安森美 (ON) 2015 Q2 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by and welcome to the ON Semiconductor second-quarter 2015 earnings conference call.

  • (Operator Instructions)

  • Thank you.

  • I'll now turn the call over to Parag Agarwal, Vice President, Investor Relations and Corporate Development.

  • Please go ahead.

  • - VP of IR and Corporate Development

  • Thank you, Lori.

  • Good morning and thank you for joining ON Semiconductor Corporation's second quarter 2015 quarterly results conference call.

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

  • This call is being webcast on the Investors section of our website, at www.onsemi.com.

  • A replay will be available on our website approximately one hour following this live broadcast and will continue to be available for approximately 30 days following this conference call, along with our earnings release for the second quarter of 2015.

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

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

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

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

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

  • The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should, or similar expressions, are intended to identify forward-looking statements.

  • We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially.

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

  • Additional factors are described in our earnings release for the second quarter of 2015.

  • 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.

  • During the third quarter, we will be attending the Citi Technology Conference in New York City on September 10 and Deutsche Bank Technology Conference in Las Vegas on September 17.

  • Now let me turn it over to Bernard Gutmann, who will provide an overview of the second quarter 2015 results.

  • Bernard?

  • - CFO

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

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

  • Although the second quarter started with strong booking trends, we noticed a deceleration in orders towards the end of the second quarter.

  • We believe that global macroeconomic uncertainties were the primary drivers of slowdown in the order trends, as customers exercised increased caution related to their inventory levels.

  • Despite an overhang of current macroeconomic uncertainties, the fundamentals of our business remain strong and we continue to make progress towards achieving our financial target model.

  • Despite lower than expected revenue, we were able to deliver strong earnings performance, driven largely by strong execution and sharp focus on managing costs.

  • Now let me provide you an update of our second quarter 2015 results.

  • ON Semiconductor today announced that total revenue for the second quarter of 2015 was approximately $880.5 million, an increase of approximately 1% as compared to the first quarter of 2015.

  • GAAP net income for the second quarter was $0.12 per diluted share.

  • Excluding the impact of amortization of intangibles and restructuring and other special items, non-GAAP net income for the second quarter was $0.22 per diluted share.

  • GAAP and non-GAAP gross margins for the second quarter were 34.6%, as compared to 34.5% for the first quarter of 2015.

  • The 10 basis points of sequential improvement was largely driven by slightly higher revenue.

  • Lower factory utilizations negatively impacted margins.

  • We lowered the utilization of our factories in the second quarter to reduce inventory levels in reaction to increasing level of macroeconomic uncertainty.

  • Average selling prices for the second quarter decreased by a little less than 1.5% as compared to the first quarter.

  • However, excluding the impact of currency, average selling prices declined by approximately 0.5%.

  • GAAP operating margin for the second quarter of 2015 was approximately 7.7%, as compared to approximately 7.9% in the first quarter.

  • Our non-GAAP operating margin for the second quarter was 12.3%, up approximately 80 basis points as compared to the first quarter of 2015.

  • Lower operating expenses and slightly higher gross margin were the key drivers for sequential increase in the non-GAAP operating margin for the second quarter.

  • GAAP operating expenses for the second quarter were approximately $237 million, as compared to approximately $232 million for the first quarter of 2015.

  • Non-GAAP operating expenses for the second quarter were approximately $196 million, down approximately $4.6 million as compared to the first quarter of 2015.

  • We exited the second quarter of 2015 with cash, cash equivalents and short-term investments of approximately $577.9 million, an increase of approximately $148.5 million from the first quarter of 2015.

  • Operating cash flow for the second quarter was approximately $102 million, as compared to approximately $84 million in the first quarter.

  • We spent approximately $75.5 million of cash for the purchase of capital equipment.

  • A meaningful part of the CapEx was deployed for expanding our back-end capacity to support increasing demand in our automotive business.

  • During the second quarter, we used approximately $427.5 million for the repayment of long-term debt and capital leases, $56.9 million for our hedge and warrant transaction on a net basis, and issued debt of approximately $749.4 million.

  • We used approximately $131 million to repurchase approximately 10.4 million shares of our common stock at an average price of $12.59.

  • At the end of the second quarter, approximately $748 million remained of the total authorized amount of $1 billion under the current stock repurchase program, which was announced on December 1, 2014.

  • At the current pace, we are tracking significantly ahead of the ratable repurchases io our stock repurchase program.

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

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

  • We are cognizant of the recent moderation in macroeconomic conditions; however, at this time, we see no evidence to suggest any meaningful deterioration in global macroeconomic conditions.

  • At the end of the second quarter of 2015, ON Semiconductor days of inventory on hand were 118 days, down approximately one day from the prior quarter.

  • As noted earlier, we reduced utilization in the second quarter in face of a slowing demand environment.

  • In the second quarter of 2015, distribution inventory decreased by approximately $15 million quarter-over-quarter and distributor resales increased by approximately 1% quarter-over-quarter.

  • In terms of days, distributor inventory was down moderately quarter-over-quarter, at slightly less than 10 weeks.

  • For the second quarter of 2015, our lead times were approximately flat as compared to the first quarter.

  • Our global factory utilization for the second quarter was in the high 70% range, as compared to the mid-80% range in the first quarter.

  • As I had indicated earlier, we lowered factory utilization in the second quarter in response to macroeconomic uncertainties.

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

  • Revenue for our Image Sensor Group was approximately $173 million, as compared to approximately $171 million for the first quarter.

  • Aptina was nicely accretive to our non-GAAP EPS and we remain on track to generate $0.08 of non-GAAP EPS accretion from Aptina in the current year.

  • Revenue for our Standard Products Group for the second quarter of 2015 was approximately $308 million, up approximately 2% quarter-over-quarter.

  • Revenue for our application products group was approximately $264 million, approximately flat as compared to the first quarter.

  • Revenue for the second quarter of 2015 for the System Solutions Group was approximately $136 million, up approximately 2% quarter-over-quarter.

  • SSG has now been accretive to our non-GAAP EPS for four consecutive quarters.

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

  • Keith?

  • - President & CEO

  • Thanks, Bernard.

  • Let me start with comments on the business trends in the second quarter.

  • The quarter started with strong bookings and bookings continued to accelerate through the first half of the quarter.

  • However, towards the end of the quarter, we noted a significant slowdown in bookings.

  • From a revenue perspective, we saw pronounced weakness in Europe and Japan.

  • There were certain signs of macroeconomic softness in China, as well; but our strong gains in the China smartphone and industrial markets helped us offset much of the weakness.

  • However, current trends suggest that the bookings have troughed and we have recently seen stabilization in the booking trends.

  • Despite the overhang of prevailing macroeconomic uncertainties, we were able to deliver strong results in the second quarter, driven largely by strong execution and our sharp focus on managing costs.

  • Although the current macro environment is not ideal, we believe that we are well-positioned to outgrow the semiconductor industry.

  • We have an attractive product portfolio and a world-class manufacturing and operational organization, which enable our industry-leading cost structure.

  • We continue to leverage these assets to generate revenue growth and strong cash flow.

  • Customer interest in our product offerings for the automotive, industrial and smartphone end markets remain strong.

  • We continue to increase our presence at key strategic accounts and our revenue footprint with leading global OEMs is expanding.

  • Based on our design win pipeline and investment in secular growth areas, such as ADAS and wireless charging, and increasing exposure to industrial, automotive and smartphone markets, we remain well positioned to deliver strong results going forward.

  • We are seeing increased momentum in wireless charging, with high level of interest from customers across multiple end markets.

  • In the smartphone market, we are actively engage with leading OEMs for models for year 2016.

  • In ADAS, our design win pipeline continues to expand with our image sensor solutions for automotive applications.

  • We are seeing strong benefits from combination of ON Semiconductor's strong relationship in the global automotive market and Aptina's market leading automotive image sensor technology and software capabilities.

  • We are seeing a very high level of interest in our ADAS offerings from automotive OEMs, as ADAS adoption continues to accelerate.

  • As Bernard indicated earlier, we are tracking significantly ahead of our $1 billion four-year share repurchase program.

  • We remain committed to creating significant shareholder value by generating strong cash flow from our operations and returning a large part of that cash to shareholders through stock repurchase.

  • 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 second quarter and was down approximately 3% quarter-over-quarter, primarily due to broad-based inventory adjustment.

  • As I indicated earlier, during the second quarter we saw weakness in Japan and Europe.

  • Recall that Europe is the largest region for our automotive-related sales.

  • Our auto-related revenue was also impacted by a customer-related production issue which contributed to the volatility in orders.

  • I believe that the issue is largely behind and we should see normal order patterns going forward.

  • We continue to gain increasing traction with our image sensors in the automotive market.

  • We are seeing double-digit growth in attach rates for ADAS for model year 2016 vehicles.

  • Our design win momentum continues to accelerate and we have secured additional design wins for ADAS in rear view cameras with leading OEMs in the Americas, Europe, and South Korea.

  • We are seeing higher than expected attach rate for our rear view cameras, driven by consumer demand ahead of government regulations and mandates.

  • A China-based automotive OEM began to ramp production of vehicles incorporating our image sensors for rear view camera applications.

  • We continue to maintain our leadership in the automotive image sensor market and we launched three new image sensors for ADAS and rear view applications.

  • We launched a number of new products for automotive applications during the second quarter.

  • Among these was a potentially revolutionary wireless smart passive sensors for the measurement of pressure, moisture, proximity and temperature.

  • This sensor does not require either battery or microcontroller.

  • We also expect to see a ramp for our new integrated power modules for our electric radiator fan applications at major global OEMs, and for our new integrated power modules and igniter modules for applications in the world's first brushless DC motor-driven power sliding door.

  • During the second quarter, we continued to see strong demand for image sensors, MOSFETs, SmartFETs, LED drivers, park assist, sensor interface, and power supply products.

  • Revenue for the third quarter in the automotive end market is expected to be up quarter-over-quarter, despite weaker seasonality in the third quarter due to year-end model changeover.

  • The Communications end market, which includes both networking and wireless, represented approximately 18% of our revenue in the second quarter and was up approximately 16% quarter-over-quarter, driven by strong design win ramps at China-based smartphone OEMs.

  • Our gains in Communications in the second quarter were driven by a broad range of OEMs and products.

  • Among the key contributors of the solid revenue growth in the second quarter were our auto focus and image stabilization solutions, battery protection FETs, EPROMs, battery chargers, ESD protection, and power management ICs.

  • As I indicated earlier, interest in our wireless charging solutions remains strong and we are positioned to serve this market with integrated silicon and discrete solutions that address the power management needs of every critical power stage of a complete wireless charging solution.

  • With our early investments and alignment with key ecosystem players, we believe that we are well-positioned to benefit from the rapid adoption of wireless charging.

  • Revenues for the third quarter in the Communications end market are expected to be up quarter-over-quarter.

  • The Consumer end market represented approximately 15% of our revenue in the second quarter and was up approximately 2% quarter-over-quarter.

  • White goods, sports action cameras, home electronics and consumer gaming electronics led sales in the Consumer segment.

  • Adoption of our intelligent power modules in white goods applications in China remains strong.

  • During the second quarter, key design wins for our inverter IPM for air-conditioner fan motors ramped into production.

  • However, white goods sales were dampened by softness in the China market.

  • We are seeing strong traction for our fast focus high resolution image sensors in the sports action camera market.

  • Adoption of our three mega pixel and two mega pixel image sensors for digital video recorders for cars in China is accelerating.

  • Our superior image quality has enabled us to differentiate our offerings and gain share in the car DVR market.

  • Home monitoring applications and B2B conferencing again drove demand for our 1080p image sensor solution.

  • Revenues from our standard products for the Consumer applications grew strongly quarter-on-quarter, driven by our E-squared PROMs, ESD production, MOSFET, and small signal solutions.

  • Revenue for the third quarter for our Consumer segment is expected to be up quarter-over-quarter, due to normal seasonality.

  • The Industrial end market, which includes military, aerospace, and medical, represented approximately 24% of our revenue in the second quarter and was down approximately 1% quarter-over-quarter.

  • We saw weakness in Europe, Japan, and Asia Pacific regions, excluding China.

  • The Americas were up slightly and China was up strongly, driven mainly by our solid gains in image sensors for security applications.

  • Robust growth in the security market again generated strong demand for our image sensing solutions during the quarter.

  • As expected, we saw strong volumes in China, as the country began to implement a large-scale transition to 1080p security cameras which will utilize our two mega pixel 1/3 inch and three mega pixel 1/3 inch sensors.

  • We continue to see good penetration globally in the top-tier machine vision camera manufacturers for the Python VGA CMOS image sensor devices, which reported a 23% sales increase compared to the first quarter.

  • In the Medical market, we had a record quarter with strong growth from our imaging and hearing aid customers.

  • To further the growth of our Industrial end market, we acquired AXSEM, a provider of low-power radio frequency RF chips.

  • AXSEM's products enable wireless connectivity, support advanced functionality in the Internet of Things, automatic meter reading, home automation, sensor networks and satellite communication markets.

  • Adding AXSEM's low-power RF chips, microcontroller technologies and system experience to our Applications Product Group is another step towards expanding our presence in the high-growth industrial IOT segment.

  • Revenue for the third quarter for our Industrial segment is expected to be down quarter-over-quarter.

  • The Computing end market represented approximately 11% of our revenue in the second quarter and was down approximately 4% compared to the first quarter.

  • As anticipated, we have started receiving orders for Intel's Skylake platform.

  • Share gains on the Skylake platform, coupled with significantly higher content, should enable us to grow our Computing revenue despite declines in the computing market.

  • Revenue for the third quarter for our Computing segment is expected to be up quarter-over-quarter.

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

  • Bernard?

  • - CFO

  • Thank you, Keith.

  • Now for the third quarter of 2015 outlook.

  • Based on product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $890 million to $930 million in the third quarter of 2015.

  • Backlog levels for the third quarter of 2015 represent approximately 80% to 85% of our anticipated third quarter 2015 revenues.

  • We expect inventory at distributors to stay flat quarter-over-quarter on a dollar basis.

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

  • For the third quarter of 2015, we expect GAAP and non-GAAP gross margins of approximately 34% to 36%.

  • We expect total GAAP operating expenses of approximately $232 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 $35 million to $37 million.

  • We expect total non-GAAP operating expenses of approximately $197 million to $207 million.

  • The increase in operating expenses in the third quarter as compared to the second quarter is driven by annual merit increases which become effective in the third quarter.

  • We anticipate GAAP net interest expense and other expenses will be approximately $14 million to $16 million for the third quarter of 2015, which include non-cash interest expense of approximately $6 million.

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

  • GAAP taxes are expected to be approximately $8 million to $12 million and cash taxes are expected to be approximately $5 million to $8 million.

  • We also expect share-based compensation of approximately $13 million to $15 million in the third 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 third quarter of 2015 is expected to be approximately 430 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, Lori, please open up the line for questions.

  • Operator

  • (Operator Instructions)

  • Ross Seymore, Deutsche Bank.

  • - Analyst

  • Hello, guys.

  • Congrats for solid results in a challenging time.

  • I guess the first question is for Keith.

  • Keith, you mentioned a couple times about bookings stabilizing.

  • Can you talk a little bit about what you think is driving the weakness in bookings and what gives you the confidence that recent stabilization is something that's going to persist?

  • - President & CEO

  • Yes.

  • Our belief from talking with customers is that there was a lot of inventory reduction going on toward the end of the second quarter, with some uncertainty as they headed into the back half of the year.

  • We believe now that uncertainty is of a lesser concern to them, and we're starting to see much more normal patterns as we get into Q3.

  • So I really think it was more uncertainty than any end-macro drop in production rates.

  • - Analyst

  • Great.

  • I guess as my follow-up, one for Bernard.

  • I know you guided the gross margin to remain relatively flat in the third quarter, but given what you're talking about in utilization, can you talk about how that flows through into the gross margin line?

  • And specifically what I'm getting at, is there a lag effect that what you do in utilization now is going to impact gross margin even out into the fourth quarter?

  • - CFO

  • What we see is again our normal fall-through of 50% continues being the rule.

  • We expect a moderately improved utilization, but not significantly.

  • We're still in the inventory control mode.

  • So I expect that's why we went 34% to 36% for the third quarter.

  • - Analyst

  • And is there a lag between the quarters, as far as what you did in the second weighs in the third, but what you're doing in the third will help incrementally in the fourth?

  • - CFO

  • Not in a very significant way, maybe a little bit.

  • - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Operator

  • Vivek Arya, Bank of America Merrill Lynch.

  • - Analyst

  • Thank you for taking my question.

  • Keith, one more on the booking trends.

  • Could you give us some more color, by whether it's end-market or geography, where you have started to see the improvement and which areas remain weak?

  • Because my sense is that when we look at all the headlines from China and Europe, they have not stabilized, but we are hearing more benign or a calmer tone from a lot of the semiconductor vendors.

  • And I'm wondering whether that's just lack of visibility, whether that's -- I don't know whether wishful thinking is the right word -- but if you could just give us some more comfort that you have the visibility and that this resumption of booking trends is more sustainable?

  • - President & CEO

  • Sure.

  • And in my comments, certainly our order patterns reflect not only the market, but our specific company positioning.

  • And we have seen a significant uptick in our European automotive and in the China backlogs in both automotive and industrial.

  • So although I understand all the comments on the macros not improving there, we're certainly seeing that in our order patterns picking up strongly.

  • The rest of the geographies, again, appear to be normal-order patterns for our Q3, which are typically stronger than Q2.

  • - Analyst

  • Got it.

  • And as my follow-up, you had highlighted strength in China smartphones in Q2, I believe.

  • Any more color on inventory levels in that market?

  • Because some other players, MediaTek, Corvo, et cetera, have offered some concern about some excess inventory of smartphones there.

  • So any color would be very helpful.

  • Thank you.

  • - President & CEO

  • Yes.

  • That always differs end-customer to end-customer, or OEM-provider to OEM-provider.

  • And we've got such a broad positioning there that our overall numbers picked up nicely, despite some pockets of inventory at some of the suppliers.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • John Pitzer, Credit Suisse.

  • - Analyst

  • Good morning, guys.

  • Thanks for letting me ask a question.

  • Keith, just a follow-up to that question, if I may.

  • Can you help me better understand when you look at both the smartphone market and the PC market, how we should think about ON content as we move into the back half of the year, whether that be with Skylake on the PC side and/or incremental applications that you might be getting on the smartphone side?

  • What I'm really trying to do is differentiate how dependent you are on unit demand versus content growth in those two markets, specifically.

  • - President & CEO

  • Yes.

  • We get a very substantial bump in content growth for Skylake.

  • It adds overall another, roughly, $1.50 or so to each PC sold.

  • And so it's a very big bump for us, moving to Skylake off the old platforms.

  • In addition, we think we've gained significant share there with having, we believe, something that will exceed 50% market share in all of the PC platforms, with Skylake.

  • On the handset side, we're seeing increased number of phones using our image stabilization, auto focus and image-sensor solutions, which again will add fairly significant dollars-per-unit sold, probably in the $0.75 or so range.

  • - Analyst

  • That's helpful.

  • And maybe a follow-up for Bernard, on the gross-margin side.

  • Bernard, just so I'm clear, no unusual utilization actions in the calendar third quarter, how should I think about inventory levels exiting Q3, and would you anticipate going through this soft patch at the industry level without having to do much to utilization levels internally?

  • - CFO

  • So on distribution, we said our inventory, we're expecting our inventories to be flat.

  • For the internal inventories, we're expecting those to be flat to slightly down, which will result in also, compared to what we have done in the last several quarters, slightly less utilization, but nothing super major.

  • - Analyst

  • Okay.

  • Thanks, guys.

  • Operator

  • Chris Caso, Susquehanna Financial.

  • - Analyst

  • Thank you.

  • Good morning.

  • For first question, I'd like to go back to the comments in Industrial.

  • And based on your segment commentary, it does look like that's the main area of weakness as you're looking at the third quarter.

  • Can you talk about that broadly?

  • You also mentioned that it looked like the China-industrial order rates had picked up.

  • I don't know if that is having effect on Q3 revenue at this point yet?

  • - President & CEO

  • Yes.

  • So we are expecting a slight amount of softness in Q3 for Industrial overall.

  • The biggest slowdowns were Europe and Japan, in those industrial marketplaces.

  • We had what we believe to be a softer macro-industrial market in China, but that was offset by the security camera increases that we saw for our image sensor business.

  • In general, I would say Industrial is one of the areas where there's some inventory correction, a little bit of slowdown on a macro basis.

  • It is pretty much global, but it is not significant.

  • So we're expecting just slight softness, similar to what we saw in Q2.

  • - Analyst

  • And that security-camera business, that would be something specific to you, not just the market?

  • - President & CEO

  • Correct.

  • That would be a very specific thing, where we've gotten some great design wins for the next-generation image sensor.

  • - Analyst

  • Great.

  • As a follow-up, could you talk a little bit about where you expect Q4 seasonality to be right now?

  • I know it's been moving around for you now with different end-market content.

  • And particularly given the softness that you've seen now, does that have any effect on what you think normal, seasonal patterns should be for Q4?

  • - President & CEO

  • It's too early to tell on Q4.

  • Typically, our Q4s are very similar to our Q3s.

  • And at this stage, I don't have significant data that would indicate a major change.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • Craig Ellis, B. Riley and Company.

  • - Analyst

  • Thanks for taking the question, guys.

  • Keith, it sounds like you 're expecting, from an end-market standpoint, four of your five end-markets to be up in the third quarter.

  • Can you just give us a sense for what you're seeing in terms of the relative performance of those end-markets versus each other?

  • - President & CEO

  • Okay.

  • So in the Automotive piece, we should see a return to some good growth.

  • And again, it's really a platform-dependent, new product content story there for us.

  • There is the model year changeover, which normally causes a little bit of a slowdown, as they close factories for a couple of weeks.

  • But in this case, we think our new-product share gains will more than offset that going into Q3.

  • In the PC area, it's really all about the Skylake platform, as I talked about earlier.

  • The dollar content increase is significant; and even without any unit increases, we should see some nice content gains in Q3.

  • In the Communications sector, it really is cell phone content again, not that we are looking for significant increases in the number of cell phones built.

  • And then Industrial, we said was down, so I won't go through that one again.

  • And Consumer.

  • Consumer, we do see the normal, well, I won't say normal, we do see an uptick in Q3, albeit at a slightly more muted rate than normal in Consumer, as they get ready for the buys in the fourth quarter.

  • - Analyst

  • Within Communications, when do you expect wireless to generate, or wireless charging to generate material revenues for the company?

  • - President & CEO

  • I think we indicated that we're really seeing significant number of models coming on in the 2016 builds.

  • There might be some this year, but it's going to be mostly next year.

  • - Analyst

  • The follow-up is for Bernard.

  • The Company acknowledged that you're tracking ahead of what would be a linear pacing on the buyback.

  • You've done, I think it's around $290 million to date in the program.

  • Given the guidance for the third quarter, is there any reason you wouldn't buyback as intensively as you have in the first half of the year, when we look at the third quarter and use of the program?

  • - CFO

  • We are opportunistically looking at opportunities.

  • - Analyst

  • Thank you, guys.

  • Operator

  • Christopher Rolland, FBR Capital Markets.

  • - Analyst

  • Hello, guys.

  • You guys mentioned better image sensor trends in China.

  • I think you guys pointed to auto DVR and backup.

  • Can you dig in a little bit more there?

  • Is this a regulatory thing driving the uptick or just consumer trends over there?

  • And then also if you could remind us or update us as to the global-regulatory backdrop and where we are there, either for backup cameras or DVR?

  • Thanks.

  • - President & CEO

  • It is really consumer driven in China completely, particularly the DVR piece.

  • That is actually not going to be mandated at all.

  • It's just the rear cameras that are being mandated globally.

  • There are different adoption dates for government requirements around the world.

  • But they start anywhere from 2016 to 2018, depending on countries.

  • - Analyst

  • Okay.

  • Great.

  • And SSG, nice to see it accretive for four quarters now.

  • Can you give us a few more details there.

  • Is there anything that can get us back to $150 million a quarter, that kind of a run rate?

  • Is there anything that you see either positively or negatively in the outlook for SSG?

  • - President & CEO

  • Yes.

  • I don't have any negatives.

  • On the positive side, we have been talking about a lot of the wins they have in Automotive and Industrial.

  • Those give us much better margins for that business and we think much more stable growth.

  • We're really looking at next year as being a significant year for growth in SSG.

  • And again, it's driven by all the design wins we've had the last two years in Industrial and Automotive.

  • - Analyst

  • Great.

  • That's great news.

  • Thanks, guys.

  • Operator

  • Ian Ing, MKM Partners.

  • - Analyst

  • Thank you for taking my question.

  • Image sensors, you talked about strength in surveillance and automotive.

  • But where you in terms of turning more selective in the commodity types of markets, like handsets and consumer?

  • Is that something that still has to play out?

  • - President & CEO

  • Actually, we are there.

  • We're participating, the majority of everything in the handset piece, which is the most commoditized, is at the 13-megapixel rates, where we can still get some differentiation.

  • And in the more consumer pieces that you might see in the homes, also again, we've got a set of higher-resolution products there and the lower-resolution products are tailing off.

  • - Analyst

  • Thank you.

  • And then Bernard, can you talk a little bit more about the puts and takes on the September-quarter Op Ex guidance?

  • I know you're talking about merit increases, but any benefits to the Aptina integration, some synergies there perhaps, or do you have some temporary cost controls from Q2 rolling off in September?

  • Thanks.

  • - CFO

  • So we will continue with our normal belt tightening that we have in times where revenues are not as strong.

  • We do expect to see some improvement due to the finalization of the integration of Aptina and we will also be looking at, based on business results, a potential tailoring of variable comp.

  • And that offsets partially the merit increases that are a focal point beginning of July.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Steve Smigie, Raymond James

  • - Analyst

  • Great.

  • Thanks a lot, guys.

  • Keith, I was wondering if you could follow up a little bit more on the Industrial.

  • Industrial is typically pretty seasonally soft in the third quarter for many companies.

  • Just curious if it's at all possible to parse the difference between normal seasonality for your comments for Industrial to be down versus macro?

  • - President & CEO

  • I think, again, the macro, we're not seeing that much different.

  • We do have a little bit of upside over normal macro, due to the security-camera upgrades to the 1080p that I talked about earlier.

  • But otherwise, there's really not that much we're seeing significantly different than macro.

  • - Analyst

  • Okay.

  • And then just on the consumer business, particularly around some of the white goods going into China.

  • Again, it's not normally that great of a time of year going into Q3 for that anyway.

  • I think it's probably more seasonally stronger earlier in the year.

  • But from that softness that you saw, has that picked up a little bit or would you not even expect that, just given the seasonality here?

  • - President & CEO

  • We would expect kind of flattish-ness.

  • Q2 was under-normal growth rates for the white goods, and Q3 is kind of flattish.

  • - Analyst

  • Okay.

  • Great.

  • Thank you.

  • Operator

  • Kevin Cassidy, Stifel.

  • - Analyst

  • Thanks for taking my question.

  • Just some clarification.

  • I think you said your new automotive application is rear-view mirror, not just the backup camera.

  • Is that correct?

  • - President & CEO

  • Actually, I don't know that it was new.

  • It's expanded.

  • We've been doing rear-view cameras, including the surround view kinds of things, for some time.

  • We're really just seeing a pickup in the attach rates.

  • - Analyst

  • Okay.

  • So it's not the actual rear-view mirror, it's just the standard --

  • - President & CEO

  • In some cases, our customers are putting them in the rear-view mirrors.

  • - Analyst

  • Okay.

  • All right.

  • And you say it's ahead of regulations.

  • Do you think that it will go through safety regulations?

  • I guess I'm not understanding how the process works.

  • A consumer can demand it and --

  • - President & CEO

  • Yes.

  • They've been appearing on cars, in fact, there is no country requiring rear-view backup cameras in the world yet.

  • And yet, they're on all kinds of cars.

  • So that is a consumer-driven feature that they find value in, and so the car makers provide that as a differentiating factor ahead of regulations.

  • - Analyst

  • Okay.

  • Great.

  • And just one follow-up, too, on the security cameras in China, those are mainly commercial cameras?

  • - President & CEO

  • Those are mainly commercial, correct.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Vijay Rakesh, Mizuho.

  • - Analyst

  • Thanks, guys.

  • Just on the Automotive side again, and as you look at your pipeline there and all the regulated tail winds, I know you had said Automotive is 32%, gets to 33% of revenues by 2016, 2017.

  • Do you see that being substantially higher now as you go through the year end you see this pipeline here?

  • - President & CEO

  • We do see increases in that as you go through the full years of 2015 and 2016 approaching, probably by the end of 2016, something in the mid-30%s.

  • - Analyst

  • Got it.

  • And looking at the Op Ex and the buybacks here, any target on your share-count as you look towards the end of the year?

  • And how do you see Op Ex going out, should it be flat?

  • Do you think we can get it down to the $190 million range?

  • Thanks.

  • That's it.

  • - CFO

  • For the fourth quarter, our Op Ex, we expect those to be fairly flat sequentially.

  • And share-count, obviously, it's a function of what the market will be out there.

  • And so I don't want to speculate on what the number is going to be.

  • - Analyst

  • Thanks.

  • Operator

  • Rajvindra Gill, Needham and Company.

  • - Analyst

  • Hello.

  • This is Josh Buchalter in on behalf of Raji.

  • Thanks for taking my question.

  • You talked about the content gains on Skylake.

  • Could you maybe talk about the cadence and timing of a ramp and how we should be looking at that?

  • Thank you.

  • - President & CEO

  • Certainly.

  • So those conversions have already started, largely in the channel motherboard and desktop areas; and then as we go through the quarter, you will see the notebook-builds pick up toward the end of the third quarter.

  • So again, we're seeing take-ups.

  • I can't give you exact percentages, but very clearly all of our customers are building Skylake, at this point.

  • - Analyst

  • Okay.

  • And we should expect some contribution in the third quarter and then more in the fourth quarter?

  • - President & CEO

  • That's correct.

  • - Analyst

  • Okay.

  • Thank you.

  • And then looking at the auto end-market, you mentioned there was one customer that had -- one large customer with an issue.

  • Could you maybe characterize how Automotive would have looked had that issue had not developed?

  • Thank you.

  • - President & CEO

  • Actually, it would have been flat, maybe slightly up, but pretty much flat, had that issue not occurred.

  • - Analyst

  • Okay.

  • Thanks.

  • And congratulations on the solid progress

  • - President & CEO

  • Thanks.

  • Operator

  • Tristan Gerra, Baird.

  • - Analyst

  • Good morning.

  • Just to follow up on your PC business, given that your Q1, PC revenue was above seasonality, how much of the share-gain in PCs related to Skylake is already realized, from a market-share standpoint?

  • - President & CEO

  • The answer is none, because there were no Skylake builds made prior to July.

  • - Analyst

  • So the other shipping in Q1 was related to something else?

  • Any feedback?

  • - President & CEO

  • It was all share gain in the previous platforms.

  • - Analyst

  • Okay.

  • Great.

  • And then the facial-recognition feature in Windows 10, any sense of the adoption rate that you could see from a hardware standpoint in notebooks in the second half and potential participation there?

  • - President & CEO

  • Certainly, we've got some participation there.

  • I think it's a little too early to call specific numbers.

  • But there was many of the consumer platforms that had that facial-recognition, like in the Xbox, previous to that.

  • So I guess it's too early for me to tell.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Gabriela Borges, Goldman Sachs.

  • - Analyst

  • Great.

  • Thanks so much for letting me ask a question.

  • Maybe just one housekeeping one, to start.

  • Can you help us understand how much revenue contribution there is from the AXSEM deal, whether this is more for longer-term revenue synergy opportunity?

  • - President & CEO

  • That's really more a longer-term revenue synergy.

  • It gives us a gigahertz radio that we want to couple, low-power capabilities that we want to couple with our IoT.

  • Approximately $4 million a year in revenue run rates.

  • - Analyst

  • That's helpful.

  • Thank you.

  • And just as a follow-up, on the backend capacity increases in Automotive, maybe just give us an update broadly on how utilization is tracking on the backend and then the longer-term visibility that we have into Automotive, what the growth rates could look like that you could grow into over time.

  • Thank you.

  • - President & CEO

  • From our perspective, the average growth-rates we're giving, I can't differentiate those by market sector.

  • But as we mentioned, we took our utilization down in the second quarter to pull back on inventory.

  • We're taking them up slightly in Q3, with a flattish inventory in mind.

  • So kind of high 70s to low 80s transition.

  • - Analyst

  • And that's to say that's the number on the back end, as well as the front end?

  • - President & CEO

  • The number is backend, as well as front-end.

  • We try and balance that as best we can.

  • - Analyst

  • Understood.

  • Thanks very much.

  • Operator

  • (Operator Instructions)

  • Craig Hettenbach, Morgan Stanley.

  • - Analyst

  • Yes.

  • Thanks for the update on the Aptina accretion.

  • Can you talk about specifically to some of the gross-margin initiatives you have to step up those gross margins, how that's playing out and the type of visibility you have for Aptina gross-margins going out into next year?

  • - President & CEO

  • Okay, I'll start on that one.

  • There's really a couple of big things there.

  • One, we've done some in-sourcing a part of that manufacturing.

  • And as we ramp that, as it goes through this year, you should see increasing contribution from that in the several-hundred basis point direction as you get into 2016.

  • The second is relative to mix and where we target those sales.

  • We have been indeed curtailing our presence in some of the low-margin consumer areas.

  • And as you've heard me talk about, we've been getting significant traction and growth in the Automotive sector that has most better margins.

  • And then lastly, there is some consolidation work that's going on from a cost perspective.

  • Again, it continues throughout this year, that's got maybe another 100 basis points attached.

  • So just on a natural basis, you should see some very good accretion in those gross margins.

  • - Analyst

  • Got it.

  • And just a follow-up on the environment.

  • If I think about some of the customer-inventory reductions at quarter end for ON and some of your peers, as well, it felt like inventory was on the lean side and yet customers were reducing again.

  • So just curious to get your take, is there a certain threshold that you think or bare minimal level of inventory that you think customers could bump up against?

  • Would love to get your thoughts there.

  • Thanks.

  • - President & CEO

  • It's been very interesting.

  • We've had lean inventories for over a year now.

  • We're less than 10 weeks in the distribution channel, which traditionally would be very lean.

  • My take on it is they're doing it because they can right now, and they can because there's no major drivers for a swift increase in markets.

  • So as long as you're bumping around with a relatively modest, global growth around 3% or so, I think the current levels are actually fairly stable, but they certainly don't have a lot of room to go down.

  • - Analyst

  • Got it.

  • Thank you.

  • Operator

  • At this time, there are no further questions.

  • I'll now return the call to Parag Agarwal for any additional or closing remarks.

  • - VP of IR and Corporate Development

  • Thank you for joining the call today.

  • We look forward to seeing you at various conferences.

  • Thank you and good-bye.

  • Operator

  • Thank you for participating in the ON Semiconductor second-quarter 2015 earnings conference call.

  • You may now disconnect.