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Operator
Good afternoon, my name is Jamie and I will be your conference operator today.
At this time I would like to welcome everyone to the ON Semiconductor's third-quarter 2013 financial earnings call.
(Operator Instructions)
Thank you.
Parag Agarwal, Senior Director of Investor Relations, you may begin your conference.
Parag Agarwal - Senior Director IR
Thank you, Jamie.
Good afternoon and thank you for joining ON Semiconductor Corporation's third-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 Relations 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 third quarter of 2013.
The script for today's call is posted on our website.
Additional information related to our end markets, business segments, geographies, and channels is also 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 and 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 third 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.
Later this quarter, we will be attending the Credit Suisse Technology Conference in Scottsdale, Arizona on December 4. Now, let me turn it over to Bernard Gutmann, who will provide an overview of the third-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 on our key financial objectives.
Let me start with our SANYO Semiconductor products group.
We continue to make progress in our efforts to improve profitability of our SANYO Semiconductor operations.
During the third quarter we were able to reach breakeven on a non-GAAP EBITDA basis for SANYO Semiconductor, on revenue of $157 million.
But we still faced headwinds of $0.01 to our overall non-GAAP EPS, as compared to a headwind of $0.05 in the second quarter, and $0.07 in the first quarter.
To further accelerate the progress towards an optimal cost structure for SANYO Semiconductor, we recently announced additional measures to further align SANYO Semiconductor's cost with its near- to medium-term revenue outlook.
These actions involve the closure of a test and assembly plant in Japan, and the initiation of our voluntary retirement program for a significant number of employees.
The primary goal of these measures is to achieve sustained profitability for SANYO Semiconductor, in quarterly revenue range of approximately $150 million to $170 million.
With these actions and additional efficiency measures, we're taking steps to further lower the breakeven point on a non-GAAP net income basis for SANYO Semiconductor to quarterly revenue of approximately $150 million in the second half of 2014, and to approximately $140 million by mid 2015.
The comparable break even point in the third quarter of 2013 was approximately $170 million.
We believe that in near to medium term we can run SANYO Semiconductor business at quarterly revenue ranges of approximately $150 million to $170 million.
With this revenue range and with the optimized cost structure, we expect SANYO Semiconductor to be accretive to our earnings for the full year 2014.
Keith will provide additional details on SANYO Semiconductor product group in his prepared comments.
Now, let me update you on the core ON Semiconductor business.
Our legacy business remains strong and we continue to make progress in key growth areas, such a smart phones, automobiles, white goods, and select areas of the industrial market.
Our design win momentum in our target growth areas remain strong and we expect continued growth in these segments.
We also continued to focus on returning cash to stockholders.
During the third quarter we used approximately $30.2 million to repurchase approximately 4.1 [million] shares of our common stock at an average price of $7.41.
At the end of the third quarter approximately $202 million remains of the total authorized amount under the current stock repurchase program.
Now, let me provide an update on the third-quarter 2013 results.
ON Semiconductor today announced that total revenue for the third quarter of 2013 was approximately $715 million, an increase of approximately 4% from the second quarter.
GAAP net income for the third 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 $0.17 per diluted share.
Non-GAAP gross margin for the quarter was 34.8%, an increase of approximately 115 basis points quarter over quarter, driven primarily by contributions from SANYO Semiconductor.
Unlike the second quarter, we did not have any benefit from insurance proceeds or other items in the third quarter.
Excluding the impact of insurance proceeds in the second quarter, gross margin improved by approximately 240 basis points, quarter over quarter in the third quarter.
Average selling prices during the third quarter declined by approximately 1% quarter over quarter.
Non-GAAP operating expenses for the third quarter were approximately $163 million, down by approximately $4 million as compared to the second quarter of 2013.
The sequential decline in operating expenses was driven by a decline in stock-based compensation in addition to tight control on cost and discretionary spending.
We exited the third quarter of 2013 with cash and cash equivalents and short-term investments of approximately $554 million, a decline of approximately $25 million from the second quarter.
Operating cash flow for the third quarter was approximately $60 million, we spent approximately $50 million of cash on the purchase of capital equipment, and approximately $32 million for the repayment of long-term debt and capital leases.
As noted earlier, we used approximately $30 million for repurchase of our stock.
At the end of the third quarter, ON Semiconductor days of inventory on hand were 115 days, up approximately 3 days from the prior quarter.
The increase in inventory was driven by builds to relieve supply constraint in certain product area, especially those related to automobiles.
And included in our total inventory is about $30 million or six days of bridge inventory, primarily related to consolidation of certain factories.
In the third quarter, distribution inventory was down by approximately $8 million quarter over quarter, while distributor resales grew by 5% quarter over quarter.
In terms of days, distributor inventory was approximately nine weeks in the third-quarter, down by approximately one week as compared to the second quarter.
Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment.
Keith?
Keith Jackson - President and CEO
Thanks, Bernard.
Let me start with comments on SANYO Semiconductor and then I will address the overall business environment and various end markets.
We are increasingly confident of obtaining sustained profitability and stable revenue within 2014 for SANYO Semiconductor.
As we stated earlier, we intend to run this business at an acceptable level of profitability, and we are aggressively taking steps to achieve our profitability goals for SANYO Semiconductor.
With the measures we announced recently we are realigning SANYO Semiconductor's cost structure to attain sustained profitability in quarterly revenue range of approximately $150 million to $170 million.
As Bernard indicated in his earlier remarks, we are targeting a break even on non-GAAP net income basis at a quarterly revenue of approximately $150 million in the second half of 2014 and at approximately $140 million by 2015.
We believe that our target revenue range is well within our reach.
Along with improvements in cost structure we are making progress in stabilizing the revenue for SANYO Semiconductor.
We've had success in growing SANYO Semiconductor's revenue outside of Japan, as we have leveraged our relationship with our existing customer base to sell SANYO Semiconductor's products.
From the first quarter to the third quarter this year, SANYO Semiconductor's revenue to customers located outside of Japan has increased by approximately 11%, as opposed to an increase of approximately 4% for SANYO Semiconductor's total revenue.
As a result of changes we implemented over the last two years, SANYO Semiconductor's product pipeline has significantly improved and we expect to see increasing revenue from new products starting in 2014.
We've identified key technologies within SANYO Semiconductor group and we are leveraging these technologies to target a broad set of markets.
We've realigned SANYO Semiconductor's R&D efforts and product lines to target applications in the areas of handsets, autos, and motor control.
We are leveraging relationships with customers outside of Japan to drive sales of products from SANYO Semiconductor.
With improved visibility into revenue potential of current product pipeline we believe that we can sustain quarterly revenue in the range of approximately $150 million to $170 million in the near to mid term for SANYO Semiconductor.
Now, let me address the current business trends.
The overall business environment continues to improve, but the recovery continues to be choppy and demand continues to lag historical seasonal trends.
Similar to many of our peers we have noticed weakness in the smartphone market due to inventory corrections.
We've also noticed some broader weakness in China, especially in the distribution channel.
However, current bookings trends continue to remain relatively healthy.
For the third quarter our leadtimes were flat quarter over quarter and we expect leadtimes to stay at the current level.
In the third quarter our global factory utilization was in the high 80% range as compared to the mid 80% range for the second quarter.
Now, I'll provide some details on the progress in our various end markets.
The automotive end market represented approximately 26% of revenue in the third quarter and declined by approximately 2% quarter over quarter.
Revenue in automotive segment was negatively impacted by customer platform [transition] related to certain mature car audio products from SANYO Semiconductor.
We've been shifting our focus to higher growth and higher-margin products in the automotive segments and as car audio is a mature product segment, it is not an area of strategic focus.
Capacity constraints in a few product areas also negatively impacted revenue.
We've taken steps to alleviate these constraints and supply has now returned to normal levels.
We continue to see strong design-in activity in automotive lighting, and we have secured wins for our integrated RGB controller and LIN communications interface at a North American OEM, and at a key European tier one supplier.
In addition, we secured our first high-volume design win for rear combination lights at a key Korean OEM.
We have content of more than $10 in this solution.
Our in-vehicle networking portfolio continues to experience strong design activity, with recent wins at a key German OEM for our FlexRay transceiver that supports the latest high-performance automotive communications protocol.
We also secured significant wins with our LIN and CAN products at a key body electronic supplier in North America.
Revenue for the fourth quarter for our automotive segment is expected to be slightly up quarter over quarter.
The communications end market, which includes both networking and wireless, represented approximately 17% of revenue in the third quarter, up approximately 4% as compared to the second quarter.
Sales in the handset market lagged our expectations due to inventory corrections at major smartphone OEMs, and also at indigenous handset suppliers in China.
We continue to gain market share with our battery protection, battery chargers, protection devices, filtering and power management ICs.
We continue to see increased traction for our autofocus and image stabilization products.
We expect to see ramp of our high precision LDO in the fourth quarter resulting from a win on a key based band reference design.
Also we expect to see increased demand in the fourth quarter for many of our standard components, such as protection devices, e2 memory, logic and discrete devices driven by releases of new smartphones and tablets.
Revenue for the fourth quarter for our Communication segment is expected to be down quarter over quarter due to the year-end inventory corrections at major handset OEMs.
The Consumer end market represented approximately 20% of revenue in the second quarter.
It was up 11% as compared to the second quarter.
We saw significant growth in revenue from the Standard Products and Power Management devices driven by volume, production ramp of next-generation gaming systems.
We also earned a design with our integrated power module at a major air conditioner supplier in Japan.
Revenue for the fourth quarter for our Consumer segment is expected to be down quarter over quarter.
Our industrial end market, which includes military, aerospace, and medical represented approximately 20% of revenue in the third quarter, and was up approximately 5% quarter over quarter.
In the military and aerospace market we secure design wins for digital ASIC supporting commercial aerospace customers in Europe, and onshore military programs in the United States, as well as wins in mixed signals foundry services.
In the medical segment we continued our success in the third quarter with our hearing health audiology products, earning six design wins during the quarter.
During the third quarter ramp of new ASICs drove robust quarter-over-quarter growth for our imaging products for medical applications.
Revenue for the fourth quarter for our industrial segment is expected to be slightly up quarter over quarter.
The computing end market represented approximately 16% of revenue in the third quarter, and was up approximately 5% compared to the second quarter.
VCore power management share gains on Haswell notebook platforms contributed to the above market performance in computing during the quarter, as this new platform ramped into volume production.
We experienced strong growth in MOSFET revenue from several motherboard and hard disk manufacturers.
In addition, we secured a custom VCore solution win for a major motherboard manufacturer that expanded our served available market to the channel motherboard market.
Revenue for the fourth quarter in our computing segment is expected to be down quarter over quarter.
In other news Electronic Products China has named our NCP1850 Series switching battery chargers for smartphones and tablets as a winner of the Top Ten Power Products award.
In addition ON Semiconductor was presented with the 2012 Excellent Development Award by Yanfeng Visteon Electronics, China's largest automotive infotainment manufacturer.
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.
Now for fourth-quarter 2013 outlook.
While booking trends and end market demand outlook remains healthy thus far in the quarter, we're being cognizant of our rather soft microeconomic outlook in our fourth-quarter guidance.
Based upon product bookings, booking trends, backlog levels, and estimated turn levels, we anticipate that total ON Semiconductor revenues will be approximately $675 million to $705 million in the fourth quarter of 2013.
Backlog levels for the fourth quarter of 2013 represent approximately 80% to 85% of our anticipated fourth-quarter 2013 revenues.
We expect that average selling prices in the fourth quarter of 2013 will be down by approximately 1% sequentially.
We expect inventory at distributors to rise on a dollar basis.
We expect total capital expenditures of approximately $30 million to $40 million in the fourth quarter of 2013, bringing the total capital expenditures to approximately $170 million for 2013.
For the fourth quarter of 2013 we expect GAAP and non-GAAP gross margins of approximately 33.8% to 34.8%.
We also expect total GAAP operating expenses of approximately $198 million to $218 million.
Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be approximately $40 million to $50 million.
We expect total non-GAAP operating expenses of approximately $158 million to $168 million.
We anticipate GAAP net interest expense and other expenses will be approximately $10 million to $12 million in the fourth quarter of 2013, which includes non-cash 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 $6 million to $8 million and cash taxes are expected to be approximately $2 million to $4 million.
We also expect share-based compensation of approximately $7 million to $9 million in the fourth quarter of 2013, of which approximately $1 million is expected to be in cost of goods sold, and the remaining is expected to be in operating expenses.
These expenses included in our non-GAAP financial measures.
Our diluted share count for the fourth quarter of 2013 is expected to be approximately 450 million shares based on the current stock price.
Further details on share count and earnings-per-share calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K.
Now, an important update on our Corporate entity structure.
We are in the process of seeking regulatory approval to migrate our principal controlled foreign Corporation from Bermuda to Switzerland, which, if approved, will be effective during the first quarter of 2014.
This change is driven by a variety of factors including feedback from customers, suppliers, and governments as zero tax jurisdictions such as Bermuda continue to lose favor within the global business and regulatory communities.
We anticipate that this change will likely result in an incremental increase to our annual cash tax expense in the range of $3 million to $5 million.
With that I would like to start the Q&A session.
Thank you and Jamie, please open up the line for questions.
Operator
(Operator Instructions)
Christopher Danely, JPMorgan.
Christopher Danely - Analyst
Thanks, guys.
On the SANYO restructuring can you just give us a sense of how much cost is going to come out of OpEx and/or gross margin?
And what sort of the pace of that will be over the next four quarters or so?
Bernard Gutmann - CFO
So, let me break it down into two things.
First one is the back end closure of our backend factory in Japan, that should generate approximately $16 million in annual savings or $4 million per quarter, primarily in COGS or pretty much all in COGS, but -- and that is scheduled to be completed by the second quarter of 2014.
With inventory bridge builds that we're doing we will not see the full benefit of that until 2015.
The second portion is a little bit more variable because it's a voluntary program that we have in place with -- we are targeting 600 to 700 people and that should yield savings of approximately $36 million to $45 million, probably 75% of that in OpEx, 70% to 75% of that in OpEx, and the remainder in COGS.
We don't have a precise timing because these discussions take time in the Japan culture, but we expect to see some of the benefits in the first quarter and fully then in the second half of the year
Christopher Danely - Analyst
Understood and for my follow-up, maybe you guys can address why sort of the SANYO revenue has not recovered and just continues to bleed, and then maybe give us a few reasons why you're confident you can stabilizing now?
Keith Jackson - President and CEO
I'll comment on that one, Chris.
This will be our third quarter above the $150 million mark.
We think we've got the floor, predominately that decline was driven by the Thailand floods, and all of the customer reactions that happened as a result of that.
Plus the decline in the Japan consumer suppliers, so our customers losing market share dramatically.
And I think to the first one, the flood stuff is now completely gone, we don't have to worry about anymore leakage.
And on the second one our exposure to those customers is now very minimal.
Most of the products we're selling in Japan is in other markets other than the consumer goods.
So that combination gives us comfort in a floor, and then the pipeline we've got for smartphones, automotive, and motor control gives us a strong indication that we should be able to grow it back from these levels
Christopher Danely - Analyst
Got it, great.
Thanks a lot, guys
Operator
Chris Caso, Susquehanna Financial Group.
Chris Caso - Analyst
Thank you.
For first question I guess ask a little bit of a bigger picture question with regard to demand, and I'm sure you guys have had the opportunity hear what some of your peers had said about what's going on now, and I think the commentary kind of ranges from demand being seasonal to perhaps a muted recovery, and again I guess there's always a fear of a cyclical correction could be starting.
What's your view of what's going on here with regard to the market?
Keith Jackson - President and CEO
Clearly, our view is that there is not a cyclical downturn in the making.
The inventory levels in the channel and in our customers are near all-time lows.
So there's really no -- nothing that would cause a cyclical downturn or frankly much room to fall.
So we think most of the impact here is seasonal.
Certainly has some choppiness in the market recoveries, particularly in the China consumers, which I think is showing up as a little bit of an inventory correction.
So overall what we would call Q4 in the broader market is a slightly more seasonality in Q4 than we have seen in the past, but not anything significant.
Chris Caso - Analyst
Okay.
As a follow-up, maybe you could expand on the weakness that you're seeing in China right now, and I guess the magnitude of the weakness, where it is and how long you think that lasts?
Keith Jackson - President and CEO
So we're seeing a little bit more, one point or two of weakness in China over what we have seen normally seasonality.
Again I think it is based on the consumption in China being a little bit off, the expectations, so people kind of overbuilt a little bit in Q3, and they're correcting it in Q4.
We don't see that sustainably going down, we think Q1 should see the consumers behaving again fairly normally around Chinese New Year, and there's no indications that this will bleed over into 2014.
Chris Caso - Analyst
Great, thank you.
Operator
Jim Schneider, Goldman Sachs.
Jim Schneider - Analyst
Afternoon, thanks for taking my question.
I was wondering if you could maybe talk about the March quarter seasonality, Keith, maybe remind us of what it typically is, and then given the muted seasonality commentary you provided earlier, maybe talk about whether you think that this March quarter will be better or worse than seasonal, given all you're seeing right now?
Keith Jackson - President and CEO
Our typical seasonality has been in the minus 2% to 3% range, and again at this stage, we're seeing pretty good fill into the quarter and nothing that would indicate that it would be substantially different than normal.
Jim Schneider - Analyst
That's helpful, thanks.
And then as a follow-up on gross margins, you talked about the fact that industrial and automotive you're expecting to be up in the fourth quarter, and you talked about the fact that your factory utilization is also up in the third quarter.
So I would've expected gross margins to be better than the down 50 basis points sequentially you guided to, so can you help us understand what's going on there with the gross margin?
Keith Jackson - President and CEO
Well there may be some opportunity, Jim but frankly you're getting about a 50% fall through on the revenues that are down sequentially quarter on quarter in our guidance.
So, it's pretty much in line with the operational metrics that we've had and talked about in the past.
Jim Schneider - Analyst
Thanks very much.
Operator
Ross Seymore, Deutsche Bank.
Ross Seymore - Analyst
Hi, guys.
When we think about the OpEx side of the equation I realize, Bernard you don't know exactly how the retirement is going to flow in, but from the $163 million mark you're guiding to in the fourth quarter, should we assume that that number should bleed down through the course of the year starting in the first quarter?
Bernard Gutmann - CFO
From the SANYO point of view, yes it should be coming down and it will be partially offset by the variable comp expenses throughout the year, but not to a significant extent.
Ross Seymore - Analyst
Right.
And then as we look into the three segments could you tell us, and forgive me if this is in the 10-Q already, but can you tell us what the gross margin is by the three products segments that you break out, please?
Bernard Gutmann - CFO
Yes, hold on one second.
So -- in the -- applications product group for third quarter is 44.2%, Standard Product group 33%, and SANYO 21.9%.
Ross Seymore - Analyst
And you expect the SANYO to go down because of seasonality or some of the cost-saving actions and efficiencies you put in allow that to continue to rise in the fourth quarter?
Bernard Gutmann - CFO
For the short-term we have a small reduction in expected in revenues similar to the overall guidance maybe even a little bit less, and so gross margin expect them to be flattish to what we have right now.
Ross Seymore - Analyst
Perfect, thank you.
Operator
Tristan Gerra, Baird.
Tristan Gerra - Analyst
Hi, good afternoon.
Last quarter you expected a greater than one-third Haswell mix in Q3 and the other half before Q1.
Is this still in line the trends that you're seeing now or are they still in line with your expectations from last quarter?
Keith Jackson - President and CEO
I think it may be slightly less than that ramp wise, so not quite as quick, but the ramps did start.
I don't have precise numbers for that, the ramps did start and will continue into Q1.
Tristan Gerra - Analyst
Okay.
And if we look at your core business, what are the opportunities for gross margin expansion outside of rising utilization rates into next year?
Keith Jackson - President and CEO
The big few I guess that we've got, one is mix.
As we again grow our target markets a little faster than the overall numbers, we talked about that we get great ASPs from the industrial side, the automotive, and the handsets, which will be the quickest growing, so the mix is a big piece of that equation.
You've heard about some of the closures that we're making there on the SANYO side, so you should expect some more expansion there as we close factories and again ramp automotive and smartphones for those guys.
And beyond that it's really the next generation platforms, as our new products become a larger percentage of the total, you get better margins on those
Tristan Gerra - Analyst
Great, thank you.
Operator
John Pitzer, Credit Suisse.
John Pitzer - Analyst
Keith, in your prepared comments you talked about the non-Japanese SANYO business being up I believe 11% sequentially.
Kind of curious --
Keith Jackson - President and CEO
Go ahead -- first three quarters of the year.
John Pitzer - Analyst
First three quarters.
So I'm kind of curious how much revenue is coming outside of Japan today, and kind of given the SANYO pipeline that you see how much would you expect it to be a year from now?
Keith Jackson - President and CEO
I believe the numbers are approximately 65% outside of Japan today, and I would expect that number to move up to the 75% range as you exit next year.
John Pitzer - Analyst
And then specific to Tristan's question about gross margin, I'm just curious, as you look at the pipeline for SANYO, how we should think about gross margins progressing there, both with the product mix and what you're doing on the cost side?
Keith Jackson - President and CEO
There will be a good progression there faster than for the overall business, because there are still a lot of operational inefficiencies that are being worked on through 2014.
Plus, as we mentioned the new product pipeline is in more favorable areas than the traditional consumer background.
So I actually don't have in front of me, nor do we project more than one quarter at a time, but I would expect a significantly steeper ramp on that than the total business.
John Pitzer - Analyst
Is there a target level we should be thinking about just for the SANYO business?
Bernard Gutmann - CFO
Well, what we said in the Analyst Day and I think that still holds true in terms of gross margin for SANYO is in the low to middle 30%s as a medium-term goal.
John Pitzer - Analyst
And I guess quickly my last question you guys recently did an $800 million revolver, I'm just kind of curious, Keith, the use of proceeds there, are you comfortable now that SANYO is behind you, you've always been somewhat of a growth by acquisition story, what's the view on acquisitions in the current environment?
Keith Jackson - President and CEO
Certainly we are feeling that we've got the SANYO problems behind us, that has been keeping us from doing anything.
We're not necessarily anxious to get back into the marketplace but certainly open.
John Pitzer - Analyst
Perfect, thanks, guys.
Appreciate it
Operator
Steve Smigie, Raymond James.
Steve Smigie - Analyst
Great, thanks a lot.
And I was just hoping you could comment a little bit on your business from more strategic, on the applications or products versus the Standard products, in terms of -- is there particular one of those that you're putting more emphasis on going into the future?
So if I look at the Standard Products for example has really great EBIT margins, so would you harvest there though to put R&D into applications, or given the strong margins would you keep ramping up say Standard Products?
So that's both organic and then as you consider an acquisition, which side would you prefer to add from an acquisition perspective?
Keith Jackson - President and CEO
Okay, so I guess I'll give you a slightly different look at the strategic thought pattern on that.
Clearly our Standard Products get a much lower level of investment, which is one of the reasons they generate some outstanding cash for us.
That will continue.
However when you're talking about growing the businesses, every time we've taken apart applications, you find the kind of ASIC or application-specific piece surrounded by an almost equal number of dollars of Standard Product.
So we're actually not looking to change our course, and we're looking to use the kit approach if you will of influence with our customers to increase sales in both categories around the key applications we're going after.
But the good news is it doesn't take more R&D to do that with the Standard Products.
Steve Smigie - Analyst
Okay, great.
And then just looking at your auto business, it's I think your largest category, you guys have been fairly successful there.
You seem to be kind of across the board, you talk about auto infotainment products, but you're also doing in-body products like the FlexRay.
Can you talk a little bit about, even if you don't have exact percentages, generally do you see yourselves more focusing on sort of an infotainment or more on the body, engine, power steering, type applications?
Keith Jackson - President and CEO
Yes, the infotainment will actually be the smaller portion for a long time.
The applications in the body and engine are going to be much better dollars and so that's where the bulk of the work will be.
Steve Smigie - Analyst
Okay, great.
Thank you
Operator
Kevin Cassidy, Stifel.
Kevin Cassidy - Analyst
Thanks for taking my question.
Your capital expenditures you're saying you expect to be $170 million, can you say where that capital expense is being used?
And then, do you have a view into what 2014 would be?
Bernard Gutmann - CFO
2014 in general, our philosophy is to spend 6% to 7% of our revenue on capital expenditures and we are not changing that approach.
For the most part the expenditures we are incurring in 2013 are capacity related with some more minor portion in cost reduction and just legal environmental.
Kevin Cassidy - Analyst
Okay, thank you
Operator
Aashish Rao, Bank of America.
Aashish Rao - Analyst
Hi, thanks for taking my question.
Keith, auto sales now have been flat for two years in a row now, flat or slightly up.
While most of your competition has been fairing better, production is still robust and there's chip content growth.
You've highlighted exit from audio products as being one of the headwinds, so just wondering are most of these headwinds out now, or do you still see some legacy business that could decline next year, that could help prevent a return to the double-digit growth targets that you have?
Keith Jackson - President and CEO
Yes, no I think all of those events are behind us now.
We had a number of flood related impacts that are now out of the system, along with the obsolescence in the radio business.
So Q3 really marked the end of the declines, and you should see us at or above market rates going forward.
Aashish Rao - Analyst
Got it, okay.
Bernard, another question just looking ahead you're shaping up to achieve net cash positive milestone sometime within the next year or so.
You still have a little bit of debt coming due in 2014.
Could you just provide some color on minimum cash level you're comfortable with?
And uses of cash for paying down further debt versus buybacks?
Bernard Gutmann - CFO
Right now we intend to pay back our debt because it matures for the next year.
We do have a share buyback program in place which we have $202 million at the end of the third quarter still available and we have been active on that and we will continue on that front.
We can operate the Company with the cash levels substantially below where they are right now, obviously we don't want to go to levels that are too low, but we are quite comfortable where we are right now.
Aashish Rao - Analyst
Thank you.
Operator
Craig Hettenbach, Morgan Stanley.
Craig Hettenbach - Analyst
Thank you.
Keith, can you talk about opportunities in the industrial market?
You said you are looking to be some selective growth there, if you can just highlight where you see the best opportunity, and also comment on just how design activity is there?
Keith Jackson - President and CEO
So I think the fastest-growing market in our industrial segment is LED general lighting.
So you should be seeing the most rapid growth revenue wise in that segment from that.
But we're also seeing some good growth from design-ins in basically energy efficient building controls, which will accelerate as industrial buildings pick up with the global market.
Craig Hettenbach - Analyst
Okay.
And as a follow-up to the end market commentary for Q4, can you rank them in terms of the markets?
Are they going to be down, some that might be down modestly versus more, and then more specifically to the consumer market that the builds for videogames, does that take a little bit of a pause here?
What's your outlook there?
Keith Jackson - President and CEO
Okay, so actually the consumer builds do slowdown and we would expect that towards the higher end -- higher end if you will of the declines.
Computing also traditionally will come down as well.
And then on the better side, cell phones or communications won't come off as much, and we're expecting flat to up in industrial and automotive.
Craig Hettenbach - Analyst
Got it, thank you.
Operator
Ian Ing, Lazard Capital Markets.
Ian Ing - Analyst
Yes, thanks.
First of all some of these temporary headwinds in automotive, how much car audio applications are left that you plan on exiting?
And have you fully lifted the capacity constraints in some of the new applications?
Keith Jackson - President and CEO
Yes, capacity constraints are all behind us.
And from an audio perspective and the radio that's down to $1 million or $2 million a quarter revenue wise.
Ian Ing - Analyst
$1 million to $2 million, okay great.
And then sort of a larger question here, absent an immediate end market recovery, what do you feel is going to drive the top line here?
Is it really the design win pipeline or some of the exposure to the better end markets, or some share or content gains?
Keith Jackson - President and CEO
Continued share gains on the computing side certainly will provide some growth as that Haswell platform ramps next year.
But in the handsets it's continued content increases, which we think will have a significant impact as you go into early 2014.
Ian Ing - Analyst
In terms of Bay Trail for Intel, that push out, is there any, is it too early to call any impact for that, have they talked about more second half?
Keith Jackson - President and CEO
Too early but there shouldn't be any significant change there from at least positioning wise from the Haswell, so probably not a major event.
Ian Ing - Analyst
Okay, thank you.
Operator
Craig Ellis, B Riley.
Craig Ellis - Analyst
Thank you for taking the question.
Keith and Bernard, as we looked at the ASP trends in the business year to date they have moderated a bit, and my question is, as you look out to next year, given how lean the channel inventory backdrop and given where your utilization is, do you see an environment where those 1% headwinds that are impacting the business in the first quarter could actually neutralize?
And if so, what do you think the drivers are to get pricing to be more of a neutral factor?
Keith Jackson - President and CEO
So pricing is definitely improving, you saw that in our Q3 numbers and in our Q4 guidance.
We still expect Q1 to be down more than any other quarter because of our annual contract performance, but right now I would say because of the leanness in the inventories we are actually expecting a better than normal year next year on ASPs.
Craig Ellis - Analyst
Okay.
And there was a comment on MOSFETs and I wasn't sure if that was on PC MOSFETs or more broadly, but there has been some discussion of a key manufacturer moving out of the PC MOSFET business.
Is there an opportunity for ON in that regard and if so how significant would it be?
Keith Jackson - President and CEO
We limit our performance in the market frankly based on margins, and so we just manage the business that way.
If there is more demand and the price is firm then we certainly are able to participate in that.
Craig Ellis - Analyst
Thanks, guys.
Operator
Vijay Rakesh, Sterne Agee.
Vijay Rakesh - Analyst
Yes, hi guys.
When you look at your 2013 OpEx you're running in the 22% range.
As you look at 2014 with all the tweaks you're doing at SANYO, do you expect to get OpEx down back under the 18%, 20% level as you exit 2014?
Bernard Gutmann - CFO
What we have said is that our long-term model is to operate in that 21% to 23%, so I'm not expecting that to go down to 18% next year.
Vijay Rakesh - Analyst
Got it.
And on the SANYO side, I know you said gross margins are running in the 21%, 22% (inaudible) level, and you expect it to go up to mid to low 30%s in the midterm, that's about a 1,000 basis point improvement.
How does that -- when you put that into the equation, how does your overall gross margin look for next year, how should that look for next year?
Bernard Gutmann - CFO
Well, again we don't guide out more than one quarter, again what I would say is the main drivers for gross margin will be threefold next year.
One as we said is the closure of some factories, including the TSS on the SANYO front, the second one is the normal fall through on incremental revenue at about a 50% rate, and the third one is the mix effect that Keith referred to as we focus and out grow selected markets including smartphones and automotive.
That's the way I would look at it.
Vijay Rakesh - Analyst
Okay.
All right.
Thanks
Operator
Patrick Wang, Evercore Partners.
Patrick Wang - Analyst
Thanks a lot.
First question is a clarification for Bernard.
I think earlier when you're talking about OpEx I wasn't quite sure if you were implying that OpEx would be up or down on an absolute basis when we take a look at Q4, the Q4 run rate.
Bernard Gutmann - CFO
You mean compared to Q4?
Patrick Wang - Analyst
That's right.
You said that you've got some cost savings going on at SANYO partially being offset by increases with core ON, which would imply that I think OpEx should be at a lower rate next year.
Bernard Gutmann - CFO
So first OpEx for the third quarter pretty much the guidance is sequentially flat the midpoint of the guidance, and then as we get the benefits of the voluntary headcount reductions at SANYO, we should see some benefit, and it will be partially offset depending on business performance and revenue based on variable comp.
Net net I expect them to be flattish in absolute dollars.
Patrick Wang - Analyst
Okay, perfect.
Thanks.
For my follow-up Keith, I was hoping you could talk a little bit more about China.
It sounds like China has been a little bit disappointing for just about everyone.
You talked about some handset problems out there.
Can you go into a little bit more color with what you think is going on when you think that the handset correction is going to complete.
And then also when you think that generally the demand environment is going to improve, whether it's ahead of Chinese New Year or kind of your thoughts there?
Keith Jackson - President and CEO
Okay, so overall, I think there's a couple of things going on in China.
Clearly they -- on a broad basis, continue to lean out their inventories, so there is a cash preservation behavior going on pretty much everywhere in China.
And that is a negative drag if you will on any component sales.
From a handset perspective, generally we have not seen these things take more than a quarter or maybe a little bit longer, four months or so, to correct.
And the Chinese New Year typically is a great time to increase the demand on the handsets.
So my guess is you'll be through the inventory correction piece in the handsets in sometime in Q1.
Patrick Wang - Analyst
Perfect, thank you.
Operator
Chris Rolland, FBR.
Chris Rolland - Analyst
Hi guys, thanks for taking the question.
So despite an uptick in revenues this quarter, inventories were still up in dollars and days, and I know you guys mentioned auto supply as a reason there, but perhaps you can talk about inventory levels for the long-term days you guys are targeting.
And if you could remind us on fab utilizations now and where we might be for next quarter?
Thanks
Keith Jackson - President and CEO
I'll make a comment and let Bernard takeover.
In general you've been seeing our days of supply and distribution drop precipitously.
They are, I think at dangerously low levels, and so we have certainly looked to see how we can offset some of that and held a little bit more internally than we have in the past models.
So frankly if something doesn't turnaround I would say we're in about the right range, but it is a much higher level than we used to run strategically.
Bernard Gutmann - CFO
I would say that if you look at the trend over the last decade or so, inventories at Semiconductor, our competitors and us have risen as more of the inventory has been pushed back to semi-manufacturers.
At the 115 we are a little bit on the high side, particularly still on the SANYO where we are higher than the average.
I would think in a long-run a goal of 100 to 110 is an adequate place as opposed to in the past under 100.
Chris Rolland - Analyst
Alright.
And utilizations?
Any color there?
Keith Jackson - President and CEO
Wafer fabs kind of in the high 80s in Q3 which is up from Q2 kind of the low to mid 80s.
Chris Rolland - Analyst
Okay, great.
And also on your clear line of sight to profitability for SANYO, can you guys talk about what sort of macro assumptions you guys have built into that sustained profitability?
I mean can we sustain levels here?
Or do we still need a modest uptick in the cycle to get you guys there?
What's your thinking?
Keith Jackson - President and CEO
There's nothing cyclical we've put into that.
It's all quite tactical, all quite short term, and I would say as long as we have something that is somewhat similar to normal seasonality, we should be operating in that $150 million to $170 million range.
Chris Rolland - Analyst
Thank you.
Bernard Gutmann - CFO
From the exchange rate point of view we didn't do anything different from where we are today.
We assume no major change
Chris Rolland - Analyst
Okay, thank you, guys.
Operator
(Operator Instructions)
Betsy Van Hees, Wedbush Securities.
Betsy Van Hees - Analyst
Thanks, good afternoon and for taking my question.
Keith you mentioned -- or Bernard it was you that talked about the distributors sort of pushing back as well as the customers and about you guys holding more inventory for them.
So it seems that the overall industry has been historically low inventory levels, historically low leadtimes for about the past year.
As you look forward and we move into 2014, is this going to be the new norm now for the industry?
Is the onus is on the suppliers rather than distributors and the customers to hold inventory?
Keith Jackson - President and CEO
Certainly that is I think it's more norm the not.
And what's happened over time is the customer base has consolidated and they have been pushing back and the semiconductor industry has not consolidated and hasn't had quite the power to offset that.
So I think in general, Bernard's comments earlier the ideal days now is probably gone up 10 days of inventory for the semi-suppliers versus what the models were five, six years ago.
Betsy Van Hees - Analyst
Okay, thanks, that was very helpful.
Operator
Steve Smigie, Raymond James.
Steve Smigie - Analyst
Great, thanks.
Just a follow-up on the voluntary workforce reduction for SANYO.
Is that something that's -- I know you announced it a while ago, but has that gone out to the employees, have they had an opportunity to step up yet, and is that sort of running as you would've expected at this point?
And you touched on Japanese cultures, I'm just wondering is this sort of voluntary reduction typical in Japan?
You sort of have some sense of what might typically yield if you will?
Keith Jackson - President and CEO
Okay, so the one we announced here in October is going on schedule, the employees have been notified, the unions over there, the discussions have already taken place, and it is moving forward at the expected pace.
So really nothing unusual.
The voluntary reduction is the way that they work over there without getting into lots of details, this is the same process and method that we used in the previous reductions in force during 2013.
Steve Smigie - Analyst
Okay, great.
And just one follow-up on computing.
Your business was up there, I think a lot of folks are down, you guys are obviously gaining quite a bit of share there.
And I'm just wondering if you could talk a little bit about how you see that over the next year roughly, you obviously won on Haswell, do you continue to expect to sort of see growth there, despite notebook challenges because you are gaining share, and do you continue to also see growth there in desktop, because you guys are very strong there and that doesn't seem to be as bad as notebooks short-term?
Keith Jackson - President and CEO
The desktop side, we're pretty much at shares near 50%, I don't think there's room for growth there, so we'll follow the units fairly closely.
In the notebook side we're still in the 30 percentages, the 30%s, and so there is room for growth there, and as Haswell ramps we expect that will increase.
So there's probably no plateauing on the share gains in notebooks until the Haswell is the dominant platform.
Steve Smigie - Analyst
Great, thank you.
Operator
There are no further questions at this time.
Thank you for your participation in today's call, ladies and gentlemen.
This concludes the conference call you may now disconnect.