安森美 (ON) 2016 Q1 法說會逐字稿

Welcome to the first-quarter 2016 ON Semiconductor earnings conference call.

(Operator Instructions)

I would now like to turn the call over to your host for today's conference, Mr. Parag Agarwal, Vice President, Investor Relations and Corporate Development.

Sir, you may begin.

Thank you, Bridget.

Good morning.

Thank you for joining ON Semiconductor Corporation's first-quarter 2016 quarterly results and conference call.

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

This call is being webcast on the investor 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 first quarter of 2016.

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 most directly comparable measures under GAAP are in our earnings release, which is posted separately on our website in the investor section.

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

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

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

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 Forms 10-K and 10-Qs and other filings with the Securities and Exchange Commission.

Additional factors are described in our earnings release for the first quarter of 2016.

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 second quarter, we will be attending Jefferies' Technology Conference on May 12 in Miami, and Bank of America Merrill Lynch Technology Conference on June 2 in San Francisco.

Now, let me turn it over to Bernard Gutmann, who will provide an overview of the first-quarter 2016 results.

Bernard?

Thank you, Parag.

Thank you, everyone, for joining us today.

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

We delivered strong performance for the first quarter of 2016.

We posted strong growth in our gross margins, exercised discipline in operating expenses, and, despite headwinds in certain end markets, we delivered strong revenue performance under the circumstances.

As we had indicated earlier, we have started taking actions to optimize our manufacturing footprint and cost structure with an objective of achieving our target model.

The macroeconomic environment appears to have stabilized, but order activity and business conditions remain subdued.

Order activity was steady throughout much of the first quarter.

We have recently seen a pick-up in order activity, in line with seasonality.

Our first-quarter revenue performance was impacted by well-publicized weakness in the computing and smartphone markets.

However, with accelerating momentum in the automotive market, we were able to offset much of the headwinds from computing and smartphones markets.

Keith will later provide additional details on end markets.

We have taken actions to streamline our manufacturing network and operating cost structure.

These steps are just first steps.

We plan to take additional steps to align our cost structure with the current market environment and to achieve our target financial model.

We have begun a plan to relocate certain of our manufacturing operations to larger existing locations within the Company.

These relocations are expected to result in annual cost savings of approximately $15 million.

As I indicated earlier, this is first of many steps we will take to optimize our manufacturing network.

We will make further announcements on additional measures as we make progress on our manufacturing consolidation plan.

In addition to manufacturing network consolidation, we took measures to further reduce operating costs of our system solutions group.

These measures should result in annual savings of approximately $8 million starting in the third quarter of the current year.

Shortly after the end of the first quarter, we obtained the financing for our impending acquisition of Fairchild at very attractive terms and interest rates.

The blended interest rate for the financing is expected to be approximately 5.5%, which is very attractive as compared to rates that other technology companies were able to obtain recently.

As we have indicated earlier, our EPS accretion analysis for the acquisition of Fairchild is based on interest rate of approximately 5.5%.

Under our current financing terms, we have flexibility of prepaying the Term Loan B and financing with cash flow generated by the combination of ON and Fairchild.

Now, let me provide you additional details on the first quarter of 2016 results.

ON Semiconductor today announced that total revenue for the first quarter of 2016 was approximately $817 million, a decrease of approximately 3% as compared to the fourth quarter of 2015.

GAAP net income for the first quarter was $0.09 per diluted share.

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

GAAP and non-GAAP gross margin for the first quarter was 33.7%, as compared to the mid-point of our guidance range, which was 32.8%.

GAAP and non-GAAP gross margins in the fourth quarter of 2015 were 33.3% and 33.2%, respectively.

The significantly better-than-expected gross margin performance in the first quarter was largely driven by higher utilization and our richer mix as compared to the fourth quarter of 2015.

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

Recall that in our first quarter of every year, our annual pricing contracts become effective, and consequently, we see a large -- a relatively larger pricing decline in the first quarter of every year.

Despite the annual pricing reset, our ASP performance in the first quarter is within our historical range of 1% to 2% decline per quarter.

GAAP operating margin for the first quarter of 2016 was approximately 7.1%, as compared to approximately 6.6% in the prior quarter.

Our non-GAAP operating margin for the first quarter was 10.6%, down approximately 50 basis points as compared to the fourth quarter of 2015, primarily due to lower revenue and slightly higher operating expenses.

GAAP operating expenses for the first quarter were approximately $217 million, as compared to approximately $224 million for the fourth quarter of 2015.

Non-GAAP operating expenses for the first quarter were approximately $189 million as compared to the mid-point of our guidance range, which was $191 million.

The better-than-expected operating expense performance was driven by continued cost control discipline.

Non-GAAP operating expenses for the fourth quarter were approximately $186 million.

We exited the first quarter of 2016 with cash, cash equivalents and short-term investments of approximately $620 million, an increase of approximately $2 million from the fourth quarter.

Operating cash flow for the first quarter was approximately $115 million, as compared to approximately $157 million in the fourth quarter.

During the first quarter, we spent approximately $73 million of cash for the purchase of capital equipment, and used approximately $45 million for the repayment of long-term debt and capital leases.

At the end of the first quarter of 2016, ON Semiconductor days of inventory on hand were 128 days, up approximately 6 days from the prior quarter.

In the first quarter of 2016, distribution inventory increased by approximately $1 million quarter over quarter.

Distribution re-sales increased by approximately 3% quarter over quarter.

For the first quarter of 2016, our lead times were up slightly as compared to the fourth quarter.

Our global factory utilization for the first quarter was up as compared to the fourth quarter.

We increased utilization to build inventory for seasonally stronger second quarter.

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

Revenue for ISG was approximately $168 million, down approximately 9% as compared to the fourth quarter.

The revenue decline for ISG was driven primarily by selective participation in margin-challenged consumer-focused markets and in lower end of security market.

Revenue for the Standard Product Group for the first quarter of 2016 was approximately $285 million, down approximately 3% quarter over quarter.

Revenue for the Applications Product Group was approximately $251 million, down approximately 1% over the fourth quarter.

Revenue for the first quarter of 2016 for the System Solutions Group was approximately $114 million, up approximately 3% quarter over quarter.

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

Keith?

Thanks, Bernard.

I will start with an update on our acquisition of Fairchild Semiconductor, then I will provide commentary on the current business trends and on various end markets.

We remain on track to close the Fairchild transaction in the middle of the year.

We have received approvals from regulators in Germany and Japan.

We're working with the regulators in the US and China to obtain necessary approvals.

As Bernard indicated in his prepared remarks, financing for the transaction has been secured at very attractive terms and rates.

Teams from both companies have made substantial progress in preparation for day one.

We're in the last stages of finalizing integration and operational plans for the combined Company.

We remain excited about the opportunities that the combination of the two companies will create for our customers, shareholders and employees.

Now, let me comment on the business trends in the first quarter.

During the first quarter, the pace of bookings was steady through much of the quarter, but we saw a greater-than-expected weakness in a few markets, especially computing and smartphones.

The pace of bookings has picked up in the last few weeks, consistent with normal seasonality.

Business conditions, although stable, continue to be soft.

Despite a subdued business environment, the underlying fundamentals of our Business continue to be strong, with major trends driving our growth in key strategic end markets remain intact.

We remain confident in our ability to outgrow the semiconductor industry, driven by the strength of our design wins in the automotive, industrial and smartphone end markets.

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

The automotive end market represented approximately 40% of our revenue in the first quarter, and was up approximately 9% quarter over quarter.

Our momentum in the fast-growing market for ADAS applications remains intact.

Sales of image sensors for automotive applications increased significantly quarter over quarter.

We are leveraging our leadership in automotive image sensors to expand into adjacent areas, such as power management for ADAS systems.

Our leadership in automotive image sensors has enabled us to significantly expand our presence in certain geographies in which we had been underrepresented.

In the automotive lighting market, we continue to maintain our leadership in the LED drivers and motor control systems.

We are benefiting from accelerating conversion from conventional lighting systems to LED lighting solutions for front lighting.

Key program ramps in the first quarter include park assist solution for a Korean automotive OEM.

We are also seeing outstanding acceptance for our T6 MOSFET products for powertrain, braking and steering systems.

Our power regulation solutions for infotainment and body electronic module applications posted strong revenue performance in the first quarter.

Demand trends in the automotive market remained steady.

We expect worldwide automotive units will continue to grow at an annual rate in the low-single digit percentage range.

We expect to significantly outgrow the automotive market with our increasing content in fast-growing applications such as ADAS, LED lighting, vehicle electrification, convenience, and in-vehicle networking.

Revenue in the second quarter for automotive end market is expected to be up quarter over quarter.

The communications end market, which includes both networking and wireless, represented approximately 17% of our revenue in the first quarter and was down approximately 10% quarter over quarter, primarily driven by pronounced weakness in well-publicized areas of the smartphone market, selective participation in certain margin-challenged product categories, and seasonality.

We continue to increase our content, and our design win pipeline continues to grow, with major global smartphone OEMs and China-based smartphone OEMs.

Key drivers of higher content on various platforms include image stabilization and auto-focus solutions, battery protection FETs, high-performance regulators, ESD protection, clock buffers, and ultra-small package MOSFET and EEPROMs.

We expect revenue contribution from these wins in the second half of the year.

We continue to maintain strong presence in the Chinese smartphone market.

Our performance in that market significantly exceeded our overall communications end-market performance.

In the wireless charging segment, we are beginning to see acceleration in design-in activity for resonant charging solutions for major platforms in smartphones and automobiles.

However, broad-based adoption of wireless charging has lagged our expectations.

Revenues in the second quarter for communications end market are expected to be up quarter over quarter due to normal seasonality.

The consumer end market represented approximately 11% of our revenue in the first quarter, and was down approximately 11% quarter over quarter.

The decline in the consumer was driven by normal seasonality, and steep inventory correction in the action and sports camera market.

On the positive side, we are beginning to see stabilization in the white goods market.

Revenue for the second quarter for consumer end market is expected to be up quarter over quarter due to normal seasonality.

The industrial end market, which includes military, aerospace and medical, represented approximately 22% of our revenue in the first quarter and was down approximately 7% quarter over quarter.

The weakness in the industrial end market was primarily driven by our selective participation in the security segment.

Trends in our traditional industrial subsegments were in line with expectations.

In the medical market, we continue to build on our strength in the hearing health market.

We continue to be a leader in this market.

We are increasing our presence with our reference design platform for wireless hearing aids and PMIC for hearing aids.

In the machine vision market, we continue to gain solid traction with our Python series of CMOS image sensors and CCD image sensors.

We are benefiting from investments by industrial companies in upgrading their manufacturing capabilities.

As I indicated earlier, the security market was the primary drag on our industrial performance in the quarter.

Given intense price pressure, we were selective in the market, and focused our efforts on more lucrative and higher-end segments of the market.

Revenue for the second quarter for industrial end market is expected to be up quarter over quarter.

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

During the first quarter, we saw greater-than-expected weakness in the computing market, with PC shipments declining in the mid-teens percentage range quarter over quarter, according to leading market research firms.

Furthermore, ramp of Skylake platform has been slower than anticipated, as OEMs work to deplete inventory of PCs based on prior generation Haswell and Broadwell platforms in a soft demand environment.

That said, ON Semiconductors Skylake-related product revenue increased sequentially as computer manufacturers continue a gradual transition to the Skylake platform.

We expect that a majority of PCs shipped in the second half of the year will be based on Skylake platform.

Revenue for the second quarter for computing end market is expected to be flat quarter over quarter.

Now, I'd like to turn it back over to Bernard for forward-looking guidance.

Bernard?

Thank you, Keith.

Now for second quarter of 2016 outlook -- based on product booking trends, backlog levels, and estimated turn levels, we anticipate that total ON Semiconductor revenues will be approximately $835 million to $875 million in the second quarter of 2016.

Backlog levels for the second quarter of 2016 represent approximately 80% to 85% of our anticipated second-quarter revenues.

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

We expect total capital expenditures of approximately $55 million to $65 million in the second quarter of 2016.

For the second quarter of 2016, we expect GAAP and non-GAAP gross margin of approximately 33.3% to 35.3%.

Factory utilization in the second quarter is likely to be up as compared to the first quarter.

We expect total GAAP operating expenses of approximately $215 million to $227 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairment and other charges, which are expected to be approximately $25 million to $27 million.

We expect total non-GAAP operating expenses of approximately $190 million to $200 million.

We anticipate GAAP net interest expense and other expenses will be approximately $38 million to $41 million for the second quarter of 2016, which includes non-cash interest expense of approximately $6 million.

GAAP net interest expense includes interest related to pre-funding of the acquisition of Fairchild Semiconductor.

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 $3 million to $7 million.

Cash taxes are expected to be approximately $5 million to $9 million.

We also expect share-based compensation of approximately $14 million to $16 million in the second quarter of 2016, of which approximately $2 million is expected to be in cost of goods sold.

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 second quarter of 2016 is expected to be approximately 416 million shares, based on the current stock price.

Further details on share counts and earnings-per-share calculations are provided regularly in our quarterly and annual reports on Forms 10-Q and Form 10-K.

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

Thank you.

Bridget, please open up the line for questions.

(Operator Instructions)

John Pitzer, Credit Suisse.

Thanks for all the details as always.

Keith, just my first question relative to the industrial market, what percent of industrial was made up by security?

Can you help me better understand how much business you think you left on the table because you didn't want to go to lower margin business?

I guess more importantly going forward, is there anything you can do in that market around cost reducing products to open up more the TAM?

Or how should we think about that market opportunity longer-term for you?

So, the security market, if that basically had been flat, the market -- the industrial results would have been flat quarter-on-quarter.

So that basically makes up that kind of 10% or so drop quarter-on-quarter.

It really is just the lower end of that market.

We still strongly participate in the higher end of the security market.

You can do the math on that but it's a noticeable percentage but not huge.

Of course, the margins were quite challenged there.

So we think it's the right move.

We do expect security to continue to grow in the high end of that market where we can make good markets -- margins.

I guess I don't know what other aspect to address.

That's helpful, Keith.

Then my second question just on computing being down 10% sequentially, you mentioned some of the drivers for that.

I am just curious, because when I look at that 10% number, it's not significantly better than the overall market.

I would have thought the Skylake content cushion and/or share gains would have allowed you to outperform maybe by a little bit more.

Help me understand where the content gains coming in as expected?

Or the share gains coming in as expected?

I guess importantly, if the PC market's flat in the back half of the year but we see that transition to Skylake more aggressively, how much do you think you can grow that business half on half?

Yes, a couple comments there.

One, we did not see the conversion to Skylake as we anticipated.

There was very few more units made of Skylake quarter on quarter as a percentage of the total.

So that was definitely a surprise to us.

We service that market through distribution.

Our customers placed very strong orders on this going into the first quarter which set expectations that Skylake would be quite strong.

As it turns out, it was up quarter on quarter on the Skylake portion, but more that product that we shipped stayed with the distributors.

So on sell-in basis, it would have been up very strongly.

Some of our competitors, for example, are all sell-in.

On a sell-in basis, it looked really strong; but on a sell-through basis, frankly, we did not see the conversion rate of Skylake that we expected.

We've talked with all of the computing folks here in the last few weeks.

They are expecting, I think, a fairly flattish second quarter.

But they are expecting continued Skylake conversions.

So I am anticipating to see that stronger up on the Skylake as we approach mid-year and the second half.

Thanks, guys.

Chris Danely, Citi.

On the restructuring, can you just talk about where you think the savings are going to come in terms of cost of goods versus OpEx?

It sounds like you might do some more restructuring.

Any particular areas that you're looking at?

Then what sort of a timeline of this -- could we expect more before the end of the year?

Or is this like an ongoing thing?

Thank you, Chris.

On the breakdown, $15 million of the $23 million is in COGS and $8 million is in OpEx.

As we said, the OpEx is mostly the SSG Group to shore up their bottom line.

On the COGS side, it is manufacturing relocation activities, which typically take 1.5 years or so, until you see the full benefits of those 18 months, until you see the full benefits of those through the P&L.

Yes, these are first steps as we indicated on our calls.

As we are ready to talk more, we will be announcing throughout the year more activities.

Sure.

For my follow-up question on inventories.

I think it said 128 days.

I think it's an all-time high.

Can you just talk about why inventory is so high?

Then where you expect those inventory days to trend for the rest of this year, along with the utilization?

So, yes, indeed.

It is a little bit on the higher side of our historical numbers.

We do expect a seasonal up-tick in the second quarter.

As we are guiding about 5% up, this is in anticipation of that increased run rate.

Obviously we are also -- our normal seasonality for the back half would also indicate more requirement for inventory.

In general terms, we would expect you to taper off that and get the inventory days to slightly lower numbers.

Maybe, Bernard, you could just give us like your typical range for inventory days, these days, and when you would expect to get there, so we could have some milestones?

So, right now, it's more in the 110 to 120 days, we have upped that compared to where we were before.

In general, it looks like the semiconductor companies now are caring a lot more inventory than we used a few years back.

So that's kind of our range.

Okay.

Thanks, guys.

Tristan Gerra, Baird.

How much exposure do you have left in consumer for your CMOS image sensor business, given the commentary that you had sub selective participation at consumer ends?

Is your $0.10 accretion target on track for this year?

Yes, it's less than 20% of our total image sensor business now.

We are actually ahead of our accretion targets there.

Strong margins in all of the sectors being the key driver.

Okay, great.

Then as a follow-up to the inventory question earlier, you mentioned that your utilization rates were up in Q1 sequentially, would increase again in Q2.

Could you give us a sense of what percentages?

Are in the low 80s currently?

What is your target for the second half based on your initial Q3 outlook?

I think you've provided, sometime in the past, your initial outlook a quarter ahead.

We are operating in kind of the high 70s range.

I expect that will be pretty much true for the second quarter as well.

Then as the second half develops, we could enter the low 80s, in the Q3.

Great.

Thank you.

Ian Ing, MKM Partners.

In automotive image sensors, you talked about entering some under-represented geographies.

Could you talk more about that opportunity?

Is there some cross-sell of other product potentially down the road?

Yes.

We mentioned a Korean design win for ultrasonic parking.

It is that area where the image sensors have picked up quite a bit for us.

So we are seeing some very good pick-up in Korea.

Okay.

Great.

Then in SSG, it looks like in March it's up modestly.

Are you coming off the Q4 loss here sustainably you think?

Do you know what the new breakeven level will be for SSG, after the share of $8 million?

I feel much, much better.

We now have an upward trajectory based on all of the automotive and industrial wins we've had the last year or so.

So, we are expecting increased sales from here on out.

With the changes that we have made Q3 onward, we should be above breakeven every quarter.

Again, as the revenue increases there, there's a pretty good fall-through of about 60% to the bottom line.

Okay.

Thank you.

Rajvindra Gill, Needham & Company.

Congrats on good results.

I wanted to talk a little bit about the ADAS systems and your competitive positioning there.

You had mentioned that automotive is about 40% of sales.

I was wondering if you could maybe provide more detail in terms of image sensors as a percentage of that?

Where do you expect that to grow over the next few quarters or so?

So, I'll back into that one.

ADAS for our image sensors, we believe we've got about 70% of the design wins in that sector.

So we are expecting to see increased share for image sensors in ADAS.

But from a total dollar for our automotive piece of that equation, it's about 25% for image and 75% for the rest of our products.

So, I'm sorry, image sensors are 25%?

25% of total automotive for the Company

Of total automotive.

Got it.

Great.

On the wireless charging opportunity, it seems like the other kind of major competitor is gaining some traction there.

They have a tri-mode standard in wireless charging.

Wondering how -- what is your thinking in terms of wireless charging going forward?

You had mentioned that you felt that the adoption rates are slower than anticipated.

But wanted to get your thoughts on how we should think about wireless charging in back half of the year and going into next year?

Yes.

So specifically, we had the resonant standard.

Tri-mode is great for the transmit side.

We are indeed releasing a part for that.

But on the receive side, the resonant pick-up has been slower than expected in the handsets.

So that was the comment relative to that.

We do see that picking up now.

As we get into the back half of the year and with the 2017 launches, we would expect on a percentage basis to see very significant improvements.

2017 should see the bulk of the growth.

Great.

Thank you.

Shawn Harrison, Longbow Research.

Two questions if I may, just in terms of the pending Fairchild acquisition.

I can't remember seeing this, but the size of the tranche fee loan that you could paydown early, what would be the size of that?

Then secondarily on Fairchild, it seems to be that they are losing headcount and having difficulty replacing it.

So just wondering if there's any concern about the good talent leaving before you can acquire the company and review who you want to keep versus who you'd like to have let go?

Very good, Shawn.

I'll answer the first one.

The tranche -- the Term Loan B is fully pre-payable, the whole amount, the $2.2 billion that we financed.

Yes, on the headcount, we watch that very carefully.

Most of the attrition we have seen so far is in the G&A portion of the business.

So we feel very confident, we are going to be picking up a company with strong engineering and sales talent intact.

Okay.

Then, I guess, a final question, just thinking about your CapEx going forward with some of the consolidation efforts.

What does that maybe bring normalized CapEx?

Either as a portion of revenue or is there a dollar basis too, 18 months out from now?

We still expect to operate in the 6% to 7% range.

We have been operating at the higher end of that, maybe we'll push it down a little bit.

But we'll still operate in the 6% to 7%.

Perfect.

Thank you so much.

Congrats on the results.

Thanks.

Steve Smigie, Raymond James.

I was hoping you could comment a little bit more on the restructuring activity.

Is the additional steps that you mentioned but haven't given detail on yet, is that going to be just for the core ON Semiconductor?

Or are you sort of making comments there about what you would do to the combined entity?

Yes.

All of our comments are relative to the current ON Semiconductor.

Obviously, when the transaction closes, there will be synergies that are associated with that combination.

But these are independent of that.

Okay, great.

Then one thing you mentioned was you are seeing, I think, a pick-up in the white goods.

I was hoping to get a little bit more color on that.

I assume that's driven by maybe a little better market over in China, but just wanted to get some extra color on that?

Yes, it appears that the inventories which were quite substantial built last year are basically being cleaned out.

We did see new orders from customers that have told us they had significant over-inventory position last year.

So, it looks like the inventory positions have been worked out.

I'm not sure it's a huge in-demand change, but it's certainly a huge change in our inventories.

Okay.

Thank you.

Vijay Rakesh, Mizuho Securities.

Just on Fairchild, I was wondering if you could give us some more -- a recap or an update on how you see the synergies at Fairchild?

How do you see the [FET] consolidations at Fairchild?

Thanks

Yes, we really haven't got any changes.

The deeper we get into it, it confirms our expectations.

We do see the $150 million or so that we talked about.

We are still not prepared to announce specifics on further manufacturing actions that can be taken.

But again, as we get deeper into it we confirm that indeed there is much more for us there on the manufacturing front.

Got it.

When you look at, on the automotive side, that between LED lighting and camera ADAS, how do you look at it globally?

Where is the penetration levels especially with the LED lighting globally?

On the camera ADAS side also, obviously, US is a nice tailwind.

But how do you see that pipeline going forward?

LED front lighting is still extremely small.

If you look at total automotive worldwide, it's less than 5% today have that.

But we are seeing a strong adoption with major US-built models picking up LED lighting for the 2017 year.

So we are seeing that increase quite rapidly.

On the ADAS systems, again today, the vast majority of everything is with rearview cameras.

What we are seeing is a very rapid adoption across all levels of models going forward.

But again, ADAS is a very thinly populated thing with less than 10% of the cars globally today.

Great.

Thanks.

(Operator Instructions)

Kevin Cassidy, Stifel.

On the image sensors, have you seen any supply disruption in the market due to the earthquake in Japan?

We have not yet had customers with major disruptions.

But we are certain closely monitoring that and offering assistance where possible.

Okay.

Great.

In the security market, you mentioned walking away from the low end.

Is the high end still growing?

Or is there a shift towards the lower end?

No, the high end is growing.

In fact, it's growing faster than the low end is growing.

So we still remain encouraged about the security market overall.

Okay, great.

Thank you.

Craig Hettenbach, Morgan Stanley.

The comments on the strength in China handsets, can you just talk about as you look into the back half, just how you see the market evolving between some of the traditional OEMs versus China?

Our expectation is that the China players will continue to gain share against the more traditional players in the second half.

At least from what we can tell, backlog-wise that is already taking place with order patterns.

Got it.

Then just a follow-up, on Aptina, you mentioned it's tracking above expectations for accretion and margin performing well.

Can you give us an update on where you are in terms of the business mix?

I know you've been focusing a little more on autos and industrial.

Do you think you are at that desired mix in terms of some of the areas you deemphasized?

Or how that plays out?

We are pretty close.

I expect leaving this year, we will be at the mix that we'd like long-term, which means the consumer piece of the business will be all accretive and all at the high end.

The security business, as we talked about earlier, will be the same.

So, I think we are a couple of quarters away from being at the ideal mix.

But we are certainly executing very strongly from a margin and profitability perspective.

Got it.

Thank you.

Rajvindra Gill, Needham & Company.

Just on the comment about outgrowing the semiconductor industry this year, just wanted to get some clarity on that.

As it stands now for the first two quarters of this year, revenue is going to be down about 9% year-over-year from the first half versus the second half -- I'm sorry, for the first half of this year versus the first half of last year.

You did have some tougher compares because of the image sensor business, but it does reflect a pretty decent snapback in the second half.

So I just wanted to get a sense of how you're thinking about growing above the market given the first two quarters of this year?

Yes, I guess a couple comments.

One, the automotive piece has been very, very good for us.

We've been outgrowing that.

You can look at the numbers.

The thing in our engines we talked about, the smartphone market has been the steepest decline.

That is what we do expect to be much stronger as we get into the second half and where our margins are much better.

So, net-net, the piece that's been missing, we think, is basically the outgrowth in the smartphone market has not shown up because the market itself shrank.

We expect that to change in the second half.

Then on industrial, I think, we are through all of the inventory corrections there.

We should see that growing as well strongly in the second half.

So the net of it is, three markets where we think we are better positioned than competition, only one of which has operated here in the first half.

So, in the second half, we think we have all three markets.

Perfect.

Thanks so much.

Ian Ing, MKM Partners.

Last quarter, you had an early read on weak hard disk drives.

Seagate looks like it's one of your representative customers in your 10-K.

Do you have any updated thoughts on this market and how it plays out the rest of the year?

I know there's concerns that some storage workloads are moving to the cloud, potentially.

Yes.

We do not see any strength coming for that market.

Okay.

Thank you.

I am not showing any further questions.

I will now turn the call back over to Mr. Agarwal for closing remarks

Thank you, Bridget.

Thank you everyone for joining the call today.

We look forward to seeing you at various conferences.

Goodbye.

Ladies and gentlemen, this does conclude the program.

You may all disconnect.

Everyone, have a great day.