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Operator
Good day, ladies and gentlemen, and welcome to the ON Semiconductor second-quarter 2016 earnings conference call.
(Operator Instructions)
I would now like to introduce your host for today's conference, Mr. Parag Agarwal, Vice President Investor Relations and Corporate Development. Please go ahead, sir.
- VP of IR and Corporate Development
Thank you, Christy. Good morning and thank you for joining ON Semiconductor Corporation's second-quarter 2016 quarterly results conference call. I'm joined today by Keith Jackson, our President and CEO, and Bernard Gutmann, our CFO.
This call is being webcast on the investor 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 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 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 the 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 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 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 third quarter we will be attending the Citi Technology Conference in New York on September 7, and Deutsche Bank Technology Conference in Las Vegas on September 14.
Now let me turn it over to Bernard Gutmann who will provide an overview of the second-quarter 2016 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.
We posted yet another quarter of strong business results, driven by continued focus on expanding margin and maintaining strong cost discipline. We delivered strong gross margin and operating margin performance, and our revenue exceeded the high end of our guidance for the second quarter.
As I indicated in our earnings call for the first quarter, we continue to work on optimization of our business manufacturing footprint and cost structure with an objective of achieving our target model. We believe that our margins have significant headroom to improve from current levels. And we have levers that we can pull to improve our profitability even if revenue growth lags our expectations due to macroeconomic factors. We will provide additional details as specific business improvement measures are implemented.
Now let me provide you additional details on our second-quarter 2016 results. ON Semiconductor today announced that total revenues for the second quarter of 2016 was approximately $878 million, an increase of approximately 7% as compared to the first quarter of 2016.
GAAP net income for the second quarter was $0.06 per diluted share. Excluding the impact of amortization of intangibles and restructuring, pre-funding interest related to our acquisition of Fairchild, and others special items, non-GAAP net income for the second quarter was $0.21 per diluted share.
GAAP and non-GAAP gross margin for the second quarter was 35.1%, meaningfully above the midpoint of our guidance range, which was 34.3%. GAAP and non-GAAP gross margin in the first quarter of 2016 was 33.7%. The significantly better-than-expected gross margin performance in the second quarter was largely driven by higher utilization, richer product mix and improved operational efficiency.
Average selling prices for the second quarter decreased by approximately 2% as compared to the first quarter. GAAP operating margin for the second quarter of 2016 was approximately 8.6% as compared to approximately 7.1% in the prior quarter. Our non-GAAP operating margin for the second quarter was 12.3%, up approximately 170 basis points as compared to the first quarter of 2016, primarily due to higher revenue and gross margin.
GAAP operating expenses for the second quarter were approximately $233 million as compared to approximately $217 million for the first quarter of 2016. Non-GAAP operating expenses for the second quarter were approximately $200 million as compared to $189 million in the first quarter. The increase in operating expenses as compared to the first quarter was driven by higher revenue and [relaxation] of certain cost control measures that were put in place in the prior quarters in face of challenging business conditions.
Operating cash flow for the second quarter was approximately $104 million as compared to approximately $115 million in the first quarter. Operating cash flow for the second quarter was impacted by approximately $24 million due to interest expense related to pre-funding of Fairchild transaction. Excluding the $24 million interest expense related to pre-funding of Fairchild transaction, our operating cash book flow would've been up approximately $13 million over the first quarter.
We also placed approximately $68 million in escrow to cover a few items related to pre-funding of the Fairchild transaction. This amount will be returned to us at the time of close of the transaction. During the second quarter we spent approximately $52 million of cash for the purchase of capital equipment, and used approximately $28 million for the repayment of long-term debt and capital leases.
We exited the second quarter of 2016 with cash, cash equivalents and short-term investments of approximately $588 million, a decrease of approximately $31 million from the first quarter. Excluding the impact of the amount placed in escrow and interest expense related to pre-funding of the acquisition, our cash balance at the end of the second quarter would have increased by approximately $61 million.
At the end of the second quarter of 2016, ON Semiconductor days of inventory on hand were 120 days, down approximately 8 days from the prior quarter. In dollar terms inventory on balance sheet declined by approximately $10 million as compared to the first quarter. We expect a further decline in balance sheet inventory days in the third quarter.
In the second quarter of 2016, distribution inventory days declined by approximately half a week as compared to the first quarter, and distributor resales increased by approximately 7% quarter over quarter. Accounts receivable went up by approximately $59 million or by three days in the second quarter as compared to the first quarter. The sequential increase in accounts receivable was primarily due to the timing of shipments. Following the end of the second quarter, receivables have returned to their normal level.
For the second quarter of 2016 our lead times were up slightly as compared to the first quarter. Our global factory utilization for the second quarter was up as compared to the first quarter.
Now let me provide you an update on the performance of our business units, starting with Image Sensor Group, or ISG. Revenue for ISG was approximately $173 million, up approximately 3% as compared to the first quarter. Revenue for Standard Products Group for the second quarter of 2016 was approximately $310 million, up approximately 9% quarter over quarter.
Revenue for the Applications Products Group was approximately $273 million, up approximately 9% over the first quarter. Revenue for the second quarter of 2016 for the System Solutions Group was approximately $123 million, up approximately 8% quarter over quarter.
Now I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?
- President and CEO
Thanks, Bernard. I will start with an update on our acquisition of Fairchild Semiconductor and then I will provide commentary on current business trends and on various end markets.
Based on the feedback from various regulatory agencies, we expect to close the Fairchild transaction around the end of the current month. We are working to obtain the last of necessary approvals in the US and China, and we will provide updates as further events unfold. I must also caution that despite our confidence in closing the Fairchild transaction this month, events outside of our control could result in unanticipated delay.
The ongoing consolidation in the semiconductor industry has further validated the strategic and financial rationale driving our acquisition of Fairchild. The acquisition of Fairchild adds highly complementary products and capabilities to our portfolio, and enables us to deliver compelling value to our customers, shareholders and employees.
Teams from the two companies have been busy planning for integration. Our preparations are further confirming the financial and strategic rationale for the acquisition. As a result, we believe that we will be able to meet or exceed the financial targets we provided to the investment community at the time of the announcement of the acquisition. We plan to provide further updates on the financial and strategic impact of the acquisition immediately after the close of the transaction this month.
Let me now comment on the business trends in the second quarter. During the second quarter the pace of bookings improved meaningfully over the first quarter and commentary from customers was generally positive. The strength in bookings has continued into the current quarter. Though we are experiencing improved bookings, the macro-economic data continues to be a mix of good and bad news and the business conditions remain subdued.
We continue to manage our business prudently, and we are directing our investments toward areas in automotive, industrial and mobile device markets that will enable us to drive both top-line and bottom growth. Examples of such areas include ADAS, LED lighting in automobiles, machine vision, medical, image stabilization, and autofocus, and power management in a broad range of applications. Our design win pipeline remains strong and continues to grow.
Now I'll provide some details on the progress in our various end markets. The automotive end market represented approximately 36% of our revenue in the second quarter and was approximately flat quarter over quarter. On a year-over-year basis our automotive revenue grew by approximately 15%.
We continue to outgrow the market, driven by our leadership in fast-growing segments of the automotive market such as ADAS and active safety, LED lighting, power devices and networking solutions. We have clearly established ourselves as a technology and market leader in ADAS. We continue to reinforce our leadership position and we are now enabling future autonomous driving vehicles through our expertise in automotive CMOS image sensors. We're working with all major auto OEMs and tier one integrators to define next-generation platforms.
In Korea we are benefiting from adoption of surround-view cameras in vehicles, with strong wins for our CMOS image sensors in multiple upcoming models. We are seeing acceleration revenue for our recently launched 1 megapixel and 2 megapixel CMOS image sensors for in-cabin driver monitoring applications.
During the second quarter we secured a win for our LED rear lighting solutions with a leading European OEM for future models. We also secured wins for new ASICs from European tier one integrators for start-stop alternators and ultrasonic park-assist applications.
During the second quarter we saw strength in specialized products for infotainment, safety and powertrain applications. Demand for products from our Standard Products Group was strong, as well. The T6 MOSFET family from our Standard Products Group continues to receive strong acceptance from customers for steering, braking, engine and transmission control applications.
Although there have been a few data points suggesting a slowdown in automotive unit sales, we believe that we can continue to grow our automotive revenue in the high single-digit percentage range annually driven primarily by content gains. Revenue in the third quarter for automotive end market is expected to be flat to down slightly quarter over quarter due to normal seasonality.
The industrial end market, which includes military, aerospace and medical, represented approximately 23% of our revenues in the second quarter and was up approximately 15% quarter over quarter. The growth in the industrial market was driven by strength in the security cameras, machine vision, medical, and general lighting-related applications.
In the medical market we continued our momentum in the hearing aid market with our Ezairo platform. We're leveraging our strength in the hearing aid market to expand into other related areas. We're seeing strong growth in the glucose monitoring applications and we are targeting this market with new products. We also experienced growth in medical imaging applications in the second quarter.
In the machine vision market, our PYTHON series of CMOS image sensors continue to grow at a rapid pace. Our CCD image sensors for industrial applications also grew an impressive pace in the second quarter, driven by demand for machine vision applications such as flat-panel inspection. We expect to continue growth in our machine vision revenue, driven by increased automation in manufacturing, and investments by industrial companies in upgrading their manufacturing capabilities. Revenue for the third quarter for industrial 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 second quarter, and was up approximately 11% quarter over quarter due to seasonality and the ramp of new design wins in various platforms. Our design win pipeline for mobile devices continues to grow and we remain well-positioned with global smartphone makers, as well as with China-based smartphone OEMs. Our strategy of broadly focusing on all players in the smartphone market and driving revenue through wins on major reference design platforms is yielding strong results.
During the second quarter we experienced strong growth in our filters, protection and low dropout regulators for multiple platforms. Our content on various platforms continues to grow. Our optical image stabilization and autofocus products continue their strong traction with China-based smartphone OEMs.
We are well positioned to benefit from our wins for protection EEPROMs, LDOs, and op amps on multiple platforms, which we expect to ramp in the second half of the year. Revenues in the third quarter for communications end market are expected to be up strongly quarter over quarter due to normal seasonality and ramp of design wins in new platforms.
The consumer end market represented approximately 11% of our revenue in the second quarter and was up approximately 5% quarter over quarter. The white goods market, which has been weak due to excess channel inventory of finished goods, posted strong growth in the second quarter. Other growth drivers included gaming and set-top boxes. Revenue for the third quarter for consumer end market is expected to be up quarter over quarter due to normal seasonality.
The computing end market represented approximately 12% of our revenue in the second quarter, and was up approximately 15% compared to the first quarter. The growth in computing market was driven by the much-anticipated ramp of the Skylake platform. We also benefited from strength in power supplies for servers and workstations. Revenue for the third quarter for computing end market is expected to be up quarter over quarter due to normal seasonality and the continuing ramp of the Skylake platform.
Now I'd like to turn it back over to Bernard for forward-looking guidance. Bernard?
- CFO
Thank you, Keith. Now for the third quarter of 2016 outlook. Based on product booking trends, backlog levels, and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $885 million to $925 million in the third quarter of 2016. Backlog levels for the third quarter of 2016 represent approximately 80% to 85% of our anticipated third-quarter revenues. We expect inventory at distributors to be flat quarter over quarter on a dollar basis.
We expect total capital expenditures of approximately $45 million to $55 million in the third quarter 2016. For the third quarter of 2016 we expect GAAP and non-GAAP gross margin of approximately 34.6% to 36.6%. Factory utilization in the third quarter is likely to be flat as compared to the second quarter.
We expect total GAAP operating expenses of approximately $225 million to $237 million. Our GAAP operating income include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be approximately $25 million to $27 million.
We expect total non-GAAP operating expenses of approximately $200 million to $210 million. We anticipate GAAP net interest expense and other expenses will be approximately $31.5 million to $41.5 million for the third quarter of 2016, which include non-cash interest expense and pre-acquisition interest expense of approximately $22 million to $29 million. GAAP net interest expense includes interest related to the pre-funding of acquisition of Fairchild Semiconductor. We anticipate our non-GAAP net interest expense and other expenses will be approximately $9.5 million to $12.5 million.
Cash paid for income taxes is expected to be approximately $5 million to $9 million. We also expect share-based compensation of approximately $13 million to $15 million in the third quarter of 2016, 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 2016 is expected to be approximately 420 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, Christy, please open up the line for questions.
Operator
(Operator Instructions)
John Pitzer of Credit Suisse.
- Analyst
Good morning, guys. Thanks for letting me ask a question. Keith, my first question is, as I'm sure you saw this morning, that Fairchild also reported earnings, put up very strong revenue results. But the margin profile, I think, was a lot weaker than a lot of us were expecting -- gross margins down sequentially versus expectations -- for them to be up.
I'm wondering, since they don't have a conference call, can you give us some insights relative to the work you've done through your integration team exactly what's going on? And should I view this margin profile as Fairchild just really trying to clean themselves up before you take receipt of the asset? Or how should I think about that?
- President and CEO
I can't share specifics on them since we're not closed the transaction yet. But I would not anticipate the margin profile that you see as a continuing expectation. I think they will bounce back nicely in the near future.
- Analyst
That's helpful. And then maybe for my follow-up, Bernard, you talked about in your prepared comments some levers you could pull to improve profitability. Good revenue results this quarter and the guide. OpEx was a little bit higher than I would've thought. Can you just elaborate a little bit about some of those levers and help me better understand, relative to revenue growth, how should I think about OpEx growth?
- CFO
Sure John. On the levers, we have talked about those in the past being manufacturing footprint, being also potential migration from six to eight inch, just in general productivity improvements, our normal operational improvements in the factories. Also potential look, now that we're a bigger company, potentially not focusing on certain areas or divesting for certain less profitable areas. In general we said our normal model we are 50% fall through on incremental revenues.
Leverage on operating expenses we should still see there. We had a few things in the second quarter that contributed to OpEx being higher. Some of it was, indeed, the fact that we had taken some temporary measures to offset cost in the fourth and first quarter, which now we went back to normal levels. We also had a few expenses associated with the Fairchild transactions that we did not pro forma out that are contributing to that level.
In general terms right now our expectation is that OpEx, we are not going to change our investment levels in OpEx, and the only increases we should expect are inflationary increases. In the third quarter our expenses are going up because we have our full-co merit increase. That's the main reason our operating expenses are going up.
- Analyst
Thank you.
Operator
Chris Danely of Citigroup.
- Analyst
Thanks, guys. On the end market results it looks like auto was a little below guidance but PC was a little above guidance. Can you just talk about what led to the beat and the miss on those end markets?
- President and CEO
On the automotive side we actually had two customers that were doing some inventory correction for their company-specific situations, which had a little less growth in automotive than had anticipated. And on the computing side, the adoption of the Skylake platform was actually slightly faster than we expected going into the quarter. So, that gave a nice pop to the computing segment.
- Analyst
Great. And then my follow-up relates to the Fairchild acquisition. It looks like an NXP is going to spin out their standard products business. Do you anticipate any impact, good or bad, to your business/the Fairchild business?
- President and CEO
Not significant. Basically the NXP business does not match the Fairchild profile to a high degree, so really not expecting much of a change there.
- Analyst
Great. Thanks, guys.
Operator
Chris Caso of CLSA.
- Analyst
Thank you, good morning. Keith, wonder if you could just go through what would be the remaining milestones for the Fairchild deal closing, and your conviction in getting there, as you currently expect, by the end of the month. In addition, the Fairchild update this morning talked about likelihood of selling their ignition IGBT business. Is this a requirement for closure of sale?
- President and CEO
On the closing milestones, we've been in communication with the FTC and had quite a few exchanges there. We believe that we are in a situation where we are going to have satisfactory conditions to close here shortly. The Commissioners still have to vote on that but we're not anticipating further issues.
The ignition IGBT business that was referred to is actually on Semi's ignition IGBT businesses that is being sold. And we do expect that also to be closing shortly as part of the Fairchild merger deal.
- Analyst
Okay, thank you. As a follow-up, on automotive again, you talked about in your commentary high single-digit growth. I assume that's over a longer term timeframe. Can you talk about some of the elements that get you there?
And, in addition, there's obviously some concern in the industry now about automotive units in total. How sensitive is your auto growth, both in near term and short term to units versus content?
- President and CEO
That high single digits is actually a true year on year, including this year. So, it's not a future event, it's actually we expect that in 2016, as well. And it's really based on the adoption of the advanced safety features and the adaptive driving features, we think is going to be at a pace such that, even with little to no growth in automotive unit sales, we will still see that kind of rate with our automotive content specifically because we have such a good position in the areas that are being adopted in new models so aggressively.
- Analyst
Great, thank you.
Operator
Vijay Rakesh, Mizuho.
- Analyst
Thanks, guys. Good quarter and guide here. Just back on the automotive side, just looking at the health of that industry, how is channel inventory for you and for the industry in general? And then if you could give US and geographic color on that inventory side. Thanks.
- President and CEO
In general we've got good inventory positions around the world. I mentioned earlier a couple of customers had a little bit more than they desired in the second quarter. That was mostly in Japan. But the rest of the world seems quite healthy.
- Analyst
All right. And as part of your Fairchild acquisition do you expect any fab consolidation, both for you or for the combined? Thanks.
- President and CEO
We ill give more details on that after we close the transaction. But over the longer term we will continue to reduce our footprint into larger, more efficient factories.
- Analyst
Great, thanks a lot.
Operator
Ian Ing from MKM Partners
- Analyst
Thank you. It looks like we'll get an update on the magnitude of financial targets once you close the acquisition. But my question is, given you've got more time to prepare, should we expect any changes on the pace of synergies over the next 18 months once the deal closes?
- CFO
In general terms, we feel very optimistic about achieving or exceeding those targets. We have basically stated that we will get exiting velocity of about 50% of those synergies after six months, and that still is in our plans. And the completion of the rest within the next 12 months.
- Analyst
Great, thanks. And I'm just trying to reconcile some of the commentary. Industrial up 15%. Obviously that's pretty robust. It feels like some of that should be replenishment versus true end demand, yet your channel inventory is down half a week.
I'm just trying to reconcile how industrial could be up so strongly with channel inventory down. Perhaps industrial specific was actually up. Thanks.
- President and CEO
First of all, seasonally, the first half is the best for industrial. So, you've got a strong seasonal headwind. And then specifically we actually did have some very, very good performance in that marketplace with the design wins we had. We're sure there's some share gain in there, as well, but it is normal for that market to be up strongly in the second quarter.
- Analyst
Okay, thank you.
Operator
Craig Ellis of B Riley.
- Analyst
Thanks for taking the question. I just wanted to follow up on the outlook commentary for the wireless business. You mentioned program ramps and seasonality, but could you be more specific with respect to the ramps that you are seeing, either by geography or by class of customer, tier one, tier two, et cetera?
- President and CEO
We're expecting a broad expansion in both China and non-China handsets as you go through the third quarter. It is the time that most of our customers launch their new models. And, of course, they do all those builds for the fourth quarter starting in September. It's really broad-based and reflects the profile of our customer base.
- Analyst
Thanks, Keith. And then the follow-up is on the announced self-help initiatives from last quarter. I think it was $15 million in manufacturing and $8 million in OpEx. And that was SSG specific, I believe,
Was any of that benefit realized in the reported quarter? And, if not, when would we expect to see that hit the income statement?
- President and CEO
You should start seeing that in the third quarter.
- Analyst
Thanks, guys.
Operator
Tristan Gerra of Baird
- Analyst
Hi, good morning. Given your commentary of flat inventory dollars at distis for Q3, and reconciling with your revenue guidance for the quarter, how many weeks of inventories would that translate into exiting Q3 at distis?
- President and CEO
It will be approximately 10 weeks
- Analyst
Great. And then what products are seeing lead time increases? And, also, is there any specific end market driver? And what's the lead time range that you are seeing currently for your products?
- President and CEO
We have an 8- to 15-week range. And some of the end markets driving that are wireless, as we just mentioned, with some very nice ramps in the third quarter, and then in specific spots in industrial.
- Analyst
Great. Thank you.
Operator
Ross Seymore of Deutsche Bank.
- Analyst
Hi, guys. Keith, a question for you on the communication side of things. You talked about the customer-specific design wins and ramps in the third quarter. There's been some concerns about excess inventory potentially building up in China and creating a need for some burn off in the fourth quarter. How are you seeing that end market?
- President and CEO
We have not seen that to date. Certainly we service that market a lot through distribution and those inventories are actually getting leaner. We certainly have not seen any of that yet.
- Analyst
As my second question, on the computing end market you mentioned that the Skylake ramp was helpful in the quarter. How far through that progression do you believe we are?
- President and CEO
We are still in the low 25%, 35% range of Skylake versus other platforms. So, we think it still takes to the end of the year before that becomes majority platform.
- Analyst
Thank you.
Operator
Rajvindra Gill of Needham & Company.
- Analyst
Thanks and congrats on good results. I was wondering if you could talk a little bit about seasonality given the commentary. You talked about the specific end markets and indications of some stabilization in the industry. Any thoughts in terms of seasonality patterns as we go into the second half?
- President and CEO
Normally our industrial market -- I'll just start with that one -- is stronger in the first half than it is the second. So, it gets flattish as you get into the third quarter. Computing normally would increase in the third quarter. But specifically there, our increases are going to be due to Skylake platform ramps as opposed to more computers being built.
Handsets almost always go up in the third quarter. That's when they launch new platforms and get ready for the seasonal builds at the end of the year. So, that is usually up strongly.
Consumer also tends to be up in the third quarter -- again, pre-builds for the holiday seasonality. And have I missed any?
Automotive for us normally is slightly down in the third quarter as automobile companies take down their plants for new tooling on the new models for a week or two. So, it's just slightly down to flat but then picks up again in the fourth quarter.
- Analyst
Okay, that's helpful. And can we talk about, Bernard, some of the gross margin drivers as we go into next year? You're benefiting from a favorable mix shift while utilization rates are flat. Can you talk a little bit about how you foresee the business mix over the next two to three quarters impacting the margins?
- CFO
Sure. In general terms, mix will be a tailwind. We are purposefully focusing on automotive, industrial and wireless. All three have better than corporate average gross margins. Obviously there's some seasonality patterns within that but in general terms the mix should be favorable.
And, in general, just on utilization, our fall-through model shows about a 50% incremental contribution to the bottom line based on incremental revenues. So, in addition to that, we had talked about, we announced the $15 million footprint consolidation that will help us as we go into the 2017 timeframe. And as we have said, we will be announcing more things as they become clearer in the future.
- Analyst
Thank you.
Operator
Steve Smigie of Raymond James.
- Analyst
Great, thanks a lot. Congratulations on the nice results. I was hoping you could comment a little bit more on PC as you look forward, or compute in general. You guys obviously gaining dollar content and share on Skylake.
What does that growth look like over the next couple years? And does it make sense at this point, given your success there, to maybe go a little bit harder after the server market?
- President and CEO
On the PC front itself we expect the Skylake transition to largely be over as we enter next year. From a dollar content perspective there are no big drivers for 2017. Share gain, obviously, as things would continue to drive, but dollar content should be relatively stable through 2017.
For the server area there are more opportunities there in specifically the power area. And we do expect to have offerings in 2017 for that.
- Analyst
Okay, great. And then, maybe I'm parsing too finely, but your comments on the macro seemed a little bit more upbeat than last quarter. I was just wondering if you're just getting a little bit better read from customers that's giving you some more confidence. Or am I just reading too much into what you said?
- President and CEO
Actually the bookings have been up strongly, and they've been much stronger in the summer season as it's approached than we normally see. So, from an order pattern perspective we are very encouraged.
But from a macro perspective, listening to the financial prognosticators on the news, it's not so exciting. So, so I'm not sure how to reconcile those, Steve, but from the order patterns we are very pleased.
- Analyst
Thank you.
Operator
Kevin Cassidy of Stifel.
- Analyst
Thanks for taking my question. With lead times stretching and inventory coming down, slight increase in utilization -- and maybe, Keith, to add onto your comment about your customer bookings increasing -- could it be that they are concerned of lead times stretching further?
- President and CEO
Could be. Basically we've been in a very lean position for a long time now. And certainly individual customers may be becoming a little more sensitive to that with the ramps of particularly handsets in the third quarter.
- Analyst
I see. Coming into the quarter, there was concern over image sensor from one of your competitors where the earthquake in Japan had damaged a factory. Did you see any increase in bookings due to that?
- President and CEO
There may have been some temporary sales impact but it was certainly over in the second quarter.
- Analyst
Okay, great. Thank you.
Operator
Harlan Sur of JPMorgan.
- Analyst
Good morning and thank you for taking my question. From a bookings and backlog perspective can you just give us some color on demand patterns by geography here in the September quarter?
- President and CEO
I'll let Bernard answer. I don't know that there's any huge discernible one. The handset market is pretty much all China for us from a build perspective, so that's going to show the strongest profile.
- CFO
In general terms, the relative strength we are seeing is pretty much across all the geographies.
- Analyst
Great, thanks for that. And what were your specific utilizations in Q2? I know last call you had expected them to trend in the high 70% range, but it looks like you guys drove a level that was higher than that.
- President and CEO
Yes, just slightly above 80% in Q2 and expected to be very similar in Q3.
- Analyst
Great. Thank you.
Operator
Mark Lipacis from Jefferies.
- Analyst
Hi. Thanks for taking my question. Keith, I think over the past 10 years of M&A, I believe you've been articulating the view that the markets had still been too fragmented to buck the normal quarterly ASP pressures that you guys have reported over time. I'm wondering if you thought that, with the Fairchild acquisition, does the industry get concentrated enough to the point where you're in a position to start resisting some of those downward ASP pressures. That's all I had. Thank you.
- President and CEO
I wish I could say that. It's really got a lot more consolidation to go before the supplier side of it, the semiconductor side, has enough strength against a very consolidated customer base.
- Analyst
Thank you.
Operator
Harsh Kumar of Stephens.
- Analyst
First of all, congratulations on good numbers. Two questions. If you look at the comm business I think you're guiding for really good growth. Yes? (inaudible) And then I had a follow-up
- President and CEO
You cut out there. Can you please repeat the question?
- Analyst
Yes, within comm, I think you are guiding for really good growth. Is all of that from mobile or is the core networking business doing as well?
- President and CEO
The majority of the growth is handsets. The networking side is a much smaller portion for us and continues to grow. But the handsets will be the story in Q3.
- Analyst
Got it. And for my follow-up, would you remind us, assuming you close the deal in about the end of the month, when would you start to expect the synergies? Is it mostly OpEx? And then your commentary suggested you're talking about meeting or exceeding those. Have you seen something new, perhaps, that you can share with us?
- President and CEO
The answer is they will start showing up in the fourth quarter. I think, as we've planned and spent more time there, we've confirmed what we expected, and we now have solid plans in place for execution. So, we've got high confidence as opposed to new discoveries.
- Analyst
Thank you.
Operator
Shawn Harrison of Longbow Research.
- Analyst
Good morning. Two questions on interest expense. Number one, do you have an updated number in terms of what you anticipate the interest expense will be for the debt associated with Fairchild? And, then, also, is it safe to assume that you're still planning on the debt to be put to you in November and that you would retire that debt?
- CFO
For the Fairchild debt, we have a term loan B for $2.2 billion at LIBOR plus 4.50, with a LIBOR floor of 75 basis points. And we will also draw $200 million on our revolver at a slightly better interest rate. And, yes, the current plan is to retire, convert them when it becomes due in December.
- Analyst
And then as a brief follow-up, maybe I'm parsing this too closely, but is your commentary or your view on automotive production, has it declined now, given what you've seen over the second quarter? Or were you more just commenting on what you're seeing on those headlines versus the incoming production rates to you business?
- President and CEO
We have not seen order rate declines or inventory growth in the channel for us on automotive. The commentary on Q3 is very specific to model changeovers and is again very normal course of business.
- Analyst
Perfect and congrats on the quarter.
Operator
Craig Hettenbach from Morgan Stanley.
- Analyst
Thank you. Keith, just following up on the commentary about bookings in business versus macro, and certainly strength in the business, any other context, whether it's a year ago the industry had to go through inventory correction, and that weighed. Do you think that inventory's just been matched better to demand? Or anything else that you can help in terms of given that context of the business versus just what is a subdued macro.
- President and CEO
Yes, I think there's no question that there was inventories being worked off in the first half. I think we commented on that in the first quarter. Areas like white goods, for example, look like they've pretty much worked through that, and in the computing and consumer segments likewise.
I think the Q2 numbers and inventory reductions that we've seen in our supply chain indicate to me that most of those have been taken care of now, so you are seeing just a bit of normal market behavior.
- Analyst
Got it. And then just a follow-up for Bernard on inventory. If I look at 120 days within your 110 to 120 target, will Fairchild influence that in terms of, as you bring that mix of business on, and the type of inventory you guys would like to hold?
- CFO
In general terms I expect the model will not change drastically. They have been reducing their inventories over the last couple of quarters in a nice way. So they are going to be aligned or slightly lower than our numbers.
But in general terms, obviously we will look at from the synergistic point of view if there's opportunity to take inventories out we will do that. But I don't expect it to meaningfully change our model.
- Analyst
Got it, thank you.
Operator
That concludes our Q&A session for today. I'd like to turn the call back over to Mr. Parag Agarwal for any further remarks.
- VP of IR and Corporate Development
Thank you, everyone, for joining the call today. we look forward to seeing you at various conferences during the quarter. Goodbye.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all connect. Everyone have a great day.