安森美 (ON) 2015 Q3 法說會逐字稿

Good afternoon.

My name is Connor, I will be your conference operator today.

At this time I would like to welcome everyone to the ON Semiconductor third-quarter 2015 earnings conference call.

(Operator Instructions)

Parag Agarwal, Vice President of Investor Relations, you make begin your conference.

Thank you, Connor.

Good evening and thank you for joining ON Semiconductor Corporation's third-quarter 2015 quarter results conference call.

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

This call is being webcast on the 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 third 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 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 Investors section.

During the call -- 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 [extra diguance] or results to differ materially from projections.

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

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

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

During the fourth quarter we will be attending the Credit Suisse technology conference on December 1 in the Scottsdale, Arizona.

Now let me turn it over to Bernard Gutmann who will provide an overview of third-quarter 2015 results.

Bernard?

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

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

As many of our peers in the semiconductors industry have noted the global macroeconomic environment remains challenging.

Despite a rather challenging macroeconomic environment we were able to deliver relatively strong growth driven by share gains and ramp on our design wins across multiple end markets.

Although our revenue grew at a reasonable pace in the third quarter being a broad-based analog company exposed to multiple end markets and geographies, we are not totally immune from the impact of prevailing economic challenges.

We saw weakness in the communications end markets and broad-based weakness in China.

In response to soft macroeconomic conditions we have taken a number of measures to control costs and expenses.

These measures include permanent actions such as targeted headcount reductions and temporary measures such as shutdown of facilities during holidays and elimination of non-critical spending across the Company.

The impact of these cost reduction measures is reflected in our guidance for the fourth quarter.

We are fully prepared to take further actions to reduce our costs and expenses if the macroeconomic conditions continue to be challenging.

Now let me provide you an update of our third-quarter 2015 results.

ON Semiconductor today announced that total revenue for the third quarter of 2015 was approximately $904 million, an increase of approximately 3% as compared to the second quarter of 2015.

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

Excluding the impact of amortization of intangibles and restructuring and other special items non-GAAP net income for the third quarter was $0.23 per diluted share.

GAAP and non-GAAP gross margin for the third quarter were 34.1% as compared to 34.6% in the second quarter of 2015.

The 50 basis points of sequential decline was largely driven by lower utilization in the third quarter as compared to the second quarter, unfavorable product mix and ASP pressure in certain markets.

We experienced stronger-than-expected growth in computing and consumer, whereas growth in automotive and communications lagged expectations.

Keith will provide additional details on the end markets in his prepared remarks.

Average selling prices for the third quarter decreased by approximately 2% as compared to the second quarter of 2015.

Despite the sequential revenue growth of 3% in the third quarter utilization of our factories was lower as compared to the second quarter.

We reduced utilization of our factories to manage internal and distribution channel inventory levels.

GAAP operating margin for the third quarter of 2015 was approximately 7.7%, flat quarter over quarter.

Our non-GAAP operating margin for the third quarter was 11.8%, down approximately 50 basis points as compared to the second quarter of 2015, primarily due to lower gross margin in the third quarter.

GAAP operating expenses for the third quarter were approximately $239 million as compared to approximately $237 million for the second quarter of 2015.

Non-GAAP operating expenses for the third quarter were approximately $202 million, up approximately $6 million as compared to the second quarter of 2015.

As expected, annual merit increases which become effective in the third quarter were the primary contributor for the higher operating expenses in the third quarter as compared to the second quarter.

We exited the third quarter of 2015 with cash, cash equivalents and short-term investments of approximately $558 million, a decrease of approximately $20 million from the second quarter.

Operating cash flow for the third quarter was approximately $128 million as compared to approximately $102 million in the second quarter.

We spent approximately $65 million of cash for the purchase of capital equipment.

During the third quarter we used approximately $30 million for the repayment of long-term debt and capital leases, and we used approximately $100 million to repurchase approximately 9.4 million shares of our common stock at an average price of $10.64.

At the end of the third quarter approximately $648 million remains of the total authorized amount of $1 billion under the current stock repurchase program which was announced on December 1, 2014.

We remain fully committed to our $1 billion stock repurchase program.

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

We believe that at current level the stock price does not reflect the potential of our Company, and use of our excess cash to repurchase our stock is a compelling investment.

At the end of the third quarter of 2015 ON Semiconductor days of inventory on hand were 116 days, down approximately 2 days from the prior quarter.

In the third quarter of 2015 distribution inventory decreased by approximately $21 million quarter over quarter, and distribution resales increased by approximately 1% quarter over quarter.

In terms of days distribution inventory declined to the lowest level in approximately the last year.

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

Our global factory utilization for the third quarter was down slightly as compared to the second quarter.

As I have indicated earlier our factory utilization was lower than expected as we reduced [loadings] to manage inventory levels.

Now let me provide you an update on performance by our business units.

Starting with Image Sensor group, revenue for our Image Sensor group was approximately $189 million up approximately 9% over the second quarter.

The revenue for our Standard Products groups for the third quarter of 2015 was approximately $312 million up approximately 1% quarter over quarter.

Revenue for our Application Products group was approximately $275 million, up approximately 5% over the second quarter.

Revenue for the third quarter of 2015 for the System Solutions group was approximately $128 million as compared to $136 million in the second quarter.

A steep decline in appliances related revenue in China and broad-based weakness in Japan contributed to weaker than expected revenue from our System Solutions group.

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 comment on the business trends in the third quarter.

Bookings during the third quarter were stable, and we did not see any significant variation in booking trends throughout the quarter.

From a revenue perspective we saw weakness in the Americas, Japan, and China.

Gains in the security market helped us offset much of the weakness in China.

As Bernard indicated in his prepared remarks the global macroeconomic environment remains challenging, which we believe is a leading to weaker than seasonal trends in our business.

However, we are not seeing noticeable change in the underlying fundamentals of our business.

Bookings thus far in the current quarter have been stable, and current trends point to improving business conditions early next year.

Although the current macroeconomic environment poses significant challenges to our business, we continue to outpace the industry in revenue growth as our design wins convert to revenue.

Our strategy of focusing investments in automotive, industrial, and smartphone markets is yielding strong results.

And I believe that our momentum in these markets should accelerate in 2016 as we launch additional new products.

As Bernard indicated in his prepared remarks, in response to a slowing demand environment we have taken a number of measures to manage our expenses.

At this time we don't see the need for deep cut in our operating expenses but if the macroeconomic environment continues to deteriorate we will act to realign our costs with revenue.

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

The automotive end market represented approximately 31% of our revenue in the third quarter and was approximately flat quarter over quarter, despite a weaker seasonality in the third quarter.

Demand remains strong for our Image Sensor solutions driven by the increased adoption of rear-view cameras and ADAS safety systems.

Our LED driver business continues to show growth driven by increased usage across all vehicle segments.

Additionally we saw good results in our automotive related power management analog products business as switch mode power supplies continue to proliferate in light vehicles.

Finally, our Power MOSFET business continues to grow as we continue to expand our portfolio and package options.

Our automotive related design win pipeline continues to grow at a rapid pace.

During the third quarter we secured design wins for our VGA image sensor to support the 2018 United States mandate for rear-view cameras.

We also won design for a substantial sensor interface IC opportunity for powertrain applications in Europe.

For body electronics we secured an important win at a key European automotive tier one integrator for our smart FET products for relay replacements.

Revenue for the fourth quarter in the automotive end market is expected to be flat quarter over quarter.

The communications end market which includes both networking and wireless represented approximately 18% of our revenue in the third quarter and was up approximately 2% quarter over quarter driven by ramp of new programs during the third quarter.

We continue to increase our presence with the key players in the smartphone market and so far this year we have posted robust year-over-year growth in revenue from a few strategically important smartphone customers.

We continue to be on track with our wireless charging program, and we expect to see initial revenue ramp starting in early 2016.

Revenues for the fourth quarter in the communications end market are expected to be down quarter over quarter.

The consumer end market represented approximately 15% of our revenue in the third quarter and was up approximately 7% quarter over quarter driven by seasonality and ramp of new programs for the action sports camera market.

In the third quarter a leading customer in the action sports camera market launched three new cameras using our image sensors.

Growth in the consumer market was also driven by build of video game consoles ahead of the holiday season.

Appliance related consumer revenue declined sharply in the third quarter due to seasonality and excess channel inventory in China.

Revenue for the fourth 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 23% of our revenue in the third quarter and was approximately flat quarter over quarter.

We saw broad-based weakness in the industrial market.

However, share gains in the security market helped us offset much of the weakness.

We have seen a significant slowdown in demand from our large global industrial OEMs.

We believe that a softening macroeconomic condition, especially in China, is a primary driver of slowdown in demand in the industrial end market.

Residential construction remains a bright spot in the industrial market, and we continue to grow our share in the residential circuit breaker market.

In the security market sales of our Image Sensors grew by more than 20% quarter over quarter.

We also saw strength in other industrial sub-segments such as our machine vision for our CMOS and CCD image sensors.

We expanded the Python family of high-performance global shutter sensors with the introduction of various members of the Python family raging in resolution from 10 megapixels to 25 megapixels.

Revenue for the fourth quarter for our industrial segment is expected to be down quarter over quarter.

The computing end market represented approximately 13% of our revenue in the third quarter and was up approximately 10% compared to the second quarter driven primarily by ramp in Intel's Skylake platform.

We believe that not only our content has increased in a significant manner on the Skylake platform, but we are also gaining share.

We expect our market share gains and content increase to continue in 2016.

Revenue for the fourth quarter in our computing segment is expected to be flat quarter over quarter.

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

Bernard?

Thank you, Keith.

Now for fourth quarter of 2015 outlook.

Based on product booking trends, backlog levels and estimated turns levels we anticipate that whole ON Semiconductor revenues will be approximately $830 million to $870 million in the fourth quarter of 2015.

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

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

We expect total capital expenditure of approximately $55 million to $65 million in the fourth quarter of 2015.

For the fourth quarter of 2015 we expect GAAP and non-GAAP gross margins of approximately 32.6% to 34.6%.

We intend to reduce our factory utilization in the fourth quarter as compared to the third quarter to manage our internal and channel inventories.

We expect total GAAP operating expenses of approximately $225 million to $237 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairment and other charges which are expected to be approximately $37 million to $39 million.

We expect total non-GAAP operating expenses of approximately $188 million to $198 million.

The sequential decline of approximately $9 million is driven by our expense reduction measures.

We anticipate GAAP net interest expense and other expenses will be approximately $13 million to $16 million in the fourth quarter of 2015 which includes non-cash interest expense of approximately $6 million.

We anticipate our non-GAAP net interest expense and other expenses will be approximately $7 million to $10 million.

GAAP taxes are expected to be approximately $2 million to $6 million, and cash taxes are expected to be approximately $5 million to $8 million.

We also expect share-based compensation of approximately $11 million to $13 million in the fourth 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 delineated share count for the fourth quarter of 2015 is expected to be approximately 418 million shares based on the current stock prices.

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, Connor, please open up the line for questions.

(Operator Instructions)

Ross Seymore, Deutsche Bank.

This is Matt Diamond on Ross's behalf.

Thank you for letting me ask a question.

It was said that you are going to take utilization down in the fourth quarter to manage channel inventory levels.

I'm curious -- do you see that as a one quarter phenomenon or given the broad-based weakness that you and many of your peers are feeling, is this something that could carry over into the beginning of 2016 as well?

I believe we are nearing the end of that.

We have reduced our channel inventory and dollars every quarter this year.

And we are now operating toward the leanest in that channel that we have with inventories.

I'll remind you that we recognize revenue on a sell through basis and, frankly, the distribution channel globally has been reducing their inventories which does not impact our revenue.

So at this point we see that happening again in the fourth quarter.

But as I mentioned I think we're near the end of that cycle as we have reached the leanest points that we can still rationally service our customers.

And to clarify, we have reduced (inaudible) utilization, not only in the fourth quarter but also in the third quarter as a result of that and in the second quarter.

Duly noted.

The op ex cuts -- it was mentioned that some of them are going to be permanent.

I'm curious to what extent are they permanent and to what extent could they come back in Q1 if macro ends up being better-than-expected?

It's a mixture of probably half and half.

Okay.

Last question -- there's been a lot of chatter about M&A recently -- you've been involved in it heavily in the past, but at your analyst today you committed to some internally focused goes much to the [refreshment of] shareholders.

I'm curious, have your views on M&A changed at all in the current environment?

If you could just comment on that I'm sure that would be greatly appreciated.

We remain committed to returning capital to shareholders.

As Bernard mentioned in his remarks, we believe that we will continue strongly buying our stock back at prices we believe are under the long-term value.

And any M&A would fit within that framework, so we plan on continuing that.

We also mentioned in our conferences that we think tuck in for technology gains is the best strategy for us.

We still believe that.

As the industry accelerates in some of its consolidation, we will have to take that into account to make sure we do protect the Company, but our primary focus again is capital return to our shareholders.

Excellent.

Thanks very much.

Vivek Arya, Bank of America Merrill Lynch.

I'm trying to get a better picture of trends from your prepared remarks.

I think one place you mentioned that current trends point to improving trends, but when I look at the lower op ex and the you lower utilization it appears that you're still somewhat cautious, and I know in general you tend to be conservative.

So, what is your read of the macro environment?

Is it just weak visibility?

Are customers still feeling nervous?

What is your general read of this environment?

My read of the demand environment is there's very slight growth globally.

It's not a contraction.

The end markets are not growing nearly as much as they were in places like China, but they're not contracting dramatically.

So we think what we are seeing mostly is a supply chain correction, and so, therefore, the cuts and changes we are doing reflect some near-term actions to protect profitability but not an expectation of any significant change in market demand.

Very helpful.

And a follow-up you mentioned supply chain affect.

Could you help us quantify what was sell in versus sell out trends during the quarter and how many weeks of inventory distribution inventory do you have versus what is normal?

Our normal range has been somewhere around 11 weeks, and we have been, as Keith mentioned earlier, decreasing inventory in the channel every quarter throughout this year.

As we mentioned in the remarks we decreased inventories by $21 million, and in terms of the weeks we are at the lowest point in the last year -- under 10 weeks.

John Pitzer, Credit Suisse.

Keith, this might be on the nitpicking side but in the prepared comment you talked about ASPs being down about 2% sequentially.

I can't remember a quarter that they haven't been sort of flat to down one.

I'm curious, you talk about pricing pressure picking up -- can you elaborate there anymore how much of this was mixture then?

Do you think this is going to continue?

How do I think about pricing going forward during the soft period?

We normally see, John, pricing pressures increased when the market makes changes.

And in this case I think the third quarter slowdown and the supply chain and reduction by distribution puts some unexpected pressure on the competition, and so they reacted with a little more pricing to try and offset that.

So I really don't see that as a continued trend.

I would be surprised to see that continue into the first quarter.

That's helpful.

Maybe as my follow-up, gross margins came in a little light in the September quarter.

I'm just trying to figure out if you can help me better understand the bridge from here to your 2017 target of 40% longer-term.

I'm trying to figure out how much of this will be mix dependent, and how much of this is going to be more efficiently using your fixed assets?

Any help there would be appreciated.

Obviously, the slowdown that we saw a right now is putting -- making the transition to the 40% more prolonged.

We are -- based off that 40% -- or that $4 billion revenue, what we have seen right now going on this year with subsidies and growth has made the transition to that goal more challenging.

Mix definitely makes a substantial portion -- we talked about that in the analyst day.

It is a significant portion of the transition.

And self-help or better use of manufacturing assets is another one that will definitely contribute a lot.

But we still need the revenue to get there.

It's a combination of all three.

If I can take a last quick one in -- the compute -- guidance for Q4 to be flat -- little surprising to me given how early we are in the Skylake ramp.

Are there moving parts within that where older platforms are declining and Skylake continues to grow?

Help me understand the flat guidance in Q4.

I think there is some opportunity for improvement there, and it really all depends on the mix of units that the computing industry builds during Q4.

So we taken a shot at what we think will be the conversion to Skylake rates in Q4, but I believe that we have certainly called that -- certainly in a fashion that allows for some upside.

Thanks, guys.

Chris Caso, Susquehanna Financial.

First question on gross margins and maybe just looking a little bit in the shorter term.

Can you talk about the impact on gross margins from utilization versus mix and I guess ASP and how that changes into the fourth quarter?

Obviously it would seem that the utilization is the easiest lever to move here and seeing how much benefit that would have going forward if that were to get better.

Yes, with the complex network and product set that we have it's pretty difficult to completely isolate those.

I would still characterize the Q3 and Q4 being driven largely by utilization and probably second order by mix - ASPs

Within the utilization, could you remind us -- does that impact the gross margins in the same quarter, or is there a quarter lag?

It is typically in the same quarter although there is a little bit of a lag based on how we cycle through.

Okay.

And within the communications market, based on what you had talked about for the third quarter and the sequential decline in the fourth quarter, the seasonality there doesn't seem to be quite that strong, and obviously there's a lot of different dynamics with different OEMs going on there.

Maybe you could outline what you are seeing in that segment and why seasonality isn't quite as a strong as we've seen in the past.

Our third-quarter -- we were expecting much more growth in the handset business.

What we did see definitely is a slowdown in China on the build rates and certain OEMs losing some share which netted up to a modest growth in Q3.

Q4 normally is not a growth sequentially, and we think it's perhaps more normal seasonality in Q4 than not.

Thank you.

Christopher Rolland, FBR & Company.

Thanks for the question.

You mentioned you're on track with your wireless charging program and expect to see initial revenue ramp starting in early 2016.

So what kind of design activity are you seeing there?

Do you guys have a design beyond the QUALCOMM referenced design, and what kind of guys are picking it up -- are they Chinese guys or from other geographies?

The initial ramps are all with the QUALCOMM referenced platform, and they are from Asia, not necessarily China the first ones, but the China hand sets right behind that.

For more of the transmit and pad side it will be more towards midyear for us.

Then also when we look at your various end markets in Q4, there were mostly downs there and not much more description.

Can you guys kind of force rank that for us to give us an idea of what might be worse than others?

Typically, I guess -- the consumer will probably be down the most followed by Comms and then industrial, and then auto and computing we said were flat.

Craig Ellis, B Riley.

Keith, I just want to go back to your comments about seeing an improved business environment in the first quarter.

Can you go into some more detail in terms of the things that you are seeing that lend that confidence?

Our booking some backlog going into the first quarter as compared to where we were this time last quarter and as compared to our normal seasonality are stronger than both of those things.

So what we're seeing as I mentioned earlier, I believe a lot of this is inventory correction, and we're seeing the signs that perhaps that is through.

And we're seeing the orders being place for Q1 more in line with the market demand.

Thanks for that.

The follow-up question is for Bernard -- Bernard, there has been a very robust and I think well appreciated move with the buyback on the part of investors.

Are we at a level where we can now more confidently look at averages over the last three quarters for what the Company should be repurchasing as we look ahead?

Or how do we think about the intensity with which you will execute the buyback from here?

The way I would answer it is obviously we will look at the market and the stock price.

We are definitely way ahead of the ratable portion.

I would view in general being ratable over the four years, and at the same time we do have to take into account the debt repayments we have through time that might moderate or increase the timing during the specific quarters.

Anything stand out on next year's debt repayment schedule that we should be aware of?

Well, we have a few things here and there.

We have the convert of about $357 million due in December 2016.

Steve Smigie, Raymond James.

Keith, thanks for making the comments about the potential impact here.

You did a good job of calling it back in October.

Curious on some of the earlier gross margin questions.

I think at analyst day you talked about potentially moving some manufacturing into some outsourced facilities in Japan.

I think those were going to be lower cost.

So I was just curious -- is that happening?

Or does the environment -- the software environment make that less likely.

And, if it is happening, how does that play out for benefits to gross margin in the coming year?

Yes, it is happening and it is happening at the fastest rate we're able and quite frankly ahead of our expectations.

I think two primary benefits there.

One, certainly will be a cost basis, but the other is going to be capital reductions.

So, the key for us, Steve, is getting all of our processes and products qualified, and that is a process that takes longer than we'd like but involves our customers.

But we're seeing a good ramp there, and I would expect that ramp to continue through 2016, both relieving the pressure on capital expenditures and improving margins.

Just to put it in perspective, though, at this stage we're running much less than 5% of our total production there, and next year we hope we can get that up in the high teens.

I wanted to follow up on the ADAS space and the cameras there.

I think you have a pretty good tie into there to mobile.

There is noise coming out of other players about trying to get into that processor market?

Do you work with other guys to try to be positioned as that ramps and your cameras work there, or is it not a major issue?

No, we do reference designs with all of the players in that marketplace.

If I could sneak one last one just in terms of the reduction in utilization to adjust for the inventory, you guys have talked about reducing inventory throughout the year and being at record lows.

Is the move to reduce inventory here about that you just want to keep taking it lower to be cautious, or is there certain -- there is just sometimes different pieces of inventory move up, and that's why you have to work them down?

I guess we believe in controlling the inventory.

Anytime you let that get away from you the results are very bad.

And I think you may have seen that with some other announcements.

So we're just a believer in keeping a tight lid on that.

We also believe that as the market turns it gives us much more upside potential.

Vijay Rakesh, Mizuho.

Just on the [order distin in channel] I know you mentioned that it came down -- how much did it come down percentage wise quarter-on-quarter and what is your historical levels be?

It came down approximately 8%, 9%, and we are almost at the lowest level -- we're close to the lowest level ever.

And if you look at the two big markets automotive and industrial, where will [channel] inventories now in those statements, and if you could give us some more color by geography -- how it looks in China and US, Europe.

Thanks.

The auto market, I think the inventories there are in very good control.

I don't see any excesses in that channel.

In industrial there are some excesses in China.

Frankly, we mentioned some of those earlier on the call.

So, maybe a quarter's worth is something that I would keep in mind there.

Then, geographically the Americas and Europe generically tend to be in pretty good shape.

The last question -- on the wireless side, I know you mentioned you have in the press release you said design wins in the handset side.

Obviously it's been a little delayed.

How do you see that ramp happening through next year?

Thanks.

I think you're referring to wireless charging, and again we get our first handsets that ramp February timeframe.

Then more handsets will come on in the second quarter and the third quarter, et cetera.

So, it's really kind of one major platform in one and than more after that.

Ian Ing, MKM Partners.

First question for Bernard on the expense controls.

After the targeted headcount reductions how much of your cost structure is fixed cost, and how much is potentially variable such as doing things like shutdowns, looking at variable compensation, et cetera?

This is a difficult question.

Definitely as you said there is a bonus and to some extent stock based comp which we quote what those numbers are in the press release.

It's $11 million to $13 million that are purely -- that can change with results.

You can make any cost variable that you need to.

In tough conditions we'll make sure that we make every cost variable except maybe depreciation.

But right now we don't feel we have the need to -- based on what we see as the long-term demands.

Then, automotive markets holding up looks like fairly nicely September as well as the December guidance.

Is this all trend ADAS and camera product cycles, or are you somehow having more favorable OEM exposure?

Also are you seeing any China weakness?

You would think China would have some contingent to the European auto suppliers.

Sure.

I'll start with the last first.

China growth has definitely slowed to a trickle.

So the growth in the auto market is much slower than it was a year ago.

Our growth, however, is really not just the cameras.

That certainly is the most spectacular piece of the growth.

Our design wins have been growing throughout the car led by our lighting solutions -- front headlights, tail lights, interior lighting, our safety solutions and our body power electronics.

Rajvindra Gill, Needham & Company.

The first question has to do with OPEX.

You talked about that you're bringing OPEX down to reflect a different reality in terms of overall growth rates.

Clearly worldwide GDP growth rates are coming down, and that's having an effect on the industry.

How should we think about OPEX growth going into 2016 or just your overall theory -- will that grow in line with revenue growth, or do you want -- are you going to manage a process where revenue growth is going to outstrip OPEX growth?

In general terms revenue growth should outstrip by some factor the OPEX growth.

At the same time we need to balance a make sure that we are investing enough in our R&D.

In our target we have -- we are basically accounting on about 100 basis points of leverage on the OPEX line over the next two years.

What was that?

100 basis points?

Yes.

My next question is -- really has to do with the overall economy.

You mentioned that this is more of a supply chain adjustment versus a contraction in demand.

But it seems like the industry has been in an inventory correction mode for the last three to four quarters ever since October of last year mainly driven because of China slowdown.

So, under an environment where you have maybe low growth and the supply chain is rebalancing itself, how should we look at your business going forward?

You have been able to grow over the market this year around 10%,11% year-over-year in 2015, but going forward in the low growth environment how should we look at the -- your business and where there are opportunities where you will be able to grow above the market?

Yes, we still believe will be of outgrowing the markets and as Bernard mentioned we are not immune.

The absolute rate may change a bit.

But we still believe in the models we did show at analyst day and in the three focus markets we should be looking at mid- to upper single-digit growth for those markets which would give you a blend number pretty close to mid single-digit growth over the next several years.

The inventory correction, again, I think the industry geared up for a China that was growing at 8%, 9%, 10% across the board in the industrial and electronic sectors.

And that clearly has stalled, and it has taken several quarters to get that in shape, but, as I mentioned earlier, I think were also pretty close to the end of that correction.

Tristan Gerra, Baird.

Could you remind us what the percentage of Aptina today is consumer driven and what type of market share Aptina has in automotive today and where could it get next year?

The consumer portion of Aptina is really more on the ISG side.

I will just have to step in.

We don't track Aptina any longer -- we do our total imaging sector but we can give you those percentages.

It is probably 15% of the total -- probably driven to some extent by the sports action camera more than anything else.

And what type of market share gain do you see, and also if you could they be give us an update on the gross margin progress that you expect as you reduce the consumer exposure in that business next year.

I'll cover the growth piece and then let Bernard talk about gross margins.

We are expecting double digit growth in imaging for the Company next year mostly driven by automotive which has our best margins.

And we think that story stays intact.

Some of the other markets like the security market where we been gaining a lot of market share there will probably grow but not grow as fast.

And from the margins point of view, first I'd like to say we are on track to deliver what we said when we purchased the company which is an $0.08 accretion or more in 2016 and $0.10 in 2016.

We have seen improvements in the gross margin from the level that we purchased them which was in the middle to high 20%'s.

We're still not and I desired place.

It's taking us a little longer, as we have -- as we are still selling some legacy parts into mobile that will continue for a while.

But in general we are very happy and excited about the performance of this acquisition giving us the, as Steve mentioned, double digit growth as well as the nice bottom line accretion.

Great.

Very useful.

Chris Danely, Citi.

On the OPEX cuts that going to be pretty evenly weighted between R&D and SG&A and then assuming we get back to some semblance of normal seasonality next year, (multiple speakers)

In general terms, yes, it is pretty much across all of P&L geographies within our mix.

So, if we assume that revenue is down a little bit in Q1 seasonally, would you be able to hold OPEX flat?

Could go down again?

If we just plug-in normal seasonality for next year in terms of the comps you get flattish growth.

In a flattish revenue growth environment would you look to keep OPEX flat -- would you cut a little more?

What would be thought process be there?

We would have to look at in more detail, but in general terms, yes, we would be able to do that.

Last question -- Sanyo 70 was that still breakeven?

It was virtually breakeven.

It is close to $1 million.

Thanks.

Shawn Harrison, Longbow Research.

Good afternoon.

First question is just a clarification.

If you could help me out with the auto exposure by geography, China, US and Europe.

Just in order of sizing, Europe is our largest market followed by the US and then Asia broadly.

A little larger market shares in Korea but China is now in the 10% or so range.

Very helpful.

I believe earlier you cited that maybe $4 million of the OPEX cuts give or take were permanent.

What percentage of maybe the cost coming out of COGS this quarter would be permanent versus what will come back as you roll into the new year?

In general terms we have the same effort to reduce COGS both across COGS and OPEX.

In the case of COGS the reductions are more directly related to activity so it is much were difficult to see how many are permanent versus temporary.

I would say that in the case of COGS it's probably a little bit more on the variable on the temporary side then the OPEX.

Thank you.

Harlan Sur, JPMorgan.

Thanks for taking my question.

On your commentary on trends pointing to a potential improvement in the first half -- first part of next year.

Keith, you mentioned confidence level driven by slightly higher backlogs in Q1, better booking trends for the [out] quarter -- is it more of a return to seasonal trends or is that being driven more by new product ramps?

I know it's early but any color on what segments or programs or end markets have a higher likelihood of driving that potential improvement early next year.

I think there is a significant amount of our design positions.

So, for example we expect the percentage of computers built on Skylake will continue to increase which gives us a non-seasonal growth -- or much above seasonal growth opportunity.

We mentioned some of the wireless wins that will continue to ramp in the first quarter.

Seasonally we also see automotive and industrial usually pick up in the first quarter.

We think that will continue to happen.

But in general my comments were around seeing things that were potentially a little better than seasonal as the first quarter is starting to shape up.

Great.

Thanks for that color.

Then within your comms outlook for the fourth quarter you addressed the mobile device subsegment.

I'm wondering directionally, qualitatively what are you seeing in the wired, wireless and data center networking segments in the market?

The data center and wired portion of our business is quite small.

It's less than 5% of our exposure, and we don't see any significant trends worth talking about there.

The handset piece -- normally we do see more builds in the third quarter than we see in the fourth and that looks seasonal to us as opposed to continued inventory reduction.

Thank you.

Craig Hettenbach, Morgan Stanley.

Keith, just picking up on the comment around the industry consolidation and protecting the Company as it accelerates, given standard products markets are pretty fragmented it seems for analog just curious in terms of things like scale you think about or technology pieces with those comments.

Yes, I would say technology is something we watch heavily, and our visibility to invest at appropriate rates so we can grow above the market is something that is quite important.

If you see too many companies consolidate in that analog space you fall behind in your ability to continue to invest at rates that will allow you to continue to be relevant.

So, really that's the thought process that we look at as we go forward.

Got it.

Just a question on the current environment -- particularly within China which has seen a reset.

As you went through late summer into early fall here, any comments specifically about China in terms of the level of bookings activities or how far along you think you are in terms of that inventory reset particularly within distribution?

I think were getting pretty close in most of the market in China with the exception of the appliances and some of the industrial.

Those two areas I think will continue to contract supply chain wise in the fourth quarter and maybe early first.

But the rest of it seems to be getting pretty well-balanced.

So, I'm not sure what else I can comment on.

That helps.

Thanks.

(Operator Instructions)

Gabriela Borges, Goldman Sachs.

Maybe just a follow-up on the [Elliott] questions on the image sensor group.

Maybe you could talk a little bit about your differentiation in the automotive market and industrial market and if you see any change in the competitive environment as those end markets continue to grow secularly?

Thank you.

Very different markets and different dynamics in the auto sector.

It really is differentiated on our technologies and focus of how we've gone after the systems level performance in automobiles.

And so we've got some great IP, some great systems approaches and great partners in the systems area which we think gives us a very, very strong situation.

Additionally the automotive safety standards or ASIL standards become very important and our history and experience there and automotive, I think, gives us an advantage over the competition.

On the industrial side it is very competitive.

Many of those applications are not technology differentiated.

And so there it is really more about having the right products at competitive costs, and we have been working diligently since our acquisition there to make sure we're using the ON network and able to generate good margins as that business has high demand, but generally again is much more cost competitive than any of the other markets.

And I think we are making great progress there.

Margins for that business have been coming up steadily -- I think we have got 500 basis points of improvement this year.

That's very hopeful.

As a follow-up if I could.

On the bookings trends and the booking patterns that you saw in the third quarter, maybe you could just comment on linearity and when you got a sense that weakened macro might be weighing on the bookings patterns which are leading to the below seasonal [fork you] guide.

In my prepared comments we talked about pretty stable bookings environment throughout Q3.

Normally they accelerate very strongly toward the end of the quarter.

So as you hit September you usually see a significant improvement in that rate.

That did not happen.

So, we would have started recognizing that if you will in September.

Maybe just one last clarification if a could.

On fourth quarter, what would you typically expect to see in terms of bookings linearity?

Thanks.

They would normally tend to decline as you go through the quarter.

You get a lot of short term turns in October, and by December everybody's pretty happy.

So in general you would expect a decline as you go through the quarter.

Makes sense.

Thank you.

No further questions at this time.

I'll turn the call back over to Mr. Agarwal.

Thank you for joining the call.

This concludes the call for today.

Goodbye.

This concludes today's conference call.

You may now disconnect.