使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day, ladies and gentlemen, and welcome to the ON Semiconductor Second Quarter 2017 Earnings Conference Call.
(Operator Instructions) As a reminder, this conference call may be recorded.
I would now like to introduce your host for today's conference, Mr. Parag Agarwal, Vice President of Corporate Development and Investor Relations.
Sir, you may begin.
Parag Agarwal - VP of IR
Thank you, Danielle.
Good morning, and thank you for joining ON Semiconductor Corporation's Second Quarter 2017 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 Relations section of our website at www.onsemi.com.
A replay of this web broadcast, along with our earnings release for the second quarter of 2017, will be available on our website approximately 1 hour following this conference call and the recorded broadcast will be available for approximately 30 days following this conference call.
The script for today's call and additional information related to our end markets, business segments, geographies and channels are also posted on our website.
Our earning release and this presentation includes 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 Relations section.
During the course of this conference call, we will make projections or other forward-looking statements regarding future events or future financial performance of the company.
The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should or similar expressions are intended to identify forward-looking statements.
We wish to caution that such statements are subject to 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 Form 10-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission.
Additional factors are described in our earning release for the second quarter of 2017.
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 law.
For all synergy-related discussion on this call, we have used Fairchild's 2015 results as a base for all comparisons.
During the third quarter, we will attend Citi Technology Conference in York on September 7 and Deutsche Bank conference in Las Vegas on September 12.
Now let me turn it over to Bernard Gutmann, who will provide an overview of the second quarter 2017 results.
Bernard?
Bernard Gutmann - CFO, EVP and Treasurer
Thank you, Parag, and thank you everyone, for joining us today.
We once again delivered solid financial results, which exceeded our guidance and Street consensus for all key metrics.
Our second quarter results clearly demonstrate the consistent and strong execution on the operational front and strength of our broad range of product portfolio for automotive, industrial and communications end markets.
Strong operating leverage and free cash flow generation in the second quarter clearly demonstrated the strength of our operating model.
Visibility into our business continues to remain strong as we benefit from our design wins in automotive, industrial and communications end markets.
Diversity in our customer base, product portfolio and end markets have insulated us from the volatility caused by weaknesses in certain end markets and geographies.
With our largest end customer contributing less than 5% of our revenue and a product portfolio weighted towards end markets with fastest-growing semiconductor content, we generally have lower customer and product-related risk.
At the same time, we are well positioned to benefit from secular and macro trends in the semiconductor industry.
We continue to make strong progress in the integration of Fairchild and remain on track to deliver the targeted synergies.
At the same time, we have taken steps to optimize our product portfolio to drive margin expansion for the company.
During the second quarter, we exited the mobile image sensor market as the margin profile for that business was not compatible with our target financial model.
Furthermore, we monetized the value of highly differentiated mobile imaging technology to an intellectual property licensing agreement with a third party.
We have excluded the gain of approximately $24 million related to this transaction from our second quarter non-GAAP results.
We delivered robust free cash flow performance during the second quarter.
As we indicated earlier, we intend to use this free cash flow to derisk our balance sheet.
For 2017, we now expect free cash flow in the range of $600 million to $650 million, higher than our earlier expectation of approximately $550 million to $600 million.
As a comparison, we generated free cash flow of approximately $371 million in 2016.
Now let me provide you details on our second quarter results.
Total revenue for the second quarter of 2017 was approximately $1,338,000,000, an increase of approximately 52% year-over-year and a decrease of 7% as compared to GAAP revenue in the first quarter.
Recall that our first quarter GAAP revenue included a onetime benefit of approximately $155 million due to the change in revenue recognition to sell-in method from sell-through method.
Second quarter revenue increased by approximately 4% as compared to non-GAAP revenue in the first quarter.
GAAP net income for the second quarter was $0.22 per diluted share.
GAAP income before income taxes for the second quarter was approximately $143.2 million as compared to $115 million in the first quarter.
Non-GAAP income before income tax for the second quarter was approximately $171.1 million.
Net cash paid for taxes in the second quarter was approximately $17.1 million, and diluted shares outstanding were approximately $426 million.
Non-GAAP income before income tax for the first quarter was approximately $133.2 million.
Net cash tax -- net cash paid for taxes in the first quarter was approximately $18.4 million, and diluted shares outstanding were approximately $426 million.
GAAP gross margin for the second quarter was 36.8% as compared to 35% for the first quarter.
Non-GAAP gross margin for the second quarter was 36.9%, an impressive increase of approximately 150 basis points over the 35.4% in the first quarter.
Better than expected non-GAAP gross margin in the second quarter was driven by strong operational execution and higher than expected revenues.
On the operational front, enterprise-wide manufacturing cost reductions and supply chain synergies from Fairchild were the major contributors to the gross margin expansion.
With tailwinds from additional manufacturing synergies from Fairchild, mix improvement and portfolio optimization, we remain on track to achieve our target non-GAAP gross margin of 40% by 2020.
GAAP operating margin for the second quarter of 2017 was approximately 11.5% as compared to approximately 12.8% in the prior quarter.
Our non-GAAP operating margin for the second quarter was 14.7%, an increase of approximately 150 basis points over 13.2% in the first quarter.
On a revenue increase of approximately 4%, our non-GAAP operating profit increased by approximately 16%.
This strong operating performance demonstrates the operating leverage and strength of our operating model.
GAAP operating expenses for the second quarter were approximately $337.9 million as compared to approximately $319.9 million for the first quarter of 2017.
Non-GAAP operating expenses for the second quarter were approximately $296.8 million as compared to approximately $284.9 million in the first quarter.
Non-GAAP operating expenses for the second quarter were at the higher end of our guidance, primarily due to the accrual for higher variable compensation resulting from significantly better results.
We expect our OpEx intensity to decline in the third quarter of 2017.
We had strong free cash flow performance in the second quarter.
We define free cash flow as cash flow from operations less capital expenditures.
Second quarter free cash flow was approximately $264.2 million as compared to approximately $155 million in the first quarter.
Operating cash flow for the second quarter was approximately $333.2 million.
Second quarter free cash flow and operating cash flow included approximately $24 million from a licensing arrangement related to the mobile image sensor business.
Capital expenditures during the second quarter were approximately $69 million.
Capital intensity based on non-GAAP revenue during the first 6 months of the year was approximately 4.6%, significantly below our target model of 6% to 7%.
We expect that capital expenditure in the second half will increase as capital intensity for 2017 is expected to be in the range of 6% to 7%.
As I indicated earlier, we expect free cash flow for 2017 to be in the range of $600 million to $650 million, higher than our previous expectation of approximately $550 million to $600 million.
We exited the second quarter of 2017 with cash, cash equivalents and short-term investments of approximately $872 million as compared to approximately $729 million in the first quarter.
We used approximately $137 million in the second quarter of 2017 for the repayment of debt.
At the end of the second quarter of 2017, days of inventory on hand, adjusted for fair market value step-up, were 108 days, down 3 days as compared to inventory days at the end of the first quarter.
Second quarter distribution inventory in days was approximately flat as compared to the first quarter.
For the second quarter of 2017, our lead times were up moderately quarter-over-quarter.
Our global factory utilization for the second quarter was slightly up sequentially.
Now let me provide you an update on the performance of our business units, starting with the Power Solutions Group, or PSG.
Revenue for PSG was approximately $671 million.
Revenue for Analog Solutions Group for the second quarter of 2017 was approximately $468 million, and revenue for the Image Sensor Group was approximately $198 million.
Now I would like to turn the call over to Keith Jackson for additional comments on the business environment.
Keith?
Keith D. Jackson - CEO, President and Director
Thanks, Bernard.
Once again, I'm very pleased with our results.
Our second quarter results clearly demonstrate the strong momentum of our Power, Analog and Sensor portfolio for automotive, industrial and communications end markets.
At the same time, our robust free cash flow generation, strong margin performance and solid operating leverage demonstrate the strength of our operating model.
While we have benefited from a favorable industry and a macroeconomic environment, a significant part of our outperformance has been driven by company-specific factors, such as accelerating traction in automotive, industrial and communications end markets and solid execution on the operational front to realize synergies and cost savings.
Our results over the last many quarters demonstrate progress that we have made in transforming ON into a highly diversified and broad-based supplier of power, analog and sensor solutions for automotive, industrial and communications end markets.
As Bernard indicated earlier, this highly diversified base of customers, products and end markets has insulated us from demand volatility from certain end markets and geographies.
Customers are realizing the depth and breadth of our Power, Analog and Sensor portfolio, and they are increasingly relying on us for key enabling technologies that are disrupting existing business models.
We are engaging at very early stage with key players in artificial intelligence for automotive, machine vision and robotics applications.
Also, we continue to extend our leadership in the ADAS markets for automotive and are investing in sensor fusion solutions for ADAS.
We believe that our exposure to secular growth drivers and emerging applications will enable us to continue to outgrow the semiconductor industry.
We continue to make strong progress in the integration of Fairchild.
Integration of Fairchild's IT systems is expected to be complete in the fourth quarter of 2017.
Also, we are on track to begin realizing manufacturing synergies from Fairchild towards the end of this year as we start in-sourcing of Fairchild's back-end operations.
We expect to exit 2017 with annual synergies run rate of $180 million.
Our target of annual synergies run rate of $245 million by the end of 2019 remains unchanged.
Performance of Fairchild continues to be strong with continued strength in bookings momentum.
We are realizing revenue synergies from Fairchild as our strategy of leveraging our sales reach and customer relationships to accelerate Fairchild's revenue is yielding strong results.
We, again, had record bookings quarter for Fairchild in the second quarter.
During the second quarter, booking for Fairchild were at the highest levels for the last 3 years.
Let me now comment on the business trends in the second quarter.
During the second quarter, demand trends and bookings were strong across most end markets and geographies.
Also, supply and demand dynamics remained favorable in the second quarter as we didn't see any evidence of inventory build in distribution channel or of anomalous booking patterns.
Commentary from customers and our booking trends point to sustained improvement in demand environment for most end markets.
Customers continue to remain concerned about potential supply tightness and demand continues to grow at a steady pace.
Now I'll provide details of the progress in our various end markets for the second quarter of 2017.
Revenue for the automotive market in the second quarter was approximately $410 million and represented approximately 31% of our revenue in the second quarter.
Second quarter automotive revenue grew by approximately 30% year-over-year and was marginally up quarter-over-quarter on a non-GAAP basis.
Our momentum in the automotive market remains intact with leadership in fast-growing applications, such as ADAS and LED lighting, and exposure to a highly diversified customer base across the globe.
For the second quarter, we again posted strong growth in our CMOS image sensor business for viewing ADAS applications.
We continue to gain market share in automotive image sensors, and our design win pipeline for our CMOS image sensors for automotive applications continues to grow at a rapid pace.
As I indicated earlier, we are working with market leaders for development of artificial intelligence-based ADAS systems.
Our Power franchise for automotive continues to strengthen, and we're working with leading ecosystem partners on power management solutions for processors and other related applications in automotive.
Other drivers for automotive in the second quarter included LED lighting, in-vehicle networking, mixed-signal ASICs and protection devices.
Despite temporary softness in automotive demand in certain geographies, global demand for automotive semiconductors has shown no signs of slowdown.
With a broad product portfolio and exposure to the fastest-growing segments of the automotive market, we're among the best-positioned companies to capitalize on increasing semiconductor content in automobiles.
Revenue in the third quarter for automotive end market is expected to be approximately flat quarter-over-quarter as opposed to normal seasonality of sequential decline in the third quarter.
The industrial end market, which includes military, aerospace and medical, contributed revenue of approximately $351 million in the second quarter.
The industrial end market represented approximately 26% of our revenue in the second quarter.
Second quarter industrial revenue grew by approximately 59% year-over-year and approximately 8% quarter-over-quarter as compared to non-GAAP industrial revenue in the first quarter.
Strength in the industrial end market was broad based across products and geographies.
With the acquisition of Fairchild, our footprint for power management solutions for industrial applications has expanded in a significant manner.
We're seeing a steep acceleration in demand for our power modules for industrial applications.
Key drivers of demand for industrial end markets include industrial power supplies, building automation, lighting, industrial automation and alternative energy.
We also saw strong growth in our medical business driven by implantable devices and hearing health.
We continue to see strong growth in machine vision applications with our PYTHON line of CMOS image sensors.
As I indicated earlier, we are engaging at the very early stage with key players in artificial intelligence for machine vision and robotics applications.
Revenue in the third quarter for the industrial end market is expected to be down quarter-over-quarter due to normal seasonality.
The communications end market, which includes both networking and wireless, contributed revenue of approximately $252 million in the second quarter.
The communications end market represented approximately 19% of our revenue in the second quarter.
Second quarter communications revenue grew by approximately 62% year-over-year and approximately 6% quarter-over-quarter.
Our presence with market leaders in the smartphone market continues to strengthen, and our content in major smartphone platforms continues to grow with each generation.
We recently achieved major successes with our power management devices and intelligent charging solutions for smartphones.
Revenue in the third quarter for the communications end market is expected to be up quarter-over-quarter due to normal seasonality.
Computing end market contributed revenue of approximately $131 million in the second quarter.
The computing end market represented approximately 10% of our revenue in the second quarter.
Second quarter computing revenue grew by approximately 50% year-over-year and approximately 3% quarter-over-quarter.
We remain on track for the ramp of our server-related revenue in the second half of this year.
Recall that with products from Fairchild, we have won designs for powered stage, for cloud computing and server applications with addressable content of more than $30.
Revenue in the third quarter for computing end market is expected to be up quarter-over-quarter due to normal seasonality.
The consumer end market contributed revenue of approximately $194 million in the second quarter.
The consumer end market represented approximately 15% of our revenue in the second quarter.
Second quarter consumer revenue grew by approximately 96% year-over-year and approximately 7% quarter-over-quarter.
Strength in white goods was a key driver of consumer-related revenue in the second quarter.
Revenue in the third quarter for the consumer end market is expected to be up quarter-over-quarter due to normal seasonality.
In summary, our execution remains strong, and we continue to deliver solid results.
We have shown impressive expansion in our margins, and our free cash flow generation is accelerating at a rapid pace.
Fairchild integration is progressing on schedule, and performance of Fairchild, thus far, has exceeded our expectations.
While we have benefited from a favorable industry and macroeconomic environment, a significant part of our outperformance has been driven by company-specific factors such as accelerating traction in automotive, industrial and communications end markets and solid execution on the operational front to realize synergies and cost savings.
With a strong pipeline of design wins, coupled with favorable macroeconomic environment and healthy supply-demand dynamics in the semiconductor industry, visibility into business remains strong.
Now I'd like to turn it back over to Bernard for forward-looking guidance.
Bernard?
Bernard Gutmann - CFO, EVP and Treasurer
Thank you, Keith.
Based on product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $1,340,000,000 to $1,390,000,000 in the third quarter of 2017.
The exit from the mobile image sensor business is slightly impacting the sequential revenue growth in the third quarter.
Backlog levels for the third quarter of 2017 represent approximately 80% to 85% of our anticipated third quarter revenue.
For the third quarter of 2017, we expect GAAP gross margin in the range of 36% to 38% and non-GAAP gross margin in the range of approximately 36.2% to 38.2%.
Factory utilization in the third quarter is likely to be up sequentially.
We expect total GAAP operating expenses of approximately $315 million to $336 million.
Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairment and other charges which are expected to be approximately $30 million to $37 million.
We expect total non-GAAP operating expenses of approximately $285 million to $299 million.
We anticipate third quarter GAAP net income -- net other income and expenses, including interest expense, will be approximately $35 million to $38 million which include noncash interest expense of approximately $8 million to $9 million.
We anticipate our non-GAAP net other income and expenses, including interest expense, will be approximately $27 million to $29 million.
Cash paid for income taxes in the third quarter of 2017 is expected to be approximately $13 million to $17 million.
We expect total capital expenditures of approximately $105 million to $125 million in the third quarter of 2017.
As I indicated earlier, capital intensity in the second half of the -- of 2017 will be higher to compensate for the low level of capital intensity in the first half of the year.
Our target of 6% to 7% annual capital intensity remains unchanged.
We also expect share-based compensation of approximately $16 million to $18 million in the third quarter of 2017, 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 2017 is expected to be approximately 427 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 Danielle, please open up the line for questions.
Operator
(Operator Instructions) And our first question comes from the line of Ross Seymore from Deutsche Bank.
Ross Clark Seymore - MD
The first question is on margins in general.
You guys had solid upside in the gross margin, but the OpEx was a little bit higher in the second quarter than expected.
Can you just, Bernard, walk us through the puts and takes on the gross margin upside?
And then the OpEx side, the variable aspect of it?
I think everybody understands if revenues are stronger, the OpEx can be higher.
But just walk us through what drove it so high and why you have confidence that, should we have more upside in the revenue side of the equation, the OpEx intensity will go down in the second half as you guided.
Bernard Gutmann - CFO, EVP and Treasurer
Thank you, Ross.
So on the gross margin front, the puts and takes are the same.
We have articulated in our Analyst Day, mainly revenue fall-through, cost reductions, mix and synergies.
Those are the major ones.
The -- on the OpEx front, the -- as we stated in our prepared remarks, pretty much all of the increase in -- the sequential increase is due to variable comp.
As we go further up, there is always the limit to that, so we expect that, that will not continue.
Also, we guided our stock-based comp to be slightly lower which is just based on normal calculation of the -- of our shares.
So it's mainly stock-based comp and variable compensation for which we know we have limits based on our bonus plan.
Ross Clark Seymore - MD
Great.
And I guess as my follow-up, Keith, one for you...
Bernard Gutmann - CFO, EVP and Treasurer
Sorry.
Furthermore, we also expect to still continue generating more synergies coming from Fairchild that will help us also moderate and reduce the intensity of our OpEx for the second half of the year.
Ross Clark Seymore - MD
Great.
Keith, one for you quickly.
You, in your script, went through reasons talking about lead times and bookings and no abnormal behavior.
Just talk a little bit more about what you're seeing there.
I get a lot of investor questions about a peak in the cycle and what does it mean for ON, et cetera.
So if you can go into maybe quantifying where those lead times are and what you've seen in cycles past in retrospect that peaks and how we might be different currently from those former peaks.
Keith D. Jackson - CEO, President and Director
Yes.
I think there's a couple of things that put us in a good situation.
One is there's been a good discipline on capacity expansion in the industry the last couple of years, and what we've seen here is a relatively low amount of increase quarterly, but it's been a steady increase for the last several quarters.
So without capacity being added, you ended up with fuller factories, a little more supply tightness and a little better positioning on pricing as opposed to something that has ramped quickly in response to some new market demands.
It's really just been slow and steady with the controlled discipline on new capacity.
Operator
And our next question comes from the line of Vivek Arya from Bank of America.
Vivek Arya - Director
Just to follow on that, the capacity utilization.
If you could help quantify what utilization is right now.
And then importantly, I think CapEx was sub-5% in the first half, but you're expecting a ramp in the second half to get back to your 6% to 7% outlook.
What's driving that?
Keith D. Jackson - CEO, President and Director
So the utilization rates are high 80s right now and will remain there in the next quarter.
From a CapEx perspective, it's really just the cycle times on getting new capital.
Things that have been ordered for some time, the lead times extended out on those, and they just appear to be landing in the third quarter versus the second quarter.
Vivek Arya - Director
Got it.
And as my follow-up, good to see the strong free cash flow generation.
I think in your prepared remarks, you mentioned the commitment to delevering the balance sheet.
At your Analyst Day, you had set out a target to getting to 2x the leverage by the end of next year.
Given the strong free cash flow, do you think it's time to rethink that target and perhaps pull it in somewhat?
Bernard Gutmann - CFO, EVP and Treasurer
Based on what we're seeing right now, the possibilities of pulling it in are very real, and we will.
It is our priority #1 to delever the balance sheet.
Operator
And our next question comes from the line of Chris Danely from Citigroup.
Christopher Brett Danely - MD
For the gross margin upside, should we assume that this is the new baseline for the synergies going forward?
And then maybe talk about the gross margins going forward, the other drivers.
Bernard Gutmann - CFO, EVP and Treasurer
In general terms, yes, it is the new mark.
Obviously, the revenue, we have increased revenue growth as compared to what we had in our target model, and that's basically helping us.
But yes, it is the new base to which we can count on our synergies, and we still expect about a 50% fall-through on incremental revenue and then the incremental savings coming from the different plans we have already articulated in the past.
Christopher Brett Danely - MD
Great.
And then my follow-up on lead times.
Can you just give us a kind of a bogey of where they are?
Do you expect them to go down this quarter?
Or when do you think you could bring them back to normal?
Keith D. Jackson - CEO, President and Director
So they are in the -- over the mid-teens, and we expect them to be relatively flat even though we're bringing on significant new capacity in the third quarter.
Operator
And our next question comes from the line of Mark Delaney from Goldman Sachs.
Mark Trevor Delaney - Equity Analyst
First question is another one on gross margin.
Gross margin, you've got it up next quarter, even though I think the end market mix gets a little bit more challenging with industrial market down.
I'm wondering how much of that is from the Fairchild COGS synergies starting to come through.
I think you guys have planned for a little over $100 million in total of Fairchild COGS synergies, which would, I think, get you another couple hundred basis points to gross margin.
Are you seeing some of that already in the September quarter?
Or is most of that still to come?
Bernard Gutmann - CFO, EVP and Treasurer
That's mostly still to come.
We expect most of the Fairchild-related manufacturing synergies to come towards the end of the year and in 2018.
There were some supply chain-related synergies in the second quarter, and we expect that, that will continue.
So it is more others than the Fairchild synergies that will help in the third quarter.
Remember, we also said we exited the mobile sensor business, which had margins that were not -- that we didn't like.
So that should also help.
And in general terms, the way we're guiding, we're guiding for a 50% fall-through in incremental revenues.
Mark Trevor Delaney - Equity Analyst
That's helpful, Bernard.
And a follow-up question about the seasonality in the fourth quarter.
Obviously, you now have Fairchild, and so maybe you can help us think about what combined seasonality is for the December quarter and the move to sell-in versus sell-through in terms of the revenue recognition through distribution.
How is that also playing into the seasonality this year?
Bernard Gutmann - CFO, EVP and Treasurer
I don't think the sell-in to sell-through is affecting in any meaningful way.
We are -- we have the controls in place to make sure we don't grow inventories in an abnormal way.
Seasonality for the fourth quarter has typically been down.
Fairchild, historically, has been down more than on legacy, and on legacy, it's in the 2% range.
So it's probably in the 2% to 4% range is what we are expecting that to be.
Operator
And our next question comes from the line of Rajvindra Gill from Needham & Company.
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market
Question on the automotive business.
It seems that you're well positioned on kind of 2 fronts, one, the proliferation of ADAS systems with respect to your CMOS sensor portfolio and your radar portfolio, but also the trend towards electric vehicles on your power management portfolio.
So I wanted to get your sense on how you're looking at total content for both sensors and power management modules and how you're kind of positioned to specifically expand the sensor portfolio to incorporate -- or to support more higher levels of ADAS systems.
Keith D. Jackson - CEO, President and Director
Yes.
On the car content, there is quite a bit of difference between the electric vehicles and nonelectric vehicles.
It's as much as $300 per automobile increase for electrification.
So that's very, very significant.
On the Image Sensing -- or ADAS side, we're seeing like a 25% CAGR growth rate on that as cars adopt more cameras for more safety features.
And so we see that as being sustainable for at least 3 or 4 years at that kind of CAGR.
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market
Okay, great.
And last question for me.
In terms of the industrial side, on the machine vision, can you talk a little bit about the trends towards machine vision and factory automation and how that's driving your business going forward?
Keith D. Jackson - CEO, President and Director
It's a big part of the outgrowth in the industrial market over years past.
Basically, the advent of affordable sensors, plus artificial intelligence being added to automation in the industrial side, gives a real boost.
We're also seeing, from a power perspective in industrial automation, the new technologies we have provide significant increases in energy efficiency.
And so there's a replacement cycle that goes on with that.
Rajvindra S. Gill - Senior Analyst of Microcontrollers, Analog & Mixed Signal; Consumer IC & Multi-Market
And you had mentioned that you're working on artificial intelligence partnership or development.
Could you maybe elaborate further on that?
Keith D. Jackson - CEO, President and Director
I can't give any specifics on it.
Just to say there are some partners that we are working very closely with to use both our Power and Sensor solutions in artificial intelligence environments.
Operator
And our next question comes from the line of Craig Ellis from B. Riley.
Craig Andrew Ellis - Senior MD & Director of Research
Keith, I wanted to follow up on activity in the compute area, specifically server power.
That's a nice win that's starting for the team.
Can you just talk about how server power could evolve over the next few years?
After getting in on this initial beachhead, what should investors expect from a share and content standpoint as subsequent server generations roll out?
Keith D. Jackson - CEO, President and Director
Yes.
So we've stated with our current powered stage participation, it's about $30 per server.
We expect -- that is not with significant market share.
We do expect that the power will be increasing in new server platforms, and so you'll get more dollar content perhaps another $15 over the next couple of years.
And then from a market share perspective, we would be participating in that powered stage market, plus the control market would add more money to that.
So you should see similar kinds of performance as we had in the desktop notebook ramps from a share perspective and a dollar content perspective.
Craig Andrew Ellis - Senior MD & Director of Research
That's helpful.
And then a broader question with regard to pricing and activity there.
Another company that is also based in the Phoenix area last week indicated that they're seeing firming pricing in their portfolio on the MCU side.
So I don't think that's a meaningful or material part of the ON portfolio, but it brings up one of the trends that we're increasingly seeing in the semiconductor sector.
Are you seeing any signs of firming pricing in your product groups?
If so, where?
And if not, do you think they could emerge either later this year or next year?
Keith D. Jackson - CEO, President and Director
No.
We see the pricing environment firming across the board.
As you would suspect with little extended lead times and continued growth in the marketplace, the supply/demand dynamics have become more favorable for us.
Craig Andrew Ellis - Senior MD & Director of Research
And do you see an environment where pricing would actually be flat quarter-on-quarter?
Or are we just looking at a more moderate decline, say, in the 0.5 percentage point area?
Keith D. Jackson - CEO, President and Director
I think we're at the flatness stage.
Operator
And our next question comes from the line of Tristan Gerra from Baird.
Tristan Gerra - MD and Senior Research Analyst
Given some softness in the U.S. auto market, what's your expectation for non-GAAP growth in automotive revenue this year?
Keith D. Jackson - CEO, President and Director
So auto revenue, '17 versus '16 for the company, should be up above or around 30% year-on-year.
Tristan Gerra - MD and Senior Research Analyst
And excluding Fairchild?
Keith D. Jackson - CEO, President and Director
About more 10%, if you exclude Fairchild.
Tristan Gerra - MD and Senior Research Analyst
Okay, great.
And then is your Q3 revenue guidance based on the expectation that channel inventories remain flat in Q3, given some -- concerning the supply chain that there could be some tightness?
And if your outlook is for flat inventory levels, when do you see there is an opportunity for the channel to start replenishing inventories a bit?
Keith D. Jackson - CEO, President and Director
So we do expect to be roughly flat.
I think we hit it in our guidance.
Quarter-on-quarter not much could change.
And from a replenishment perspective, actually, we think we're managing it quite well.
So we're not looking for any replenishment cycle, just really managing on a sell-through basis even though we're now sell-in.
Operator
And our next question comes from the line of Chris Caso from Raymond James.
Christopher Caso - Research Analyst
Just ask about the September guidance in the context of some of the stronger business conditions you're seeing now.
I mean, it seems like the guidance is on the lower end of what we'd say to be normal seasonality.
Is that a function of conservatism on your part?
Is it perhaps a different definition of seasonality, given Fairchild?
Just for some perspective there, please.
Bernard Gutmann - CFO, EVP and Treasurer
So as a reminder, the exit of the mobile business is indeed affecting the seasonality or the growth -- sequential growth by approximately 1%.
Also, you can argue our number is not the most aggressive.
Christopher Caso - Research Analyst
Okay, fair enough.
As a follow-on to that, you talked about in your prepared remarks about no evidence of inventory build or anomalous booking on the part of customers.
I mean, given your experience, how high do lead times typically get when you typically see that?
I guess perhaps another way of asking it is what's different right now from the prior years where we have seen some of those anomalous bookings?
Keith D. Jackson - CEO, President and Director
Well, lead times definitely had reached higher levels when we had the last peaks.
So this is more moderate at this stage.
And I think the other piece of it is even though the lead times have gone out, generally speaking, the supply is keeping up with the demand.
So there's not a felt tremendous imbalance there.
Operator
And our next question comes from the line of Vijay Rakesh from Mizuho.
Vijay Raghavan Rakesh - MD of Americas Research & Senior Semiconductor Analyst
Congratulations on your margins of finally breaking out of the 37% level.
Just on the automotive side, if you look at the automotive ADAS, can you talk about what are the tailwinds there, especially what is the A B penetration in the U.S. now?
And do you see any tailwinds from China in CapEx, especially as you look at 2018?
Keith D. Jackson - CEO, President and Director
Yes.
So specific on ADAS, that continues to be a global phenomenon, just not -- not just a Europe or U.S. phenomenon.
There are fewer cars with advanced ADAS in China.
But just the sheer number that are being built there and the growth, particularly in the SUV arena, is contributing nicely to a very quick ramp.
So what we do see is continued global demand.
I mentioned earlier, we're expecting something in the mid-20s CAGR there as a result of not just more content in the higher-end cars, but in China as well with the lower end.
Vijay Raghavan Rakesh - MD of Americas Research & Senior Semiconductor Analyst
Got it.
And then the use of cash, I know you mentioned delevering was a top priority.
Is there any update to that 2x net leverage that you talked about by end of 2018?
Does that get pulled in now?
Bernard Gutmann - CFO, EVP and Treasurer
It is -- very likely will be pulled in, yes.
Operator
And our next question comes from the line of Kevin Cassidy from Stifel.
Kevin Edward Cassidy - Director
Going back to the pricing question or comments.
If you're seeing better pricing than expected and your estimated -- or your target for 40% gross margin, I guess, what -- when you're targeting 40% gross margin, what were your assumptions for price declines year-over-year?
Keith D. Jackson - CEO, President and Director
Yes.
We usually build them -- we don't usually.
In our specific model there, we used a 6% decline in ASPs to be offset with cost reductions to get to the 40% gross margin.
Kevin Edward Cassidy - Director
Okay.
So would you say you're tracking ahead of it then with the -- it seems the last few quarters, you've been saying price pressure is lessening.
Keith D. Jackson - CEO, President and Director
Price pressure is lessening, and we would be doing better than our model, if this continues.
Operator
And our next question comes from the line of Chris Rolland from Susquehanna.
Christopher Adam Jackson Rolland - Senior Analyst
Really nice execution.
Nice to see it all come together.
So exiting the mobile image sensor business during the quarter, what was the revenue impact there and the impact for next quarter as well?
And then finally, are there other businesses that you guys view that don't meet that gross margin profile?
Bernard Gutmann - CFO, EVP and Treasurer
So the revenue was approximately 1% or 2%, and we continually look at opportunities.
And we articulated that in our Analyst Day that we're counting on about 40 bps coming from exiting business, and we'll continually look at divesting from nonstrategic underperforming businesses.
Christopher Adam Jackson Rolland - Senior Analyst
Great.
And you guys also talked about the integration of Fairchild's back-end.
What's the timing there and the impact?
And then Keith, you mentioned putting more capacity online to alleviate lead times.
Where does that capacity come from?
I assume that you're talking about front-end there?
Keith D. Jackson - CEO, President and Director
No.
Actually, there's more back-end than front-end, and that also plays into the in-sourcing piece of the equation.
So more of our capital will go towards back-end equipment in the second half of this year.
And the Fairchild in-sourcing piece really doesn't kick in until all of our qualifications are done, and that'll be late in this year.
Operator
And our next question comes from the line of Harsh Kumar from Stephens.
Harsh V. Kumar - MD
Keith or Bernard, I was curious about your views on the auto market.
Generally speaking, you're guiding better than normal, but you mentioned there were parts of it that are temporarily soft.
I was curious if these are end geographies or end markets that are softer than normal?
And I was also curious about your views on content growth versus this whole kind of negative SAR that all the investors are talking about.
Then I have a follow-up.
Keith D. Jackson - CEO, President and Director
Yes.
The softness was really geographic-based and, specifically, North American-based.
We, in our look, think there's a 6% or more CAGR on content growth with no SAR growth, and that's what we've used in our models.
Harsh V. Kumar - MD
Understood.
And then do you think with the trends you're seeing and the benefits and execution and all the other things you guys are doing on cost side, that 40% gross margins are achievable before 2020 at this point in time?
And then you mentioned that we're in the flat side of the pricing curve in the marketplace.
And you also mentioned subsequent to another answer that you're building in less than 6% decline.
I was curious if you're building in flat by any chance in your model at this point.
Keith D. Jackson - CEO, President and Director
We really haven't changed our model.
We're experiencing better performance, but we haven't changed that model.
What I will say is we are, because of that, certainly ahead of our curve toward the 40%, and certainly, that is a possibility that it could be brought in from 2020.
Operator
And our next question comes from the line of Shawn Harrison from Longbow Research.
Shawn Matthew Harrison - Senior Research Analyst
Congrats on the results.
Two questions, if I may.
Just the mobile devices business, is there any different dynamic in the seasonality this year potentially because of adaptive charging dynamics and a broader adoption that would maybe mitigate some of the pressure Fairchild used to see at the end of the year?
And then second, on the $180 million of synergies targeted for this year, what are we at to date through the first 6 months?
Keith D. Jackson - CEO, President and Director
On the mobile business, we are actually seeing a favorable condition for the third quarter.
We're expecting the China-based handsets to increase over the second quarter as well as preparation for new launches from the non-China-based areas.
So seasonality, actually, normally, should have been, even for Fairchild, up in the third quarter when they launch those new models, and it will continue being so this year.
Bernard Gutmann - CFO, EVP and Treasurer
And on the Fairchild synergies, we are ahead of the plan.
We have yet to complete the back-end integration.
The ERP final steps are scheduled to happen in the fourth quarter, at which we will see some incremental back-office savings.
And then most of the rest will be coming from the COGS manufacturing line in 2018.
Shawn Matthew Harrison - Senior Research Analyst
Keith, just as a follow-up on that seasonality, I meant more fourth quarter.
Typically, Fairchild, it could be up, it could be down for that business.
Didn't know if you would maybe...
Keith D. Jackson - CEO, President and Director
Yes.
Fourth quarter tends to soften.
This year, again, based on specific phone launches, there may not be as much softening.
Operator
And our next question comes from the line of Harlan Sur from JPMorgan.
Harlan Sur - Senior Analyst
Within the industrial segment, you guys have talked about military, aerospace-related program traction.
Given the focus on defense-related spending, what are you guys seeing in either design win pipeline or sort of near to midterm revenue contribution?
And can you just remind us the margins for defense and aerospace?
Are they higher than corporate gross margins?
Keith D. Jackson - CEO, President and Director
Yes.
The margins are higher, and we have seen a strengthening in that business overall.
And the design win pipeline is as active as it's ever been.
Operator
And our next question comes from the line of Craig Hettenbach from Morgan Stanley.
Vinayak Rao - Research Associate
This is Vinayak calling in for Craig.
I just had a follow-up on the mobile side of things.
You guys touched upon the content growth opportunity you're seeing in mobile.
Can you just elaborate on what are the key applications driving that content growth?
Keith D. Jackson - CEO, President and Director
The move to fast charging, move to USB Type-C, are probably the largest dollar content contributors.
Vinayak Rao - Research Associate
Got it.
And just to follow up on that.
The move up to USB Type-C, can you talk about the competitive profile there and how are you differentiating in that market?
And finally, like what end market, like what product segments within USB Type-C are you seeing the most traction?
Keith D. Jackson - CEO, President and Director
So really, it's about efficiency and bandwidth when you're talking about the USB marketplace, and so you do differentiate basically on device performance.
We participate in end-to-end, so we have the whole solution, and that gets adopted by various customers in various ways.
Operator
(Operator Instructions) And our next question comes from the line of John Pitzer from Credit Suisse.
John William Pitzer - MD, Global Technology Strategist and Global Technology Sector Head
Bernard, my first question just has to do with the full year free cash flow guidance.
Even if I adjust for the onetime licensing gain in the first half and sort of higher CapEx in the second half, it looks like, on an organic basis, you're kind of guiding to flat half-on-half free cash flow despite revenue growth and better profitability in the second half.
Are there other big onetime issues?
I know that free cash flow can have some timing issues that hit in the back half of the year.
Or do I just chalk this up to you being kind of conservative?
Bernard Gutmann - CFO, EVP and Treasurer
Probably a bit more of the second.
We do have to pay the bonuses that we accrued for in the first half, so you have a little bit of working capital leakage in the second half.
But other than that, it's -- and as you mentioned also, CapEx is definitely going to pick up substantially.
But other than that, nothing more.
No other one-times.
John William Pitzer - MD, Global Technology Strategist and Global Technology Sector Head
Perfect.
And then, guys, you sort of gave the revenue impact from getting out of the mobile image sensing business.
What was the margin impact?
How do I think about the margin for that business?
And I know this was asked earlier.
But Keith, can you help size kind of other revenue pruning you might do and kind of the timing of that?
Or how we should think about that versus your long-term sort of gross margin and op margin model.
Keith D. Jackson - CEO, President and Director
So the second part of your question there, Bernard indicated earlier, we had about 40 bps in our model of improvement due to getting out of such businesses.
There are 3 or 4 of them actively being discussed right now, and the timing, frankly, will be whatever we can do from a closing perspective.
So we're quite active in that area, but really can't do a prediction based on the timing the customers take.
Bernard Gutmann - CFO, EVP and Treasurer
And on the margin contribution for the mobile image sensor, it was very, very low.
Operator
And this concludes today's Q&A session.
I would now like to turn the call back over to Parag Agarwal for closing remarks.
Parag Agarwal - VP of IR
Thank you, everyone, for joining the call today.
We look forward to seeing you at various conferences.
Goodbye.
Operator
Ladies and gentlemen, thank you for participating in today's conference.
This does conclude the program, and you may all disconnect.
Everyone, have a great day.