安森美 (ON) 2014 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the first quarter 2014 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I'll now turn the conference over to Mr. Parag Agarwal, Senior Director of Investor Relations.

You may begin.

Thank you, Candace.

Good afternoon and thank you for joining ON Semiconductor Corporation first quarter 2014 quarterly results conference call.

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

This call is being webcast on the investor relations 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 first quarter of 2014.

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

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

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

Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release, 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, 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 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 developer from our forward-looking statements, are described in our Form 10-K, Form 10-Q, and other filings with the Securities and Exchange Commission.

Additional factors are described in our earnings release for the first quarter of 2014.

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

During the current quarter, we will be attending in Robert W. Baird conference in Chicago on May 7. Now, let me turn it over to Bernard Gutmann who will provide an overview of the first quarter of 2014 results.

Bernard.

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

Let me start by providing an update on overall business results.

We continue to see steep acceleration in our order activity driven by a robust design win pipeline across multiple end markets.

Our current quarter rate is at the highest level it has been in the last two years.

We are seeing robust order activity from the distribution channel.

Distribution orders are up by approximately 20% as compared to the prior order.

Keith will provide additional details on business plans in his prepared remarks.

Along with heightened order activity, operational improvements put in place over the last few quarters are beginning to show results and our margins on a non-GAAP basis improved significantly despite a slight decrease in revenue in the first quarter.

Our design win momentum is being further aided by continuing improvements in global macroeconomic environment and a favorable supply-demand dynamic currently prevailing in the semiconductor industry.

Now, let me provide you an update on our first-quarter 2014 results.

ON Semiconductor announced total revenue for the first quarter of 2014 was approximately $706.5 million, a decrease of approximately 1.6% as compared to the fourth quarter of 2013.

GAAP net income for the first quarter was $0.13 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 35.5%, up approximately 70 basis points quarter over quarter.

This strong gross margin performance was driven by improved operating performance and our richer mix, resulting from strong growth in higher margin industrial and automotive businesses.

Average selling prices for the first quarter decreased by approximately 1% as compared to the fourth quarter.

Our non-GAAP operating margin for the first quarter was 12.4%, up 50 basis points as compared to the fourth quarter of 2013.

Non-GAAP operating expenses for the first quarter were approximately $163 million, down by approximately $2 million as compared to the fourth of 2013.

The sequential decrease in operating expenses resulted from previously announced restructuring measures in our system solutions group, and fewer days in the first quarter of 2014 as compared to the fourth quarter of 2013.

We exited the first quarter of 2014 with cash and equivalents and short-term investments of approximately $617 million, a decrease of approximately $9 million from the fourth quarter of 2013.

Operating cash flow for the first quarter was approximately $75 million.

We spent approximately $48 million of cash on purchases of capital equipment.

During the first quarter we used approximately $24 million for repayment of long-term debt and we used approximately $19 million to repurchase approximately 2.2 million shares of our common stock at an average price of $9.12.

At the end of the first quarter approximately $123 million remained of the [total] authorized amount under the current stock repurchase program.

At the end of the first quarter, ON Semiconductor's days of inventory on hand were 123 days, up four days from the prior order.

This increase in inventory was driven by anticipated -- anticipation of improving demand and the likelihood of restocking in the distribution channel; as indicated by significantly higher order rates from distributors.

Included in our total inventory is about $33 million or seven days of bridge inventory.

Most of this bridge inventory is related to the consolidation of system solutions group manufacturing operations.

In the first quarter, distribution inventory was up by approximately $18 million quarter over quarter while distribution resales were approximately flat.

In terms of days, distributor inventory increased slightly over nine weeks in the first quarter, from slightly below nine weeks in the fourth quarter of 2013.

For the first quarter our lead times were approximately flat quarter over quarter and we expect lead times to continue at the current level.

In the first quarter our global factory utilization was in the low 80% range as compared to the mid-80% range in the fourth quarter.

Now, let me provide you an update on performance of our three business units or segments.

Revenue for standard product group for the first quarter of 2014 was approximately $293 million, up approximately 1% quarter over quarter.

Automotive and industrial end markets were the key drivers of above-seasonal revenue for standard products group.

Revenue for application products group was approximately $280 million, up approximately 3% quarter over quarter.

Again, automotive and industrial were the key drivers for the applications product growth.

Revenue for the first quarter of 2014 for the system solutions group was approximately $134 million.

The greater than seasonal decline in revenue for system solutions group in the first quarter was driven by certain program transitions.

We believe that underlying business for SSG remains stable and current booking strength thus far in the quarter, points to a healthy growth for the SSG in the second quarter.

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

Keith.

Thanks, Bernard.

I am very encouraged by our first-quarter results.

Our bookings momentum continues to strengthen and currently our bookings rate is at a level we haven't seen in the last two years.

Activity in the distribution channel has picked up momentum, and as Bernard noted in his earlier comments, distribution orders are up approximately 20% quarter-over-quarter.

Based on heightened distribution activity we believe that much-anticipated restocking in the distribution channel has started as distributors are increasingly optimistic about the second half of the year.

As we recognize revenue on a sell-through basis, the benefit of this improved order activity from the distribution channel is not immediately reflected in our revenue; however, the heightened order activity from distributors and improving commentary on demand trends from our customers, significantly raises our optimism for the second half of the year.

In line with our stated goal, we continue to see significantly increased traction in our targeted growth segments of automotive, smartphones, and select areas of the industrial end market.

We are not only benefiting from increased semiconductor content in automotive and industrial applications, but also from share gains across our targeted end markets.

We expect our momentum in these markets to further accelerate as our design wins begin to convert into revenue.

Along with increased design win traction, our operating performance continues to improve driven by efficiency improvement measures we put in place during last year.

This improvement and operational efficiency coupled with strong growth in our margin-rich segments has enabled us to deliver solid margin expansion in the first quarter despite a sequential decline in revenue.

Our current operation structure should enable us to deliver strong operational leverage as our revenue grows.

In addition to operating leverage, a richer product mix driven by growth in our targeted segments should provide additional tailwind to our margins.

While we are pleased with the performance of our standard products group and applications product group, performance of our system solutions group slightly lagged our expectations.

Unexpected ramp down of certain customer programs is the primary contributor of the greater than seasonal decline for SSG in the first quarter.

However, booking trends and backlog for SSG point to healthy growth in the second quarter.

Based on SSG's design win pipeline and impending ramp of multiple new programs in the second half of the year, we remain confident that SSG's revenue will continue to grow for the remainder of the year.

This revenue growth coupled with benefits from previously announced restructuring measures should enable SSG to be accretive to our earnings in 2014.

Let me reiterate that we remain committed to running SSG in a manner that is profitable on a sustained basis.

We believe that the cost structure is now in place to achieve sustained profitability for SSG.

However, if needed, we are prepared to implement any and all measures to drive sustained profitability.

We closed our acquisition of Truesense Imaging on April 30.

It is my pleasure to welcome the Truesense team to ON Semiconductor family.

The team at Truesense established a clear leadership and high performance imaging market, and I'm excited about the opportunities that the combination of the two companies will create for our customers, shareholders, and employees.

The acquisition of Truesense is in line with our stated strategic intent of growing select segments of our margin-rich industrial business.

This acquisition is highly complimentary in terms of technologies, products, customers, and channels.

Truesense brings approximately 200 new customers to ON Semiconductor and actually expands our image sensor portfolio with the addition of both CCD and CMOS devices.

Truesense also provides us access to new channels such as camera makers and system integrators for the most demanding and critical imaging applications.

Now, I'll provide some detail on progress in our various end markets.

The automotive end market represented approximately 30% of our revenue in the first quarter and was up by approximately 5% quarter-over-quarter.

Revenues in this segment were driven by strong product sales across our complete automotive portfolio.

We saw strong sales for our ignition in IGBT's, LED drivers, motor control IC's for advanced front lighting systems, in-vehicle networking products, slow [dropout] regulators, and switch mode power supplies.

In our standard products group we saw solid growth for automotive in every focus product area as compared to the fourth quarter.

Leading automotive related revenue drivers for our standard product groups include rectifiers, small signal diodes, MOSFETs, protection devices, and diodes for body electronics, safety, infotainment, and powertrain.

Additionally, we gained significant share year-over-year as a result of or annual contract negotiations with our key automotive customers worldwide and we expect the share gains to translate into revenue during the remainder of the year.

As I've indicated in my earlier comments, our design win momentum in the automotive sector continues to accelerate.

Key design wins secured in our first quarter include wins with key European auto makers for low side optical relay drives, in-vehicle networking products, LED drivers, and motor control IC's for front lighting.

In the Americas we secured wins for body control, engine control, LDO and MOSFETs for rear light applications, smart fits for the instrument cluster, and ASICs for in-vehicle networking.

In Korea we secured wins with a major auto OEM on numerous rear and front lighting programs.

In Japan we continue to drive success with a recent design for intelligent power module wins for electric oil pumps for hybrid electric vehicles at a key automaker.

Revenue for the second quarter in our automotive segment is expected to be up quarter-over-quarter.

The communications end market, which includes networking and wireless, represented approximately 17% of our revenue in the first order and was down approximately 6% quarter-over-quarter due to normal seasonality.

On a year-over-year basis, our communication revenue was up by approximately 7% driven by new product introduction and design wins in smartphones.

We continue to gain market share in smartphones with our battery protection, battery chargers, protection devices, filtering, and power management IC.

Traction also remains strong for our auto focus and image stabilization products.

We continue to see strong demand in smartphones and base station applications for many of our standard components such as protection devices, E-squared prom and chip-scale packages, high position LDOs, logic, operational amplifiers, and discrete devices.

During the quarter, we ramped and shipped [ECDC] power management and protection products for two premiere customers in the wireless market.

We saw growth in the key Chinese smartphone maker for our protection, filtering, and other standard products.

We secured multiple design wins on Chinese smartphone platforms for display, camera modules, and battery solutions, and we expect revenue from these wins to ramp beginning in the second quarter.

We won additional designs at three key smartphone makers for our image stabilizer, auto focus controller, and driver solutions for cameras.

We also secured a major design win for wireless charging in the smartphone space.

Revenue for the second quarter for our communications segment is expected to be up quarter-over-quarter.

The consumer end market represented approximately 17% of revenue in the first quarter and was down approximately 14% quarter-over-quarter due to normal seasonality, which was further exacerbated by the end of initial production ramp of new gaming platforms.

The White Goods market showed steady growth during the quarter with exceptionally strong demand for intelligent power module solutions, specifically for our two-in-one intelligent power modules with integrated AC inverter and power factor correction.

Orders for our standard products and power management devices slowed with seasonal production decline for gaming systems, digital media players, and LCD televisions.

Yet, design win momentum for the next-generation consumer electronic systems and White Goods remains strong.

We secured wins for a broad range of our power and standard products at a key customer for a new streaming TV device.

We also secured new design wins for set-top boxes and brushless DC motor drivers from White Goods such as refrigeration fan drivers, battery-powered hand tools, and other pumps and blowers.

Also during the quarter we entered into a joint development agreement to develop ICs,, utilizing Studio One's award-winning AfterMaster audio technology and ON Semiconductor's DSP product expertise for audio solutions, to deliver unprecedented performance for consumer and industrial electronics.

Revenue for the second quarter for our consumer segment is expected to be slightly up quarter-over-quarter.

The industrial end market which includes military, aerospace, and medical, represented approximately 21% of our revenue in the first quarter and was up approximately 8% compared to the fourth quarter.

Within the industrial segment we saw especially strong growth in our medical and [Millero] end markets as our design wins translated into revenue.

We began to see revenue from the first of many major design wins on our flagship Ezairo 7100 DSP hearing aid platform.

We launched our new rhythm DSP system for hearing aids, with full production anticipated during the second quarter.

Our (inaudible) DSP solutions are now being utilized by customers to enable wireless interface with specific smartphone models to better service the baby boom generation.

We also ramped production of a CRM solution for one of our key implantable medical device customers.

We saw good growth for image sensor products, especially in a high-speed market segment; and we secured initial design wins for our new PYTHON CMOS image sensor platform for machine vision, intelligent traffic control, and surveillance application.

Industrial-related revenue for our standard products group was up with strong demand for our ESP production solutions at a leading high brightness LED lighting maker.

Revenue for the second quarter for our industrial segment expected to be up quarter-over-quarter.

This guidance includes contribution from our recent acquisition of Truesense.

Competing end market represented approximately 15% of our revenue in the first quarter and was down approximately 5% compared to the fourth order due to normal seasonality.

Consistent with our Sam expansion strategy, we successfully introduced secured design wins for new Vcore controller, serving channel motherboards and AMD computing platforms which should ramp during the year.

We continue to gain Vcore share in the computing market driven by our strong position on Haswell and Broadwell platforms and strong demand for our [DR MAS] power solutions.

The design window for Intel's next-generation platform, IMVPA, is now open and we're well positioned to further increase our market share with higher content.

Revenue for the second quarter for our computing segment is expected to be down quarter-over-quarter.

In other news, ON Semiconductor has been named one of the most popular semiconductor brands in China for 2013, by China Electronics News.

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

Thank you, Keith.

Now, for the second quarter of 2014 outlook.

Our guidance for the second quarter includes the contribution from our acquisition of Truesense Imaging which closed on April 30.

Based upon product booking trends, backlog levels, estimated turns levels, we anticipate that ON Semiconductor revenues will be approximately $738 million to $768 million in the second quarter of 2014.

Backlog levels for the second quarter 2014 represents approximately 80% to 85% of our anticipated second quarter 2014 revenues.

We expect that average selling prices in the second quarter of 2014 will be down approximately 1% as compared to the first quarter of 2014.

We expect inventory of distributors to rise on a dollar basis.

We expect total capital expenditure of approximately $50 million to $60 million in the second quarter of 2014.

For the second quarter of 2014, we expect GAAP gross margin of approximately 34.7% to 36.6% and non-GAAP gross margin of approximately 35.1% to 37.1%.

We expect total GAAP operating expenses of approximately $179 million to $192 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairment, and other charges which are expected to be approximately $11 million to $14 million.

We expect total non-GAAP operating expenses of approximately $168 million to $178 million.

We anticipate GAAP net interest expense and other expenses will be approximately $9 million to $11 million for the second quarter 2014, which includes non-cash interest expense of approximately $2 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 $9 million to $11 million and cash taxes to be up approximately $6 million to $8 million.

We also expect share-based compensation of approximately $11 million to $14 million in the second quarter of 2014, of which approximately $2 million is expected to be in cost of goods sold.

The remaining amount is expected to be in operating expenses.

These expenses included in our non-GAAP financial measures.

The increase in stock-based compensation in the second quarter [the] first quarter of 2014 is due to our annual grants and the higher stock price.

Our diluted share count for the second quarter of 2014 is expected to be approximately 444 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.

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

Thank you, and Candace please open up the lines for questions.

(Operator Instructions)

Ross Seymore with Deutsche Bank.

Hi, guys.

Congrats on the strong quarter and guidance.

Thanks for letting me ask a question.

I guess the first question on the SSG side of things, does it give you any pause that that was weak?

I know you said that there was some product there program transitions, but is this something that has been a similar problem in the past or is it something that you have, for whatever reason, more confidence that it can snap back.

If that latter is the case, what gives you that confidence?

Okay.

So, it was slightly weaker than we expected.

We did expect it to be weaker.

As you know, 40% of that business is consumer which is off very significantly in the first quarter of each year.

What we saw there is a couple of those consumer programs ended a little quicker than we expected and the new models weren't ramping until here in April.

So it really was a timing issue right there at the end of March more than anything else.

We expect SSG to grow faster than the overall company in the second quarter based on backlog and design wins and specific customer input.

So, no, we think it was a little weaker in Q1 than we expected but we expected it to be softer than Q4 and it really is product transitions which are returning in second quarter, so we should see a very nice growth rate here in Q2.

I guess as my followup switching over to the OpEx side of things.

The guidance is a little higher than I had expected.

I know, Bernard, you said there's an annual grant in there and the stock price raising, et cetera, but how should we think about the leverage on that line going forward on an absolute basis?

Is this kind of the new run rate or are there other things that can influence it to the upside or downside as the year progresses?

On a net basis I would expect it to be pretty much of that level for the rest of the year.

Thank you.

John Pitzer with Credit Suisse.

Thanks for letting me ask the question.

Can you -- maybe just a follow on to Ross' question around SSG.

I'm just kind of curious, you made comments in your prepared remarks that you still think it's going to be accretive to full-year 2014.

One, how dilutive was it at this revenue level in the calendar first quarter, and I think you talked about sort of that $150 million kind of breakeven level.

Can you just update us on the accretion comment you made?

To what extent is that wholly based upon revenue growth expectations from here?

Are you doing more in that division to try to get the breakeven lower?

Okay.

So, Q1 was roughly $0.02 dilutive and we believe the full year will be in excess of $150 million a quarter average.

So, we are expecting growth.

From a cost perspective though, we are not fully executed on the programs we initiated last year.

We'll be exiting our factory in Japan in June and we still had head count transitioning out through Q2.

So, that breakeven point we're targeting 140 as we exit this year.

So again, I think we're going to have widening positive margins as you go through the year with costs going down and revenues going up slightly.

Keith, just for June quarter specifically, should we still kind of model SSG as dilutive to the overall earnings?

It will be very close to breakeven, plus or minus.

Perfect.

And then, Keith, I think you also said in your prepared comments you expect computing to be down in the June quarter.

To what extent you think that's just market forces or can you help me understand the kind of competitive dynamics because we heard some very differing views on that compute business sequential growth from some of your competitors.

I'm just kind of curious, is it market or is it market share?

We expect our Vcore business to continue to grow, in fact grow very nicely.

We are selectively not participating in some of the commodity sales into computing where there's some very low margins and frankly we have better uses for our capacity.

So, it's really a margin enhancement approach were taking and I wouldn't read that to be significantly down, it will be just slightly down.

My last question, you guys did a fairly strong buyback program in the calendar fourth quarter.

I think it was $59 million and it was about $19 million this quarter.

How do we think about buybacks going forward and what should we think about is your target to try to get cash back to shareholders?

Currently, we do have still our $123 million program.

We have $300 million.

We still have $123 million that will expire in about five quarters.

We expect to utilize it fully in that time frame.

Perfect.

Thanks, guys.

Gabriela Borges with Goldman Sachs.

Thanks for taking the question.

I wanted to ask on the gross margin guidance for 2Q.

Could you give us a sense of how much of that expansion is being driving by high utilization and if there are any other impacts for mix shift or from the ongoing operation initiatives that we should be aware of in the quarter?

For the most part in the second quarter it's high utilization and continuing mixed improvement as we continue growing our automotive and industrial area.

The cost reductions that Keith mentioned associated with the SSG group will be more a second half and 2015 story as we close down the factory in June.

That's helpful.

Thank you.

And just as a followup if I may.

Could you help us quantify how much Truesense is contributing to the sequential revenue or the OpEx growth in the second quarter?

Then if you could elaborate on your revenue and cost synergies that you expect to see from that acquisition?

Thanks so much.

The revenue in the second quarter guidance is $10 million to $12 million.

Right now in 2013 it was a business that ran in the low to middle 40% gross margin.

We don't see a reason why that would change.

We're not expecting a significant amount of R&D savings on the OpEx front.

In general, it's going to be done by modest SG&A savings.

I appreciate the color and congrats on closing the deal.

Thank you.

Steve Smigie with Raymond James.

Great.

Thanks a lot.

Keith, I was hoping you could you talk a little bit about share gains in the automotive market.

First of all, can you talk about how you got the wins versus the competitor?

What did you do differently?

And then does that change the growth profile for that business over the next 12 months?

In essence our businesses both on the standard product side and on our application product side are both gaining share there.

There are separate phenomenons.

I'll walk through.

The application side is really expertise that we've been developing in some areas that are growing pretty rapidly in the cars.

We win their basically on technology at competitive prices and continuing to do very well.

On the standard product side, we continue to be a larger player there with significant volumes and new technologies that specifically reduce energy leakage in the car so that they get better battery performance, et cetera.

A combination of good products with good prices we think is a winning formula in automotive.

Okay, great.

And then just with regard to Truesense as we look into September.

It seems like we had maybe two-thirds of the revenue in the June quarter.

Should we expect obviously a little bit more of a seasonal September as we add in the extra month there?

Also should we expect growth in Truesense?

So if we just took -- multiplied the month's worth and would've grown off that base as well?

We would expect -- your math is not far off.

It's going to be full quarter instead of a partial quarter and certainly we are expecting to see growth in that business, but I would not project a lot of growth right now.

As a frame of reference, last year Truesense (inaudible) $79 million for the full year.

Okay.

Great.

Thanks.

Congrats on nice margin improvement.

Chris Caso with Susquehanna Financial.

Thank you.

Just following up from that last question.

Could you clarify the operating expense associated with Truesense and if there's an extra month on that, too, would we factor that into the third quarter as well?

Yes.

The amount in the second quarter is $3 million to $4 million and, yes, that's going to be a partial.

Okay, great.

Just with reference to your prepared comments on the distribution channel.

You talked about that being a little above nine weeks.

Could you characterize where that is versus historical norms and where your target levels are?

And if you have any feel for the inventory at your customers beyond the distributors, do you feel that they're doing some restocking as well here?

We like to target between our approximately 11 weeks, so this is still below where we would like to be and it is below norms.

This looks very similar to 2009 on the [DC] side.

So, it's still quite lean and even with the order patterns we would remain lean by historical standards.

From our OEMs, looking at their order patterns we're seeing significant amount of inside lead time requests for expedites and that indicates to us they are also still quite lean; however, as you know, it's pretty tough for us to judge that accurately, but at least their behaviors right now are seeming to be quite lean.

Great.

And just as a final question.

You guys had talked about some targeted share gains in handsets as you go into the second half of the year.

Could you give us an update on that and what that implies in terms of seasonality for the third quarter?

From a cell phone perspective, we are expecting to see seasonal units out there, so third quarter would be a better quarter than the second quarter.

Within that we've seen some really good design wins with some high dollar content in China and it is our belief that the smartphones produce there at the more modest cost points to the consumers is going to drive a lot of volume.

So, we think the combination of the Good wins and winning them where we see the customers growing the most rapidly we think is what's going to lead to those gains in Q3.

So it should be a little stronger for us in Q3 than the overall handset volume change.

Craig Ellis with B. Riley.

Thank you for taking the questions and nice job on the gross margin, guys.

Keith, it sounds like them some of the prepared remarks that the Company is feeling pretty constructive about the ability to grow through the year in the back half.

Can you help us understand what you're seeing from a half on half growth standpoint by end markets?

Where are you seeing the most growth in the second half?

I think end markets will look fairly seasonal, so the handset should be up in the second half over the first half.

Your computing and consumer should be up second half over first half.

Automotive actually tends to be not a lot different half on half.

They should be up steadily, but nothing significant from half on half rate change.

What did I miss.

Industrial tends to be stronger first half, but net-net we would see kind of at or slightly above second half over first half trends this year.

Okay, and just a clarification on the earlier Truesense inquiries.

What end market does that fit into?

It looks like it's an industrial base, is this is that right?

Or does it mix out into a number of end markets?

For the most part it is industrial.

Thanks, guys.

[Asi Shrel] with Bank of America.

Your line is now open.

Thanks for taking my question.

With regards to the [Wall Tree] retirement program in SSG you had originally guided for about $9 million to $11 million in quarterly OpEx reduction and additional savings in gross margins.

How much of that has kind of worked its way through the model and how much more remains?

Also, shouldn't this be causing a downward bias through OpEx in the back of the year?

We have, from the headcount point of view, at the end of the first quarter about 60% to 70% done.

We are still going to see some further headcount reductions in the second quarter and a few more in the third quarter as it relates to the voluntary program.

And we have seen some of th

ose already going through the P&L both in Q4 and Q1 and we'll see some more in Q2.

And we have mentioned that in the past the downward pressure in OpEx is expected to be offset by increased stock-based comp and variable comp in general and keep the numbers roughly on a flattish basis for the rest of the year.

Got it.

And also with respect to -- I mean if you assume like a normal seasonal September quarter you're going to begin to approach close to the $800 million revenue level.

The last time you discussed gross margin at analysts day you were thinking you could exceed 40%.

What do you think the new -- like given the ongoing change in SSG and stuff like that, what do you think the new good gross margin number would be at, at that $800 million revenue level?

I think in the medium term we can still achieve that at that level, but there is a significant amount of mix impact that will play into getting to that level.

So, we are still expecting to fall to around 50% on the incremental revenue.

We are going to see some more savings coming from the SSG group that will contribute to getting us closer.

But the rest is a function of getting the mix to achieve that and we are continuously focusing on the areas that have above corporate average gross margin.

Thank you.

Vijay Rakesh with Sterne, Agee.

Hi, guys.

Very fine work on the gross margin line.

I just want to go back on the system solution, the SANYO group.

What are the consumer products that you're seeing driving the growth in the second half that you have visibility there to drive that year-on-year growth in that segment?

Well, significant piece is going to be the handset content that they got, the White Good content that they've got, and then just a variety of normal seasonality from there on the rest of the White Goods, the televisions and entertainment piece.

Got it.

And obviously when you look at your gross margins they are improving.

Do you think you can keep your OpEx flat and to kind of next year also, and if your margins improve, do you see your op margins get back to kind of the 15% to 20% level if you look at next year?

Yes.

If you look at this year, the change year-over-year last year there was extremely low variable pay based on the performance of the Company.

This year that's been restored.

There's no reason to believe that that's going to go up substantially next year because you're basically fully restored there.

That was the biggest change.

And then of course we've added in the Truesense here in the second quarter which makes the growth look a little larger in the second quarter but, nonetheless, there's really from Q2 of this year through all of next year there really is no reason for it to be appreciably different.

Thanks.

Ian Ing with MKM Partners.

Yes.

First question, just trying to understand the industrial performance in the March quarter up 8%.

That seems better than the analog peers and including distributor [Avnets] and also your commentary is more positive.

What do you think is going on there?

It's all specific design wins in that segment.

We just had some really good products out there that are finally starting to go to production.

Technology driven, we mentioned some of them in the specific script, but the medical team has basically been doing some great work and those have now all gotten their FDA releases and we're seeing our customers ramp them.

Great.

And my followup, trying to get a sense of the opportunities left on gross margin improvement in the second half.

It looks like with the top line for June you're looking at utilizations maybe in the mid-80s, so pretty close to a sweet spot.

Just see if there's any more operational efficiencies?

There are.

We mentioned the closure of the factory in Japan that would add to the normal utilization piece, but then the other thing we think we have in the second half is continued improvement in mix.

So, the operational piece plus the mix piece.

Even with less industrial and flat automotive?

Even less industrial and automatic because remember our handset business is also high margin for us and that will overtake, if you will, any loss that you have in industrial.

And automotive should still grow in the second half.

So, that's not a -- in other words it doesn't cease growing.

Got it.

Thank you very much.

[Christopher Lowland] with FBR Capital Markets.

Hey, guys.

Thanks for letting me ask a question.

So, if we could talk about inventories for a second here.

I think you guys had $35 million in bridge inventories.

Remind us when that bridge works out and then also on the this [DIS-D] side you mentioned more than nine weeks there.

What are you guys comfortable with there?

When will you stop building internal inventories?

Thanks.

So, on the bridge inventory, let me address that one first.

We are burning at a rate of about $2 million to $3 million a quarter, but in the couple of most recent quarters we've also had to build more for the closure of [KSF] so that kind of kept flat, and after we complete the closure we should see a gradual decrease of our $2 million a quarter for that inventory, $2 million to $3 million a quarter.

And on the distribution side, as I mentioned earlier, we like to see about 11 weeks out there.

We're at nine, so we do think there's some more room for growth.

And then internally I think you'll see as we burn off this bridge much more of a seasonal pattern where we will take inventory down in the second half of the year as the peak season is over and then bring it up in the second half like we're doing here this year.

Okay, great.

Thanks.

And back to the OpEx again.

It seems like the contribution from Truesense was probably a little bit less than I had expected.

It seems a lot more organic and also somewhat more permanent than I'd expected here.

Maybe you guys could talk a little bit more detail about why this is so permanent and why it was so needed and exactly where this is going that's incremental?

Thanks.

For the most part, the biggest portion of the Truesense OpEx is in R&D and these are good technical people that we want to retain to foster the growth in the image sensing area.

We will look at the normal synergy update on the SG&A.

And on the sales and marketing it's a set of different customers, so we probably will be less aggressive there just to make sure we have good coverage on the customer base.

Net-net reduction will come more from the regular G&A function.

Great.

Thanks, guys.

Kevin Cassidy with Stifel Nicholas.

This is Dean Grumlose calling in for Kevin.

Thank you very much for taking my question.

The automotive market has been strong for on and the industry for multiple quarters now.

Do you have any concern of inventory building up in this market or do you feel that inventory maybe managed differently in this segment?

Yes, I don't have any concerns.

We are very close to those customers and we have basically various [jit] and vendor managed inventory programs for them.

So, we see the draw rate, et cetera, and they're actually not excessive.

They're actually a little leaner than where they would like to be.

And so I've got no concerns whatsoever on inventory there.

There were concerns in the first part of the year for North America inventory.

The numbers have now shown that they have declined back to normal levels.

To the extent you can, could you shed some color on how long you think the automotive segment will continue to be strong and what your expectations are for this segment?

We think it's got a nice, steady growth in global units and low single digits for some time.

Absent major economic events on a global basis, there's no reason to believe that will change.

The key for us of course is the content growth of electronics being much faster than that.

Then specifically for us if we continue to expand share into Japan and China where we've had relatively low percentages of our business in the past.

From our perspective, we think automotive is going to be a good market for us for many years to come.

(Operator Instructions)

Craig Hettenbach with Morgan Stanley.

Not to split hairs on the Truesense contribution, but if you look at the partial contribution it would imply a quarterly revenue of $16 million to $17 million versus last year it looked like maybe $20 million.

So is there anything seasonal in their business or can you talk about how it kind of trends through the year?

It looks like the shipments in April were quite strong, so it looks like there was a higher amount in that month so we don't see any -- we don't have the experience about seasonality and from our due diligence.

We didn't see anything significant, but we don't see any reason to believe that the business is declining.

Okay.

Do you have a rough kind of long-term growth projection for the business relative to semis?

It should grow at the same pace as the industrial segment, whatever that is.

Okay.

And then as a followup.

The ASP really benign pricing environment last quarter, this quarter.

Keith can you maybe talk to kind of the influence of the cycle, we have expedites, just what your expectations if you think you can hold this kind of benign pricing through the year?

I think we're hopeful that it will continue and it's based largely on the entire industry being at relatively good utilization rates and seeing demand improve.

So, I think that combination plus any restocking that takes place in the distribution should keep the lid on prices this year.

Got it.

Thank you.

And we have no further questions at this time.

I'll turn the call back to our presenters for closing remarks.

Thank you, everyone, for joining the call today.

Please feel free to follow us with any questions.

Goodbye.

And this concludes today's conference call.

You may now disconnect.