安森美 (ON) 2013 Q2 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the ON Semiconductor second quarter 2013 financial 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 will now turn the call over to Senior Director of Investor Relations, Parag Agarwal.

You may begin your conference.

Thank you, Mike.

Good afternoon and thank you for joining ON Semiconductor Corporation second quarter 2013 quarterly results conference call.

I am joined today by Keith Jackson, our President and CEO, and Bernard Gutmann, our CFO.

This call is being webcast on the investor relation section 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 earnings release for the second quarter of 2013.

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

Additional information related to our markets, business segments, geographies and channels is also posted on our website.

Also, please note that with an aim of improving the accuracy of our end market reporting, we have made changes to the methodologies we use to classify revenue for our various end markets.

A historic comparison has been posted on the investor relation section of our website.

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

The consolidation of these non-GAAP 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 the future financial performance of the company.

The words believe, estimate, project anticipate, intent, 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 risk 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 Securities and Exchange Commission.

Additional factors are described in our earning release for the second quarter of 2013.

Our estimation may change and the Company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other factors.

In the upcoming quarter we will be attending Citi Technology Conference on September 4th in New York City and Deutsche Bank Technology Conference on September 10th in Las Vegas.

Now let me turn it over to Bernard Gutmann, who will provide an overview of second quarter 2013 results.

Bernard.

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

Let me begin by updating you on the progress on our key financial objectives.

Let me start with our SANYO Semiconductor Products Group.

We remain on track to achieve our target cost structure of breakeven even on a non-GAAP net income basis for SANYO semiconductor at a quarterly revenue level of $170 million.

Even though we have taken out a significant amount of costs out of our SANYO Semiconductor Group we are prepared to take further actions if revenue growth for our SANYO Group fails to materialize.

These actions will involve making structural changes in addition to further headcount reductions.

Although we are close to achieving the desired cost structure, visibility into revenue growth for our SANYO Semiconductor Group remains limited.

Thus far stimulus measures undertaken by the Japanese government have not translated into increased order activity for our SANYO Semiconductor business.

Now moving onto the ON legacy semiconductor business.

Key drivers of growth for our legacy business remain intact.

Our investments in fast growing end markets such as wireless and automotive are yielding results.

Our design win momentum remains strong and we are now addressing an increased year of opportunities in our targeted growth segment.

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

Our third area of focus is returning cash to shareholders.

During the second quarter we used approximately $12.1 million to repurchase approximately 1.5 million shares of our common stock.

We remain committed to repurchase our stock in a disciplined matter.

We recognize the need to return excess cash to our shareholders especially as we approach at debt neutral level.

Now let me provide you an update on our second quarter 2013 results.

ON semiconductor today announced that whole revenue for the second quarter of 2013 was $688.3 million, an increase of approximately 4% from the first quarter and a decrease of approximately 8% from the second quarter of 2012.

GAAP net income for the quarter was $0.11 per diluted share.

Excluding the impact of amortization of intangibles and restructuring and other special items, non-GAAP net income for the quarter was $0.13 per diluted share.

Non-GAAP gross margin for the quarter was 33.7%, an increase of 170 BPs quarter-over-quarter, driven primarily by higher utilization.

Quarter-over-quarter gross margin expansion was also aided by approximately $3.5 million of higher than expected insurance proceeds related to the Thailand floods.

All claims related to the Thailand floods have now been settled and we don't expect to receive any further insurance proceeds.

Non-GAAP operating expenses for the quarter were approximately $167 million, up by approximately $9 million as compared to the first quarter of 2013.

Higher share based compensation due to annual grants and the absence of nonrecurring belt tightening actions such as forced vacations were the key drivers of higher operating expenses as compared to the first quarter.

Average selling prices during the second quarter declined by approximately 2% sequentially.

We exited the second quarter of 2013 with cash and equivalents and short-term investments of approximately $579 million, a decline of approximately $35 million from the first quarter.

Operating cash flow for the second quarter was approximately $55 million and was negatively impacted by approximately $40 million due to restructuring activities mostly related to SANYO Semiconductor Group.

We also spent approximately $46 million of cash on the purchase of capital equipment and approximately $36 million for the repayment of long-term debt and capital leases.

As noted earlier, we used approximately $12 million for repurchase of our stock.

At the end of the second quarter, ON Semiconductor days of inventory on hand were 112 days, down approximately 2 days from the prior quarter.

Included in our total inventory is about $28 million or 6days of bridge inventory primarily related to consolidation of certain factories.

Distribution inventory was up by approximately $16 million quarter-over-quarter and distributor resales grew by 11% sequentially.

In terms of days, distributor inventory was at approximately 10 weeks, roughly 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.

Thanks, Bernard.

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

We are seeing a steady improvement in overall business conditions.

Our bookings have continued to improve and are trending in line with typical seasonality during the summer.

We experienced strong growth in the communications segment, although growth lagged our expectations due to well publicized order pushouts.

We are seeing strong booking and consumer segment driven by launch of new gaming platforms.

Our average lead times continue to expand as we entered the second quarter at approximately 12 weeks compared to approximately 11 weeks at the end of the first quarter.

Please note that these times are based on a dollar weighted methodology as opposed to a unit weighted methodology which we had previously used.

We expect the lead times to stabilize at current levels.

Utilization of our factory network continues to improve.

Our global fab utilization was in the mid 80% range for the second quarter as compared to approximately 80% in the first quarter.

We will increase the use of our external foundry partners as we approach full utilization level and at the same time selectively add capacity in key strategic areas.

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

The automotive end market represented approximately 28% of revenue in the second quarter and grew by approximately 4% sequentially.

Sales growth in this end market was driven by strength in the North American and Chinese markets.

Despite continuing contraction in the European auto market, share gains enabled us to maintain sequentially flat revenues.

We continue to sustain our robust design momentum in the automotive end market and we have secured significant wins at global Tier 1 customers.

Key areas of recent design wins are sensor interface for the management, interior and exterior lighting, in vehicle networking and in body electronics.

During the quarter we secured a design win for a new ASIC sensor interface device for a major European Tier 1 customer.

Also, we are excited about a significant win of all power sockets in a high end automobile audio system which we believe will be used -- utilized by a broad range of OEMs in North America and Europe.

Our automotive-related standard products business remains strong as well.

Annual contract wins in 2013 at top automotive customers is one of the key drivers for solid growth for automobile-related standard products.

Revenue for the third quarter for our automotive segment is expected to be approximately flat sequentially due to the seasonality in the automotive industry.

The communications end market, which includes both networking and wireless represented approximately 17% of revenue in the second quarter, up approximately 10% as compared to the first quarter.

Our wireless business grew by more than 10% quarter-over-quarter.

During the second quarter, we shipped our recently introduced passive tunable ICs to multiple OEMs in North America and China.

These tunable ICs facilitate smaller volume antennas, reduce power consumption and support increasing mobile data demands for LTE enabled mobile devices.

One key design win secured was for a sole source custom memory solution that will ramp in the second half at a major OEM.

Three new smartphones incorporating our optical image stabilization ICs were launched by key OEMs in Asia and Europe.

One of these newly launched smartphones incorporates the highest resolution camera on the market today.

Sales during the quarter are also driven by our auto focus ICs, battery chargers, protection, common mode filter and power management ICs.

Design win momentum continues to be robust for our power and battery management solutions with leading OEMs and base band reference design providers.

Ramp of these design wins in the second half of this year are expected to be a key revenue driver for our communications business.

Revenue for the third quarter for our communications segment is expected to be up nicely driven by a ramp of new programs and higher content.

The consumer end market represented approximately 20% of revenue in the second quarter and was up 1% compared to the first quarter.

White goods were the key driver of strength in the consumer end market.

White goods related revenue grew by 7% quarter-over-quarter.

Key drivers of growth for the quarter included increased adoption of our SANYO Semiconductor Product group's, intelligent power modules by various white goods manufacturers.

Standard product sales for the consumer end market were also up sequentially with a strong share gain in the white goods market.

Game consoles have been another area of heightened activity within the consumer end market.

Within game consoles we strong adoption of our CPU and graphics power controllers, DC/DC power switching devices, drivers, MOSFETs, ESD protection, LDOs, clock management, thermal monitoring devices, temperature sensors and small signal ICs.

This has resulted in more than $5.50 of content in a leading game console system which is expected to be launched for the upcoming holiday season.

Although we anticipate a seasonal decline in sales for white goods in the third quarter, the ramp of our design wins and new game consoles is expected to lead to sequential growth in our consumer-related revenue.

Our industrial end market which includes military, aerospace and medical, represented approximately 19% of revenue in the second quarter and was up approximately 5% sequentially.

Customer orders for industrial were steady and pull-in requests have been increasing reflecting optimism in this market.

We are seeing modest increases in orders for our switch gear and circuit breaking solutions as residential and consumer building starts began to improve in the US and China.

Design wins for our latest KNX and end bus building automation device are gaining momentum.

Demand for our standard products and industrial applications also strengthened led by building control sensing and LED general lighting in Asia and Europe.

Of note in our medical end market was strengthening demand from medical imaging customers for our analog front end solutions.

We also secured several design wins for our Ezairo wireless high precision DSP system with established hearing aid customers.

We also successfully transitioned a number of other customers to adopt our Ayret preconfigured wireless DSP system for hearing aids.

The computing end market represent approximately 16% of revenue in the second quarter and was up approximately 1% compared to the first quarter.

Significantly better than computing revenue of our peers which declined in the aggregate by roughly 6% quarter-over-quarter.

Although conditions in the computing end market are expected to remain challenging, we remain well positioned in this end market with leadership position in Vicor power and notebook adapters.

Our design wins are expected to translate into share gains with a ramp of the Haswell platform in the second half of the year.

We continue to secure design wins at leading computer customers with our VR12.5 controllers, MOSFETs, drivers, LDOs, voltage regulators, and a myriad of standard components, including ESD protection, CMF and standard logic.

Sales of standard products in computing were up quarter-on-quarter on the strength of MOSFETs at motherboard notebook customers, and hard disk drive makers.

In other news, I'm pleased to report that ON Semiconductor has recently won the Total Cost of Ownership Supplier Award from Celestica for supporting TCOO strategy and demonstrating excellence in quality delivery, technology, service, pricing, and flexibility.

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

Bernard.

Thank you, Keith.

Third quarter of 2013 outlook.

Based upon product booking trends, backlog levels and estimated turns levels we anticipate that total ON Semiconductor revenues will be approximately $700 million to $730 million in the third quarter of 2013.

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

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

We expect inventory at distributors to remain flat on a dollar basis.

We expect total capital expenditures of approximately $45 million to $55 million in the third quarter of 2013 and total capital expenditures of approximately $170 million for 2013.

For the third quarter of 2013, we expect GAAP and non-GAAP gross margins of approximately 33.8% to 35.8%.

We also expect total GAAP operating expenses of approximately $170 million to $180 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairment and other charges which are expected to be approximately $10 million.

We expect total non-GAAP operating expenses of approximately $160 million to $170 million.

We anticipate GAAP net interest expense and other expenses will be approximately $10 million to $12 million for the third quarter of 2013 which includes noncash interest expense of approximately $3 million.

We anticipate our non-GAAP net interest expense and other expenses will be approximately $7 million to $9 million.

GAAP taxes are expected to be approximately $4 million to $5 million and cash taxes are expected to be approximately $3 million to $4 million.

We also expect share based compensation of approximately $8 million to $10 million in the third quarter of 2013, of which approximately $1 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 diluted share count for the third quarter of 2013 is expected to be approximately 453 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.

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

Thank you and, Mike, please open up the line for questions.

(Operator Instructions)

James Schneider of Goldman Sachs.

Thanks for taking my question.

I was wondering if you could address SANYO, the revenue level and gross margin level you saw in Q2 and then maybe address your level of visibility in terms of when you think that revenue could finally reach the $170 breakeven level.

Thank you, Jim.

The revenue for the second quarter for SANYO was approximately $160 million with gross margin very similar to the first quarter of approximately 13%.

The visibility unfortunately is quite limited for that business as a practice for the SANYO customers is different in terms of putting backlog out there, we will -- we will on the other hand achieve our cost structure of $170 million in the second quarter and that should be a substantial improvement sequentially in terms of EPS contribution.

And I would add, Jim, we did see growth in the second quarter for the SANYO business which is a great milestone, even with the weakening yen, we were managing to grow quite nicely.

So that business is starting to show some good signs of life.

Thanks.

Then as a follow-up, I don't think you in your end market commentary addressed what you think the industrial business will do in the third quarter, so can you maybe give us a flavor of your expectation for that business in Q3, and then moving parts around that by sub vertical, please.

Yes, it should be up in the low single digits, kind of in line with the overall guidance.

I'll walk you through kind of a summary of all of them if you would like.

Automotive should be flattish, Q3 normally they take their factories down for model changeovers.

PCs, the market will probably be down but for us we are kind of looking for flattish performance with the share gains.

The wireless handset business should be up very nicely, maybe approaching the kinds of growth that we had in the second quarter.

The consumer business will be up a little bit.

As we mentioned the white goods typically drops a bit in the summer but the gaming piece should offset that for some low single digit growth.

And then what did I miss?

No, I did industrial first.

Computing.

No, I did computing too.

I think I got them all.

That's helpful.

Thank you.

Chris Danely with JPMorgan.

Thanks, guys.

So it sounds like SANYO grew a little bit and the margins got better.

Can you just give us maybe your longer-term outlook there on how you expect it to trend post this quarter, what the key levers are there and do you expect to take costs down further there or do you think in a couple of quarters you can get past the $170 million mark?

So, we have been kind of pointing everybody at the breakeven point.

The reality is breakeven is really not a good business model.

So the simple answer is we plan on continuing to reduce the costs while focusing on trying to grow the revenue levels.

The precise transition between the two for breakeven was really more of an external target as we talked about it.

So the expectation there is we will continue structuring the assets there so that we can increase our profitability on an ongoing basis and certainly we are focused the resources on generating new revenues around some really good technologies that they have got.

We mentioned several of those in the cameras for the phones, in the power modules, in our motor control areas and frankly in our protection devices.

So we've got some good areas to build from.

We will focus the investments and get the structure built so that we can turn good profits in that business as well.

Great.

And for my follow-up, could you just talk about how you expect OpEx and gross margins to trend after this quarter and what would be the drivers for those two?

So our guidance for a third quarter is on a non-GAAP basis, basically flat with -- the midpoint is flattish with what we turn in the second quarter, so we do have a few things that will cause numbers to go up as it relates to some bonuses and just regular salary costs.

But we are offsetting those with continued headcount reductions on the SANYO front and just in general keep tight cost controls, so right now we are expecting it to be on a flat mode.

Yes I was thinking more after Q3, going into Q4 next year.

Well, we don't guide out there but in general terms we are not seeing any big catalyst to increase costs.

The only one that I would caution of is variable comp and that depends on business results and if we turn in good business relates we should be increasing our variable comp contribution.

Okay.

Thanks.

Ross Seymore with Deutsche Bank.

Hi, guys.

Just want to go back to the SANYO side a little bit.

One precise question and then one a little bit bigger picture question.

On the precise question, what does your guidance assume that SANYO does from that $160 million level as we head into the third quarter?

And then the bigger picture question is, I realize macro has to cooperate for semiconductor companies, but it seems like it's coming down to things that you have to control.

Talk a little bit about the time to revenue on things you can control with new product introductions, pumping some of their products through different channels as opposed to kind of waiting for macro to save us.

So I'll let Keith talk about the product introductions.

On the assumptions for the third quarter, again, we look at the business in total and right now we sit 4%, SANYO is within those parameters, probably not exceeding that 4% but getting within that parameter.

The longer term there, Ross, a good point and I think I tried to highlight some of those in the discussions earlier.

It's really driven by new design wins of our technologies.

We have been doing a great job of refreshing those this year.

In the handsets we have increased the content dramatically and we are picking up share at the larger players in that marketplace, so with or without market there, we expect -- and I said this in the first quarter, communications to continue to be a big catalyst for our growth.

Automotive, same story, haven't seen as large a growth, markets aside, only because basically the Japan side and Europe have lagged where we've got some very good presence, but we are now, as I mentioned, getting a lot more design wins in North America and also pushing deeper into Asia.

So, what we are basically all about is getting those products out, getting the new design wins, and then trying to capture the opportunities with content.

The markets as you say are unpredictable but in general what we are seeing is positive trends in the markets and then increased contents in our focus areas.

Great.

I guess one other clarification on the OpEx side.

I think in the second quarter if I'm looking at the right information, you guys came in at the high end of the range despite the revenues being pretty much at the midpoint.

Can you talk a little bit about how you ended up at the high end and then conceptually as we go longer into the future, how should we think of OpEx relative to revenues on a companywide basis?

I know you only guide for one quarter but how should we think of the relationship between those two metrics, and then I'll go away?

Thanks.

Thanks, Ross.

So I'll answer the second part first, in our long-term model that we presented at the analyst day we talked about OpEx being in the 22% to 24% range.

We said 11% to 12% for R&D and 11% to 12% for SG&A.

That is a model that we think is a good viable thing for us.

The reason on the OpEx, why we ended up high -- on the high end of the guidance, there was not a single big reason for it, we believe the biggest thing is that we have had some substantial belt tightening actions in the last two quarters in the fourth and the first quarter, and as we released some of that there was a bubble of a few extra expenses associated with all of that pent-up demand.

But we think it's going back and as we guided -- we are guiding to get back to about $165 million at a midpoint for our guidance for the third quarter.

Thank you.

Chris Caso with Susquehanna Financial.

Hi, thank you.

I wonder if you could discuss a bit about what you saw in the handset market.

It sounded like from the commentary that was one of the areas that was perhaps the biggest difference from your expectations coming in.

Could you expand on what you saw and give us a sense of the Company's total exposure to the handset market now.

Sure.

So handset side, we believe is now greater than 13% total Company revenues.

We had expected -- I mean, we got very good growth, north of 10% growth quarter-on-quarter but we were expecting actually quite a bit more based on backlog that we had going into the quarter.

So, frankly what happened is there were some handset manufacturers that pushed orders out into Q3 and we weren't able to capture as much growth as we thought we would in the second quarter.

So it's not a bad story.

It's just not as good as we thought it was going to be.

Okay.

And going forward, the expectation for that is that you do see some growth in the third quarter?

Yes, well, we actually -- we said very nice growth in Q3 and I think I also mentioned that it could approach the same kind of growth we had in Q2.

So it's very strong growth in handsets for us and it's really a content story as we go through the year, where our content keeps increasing so as long as the volumes of the market don't drop, we should see good growth there for a while.

Okay.

Great.

And then just getting back to the SANYO and you guys have talked about this a lot, but perhaps you could get us back to the terms that you talked about earlier with the $0.07 headwinds that you were seeing from SANYO earlier in the year.

I mean, based on what you -- what you seem to indicate for SANYO going forward is that's trimmed to just a couple cents of headwinds here in the third quarter and perhaps that starts to go away at some point a quarter or two after that.

Could you give us some details there?

Yes, Chris.

Thank you.

So as you said, the first quarter we had the biggest headwind of $0.07.

In the second quarter it was reduced to $0.05 and based on the cost structure that we have and depending on what the revenue ends up being, it is indeed somewhere between zero and $0.02 headwinds in the third quarter.

Okay.

That's good color.

Thank you.

Terence Whalen with Citi.

Hi.

Thanks for taking the question.

It seems like you made very good progress with content in handsets recently.

I wanted to understand what your content would be on an average basis on a high end smartphone versus a mid-range smartphone versus a low end smartphone.

Thanks.

Okay.

Pardon me.

In the high end phones we have an opportunity of up to about $7 per phone, kind of the mid-range is $3.50 to $4.50 and the low end is going to be a couple of bucks.

Thanks.

And then also if we could have an understanding of how that's distributed across like power, across protection, interface, anything -- any color that you could give by device type would be helpful as well.

Thanks.

Yes, that's going to be hard for us.

I would say you've got something less than $1 in the camera module so I'm not going to do it by device because there is just too many devices.

You've got something less than $1 in the antenna and then the balance of it is going to be power related or display related in the main phone.

Thanks very much.

Craig Ellis from B. Riley.

Thanks for taking the questions, guys.

Bernard, you noted that pricing was down 2% in the quarter and in the outlook you're guiding to down 1% to 2%.

Are you saying that pricing is actually getting a little bit better as your utilization moves up towards 85% or are you really just giving kind of a standard of 1% to 2% range?

No we think that the pricing is slightly better for the third quarter.

So if pricing is getting a little bit better in the third quarter as things move up and if seasonally utilization would typically move up a little bit on higher sales in the fourth quarter, would you expect pricing to get a little bit better, still not positive, but less negative in the fourth quarter?

Yes, there's no reason to believe that the environment is going to go the other way anytime soon so we would expect to have kind of steady improvement unless there's a major market correction in a negative way.

That's helpful Keith, thank you.

And then as a follow-up on the PC business, you're doing with Haswell.

Can you just give us your expectation for what Haswell will be as a percent of your platform mix in 3Q and 4Q?

That will frankly depend on our customers' final mixes themselves.

They give us kind of ranges.

So I'm not sure I'm going to be very precise here, but we should see greater than a third of Haswell as we exit the third quarter of this year and that should continue up based on past trends to something over half before the first quarter.

Thanks, guys.

Tristan Gerra with Baird.

Hi.

Good afternoon.

As utilization rates are close to optimal levels what are the opportunities for gross margin expansion going forward outside of improvement at SANYO?

So SANYO has still got a lot of improvement as you know.

I won't elaborate on that.

But we've got mix and as we mentioned we are seeing good growth in the phone business.

That has got a higher than corporate average margin associated with it.

The automotive also outgrowing the rest of our businesses, we believe, also with a higher than corporate gross margin.

So on a mixed basis you've got some opportunities.

We are also not anywhere near fully utilized in our factories.

I mean, we are talking kind of mid-80%s.

We've got plenty of room in the factories to go up another 10% or so and there's a lot of leverage in that.

So I think if you look at our guidance, you'll see some very nice gross margin increases Q3 over Q2 on a pretty small revenue move.

Okay, that's useful.

And then is there a -- enough of a change in end market mix for SANYO to change to a normal Q4 revenue seasonality which in the past two years has been down sequentially?

And then also if you could give us maybe your initial outlook for Q4 for the entire Company in terms of booking trends.

Yes.

We don't -- we won't give guidance.

What I will say is Q4 continues to fill in quite nicely.

The trend we have had this year is we have seen good filling into the current quarter plus two and that trend continues here through this summer.

So we are not seeing anything that concerns us at this stage.

I don't know that we will reverse the normal seasonality on SANYO but it does look like it's a much more muted seasonality that we are experiencing, so their business being consumer is typically a stronger down in Q4 than I think we are likely to see this year.

So we are not giving guidance at this stage but right now we are seeing good book fill and not seeing anything that looks like there's going to be a significant drop.

Great.

Thank you.

Aashish Rao with Bank of America.

Hi.

Thanks for taking my question.

Wondering, virtually all of your analog and mixed signal competitors had double digit sequential growth in the industrial and auto end markets in June which is well above the 4% to 5% you reported.

I'm guessing they are roughly comparable because you cited computing as a relative comparison, so could you just walk us through what some of the reasons behind why your industrial and autos business kind of grew a bit slower than you had anticipated.

Yes, I'll -- I think they are separate things so I'll separate them.

On the industrial side we have looked at several of our peer group in the analog side and they have things like white goods in their industrial business.

And our white goods was up in the high single digits as I mentioned earlier.

And so the way we group things, industrial is a broad categorization and I think companies just kind of put different things in those buckets so some of it, well the answer is I can't explain.

We did see and I tried to break out within the industrial segment in my comments earlier we are starting to see good growth in the building side which is the predominant portion of our industrial.

So I think mix, I guess, I would point you at.

On the automotive side, we actually saw great growth, US and Asia in our automotive business.

In Japan we had a weakening yen and some Japanese automakers that were not doing as well.

And in Europe, as I mentioned, the European market has been quite weak.

So again, I think there, the only difference would be exposure to which region on the automotive side from a total revenue base, most of our revenue is in Europe followed by the US, Japan and then Asia.

Okay, thanks for the color.

And then Bernard, wanted to focus on gross margins a bit more.

Your midpoint of September quarter guidance has something close to 35% and you had also set a target of 40% which you had hoped to achieve at $800 million in quarterly sales.

When I do the math, I mean, it -- that would require like an 80% fall-through which is well above the typical 50% to 60% fall-through that you were expecting in the legacy and the SANYO business.

Is there something else that we are not accounting for or could you just walk us through the longer term how you expect gross margins to trend from here?

Yes, thank you.

So indeed it is a high fall-through.

What we have that will help us is mix, as we focus on automotive and wireless, which on the average have gross margin above the corporate average that should significantly contribute to our growth in gross margin.

The second one is we still are going to see some, as we go into the future, some benefits of these structural changes at SANYO that will help contribute towards that.

As Keith said, achieving a breakeven is not the end game.

Achieving breakeven should only be the first step in stopping the bleeding and then we should be continuing with further structural improvements.

In addition to the normal fall-through, that indeed should be in the 50% range.

Thank you.

You're welcome.

Steve Smigie with Raymond James.

Great.

Thanks a lot.

Keith, I was wondering if you could talk a little bit about computing from the sense of if you look in this quarter, you were ahead of the comparables, your guidance is probably better than the comparables, and you guys have probably one of the lower cost structures out there and a good strong position, lots of scale.

Some of your competitors are talking about getting asked in this business even though the overall PC market has been slowing somewhat, is there an opportunity for you as a scale player to come in and scoop up a lot of share and end up ultimately sort of dominating your particular categories?

Yes.

Clearly we have talked about share gains and I believe that there are strong opportunities for that.

We saw -- we talk a lot about the Vicor power and graphics power but frankly our standard products were actually up as I mentioned in the commentary quarter-on-quarter in a down market.

So we are seeing lots of opportunities for share gain in computing and I'm not going to set any expectations of fast growth, but we do think there is positive growth in computing for us, albeit low single digits over the next couple of years.

Okay.

Great.

And then on the handset side for the RF tuner product, it's my understanding, and please correct me if I'm wrong that that's currently more of a targeted lower end handsets.

Looking out from like two years, would you expect to try to migrate that up to higher end handsets or is it preferable to be where you are because there's higher volume?

It's actually the other way around, Steve.

Right now almost all of our business is in the higher end LTE handsets.

From a cost competitiveness, the higher end of the phone, actually the most competitive our solution is.

So the lower end, I mentioned kind of sub dollar, the lower end might have $0.20, $0.30 worth of solution and high end might have $2 worth of solution.

But in that range, the higher end actually gives us more benefit.

And so would you take that opportunity, though, to migrate that down, then?

Yes, we are.

We are, basically what we have to do is there's a little chip that actually does the control of the tuning elements, and it is targeted at kind of the -- how many bands the phone has, and so the more bands the better it is for us, so we are coming out with a range of controllers that handle all of the bands which should give us complete coverage high end to low end.

Thanks a lot.

Patrick Wang with Evercore.

Great.

Thanks.

Hey, first question, Bernard, I wanted to go back to gross margins.

When I back out the insurance offset in the second quarter it sounded like you're guiding to about 150 BPs expansion at the midpoint.

Can you walk us through the puts and takes there?

Is it just the mix and utilization, or is there something else going on?

No.

It is -- on one hand we are going to see some sizable improvements on the SANYO front as we have now completed the integration of our systems which will allow us to have much better inventory management and substantially reduced inventory reserves.

We do have the incremental fall-through on the revenue because of factory utilization, and indeed the offset on the insurance is quite a significant number in the second quarter without any insurance, the difference is about 130 BPs so indeed it is a bigger amount than what just the delta shows.

Okay.

So pretty much at the end of the day it's factory utilization and substantial SANYO actions.

I see.

Okay.

That's helpful.

And then, hey, Keith, I wanted to ask you about the feedback you're getting from your SANYO customers.

I think in your prepared comments you said that the visibility remained tough there.

Could you give us some color on what's happening there and what you think the biggest challenge is right now.

We are seeing -- we have been shifting the business outside of Japan, basically our focus is design wins outside of Japan where we thought the market opportunity was stronger, and there we are seeing great results.

You saw the growth we had in Q2 over Q1.

Basically you had Japan not doing much and all of that coming from outside.

So great customer feedback outside Japan.

In Japan they are becoming more confident, they are becoming more positive, expecting some benefits here with the new environment they have got financially, but we are not seeing a lot of orders being placed.

And so that's pretty much the commentary I had a quarter ago.

They are feeling better, but it's not translated into additional builds at this time.

Okay.

So it sounds like the expansion into China has been good for you guys but the more traditional SANYO semi customers in Japan just haven't stepped it up yet?

They are just not stepping it up yet.

It's stabilized, it's stopped dropping.

I would be positive in my business was dropping like a rock and it stopped but it hasn't really increased yet.

Okay.

Got you.

That's helpful and then last question, I think you've seen extending lead times for a couple of quarters now.

I mean, it sounds like you're getting better visibility, your backlog is building and I think -- but you're citing stable lead times in the third quarter going forward.

Just curious what the drivers behind that are.

Is it that the supply side has really caught up?

Just help here.

We've got caught up on a lot of the hot packages as it were with capacity, and again we are showing much more moderate growth, or at least more steady growth in the handset side.

Most of the pushouts were related to the handset business which was growing more than double digits quarter-on-quarter.

I think we have caught up with that situation and can handle it so the balance of the markets are growing kind of mid single digits and that's a very comfortable pace.

I see.

Okay.

Thanks so much.

Vijay Rakesh with Sterne Agee.

Hi guys, just going back to the SANYO business, I know earlier in the year you had some expectations of probably getting it to $180 million, $200 million plus run rate.

And in terms of design wins, are those wins still there or is it just a delay in the ramp given some of the weakness in Japan or --

Yes, we haven't lost any design wins.

The difference is, again, the folks in Japan just have not started ordering again.

They were hopeful they would be ramping and they just really haven't.

As far as the cell phone ramps and the white good ramps, those have taken place outside of Japan as expected.

It's really the stuff in Japan that is still in a holding pattern.

Got it.

And going back on the industrial side, that's been a little -- looks like a little bit softer versus the peers.

I know you addressed that briefly.

Any thoughts there and do you intend to pay down any more debt here in the second half?

Thanks.

Bernard.

Let me talk about debt.

Yes, in the second half we will pay our normal amount that we have to pay on a normal monetary basis which is somewhere in the $30 million range.

And on industrial, again, I think we are seeing positive signs, we are seeing pull-ins, et cetera.

I do think that that is up another 4% or 5% for us in the third quarter and it looks like is building momentum as we go through the year.

And I mentioned earlier kind of the differences between ours and other folks.

Got it, thanks.

Betsy Van Hees with Wedbush Securities.

Good afternoon, thanks for taking my question.

Keith you walked us through the seasonality for Q4 for SANYO, I was wondering if you could do that for the rest of the product groups, or end markets, excuse me.

At the Company level we are typically kind of flattish to down a couple points.

I mean each year is a little different but I mean in a normal environment Q3 would be the peak and Q4 would be similar but maybe down a little bit.

Okay.

Thanks.

And then in the handset business, thanks for giving us the ranges in terms of the high end phones, your content and mid-range.

I was wondering if you could take us a step further on that and let us know how your mix is in terms of what percent of your business is going to the high end, mid-range and low end.

And then another question, and my last question is, when you look at the handset business, how much of your business is tied to the Tier 1 OEMs and then how about the emerging markets, the BRIC countries?

So I can only do a little bit of an approximation for you on there because we don't have all of the mix from our customers.

But less than half of our business go to the top guys that have most of the high end phones and the other half are going into the rest of the country, so it's maybe half and half.

But I have no way of quantifying that precisely.

Okay.

Thanks so much.

Yes.

Christopher Rolland with FBR.

Hey, guys.

So, on utilizations, mid 80%s, nice ramp there.

You guys also talked about external foundry partners that you guys have.

Can you talk about maybe agreements that you have in place.

Do you sort of have a target in terms of external during a normalized cycle and what products are you going to migrate to the external guys?

Thanks.

So we have an internal model of kind of modulating between about 15% to 25% of our manufacturing being external.

And as you might guess in the heat of an up-cycle we do a little bit more upside and in the throes of a downturn we do the low end of that number.

And right now we are kind of in the mid-20%s, kind of range so we are a little higher than normal but that was to respond to some of this growth we had in handsets.

Most of that is to answer your question on what is it.

Most of that is in the IC business in wafer fabs and in the assembly for packages that would go into mobile devices.

Okay.

Great.

Also on the gaming platform side, what percent -- that's in the consumer bucket, I believe.

What percentage of consumer revenues does that consist of?

And I guess you guys saw strong shipments in Q2, what do you think linearity for that shipment, for those shipments look like for the remaining quarters of the year?

So actually those should peak in Q4 so they will grow nicely in Q3 and then peak in Q4.

They bottom in Q1 and then start recovering in Q2, so it's actually one of the most pronounced seasonalities of any market.

And round numbers, $10 million or so of the consumer number in the last quarter was in the gaming.

Okay.

And sorry just one last one.

I guess maybe you guys ship a little bit ahead of some of the other major components in those systems so it's still those builds are all in Q4, that is where it peaks?

Yes, it peaks.

So we actually start -- most of those things start ramping in Q3 and then they hit a crescendo in -- from our perspective in the October time frame.

Okay.

Perfect.

Thank you.

Yes.

Kevin Cassidy with Stifel Nicolaus.

Hello.

This is Dean Grumlose calling in for Kevin.

Thank you for taking my question.

Can you provide some color on the outlook for your share and content in X86 based servers, both launching this year and into next year?

Yes, I don't know if I can do that without getting some more data.

Can we follow up with you on that, Dean?

Sure, okay.

As a follow-up question, in the PC realm do you foresee any risk of your content becoming integrated or being reduced by integration by devices going into the CPU package or do you not foresee --

Yes, so Haswell actually had that phenomenon and so it removed some of the MOSFET content by removing a power rail and taking it internal.

The actual -- the next set of 86 architectures actually splits that back out again.

So the rails are going to grow and the power opportunity is actually going to grow in the next set of architectures.

That's very helpful.

Thank you very much.

Yes.

(Operator Instructions)

Ian Ing with Lazard Capital.

Yes, thanks.

You talked about Japan and Europe.

Your thoughts on the China economy.

It seems there's areas of slowdown or a pause due to lack of funding, any impact here on white goods and automotive?

So white goods and automotive appear to be behaving fairly decently and predictably, although there were some rebates on the auto side for economy vehicles that look to be expiring that we are watching quite closely.

The biggest phenomenon we have seen in China is there is some caution, but most of this is revolving around the use of cash.

And so the inventories have continuously tightened for the last year and we have not seen a change in that trajectory.

Okay.

And my follow-up, how would you characterize inventory levels here in the industrial and automotive customers?

Is there any -- any of the orders reflecting replenishments from lean levels or do you think these current levels are the new normal?

Yes, we have seen absolutely no move to replenish in China at all.

They continue to get leaner on a days basis and as long -- in the absence of any inflection, that's probably okay but as soon as they are in an inflection it's going to be very ugly quickly.

In terms of replenishment coming you're saying it would be?

Right.

Because they are so lean, like I said any kind of inflection in an upward direction would cause them to panic.

Okay.

And that's not just China, that's worldwide, I think also you're seeing?

No, that's actually predominantly China.

I think inventories in North America and Europe are at adequate levels.

They are not too heavy, not too light, but they are adequate.

But in China they are clearly very inadequate.

Okay.

Thank you very much.

Yes.

There are no further questions at this time.

I will turn the call back over to the presenters.

Thank you very much for joining the call today.

We look forward to seeing you at various conferences during the quarter.

Goodbye.

This concludes today's conference call.

You may now disconnect.