安森美 (ON) 2014 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the ON Semiconductor fourth quarter earnings conference call.

(Operator Instructions)

Thank you.

Parag Agarwal, Senior Director of Investor Relations, you may begin your conference.

Thank you, Chris.

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

I'm joined today by Keith Jackson, our President and CEO, and Bernard Gutman, 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 fourth quarter of 2014.

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

Additional information related to our end markets, business segments, geographies, channel and share count is also posted on our website.

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

Reconciliation 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 predictions 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 risk and uncertainties that could cause actual events or results to differ materially.

Important factors which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in Forms 10-Ks, Form 10-Qs, and other filings with the Securities and Exchange Commission.

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

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

I take this opportunity to remind you of our 2015 Analyst Day, which we plan to host on February 26 in Scottsdale, Arizona.

If you would like to register for the event, please go to our Investor Relations website, at www.onsemi.com.

Now let me turn it over to Bernard Gutman, who will provide an overview of fourth quarter 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.

During the fourth quarter, we noticed a significant improvement in our order trends, following a slowdown towards the end of the third quarter.

The strength in orders has continued so far in the current quarter and, based on our design win pipeline and a generally favorable global macroeconomic outlook, we remain optimistic regarding our near to midterm outlook.

Integration of Truesense is effectively complete, and integration of Aptina Imaging is progressing well.

For the fourth quarter, Aptina was nicely accretive to our non-GAAP net income, which excludes the impact of such items as costs related to restructuring, fair market value, step-up of inventory, amortization of intangibles, and other special items.

We remain on track to deliver projected financial results provided at the time of announcement of our acquisition of Aptina.

Keith will provide additional color on the progress of Aptina and Truesense.

Now let me provide you with an update of our fourth quarter 2014 results.

ON Semiconductor today announced that total revenue for the fourth quarter of 2014 was approximately $864 million, an increase of approximately 3.7% compared to the third quarter of 2014.

Included in our fourth quarter results is the contribution for the full quarter from our acquisition of Aptina Imaging, which closed on August 15, 2014.

GAAP net income for the fourth quarter was $0.01 per diluted share.

Excluding the impact of amortization of intangibles and restructuring, step-up valuation of inventory, and other special items, non-GAAP net income for the quarter was $0.17 per diluted share.

GAAP gross margin for the fourth quarter was 32.1%, as compared to 33.7% in the third quarter of 2014.

Non-GAAP gross margin for the fourth quarter was 34.1%, down approximately 110 basis points quarter-over-quarter.

Non-GAAP gross margin in the fourth quarter declined quarter-over-quarter, mainly due to lower factory utilization, write-down of inventory related to a smartphone customer, and other one-time reserves.

The write-down of smart phone inventory was higher than our expectations.

Average selling prices for the fourth quarter decreased by approximately 2%, as compared to the third quarter.

GAAP operating margin for the fourth quarter of 2014 was approximately 2.3%, as compared to approximately 6.8% in the third quarter.

Our non-GAAP operating margin for the fourth quarter was 10.3%, down approximately 230 basis points as compared to the third quarter of 2014.

Lower gross margins was the key driver for sequential decline in non-GAAP operating margin for the fourth quarter.

GAAP operating expenses for the fourth quarter were approximately $257.6 million, as compared to approximately $224.1 million for the third quarter of 2014.

Non-GAAP operating expenses for the fourth quarter were approximately $205.7 million, up approximately $16.7 million as compared to the third quarter of 2014.

The sequential increase in non-GAAP operating expenses was driven primarily by inclusion of Aptina for the full quarter in our results.

We exited the fourth quarter of 2014 with cash and cash equivalents and short-term investments of approximately $517.8 million, an increase of approximately $23 million from the third quarter of 2014.

Operating cash flow for the fourth quarter was approximately $162.5 million, as compared to approximately $92 million in the third quarter.

We spent approximately $41.3 million of cash for the purchase of capital equipment and approximately $20.4 million for the acquisition of a noncontrolling interest in our Leshan joint venture.

During the fourth quarter, we used approximately $39.5 million for the repayment of long-term debt and capital leases, and issued debt of approximately $38.9 million.

We used approximately $68.1 million to repurchase approximately 8 million shares of our common stock at an average price of $8.32.

This is the highest amount of capital we have deployed for share repurchase in a quarter since we instituted our first buyback program in the third quarter of 2012.

At the end of the fourth quarter, approximately $976 million remained of the authorized amount under the current stock purchase program which was announced on December 1, 2014.

For the full year 2014, we generated free cash flow of approximately $277 million, despite using approximately $51 million of cash for restructuring.

We remain on track to generate annual free cash flow of $300 million to $400 million in the near- to mid-term.

We define free cash flow as cash flow from operations, less capital expenditures.

We expect that our capital expenditures should remain in the current range of 6% to 7% of revenue in the near- to mid-term.

At the end of the fourth quarter, ON Semiconductor days of inventory on hand were 116 days, down approximately 7 days from the prior quarter.

Excluding the impact of fair market value step-up of Aptina's inventory, days of inventory at the end of the fourth quarter were also 116 days, down approximately 5 days from the prior quarter.

In the fourth quarter of 2014, distribution inventory was up approximately $6 million quarter-over-quarter, and distribution resales declined by approximately 6% quarter-over-quarter.

In terms of days, distributor inventory was up by a week quarter-over-quarter to approximately 10 weeks.

For the fourth quarter of 2014, our lead times were down approximately two weeks as compared to the third quarter.

In the fourth quarter, our global factory utilization was in the low 80% range, as compared to the high 80% range for the third quarter.

Now let me provide you an update on performance by our business units, starting with Image Sensor Group, or ISG.

Revenue for our Image Sensor Group was approximately $166 million, as compared to approximately $104 million in the third quarter.

The increase of approximately $62 million was driven primarily by the inclusion of Aptina for the full quarter.

Revenue from our Standard Product Groups for the fourth quarter of 2014 was approximately $297 million, down approximately 7% quarter-over-quarter.

Revenue for our Applications Product Group was approximately $260 million, down approximately 2% quarter-over-quarter.

Revenue for the fourth quarter of 2014 for the System Solutions Group was approximately $141 million, down approximately 4% quarter-over-quarter.

Revenue for SSG was negatively impacted by the weakness of the Japanese yen.

However, as we have a natural hedge in place with a sizable amount of cost base in Japanese yen, the net impact on earnings was approximately neutral.

SSG was accretive to our non-GAAP EPS with contribution of approximately $0.01.

Non-GAAP EPS and net income exclude the impact of such items as costs related to restructuring, amortization of intangibles, and other items.

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

Keith?

Thanks, Bernard.

Let me start with laying out our priorities for 2015, and then I will reflect on our accomplishments for 2014.

Lastly, I will address the overall business environment and trends in various end markets.

For 2015, there are three main objectives for us.

First, deliver improved financial performance in terms of margins and free cash flow.

Second, complete integration of Aptina and deliver the targeted financial results from the acquisition.

And third, continue to build on our momentum in our strategic growth segments of automotive, wireless devices, and select areas of industrial.

Now let me expand on each of these objectives, starting from improving margins and cash flow.

The key drivers for margin expansion and improving cash flow will be mix improvement, acquisition integration, and significant reduction in restructuring activities.

During 2015, we should continue to drive growth in our higher margin end markets, which include automotive, industrial, and smartphones.

At the same time, integration of Aptina and improved operating performance from SSG should contribute to improved margins and higher cash flows.

I'm excited about our prospects for 2015.

We should have tail winds from SSG, Truesense, and Aptina which, coupled with improved performance of our core business, should enable us to deliver strong cash flow and EPS expansion.

I'm confident that we should be able to achieve our free cash flow target of $300 million to $400 million in 2015.

Furthermore, we do expect leverage to EPS from our four-year, $1 billion share repurchase program announced in December of last year.

We do believe that our strong free cash flow generation and a consistent capital return policy in the form of stock repurchase should help drive significant value for our shareholders.

Moving on.

At the time we announced the acquisition of Aptina, we had indicated to investment community that we intended to achieve EPS accretion of $0.08 from Aptina in 2015.

Based on our experience with the business in the last few months, I'm very confident of achieving the profitability targets for Aptina.

In fact, I'm pleased to report the financial performance of Aptina so far has significantly exceeded our expectations.

Aptina should enable us to drive growth in the industrial and automotive market in a significant manner.

The strategic value of Aptina was further reinforced by extremely positive reaction from many of our customers, especially in the automotive and industrial end markets.

Lastly, let me discuss our continuing thrust in the automotive, industrial and wireless end markets.

Our strategy is to grow our presence in these markets, as we believe these markets will grow faster than the overall semiconductor market in the next five years.

Furthermore, a mix shift toward these markets should enable us to improve our margins.

Our strategy has been paying dividends, as apparent from accretion in our revenue in these end markets.

We have existing relationships with most of the major players in these markets and we intend to leverage our broadening product portfolio to grow our presence with our customer base.

In 2015, we intend to grow our revenue in the automotive, industrial and wireless end markets in the high single digit percentage range.

Let me now briefly address our achievements in the past year.

2014 was a pivotal year for ON Semiconductor.

During the year, we stabilized System Solutions Group and made two accretive acquisitions, which have positioned us as the leader in image sensors for industrial and automotive applications.

We instituted a capital return policy under which we plan to repurchase $1 billion of our stock during the next four years.

I do believe that given the outlook for our business and current valuation level of our stock, repurchase of our stock is an extremely compelling opportunity for deployment of our capital.

We showed strong execution on our strategy to grow our automotive, industrial and smartphone revenue.

On organic basis, our automotive revenue grew in double-digit percentage range, and industrial and wireless revenue grew in the high single digit percentage range.

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

The automotive end market represented approximately 32% of our revenue in the fourth quarter, and was up approximately 12% quarter-over-quarter.

Contribution from Aptina for the full quarter was the key driver of sequential growth.

Fourth quarter automotive revenue was stronger than anticipated in all regions, except for Japan.

Demand was especially strong in the US and China, and we had record revenue in these regions.

In addition to unit growth, share gains and increasing content are also driving growth in our automotive revenue.

We believe that the decline in oil prices has been the key catalyst for automotive demand.

Aptina posted solid results for automotive in the fourth quarter.

Attach rates for rear view cameras continued to increase, driven primarily by automotive customers in North America, Korea and Japan.

We saw continued strength in current generation advanced driver assistance systems, ADAS solutions, and ramp of our newest 1 megapixel ADAS solution with automotive customers in Europe and Japan.

There was also strong traction with our third inch 720p sensor with Chinese OEMs and continued adoption of our VGA quarter-inch sensor in the low end market vehicles.

During the fourth quarter, our automotive segment registered a few impressive design wins.

We won sockets for a key pedal position sensor interface win at a major European Tier 1 customer; an integrated power module, or IPM, at a key Japanese Tier 1 customer; and a scalable door module solution at key Tier 1 customer in North America.

In 2015, we look forward to ramp of many of our design wins, especially for LED front and rear lighting solutions, motor control ICs and modules, ultrasonic park assist solutions, image sensors, and custom silicon.

Ramp of discrete IGBTs and complete ignitor solutions from SSG should also drive revenue growth in 2015.

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

The communications end market, which includes both networking and wireless, represented approximately 18% of our revenue in the fourth quarter and was down approximately 4% quarter-over-quarter.

Our revenue for the communications market was impacted by inventory correction in a few segments of the market.

Our wireless charging solution for smartphones received a significant amount of attention at the recent CES in January.

We believe that we have the right products, based on standards and technologies, that will be broadly adopted by the leading market participants and consumers.

Our solutions offer better power efficiency, smaller footprint, and convenience of charging multiple devices on a single charging platform.

Our wireless charging solution is expected to be the first to be embedded in major mobile devices, whereas most of the existing solutions are incorporated in after market applications.

During the quarter, we broadly sampled our wireless charging products to lead customers.

We expect to see revenue contribution from our wireless charging solutions in the second half of the year, followed by a steep ramp in 2016 and beyond.

In addition to success in wireless charging, our momentum in the smartphone market remains strong, driven by increasing content and share gains.

We are favorably exposed to the major players of the market and we are increasing our presence with the key share gainers.

Our content in smartphones manufactured by several China-based smartphone OEMs is more than $3.00 per device.

We continue to gain share in the smartphone market with our battery protection, battery chargers, auto focus, optical image stabilizers, ESD protection, filtering devices and power management ICs.

Revenue for the first quarter for our communications segment is expected to be down quarter-over-quarter, due to seasonality.

The consumer end market represented approximately 15% of our revenue in the first quarter, and was down approximately 1% quarter-over-quarter.

Demand from action sports camera customers was stronger than expected during the quarter for our image sensor solutions.

We continue to see increasing adoption of 13-megapixel image sensor solutions for mainstream consumer mobile designs.

There's also a strong push for the fast focus and OIS solutions at 13-megapixel and higher.

Design win activity during the quarter, including adoption of our 3-amp intelligent power module and 20-amp IPM for two key white goods manufacturers.

These wins are expected to ramp in the first half of 2015.

We also secured design wins for our image sensors for home monitoring applications and B2B conferencing.

Revenue for the first quarter for our consumer segment is expected to be down quarter-over-quarter, due to normal seasonality.

The industrial end market, which includes military, aerospace and medical, represented approximately 24% of our revenue in fourth quarter and was up approximately 11% quarter-over-quarter.

The sequential growth was driven primarily by contribution for the full quarter from Aptina.

We are seeing improving business trends from our customers in the commercial and residential building segments.

We saw good growth during the quarter for our new medical imaging ASICs for CT imaging at a key customer and for circuit breaking ASICs for a major residential GFCI/AFCI customer.

We continue to see strong growth for our ASICs for mobile point-of-sale credit card solutions, especially in Asia.

Aptina continued its momentum in the industrial market with wins for new image sensor products at the top tier bar code scanning customers.

These wins were driven by strong traction from our third inch 1 megapixel global shutter offering.

We secured additional wins for our third inch 13-megapixel imager for commercial hand held scanners.

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

The computing end market represented approximately 11% of our revenue in the fourth quarter and was down approximately 10% compared to the third quarter.

In addition to normal seasonal declines, Haswell notebook Vcore share gains were offset by reduced power stage content from Ivy Bridge generation platforms and lower ASPs.

Furthermore, we are being selective in the computing market and we are focusing on opportunities with better margin profiles.

During the quarter, we broadly sampled our IMVP8 Vcore solutions for next generation Intel Skylake platforms.

We expect strong Vcore share gains on Skylake notebook platforms to be amplified by significantly increased power stage content.

Revenue for the first quarter for our computing segment is expected to be down quarter-over-quarter, due to seasonality.

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

Bernard?

Thank you, Keith.

Before I get into the guidance for the first quarter of 2015, let me inform you that we have revised results for prior periods to record a deferred tax asset in a foreign subsidiary.

The prior periods also include revised amounts from a change in application of an accounting policy related to manufacturing variances and other adjustments.

We have determined that all amounts were immaterial to each of the reporting periods.

Now for the first quarter of 2015 outlook.

Based upon product booking trends, backlog levels, and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $840 million to $880 million in the first quarter of 2015.

Backlog levels for the first quarter of 2015 represents approximately 80% to 85% of our anticipated first quarter 2015 revenues.

In our first quarter revenue -- our first quarter revenue is being negatively impacted by approximately $6 million, due to the strength of the US dollar relative to European and Asian currencies.

However, the impact to our bottom line from foreign exchange volatility is neutral, as we have a natural hedge in place due to significant cost base in Europe and Asia.

We expect that average selling price in the first quarter of 2015 will be down by approximately 2% as compared to the fourth quarter of 2014.

We expect inventory at distributors to fall quarter-over-quarter on a dollar basis.

We expect total capital expenditures of approximately $65 million to $75 million in the first quarter of 2015.

For the first quarter of 2015, we expect GAAP and non-GAAP gross margin of approximately 33.4% to 35.4%.

We expect total GAAP operating expenses of approximately $231 million to $244 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to be approximately $31 million to $34 million.

We expect total non-GAAP operating expenses of approximately $200 million to $210 million.

We anticipate GAAP net interest expense and other expenses will be approximately $9 million to $11 million for the first quarter of 2015, which include 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 $7 million to $10 million, and cash taxes are expected to be approximately $5 million to $8 million.

We also expect share based compensation to be approximately $12 million to $14 million in the first quarter of 2015, of which approximately $2 million is expected to be in cost of goods sold and the remaining amount is expected to be in operating expenses.

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

Our diluted share count for the first quarter of 2015 is expected to be approximately 435 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 Forms 10-Q and 10-K.

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

Thank you.

And Chris, please open up the line for questions.

Certainly.

(Operator Instructions)

Ross Seymore, Deutsche Bank.

Hello, guys.

Thanks for letting me ask a question and congratulations on the solid results and guidance.

I guess first of all, Keith, you were nice enough to give some guidance on what you thought would be the growth sectors by end market.

Could you given us the same sort of growth trajectory for 2015 by your product segments?

So our product segments, I'm not going to be able to give you precise numbers, but I will say that we have broad participation by the SPG Group in every segment.

So I expect they have a strong placement in automotive, smartphones and industrial, and should be pretty much in line with those numbers I just mentioned.

Our APG Group is heavily weighted to automotive and industrial.

So again, I think you'll see maybe a favorable trend to the corporate average with that group.

SSG has a good blend in the smartphone and industrial areas.

They might be slightly lower than the corporate average in that growth in those three segments.

And then Aptina, of course, the majority of their business, automotive, industrial, they should see slightly better than corporate average.

Perfect.

And I guess as my follow-up, for Bernard, could you give us an idea of the sort of progression through the year?

I know you're only guiding for one quarter, but the progression through the year as you integrate Aptina and take it whatever sort of expenses out, for both the gross margin and the absolute dollars of OpEx.

Thank you.

Thank you, Ross.

So on the OpEx front, last quarter we talked about remaining fairly flat with our prior guidance, which was $210 million.

We have reduced our guidance for the first quarter to $205 million.

So I expect the first and second quarter to be fairly even.

And then we should see a small increase in cost that will be partially offset with synergies.

So in general, it's a fairly flat to slightly up trend, but still quite flat.

Gross margin, it's also a function, a big function of the revenue progression by quarter.

So that will be more a result of that as we have talked in the past.

It's more a function of the fall-through of the 50% of that incremental revenue.

So it will be a function of the growth by quarter.

Synergies, we should see some of them coming gradually throughout the year, especially with the integration of the CSA operation, and the mix will also be gradual.

So it's more a function of the seasonality of the top line that will cause the fall-through to the bottom line.

Perfect.

Thank you.

John Pitzer, Credit Suisse.

Good afternoon, guys.

Thanks for letting me ask the question and congratulations on the strong results.

Keith, wanted to talk a little about the PC business in particular.

I think in your prepared comments, you talked about that being down along seasonal lines in the calendar first quarter.

There's clearly been a lot of mixed data points on the PC front, Microsoft, the hard disk drive guys.

I'm just kind of curious what gives you the confidence around seasonal.

As you go throughout the year in the PC business, can you talk a little about where you think your potential share gains are going to come from Skylake?

Because clearly, a lot of guys in the market today all claim they're going to be gaining share as Skylake comes out in the back half of the year.

I would love to get your perspective on that.

Okay.

So PC seasonality, we're really looking from a backlog basis and just doing a compare to sequential changes and our normal seasonal patterns.

So right now, I guess the confidence is just based on backlog that's been laid out by our customers and orders that are on the books.

From a progression during the year, I can't speak to the other guys.

What I can tell you is we've done very, very nice with design wins on Skylake; and as we've mentioned before, they have more dollar content in the power rails there.

And so we are expecting very nice gains and we are expecting we'll move from kind of our low to mid 30%s market share in notebooks today, with an opportunity to get to about half the market in the Skylake platform.

So the net of all that is as they ramp in the second half of this year, we're still expecting very substantial gains from current levels.

That's helpful.

And then Keith, maybe you could talk a little about the capital allocation.

Now that you've gotten some of these acquisition and integrations behind you, I'm just kind of curious, how do you think about buyback versus dividend?

And is there a point in time in the maturation of the Company where dividend starts to make a lot of sense, and if so, how do you come to that conclusion?

Certainly.

Return of capital to shareholders can be done in many forms, and a lot of companies do it in several forms simultaneously.

What we're looking at right now is we look at the multiples the Company is getting share price-wise as compared to the marketplace and peers.

And frankly, as long as that under performs those metrics, share buybacks seem to make a lot of sense.

As we get more normally valued, as it were, then certainly the dividend would become a more attractive portion of it, for either part of the capital return or all of it, depending on where that number sets.

Perfect.

Thanks, guys.

Congratulations again.

Vivek Arya, Bank of America.

Thanks for taking my question.

Sounds like you're off to a good start with Aptina.

Could you give us some color how much that is roughly of your Q1 outlook?

And then more importantly, which applications are you seeing the most traction?

And I believe you mentioned rear view camera.

What are the next set of milestones around your integration progress?

A lot of questions there.

From an Aptina traction perspective, the automobile is, current sales are mostly around the rear camera and attach rates there, as more car companies put rear cameras in their cars.

But from a design win traction perspective, the advanced driver assist systems hold a lot of promise for significant growth as we're going forward, and we've seen a lot of strong design wins that are now starting to ramp in the more high end models here this year.

So lots of momentum in automotive, besides just backup cameras.

And that's pretty exciting to us.

Got it.

And then as a follow-up, I believe you mentioned that disti inventory was up by a week, to 10 weeks, yet your lead times were down by two weeks relative to the last quarter.

I'm trying to make sense of both these.

Is this consistent with seasonality?

Should we be reading anything else into it?

So a couple things are consistent with seasonality and some of it are company unique.

The lead time contraction, very bluntly, is mostly due to some substantial capacity we installed in the fourth quarter in our small signal business, which drives a large number of units.

That pulled the lead times in.

And so that's -- the lead time piece of it is pretty much just the additional capacity which came on in a very large module in the fourth quarter.

Distribution tends to slow down year-end.

That's not a new phenomenon.

So the weeks of supply there, or days of supply there, goes up slightly.

10 weeks is still low for us.

We like to be closer to 11 to 12.

And as Bernard, in his comments, mentioned, we expect those numbers on a dollar basis to go down.

And you can see from our revenue guidance, you should be seeing a contraction again in Q1 to our inventories and distribution.

So nothing really abnormal there, more normal seasonal behavior.

Got it.

One last question, if I may.

You mentioned the communications market was impacted by some inventory correction in some segments.

If you could give us some more color, and if you think that inventory correction is over now.

Thank you.

It's predominantly handsets in spots of China and other places, but handsets.

And we think it's largely behind us.

The backlogs for Q1 look much more seasonal and Q4 was more than seasonal.

Okay.

-Thank you.

Christopher Rolland, FBR Capital Markets.

Hello, guys.

I echo my congrats on a great quarter.

Great job.

So if we could talk about auto quickly, great exposure there.

Do you guys think you can hit double-digit organic growth again there this year and how are you looking at long-term organic rates there?

We do think we can hit double-digit organic growth there this year, based on design wins in the wide range of platforms we've been talking about.

Long-term, we think the market itself is kind of more a high -- mid to high single digit growth, from a content perspective.

But we've really done a couple of things there that have changed our dynamics.

One of them is getting a very strong image sensor position.

And then secondly, some of the big wins I just mentioned to you just are reflective of the share gains we've been getting in the marketplace.

Okay.

Great.

And then also on the rate of buyback, should we roughly expect this on a quarterly basis?

And also, why not accelerate your buyback program with a little bit of debt here, particularly given that you think the stock is cheap here?

And then also, what is the multiple in which you think you might switch to a divi?

Should we think industry average, or how should we think about it?

Well, so obviously, we're still learning, in the process.

We do think that with the $1 billion over four years, you can't not do a fairly ratable, at least to start with.

So that's how we are modeling it for right now.

The industry average of our peers is probably a good measure to start looking at whether it makes sense to switch or do some partial.

But obviously, we'll have to discuss that and analyze that in a lot more detail.

And sorry, why not take out a little bit of debt and accelerate the buyback program?

It's always an alternative that can be looked at.

We consider all alternatives always.

At this moment, I think it's prudent.

Leverage is a good thing to still have, and we are pretty happy where we are.

We're not afraid of leverage, but we don't want to go overboard.

Thanks, guys, and congrats again.

Steve Smigie, Raymond James.

Great.

Thanks a lot, and I'll echo the congratulations.

And on that point, actually, the guidance here, I think, is fairly good, considering some weakness we've seen in industrial from some other folks.

And so Keith, I was wondering if you could comment a little bit on do you view your performance here as better than average?

And if so, is that driven by the acquisitions doing better than expected or just you've had design wins and they're paying off now?

Any color there.

It does vary by market.

I will say in industrial, I mentioned a few of the wins we've had in building and construction, which are all -- they're not related to acquisitions.

They're all big wins that have been out there and are finally starting to get a product cycle and a positive side.

In the medical ones, we talked about also new design wins.

So just in general, I'd say we've had some really good design win performance in 2015 that are giving us some momentum, perhaps better than some of the competition, as we go into Q1.

Okay.

Great.

Just curious on the Leshan investment there, what was the reasoning behind that?

Basically over time, we would love to own the entire asset.

It gives us a little more flexibility, without having to satisfy a partner, as we expand that facility.

So it's just another step towards that.

It takes us up from 70% to about 80% of that asset.

Okay.

Great.

Thank you very much.

Kevin Cassidy, Stifel.

Thanks for taking my questions.

The wireless charging, it seems like an exciting new product area.

What would the dollar content change be from the standard charging to the wireless charging?

It's about $1 per handset would be a round number approximation.

Okay.

$1 increase?

Yes.

I would assume.

Okay.

And also on the PC, are you working on wireless charging for PCs also?

Absolutely.

The standard for wireless charging is usable, frankly, by all electronics.

And we're very active out there working with things other than handsets, including PCs, right now.

Okay.

And similar content, dollar content increase?

Similar content.

It's a little different, because there's a little higher power content in the notebook than there is a handset.

So it's probably a little bit higher there.

Okay.

Great.

Thank you.

Tristan Gerra, Baird.

Hello.

Good afternoon.

Could you talk about the expected accretion that you expect for Q1 for both Aptina, now that the inventory step-up is behind, and also for Sanyo?

So basically what we have said is that next year we should deliver about -- or this year, we should deliver about $0.08 for Aptina, which if you fairly ratably deliver, it's around $0.02 per quarter, maybe it's a little bit less, because they usually have a little acceleration towards the end.

SSG we delivered $0.01, approximately $0.01 in Q4.

It is typically seasonally down in that quarter, so it should be probably around that same level.

Okay.

And then is it fair to assume that your desktop content opportunity with Skylake is similar to what you're going to get in notebook, or is it going to be higher?

The only difference -- the difference is, we're not looking for share gains in the desktop.

We will get the power rail content improvement, but we're already about 50% of the desktop market, from a share perspective.

Great.

Thank you.

Craig Ellis, B. Riley.

Thanks for taking the question.

A couple clarifications, just on some of the key businesses.

On the Aptina business, Keith, with it in the portfolio for a couple quarters now and as you've had a chance to really go through all of the product lines, how are you feeling about the current portfolio versus what really fits with ON longer term?

Will there be some mix-out, or do you plan to keep everything that you've got there?

There are areas that are being deemphasized, basically areas that are turning into commodities, the low end of it.

But in general, we will be increasing our investments in the automotive and industrial segments over where they are today.

So you can expect the portfolio to become increasingly automotive and industrial.

And is that really a statement for this year or more calendar 2016?

That's a statement even for this year, although we'll still have some pretty good content in the consumer areas this year, as well.

Okay.

The other end market question is a follow-up to the comments on pricing in PCs and walking away from some aggressive pricing.

One, is that a change in tactics for ON?

And two, given that there's such a significant share gain in the next gen Skylake platform, was that not at play when you were competing for new business?

What was the dynamic there?

There us is a portion of that PC business, so call it the white box market, if you will, that is pretty much spot market performance.

And we're very comfortable playing there and watching our margins as that goes through the seasonality.

Okay.

That makes sense.

Lastly, on the margin comments related to your objectives for this year, any color on the degree to which you can close the gap, gross and operating versus current targets?

So basically closing the gap, we are not going to increase our operating expenses in any meaningful way.

So that should also help with the expansion in revenue, should also help close the gap.

Thanks, guys.

Gabriela Borges, Goldman Sachs.

Great.

Thank you for taking the question and congrats on the solid results.

I wanted to follow up on the commentary on strength in order patterns.

It seems like that picked up around October and it's continued into January and February.

Maybe you could compare and contrast how that compares to what you'd normally see ahead of Chinese New Year.

Are there any geographies that stand out, and maybe then what that implies for 2Q, maybe whether 2Q could be a little stronger than seasonal, as well?

Thank you.

Okay.

So the order patterns we referenced there in the fourth quarter, we saw a larger than normal drop-off at the end of Q3 in order patterns, so that was bigger than seasonality, primarily in handsets.

And then as we went through Q4, it started picking back up and looking much more normal.

As we get into Q1, we don't see any abnormally down sectors at all and some pretty much seasonal behavior across all the markets.

And generally what happens from a Chinese New Year perspective is you have kind of moderate performance pre Chinese New Year, and then you get a lot of turns requests just after Chinese New Year.

We're obviously not to Chinese New Year yet, but I can say that the order patterns so far this quarter have been a little stronger than most first quarters that we've experienced in the past few years.

That's helpful.

Thank you.

And as a follow-up, if I may, on the wireless charging opportunity, I believe you mentioned a steep ramp going into 2016.

To the extent you can comment on the breadth of your engagements, is it mainly Tier 1s versus others, a little bit of both, and then how comfortable you feel about your competitive lead in that market?

Thanks very much.

It's pretty broad.

It's Tier 1s.

It's large Chinese OEMs.

And as we mentioned earlier, it's not just handsets.

It moves into notebook computers and other electronic devices, wearables, et cetera.

So a lot of activity right now.

All of it is in the design win phase.

Any kind of production units, frankly, can't come off until the second half of this year and then we expect very broad adoption in 2016.

So yes, we expect some good growth this year, but I think substantial and material growth in 2016.

Great.

Thanks very much.

Chris Caso, Susquehanna Financial Group.

Yes, thank you.

Just a question regarding clarification for Q1.

And it does look like the guidance is a little better than typical seasonal.

Is there anything in particular that's driving that, or would you say that's fairly even across the segments?

And then as you increase your exposure in industrial and automotive, should we expect that to change the seasonal pattern of your revenue?

It should.

And so the markets that are blowing up Q1 are automotive and industrial.

And I would say we're seeing slightly better than normal seasonality in those two areas and normal seasonality everywhere else.

And then as we -- as auto, industrial increases as a percentage of the mix, any guess at this point what that -- how that may change the seasonality as we go forward?

Obviously, it would flatten it out a bit.

You're still going to have big quarters in Q2 and Q3, but what you'll have maybe is a little flatter performance in Q4 and Q1.

Okay.

And just a final follow-up, with regard to your cash flow and the availability of cash for buyback.

Can you talk about how much of the cash that you have now is on-shore and available for buyback?

And then as you go forward, if you're talking about this $300 million to $400 million in free cash flow, how much of that is on-shore that becomes available for buying back stock?

So we have approximately 50% of our cash, a little bit more than 50% of our cash on-shore.

And the generation is probably skewed a little bit more towards offshore, but we do have mechanism of bringing in that are tax effective.

So it shouldn't be a problem.

Great.

Thank you.

Chris Danely, Citigroup.

Good afternoon, guys.

This is Sean Buckley calling in for Chris.

Nice job on the quarterly execution.

I just want to ask more of a broad question on the overall environment.

Where do you guys see yourselves now versus maybe a quarter ago?

And are we back to where we were a year ago where it's kind of a normal seasonal type environment?

The end markets, like I mentioned earlier, are looking much more seasonal than they were at the end of Q3 and beginning of Q4.

We're seeing little better perhaps than seasonal in automotive and industrial, but pretty much everything else is going to look very seasonal.

Okay.

And just as a follow-up, I wanted to ask about your expectations on the SSG unit this year.

Do you think you can get it to grow again this year, or do you see it kind of flat-lining with the rate where it was last year?

I would see some growth this year, without question.

We've got some great design wins in some markets that should see some traction.

Not as much growth as the rest of the corporation, but return to growth in 2015.

Okay.

Thanks.

Vijay Rakesh, Sterne Agee.

Looking at the gross margin, I know you said 50% drop-through.

How should we look at gross margin as we go through the year, the overall margins?

Again, as I mentioned before, it is a function of how the revenue grows and the 50% fall-through added with the mix, the gradual mix, and some additional synergies.

But it's, to a big extent, a function of the top line growth.

And that obviously depends on how it progresses throughout the year.

And I don't have a guidance for Q2 or Q3, Q4.

We won't give guidance quarterly, but our normal patterns would be for good growth in Q2 and Q3 and then kind of flattish in Q4 and Q1.

Got it.

And long-term, are you still expecting kind of the 40% -- what is the long-term gross margin target there?

And a second part there, on the automotive side, I know you mentioned rear view cameras coming through.

Where are you seeing more traction?

Is it US, Japan, Europe?

If we can get some more color there.

Thanks.

So on the gross margin target, we'll be updating everybody in more detail at the Analyst Day in two weeks.

And on the automotive side, the earliest adopters, if you will, on the adaptive driver assistance systems are coming from Europe and Japan, and then the US is a follower, and China after that.

Got it.

Thanks.

Mike McConnell, Pacific Crest Securities.

Thanks.

Hello, guys.

Just two quick ones from me again on wireless charging.

Has there been any impact from Samsung Mobile's decision to shift to Xanos this year on the business?

And could you remind us, looking at your charging platforms, which standards you are linked to of the -- well, I guess now two, given the merger?

So on the Samsung thing, I guess those are chip set decisions they make and they have to decide whether they're going to have wireless charging or not.

And so we really couldn't say anything customer specific around that one.

Clearly, there's was a well-known chip set platform that wasn't adopted.

But again, we don't know what that is going to do to wireless charging.

So I just can't answer that question whatsoever.

The second part of your question, I'm sorry, Mike.

Was just on the standards.

If you could just remind us what standards your platforms are utilizing on the wireless charging.

I know there's been a merger, so I think there's two remaining, but if you could just remind us which standards you're --

It's the A4WP standard, so magnetic resonance.

Betsy Van Hees, Wedbush Securities.

Thanks.

Good afternoon, and congratulations on the strong quarter and for the good guidance.

You mentioned in your prepared remarks, Keith, that you saw strong demand from the sports camera, which was one of the big drivers for Aptina.

Was there anything else that possibly surprised you on the Aptina business?

That's my first question.

Really positive surprises there have been mostly the momentum they've got with new ADAS designs in automotive.

We were surprised at how far along some of those were and how quickly they're rolling out.

Great.

Thank you very much.

And then wireless charging, you talked about the applications end markets, smartphones, wearables, PCs, and you talked about 2016 really being the meaningful revenue growth.

I was wondering if you could rank for us how you see those end markets, what's going to be the most meaningful for you?

I believe the handsets will ramp first and then be followed by PCs, from a dollar content, and then wearables.

The wearables may actually ramp with more units, but they're going to be lower power solutions with lower ASPs.

Okay.

And then my last question on wireless charging is I believe with the design, with the product that you guys have today, you don't have any near term competition.

Is that correct?

There's no one else out there that's competing with you?

And obviously, how long do you think your competitive advantage will be?

I'm sure there are several competitors working on things.

We haven't seen other things sampled yet with this standard.

But we're not relying on us being the only guy for a long time.

All right.

Thanks so much for taking my questions.

And once again, congratulations on the great results and guidance.

Thanks.

Ian Ing, MKM Partners.

Hello, guys.

It's actually Chris calling in for Ian Ing.

In prior quarters, you guys had a string of ASP declines of 1% a quarter or less.

You guys are now guiding down 2%.

Is this kind of a new normal, or does it reflect annual price declines in standard products?

Normally our Q1 is larger than normal, because we get all of the annual contracts that get repriced in the first quarter of the year by our large industrial and automotive customers.

So it typically is one of the larger ones.

But the other contributing factors, as you look at pricing and how we report those, we've got to look at currency changes, et cetera this year.

Got you.

Thank you.

And on your outlook for PC units this year, are you guys still seeing stabilization and flattish units, just given some of the weakness we've seen from some of the PC players out there?

We think for the year it will be roughly flattish.

Obviously, some slightly different performance quarter to quarter; but for the year, we're looking at something that's very flat.

Got it.

Thank you.

Craig Hettenbach, Morgan Stanley.

Yes, thank you.

Had a question on SSG.

Can you provide just kind of a rough breakout in terms of the exposure today to Japan and outside Japan, and then how you see that maybe shifting over the next year or two?

So it has been coming down.

It is about now the low 30%s, about 30%.

We expect that as we focus on outside of Japan markets, it will continue drifting down on a percent basis.

I don't know if we can give you an exact projection, but certainly based on the design win profiles, that should move somewhat less than 30% by the end of the year.

Got it.

Thanks.

And then a follow-up on the gross margin.

I understand the core business and revenue drop-through.

On the Aptina piece, you have some mix as you change that business a bit and then as well as maybe some manufacturing savings.

Can you just talk about Aptina specifically, how you expect gross margins to trend?

Obviously, we're starting from when we acquired them, from a point where they are lower than the corporate average and will be gradually moving it up.

I expect some of the benefits from the synergy of CFA to start showing up in the first half, and the rest will be more gradual towards the end of the year.

Thanks.

Ladies and gentlemen, this concludes the question-and-answer session.

I'll now turn the call back over to Mr. Agarwal for any closing remarks.

Thank you, Chris.

Thanks for joining the call today.

Please feel free to contact us with any follow-up questions.

Good-bye.

This concludes today's conference call.

You may now disconnect.