jackson - President & CEO

  • I'll start with the last part of it.

  • That is a big piece of the reason we've gone from the $160 million range to $170 million on CapEx, is really to address the key areas where we're seeing more rapid expansion.

  • The disty comment and lead times actually aren't at opposition, as you might think.

  • They're actually in conjunction.

  • So the distributors continue to be very tight with their weeks of inventory, particularly in Asia.

  • And so that means basically on our side we see more of that demand coming directly to our factories as it picks up.

  • So they actually reinforces as opposed to being an opposite.

  • Terence Whalen - Analyst

  • Thanks, Keith.

  • And then my last follow-up was with regard to the handset business, you made a comment specifically saying that you're gaining the power slot for an application processor.

  • Can you just elaborate a little bit more on that win?

  • And maybe talk more broadly about the gestation involved in initially building raw components and then making your way in to more crucial components?

  • Can you talk about where you are in that stage?

  • Thank you.

  • Keith Jackson - President & CEO

  • That comes from, frankly, gaining reference design position that does take the products, and those have to come out continuously.

  • As I mentioned before, about every six months or so we have to have new platforms.

  • We've done some good gains there and we've got good position in all of the reference designs now with our DC-DC kinds of products.

  • So I'm not sure exactly what you're looking for, but the key is those are actually ramping here currently in the second quarter, and are widely adopted in China.

  • As you know, those reference designs get fairly well distributed in China.

  • And then outside of China, in Korea and North America, we also see a good adoption.

  • Terence Whalen - Analyst

  • Okay.

  • Thank you.

  • Operator

  • There are no further questions at this time.

  • Keith Jackson - President & CEO

  • Thank you.

  • Bernard Gutmann - CFO

  • Thank you.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.