ON Semiconductor Corporation
Q4 2008 Earnings Call Transcript

Published: 5 Feb 2009

[Operator:]

Good afternoon. My name is Jennifer and I will be your conference operator today. At this time, I’d like to welcome everyone to the ON Semiconductor fourth quarter earnings conference call. (Operator instructions) Thank you. Mr. Rizvi, you may begin your conference.

[Ken Rizvi:]

Thank you. Good afternoon and thank you for joining ON Semiconductor’s fourth quarter 2008 conference call. I am joined today by Keith Jackson, our CEO, and Donald Colvin, our CFO. This call is being webcast on the investor relations section of our website at www.onsemi.com and will be available for approximately 30 days following this conference call, along with our earnings release for the fourth quarter of 2008. The script for today’s call is posted on our website and will be furnished via form 8-K filing. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparables under GAAP are in our earnings release and posted separately on our website in the investor relation section. In the upcoming quarter, we’ll present at the Morgan Stanley Technology Conference on March 4. 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, anticipate, intend, expect, plan, 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. Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our form 10-K, form 10-Qs and other filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect actual results, change in assumptions, or other factors. Now let’s hear from Donald Colvin, our CFO, who will provide an overview of the fourth quarter 2008 results. Donald.

[Donald Colvin:]

Thank you Ken, and thanks to everyone who is joining us today. ON Semiconductor Corporation today announced that total revenues in the fourth quarter of 2008 were a $488.7 million, an decrease of approximately 16% from the third quarter of 2008. During the fourth quarter of 2008, the company reported GAAP net loss of $519.6 million or $1.27 per share. The fourth quarter 2008 GAAP net loss included net charges of $581.6 million, or $1.42 per share from special items, which are detailed in schedules to our earnings release. The largest special item of $557.4 million arises from our annual goodwill impairment testing and is an estimate finalized with the filing of our 10-K. Fourth quarter 2008 non-GAAP net income was $62 million or $0.15 per share on a fully diluted basis. On a mix adjusted basis, average selling prices in the fourth quarter of 2008 were approximately flat with the third quarter of 2008. The company’s GAAP gross margin in the fourth quarter was 38%. Non-GAAP gross margin in the fourth quarter was 39.9%. Adjusted EBITDA for the fourth quarter of 2008 was a record $102.9 million. We exited the fourth quarter of 2008 with record cash and equivalents of approximately $458.7 million or approximately $41 million more than the third quarter and approximately $184 million greater than FY07. We also exited the fourth quarter with the lowest debt position and the net deposition in the company’s history as a public company. During the fourth quarter, the company used $49.4 million of cash to retire $60.9 million of its zero convertible senior notes. At the end of the fourth quarter, total days sales outstanding were approximately 35 days. ON Semiconductor total inventory was approximately $335.5 million or approximately 101 days. This is up from the third quarter 2008 of $309.4. Included in our total inventory is approximately $28 million of inventory, which includes inventory write-off to share value related to the acquisition of Catalyst Semiconductor, which closed in the fourth quarter of 2008. Also included in our fourth quarter inventory is approximately $6 to $8 million of bridge inventory related to the acceleration of the three closures previously announced. Also included in our overall inventory is approximately $40 million of inventory associated with the write-up to share value from the AMIS and Catalyst Semiconductor acquisitions. This is up approximately $2 million from the third quarter of 2008 due to the Catalyst acquisition. Distribution inventories were approximately 12 weeks at the end of the fourth quarter. On a dollar basis by approximately $30 million, but the weak, as a result of overall sales. Cash capital expenditures during the fourth quarter of 2008 were approximately $20 million and total cash capital expenditures for the year were approximately $95 million. Now, I would like to turn it over to Keith Jackson for additional comments on the business environment.

[Keith Jackson:]

Thanks, Don. Now for an overview of our end-markets. During the fourth quarter of 2008, our end market splits were as follows. The computing end-market represented approximately 23% of fourth quarter 2008 sales. The communications end-market which includes wireless and networking represented approximately 20% of sales. The automotive end-market represented approximately 16% of fourth quarter sales. The consumer electronics end-market represented approximately 16% of sales. Industrial, military, and aerospace represented approximately 19% of sales and medical represented approximately 6% of sales. During the fourth quarter on a direct billings basis, no ON Semiconductor product OEM customer represented more than 4% of sales. Our top five product OEM customers were Continental Automotive Systems, Delta, LGL Electronics, Motorola and Samsung. On a geographic basis, excluding ON Semiconductor’s historical manufacturing services revenue, our contribution from sales in Asia represented approximately 59% of revenue. Our sales in the Americas represented approximately 22% of revenue and Europe represented approximately 19% of revenue during the quarter. Looking across the channels, sales to distribution channel were approximately 41% of fourth quarter revenue. Direct sales to OEMs represented approximately 48% of revenue and EMS channel represented approximately 11% of revenue. During the fourth quarter, ON Semiconductor revenues broken out by our divisions were as follows. The custom and foundry product group represented approximately 30% of fourth quarter sales. The standard products group represented approximately 22% of sales. The automotive and power regulation group represented approximately 20% of sales. The computing products group represented approximately 20% of sales and the digital and consumer products group represented approximately 8% of sales. In addition, ON Semiconductor recognized approximately $8 million of revenue during the quarter from the acquisition of Catalyst Semiconductor. We will publish the annual revenue, gross margin and operating margin breakout of these divisions in our Form 10-K filing for this period. Now I’d like to provide you with some details of other progress we’ve made. 2008 was a year of solid revenue growth for the company. We recorded approximately $2.1 billion of total revenues for 2008 and generated approximately $394 million in cash flow from operating activities. During the year, we closed two acquisitions, which have furthered the successful transformation of ON Semiconductor into an analog and power solutions leader. These acquisitions, coupled with ON Semiconductor’s global footprint, effective channels of distribution, and top tier customer relationships will allow an even broader and deeper penetration of the automotive, computer, consumer, industrial, medical and wireless markets in years to come. The end of 2008 and the beginning of 2009 have been a challenging time for the Semiconductor industry. Sales came down dramatically in the fourth quarter of 2008 and we are expecting further declines in the first quarter of 2009. We are uncertain as to the depth orderation of the current recession. To prepare for this uncertainty, we announced a number of proactive cost savings actions on January 7 that once completed should take revenues required for cash breakeven down to approximately $340 million. Today, we also announced plans to close an additional wafer facility. Disclosure is consistent with the company’s ongoing manufacturing consolidation strategy and cost saving measures. The fab we decided to close is our remaining Phoenix wafer fab. Disclosure is expected to result in a total cash charge of approximately $8 to $10 million beginning in the first quarter of 2009. We expect to eliminate approximately 350 jobs at this fab between now and early 2010. As a result of the fab closure, the company expects to save a total of approximately $9 million per quarter compared to the third quarter of 2008 with the full benefit seen in the second quarter of 2010. In the computing end-market, we are positioned as a leader for desktop power management and our notebook presence continues to grow. In the current desktop platform, we increased our penetration by over 50% from the prior platform, having secured over 25 design wins. On the notebook segment, we were able to increase our position by over 20%, having secured over ten design wins. We believe we are well positioned and have the momentum to continue our success on the next generation of desktop and notebook platforms. In addition to our expertise, we are also developing a broader system power portfolio to further strengthen our value proposition in notebooks and desktops. We continue to see penetration of our controllers, drivers, audio amplifiers and MOSFET products in both notebook and server applications. In addition, we are seeing new opportunities from our Catalyst acquisition to gain share with our product line in the computing market. The overall unit demand returns to the computing end market, we believe our computing business should see above market growth as a result of our recent platform gains. In the medical market, we saw strong sequential growth in the fourth quarter of over 20%. Our previous design wins in development activities continue to make this a profitable and growing end market for ON Semiconductor. Our audio DSO products are gaining traction in both North America and Asia for hearing aid as well as additional non-medical specific wireless applications. As anticipated, we experienced continued slowing in our overall automotive business in the fourth quarter. Given the continued global tightening of credit for large ticket items such as automotives, we anticipate a continued slow period of sales to last at least through the first half of 2009. Once the economic environment stabilizes, we believe we are strongly positioned with the leading automotive OEMs through our design, sales, and supply chain resources, along with our broad portfolio of ASICs, CAN and LIN products, motor control products, drivers, MOSFETs, and discrete devices. Now I would like to turn it back over to Donald for other comments and our other forward-looking guidance. Donald?

[Donald Colvin:]

Thank you Keith. Fourth quarter 2008 outlook. Over the last few months, we have seen considerable uncertainty and volatility in the global market. As a result, our guidance is not as in the past. We have updated our guidance to accommodate our best view today. In a normal environment, our customers place [models] with ON Semiconductor. However, given our customers limited visibility, we have reduced the [models] with Semiconductor suppliers. As such, we believe the Semiconductor industry will move towards a higher term environment. In addition, we currently expect our distribution partners to reduce their inventories during the first quarter of 2009. With our sale through recognition policy for this channel, this reduction is expected to result in incremental revenue above our beginning levels. In the last few weeks, prior to Chinese New Year, we saw stabilization of our backlog as well as some point of turn activity with a 15-week greater than one in January. Based upon current product booking trends, backlog levels, manufacturing service revenues and estimated turns, we anticipate that total revenues will be approximately $340 million to $380 million in the first quarter of 2009. Backlog levels at the beginning of the first quarter of 2009 were down from backlog levels at the beginning of the fourth quarter of 2008 and represent approximately 80 to 90% of our anticipated first quarter 2009 revenues. We expect the average selling prices for the first quarter of 2009 will be down approximately 2% sequentially. We expect cash capital expenditures of approximately $20 to $25 million in the first quarter of 2009, total cash capital expenditures for the total year of approximately $55 to $60 million. For the first quarter, we expect GAAP gross margin of approximately 29 to 31%. Our GAAP gross margin in the fourth quarter will be negatively impacted from among other things expensing of appraised inventory fair market value step up associated with the acquisitions of AMIS and Catalyst Semiconductor. We expect non-GAAP gross margin of approximately 31 to 33%. Non-GAAP gross margin excludes special items of approximately $7 to $8 million. For the first quarter. we also expect total GAAP operating expenses of approximately $146 to $148 million. GAAP operating expenses include the amortization of intangibles, stock base compensation expense, restructuring, asset impairments, and other charges which total approximately $31 to $33 million. We also expect total non-GAAP operating expenses of approximately $114 to $116 million. We anticipate that net interest expense and other expenses will be approximately $21 million for the first quarter of 2009. This includes a non-cash interest expense of approximately $9 million from the adoption of stock position number EPB 14/1, relating to our convertible senior notes. Cash taxes are expected to be approximately $3 million. We also expect stock base compensation expense of approximately $12 to $13 million in the first quarter of 2009. This number could fluctuate based on yearly stock awards schedule this quarter. Our current share count is approximately 413 million shares based on the current stock price. Further details on share count and EPS calculations are provided regularly in our 10Qs and Ks. As previously stated, management is committed to deliver positive operating cash flow under all circumstances. It is obvious that the industry is currently shipping under the end market consumption of finished products. We believe the industry should hit the bottom of the current correction in the first half of 2009. We also believe that the second half of this year should see a measurable recovery in our business. Management’s strategic objective remains achieving 45% gross margin, 22% operating income. As previously stated, we are prepared to take additional cost reductions if required to achieve this strategic objective. With that, I would like to start the Q&A session.

[Operator:]

(Operator instructions) Your first question comes from Chris Danely with J.P. Morgan.

[Scott Jones (for Chris Danely:]

This is Scott Jones calling in for Chris. I have a first question on OpEx trends in gross margin going over the course of the year. How do you expect it to take down given the cost reductions in the out quarters? And then on a gross margin, could you tell me how you expect that to trend up to the target of 45% with the plans now of the fab closure help you get there over time?

[Donald Colvin:]

Operating expense and the other is on gross margin. I think it’s obvious the industry has seen a dramatic form in its revenue and we are currently shipping under consumption. So gross margins for us is very much predicated of one the level of revenues. The faster the recovery of the revenue, the faster the recovery of the gross margin. And so, right now I think we’re in a bit of a holding. We don’t want to start projected rosy numbers and so with the relatively modest outlook we gave, we think we can probably grow our gross margin in the mid-single digit range, but we don’t have enough certainty on the exit revenue for the year to give any more color to that and as a company we always just give gross margin and revenue guidance one quarter at a time and especially in these most uncertain times, we don’t think it’s appropriate to stick our necks out any further than normal. As far as operating expense is concerned, we’ve taken a lot of actions on operating expense. Salary reductions, bonus cancellations, headcount reductions, discretionary expense reductions, etc. and we would like to make some of these salary reductions only temporarily. So again, a lot depends on the outlook for our business. As I stated and Keith stated, we are constantly reviewing our P&L structure. So again, I can’t give you a specific answer. I think the number, if you look, in the first quarter for operating expense. If you look at that compared to the third quarter of last year, it is down on an apples to apples basis by more than $20 million in a quarter. So when I look at other companies, that cash OpEx expense saving and I think there we are certainly taking strong actions. If we are required to take additional actions, we will not hesitate to take them.

[Scott Jones (for Chris Danely:]

Do you guys have any color at all for outside of automotive where you saw the most weakness and obviously medical seems to have held up a little better. So any color on which one has underperformed or outperformed?

[Keith Jackson:]

Simple answer to that one is medical is the only market. It actually grew for us quite strongly, but it’s the only market that was up. Everything else was down and they were all down substantially. That 16% down overall, quarter-on-quarter, actually is spread pretty well between all the markets. So there was really nowhere that was a safe haven and other than automotives, nowhere that stands out as being particularly weak.

[Operator:]

Your next question comes from John Pitzer with Credit Suisse.

[John Pitzer:]

First when you talked a little about pricing in December and what you expect for March, I guess I’m trying to understand as units start to pick up and we actually get them to the recovery phase of the cycle, what’s your expectation on ASPs and pricing in general?

[Donald Colvin:]

ASPs were relative flat in the fourth quarter. We did get some benefit there from currencies in our favor. We don’t have that currency benefit in the first quarter and we also got some long-term pricing contrasts kick in Q1. So that’s why we stated 2% price erosion. As far as inventories are concerned, I gave a very detailed explanation on inventories. Basically the core inventories went down. We have to build some bridge and we got some fair market value inventories from the AMIS and Catalyst acquisitions. We want to continue to reduce our inventories in the first quarter and as we stated in the prepared remarks, John, we anticipate that our distributor partners will also continue to reduce their inventories in the first quarter. We haven’t given any specific guidance on the second quarter, but we did state that we expect that there will be a meaningful recovery in the second half. So as far as an increased demand having a positive impact on ASPs, I think that’s more of a second half story.

[John Pitzer:]

Are you at all concerned given where utilization levels are going to trough for the industry. Pricing never seems to be the first casualty of a downturn. It always seems to get more aggressive as unit demand starts to pick up and you’re kind of indicating that a pickup in demand might be positive in pricing. I’m just trying to figure out why you wouldn’t be more worried about ASPs as demand starts to pick up.

[Donald Colvin:]

We remain on ASPs, John. It would be a foolish mind to say that we have complete control of a huge market. In our models that we project, one or two percent ASP reduction per quarter. And so, the second half of the year we have not turned away from that for modeling purposes. So we are not modeling an ASP increase in the second half. We remain vigilant, but we will not be the instigator in a price war, as we believe we are in a relatively elastic end market demand situation.

[Keith Jackson:]

John, I would add here really from a gross margin perspective, there may be some more pressures on ASPs as the market structure recover in the second half when there is some demand to go after, but really the gross margins are going to be mostly moved just by the volumes that we got in utilization range. If you look at what we guided you to in Q1, we’re having a substantial reduction in distribution inventories and since we’re sell through, that won’t roll through to the revenue line works, but it will mean our factories are significantly under-loaded and we’re reducing our own inventories at the same time in our low-demand market. So utilization rates, which were kind of mid-60’s in Q4 are going to go to mid-40’s in Q1 and I think that that is an overwhelming impact on gross margins as you get to the second half versus any ASP impacts you may have.

[Operator:]

Your next question comes from John Barton with Cowen.

[John Barton:]

40% utilization in March, what would that utilization figure be if the Phoenix fab was closed as of January 1 for the quarter?

[Keith Jackson:]

So that factory, between 5 and 10% of the volumes in the numbers. So you could get the impact of that into the number.

[John Barton:]

In a previous response, you were talking about, or Donald was talking about, the temporary cost savings, embargos on bonuses, non-paid time off, etc. How are you thinking about bringing that back in? I mean how long can you stay in that scenario if revenue doesn’t come back? What type of revenue return would you have to see until you start to bring that back? What are the basic parameters the way you think about it going forward?

[Keith Jackson:]

Again, basically the way we’re managing the business is no different. We’ve been telling folks we’re managing it for generating cash. So as the business recovers to a point where our cash generation allows us to start returning some benefits, we’re going to absolutely get on that to the extent that that doesn’t happen in the near term, then we’ll figure out what other alternatives are out there for us.

[John Barton:]

Design activity, in the current environment that we’re seeing, at end customers is it changing their design activity. Meaning, are they accelerating to new projects that get design in, because they’re trying to hit lower price points. Are they holding up on new designs because they’re trying to get more life out of their R&D spend or how are you seeing customers react?

[Keith Jackson:]

We’ve seen them react in all manners. It really does differ by customer. What I will say is we’re seeing a larger percentage put energy into cost-reducing existing platforms than we traditionally see. You see some people who are accelerating new platforms. You see some of them who are delaying new platforms, but the only real change through the last three or four months has been more people putting more energy in the cost-reducing existing platforms.

[Operator:]

Your next question comes from Craig Berger from FBR Capital Markets.

[Craig Berger:]

So you’ve got three fabs closing in the first half of this year and then Phoenix a little further out. How do we think about that impacting the overall margin structure?

[Keith Jackson:]

It’s actually going to be for the first three quarters of the year. Three fabs this year, we won’t get all of them out in the first half. There’ll be some trickling into the third quarter. From a gross margin perspective, again, maybe the simplest way to look at life is the volumes that those factories represent of the total and of course it is wafer fab not l. fab and backend. So there is a factor of dilution, if you will, in the total GM. But those three factories when added together are going to be somewhere in the 20% to 20+ percentage of the total volumes that’ll come out of the system.

[Craig Berger:]

So is it 20% of half of the cogs, is that the right way to think about that then?

[Keith Jackson:]

That’s not too far off. On the cogs, it’s not the variable portion, which is materials. It’s the fixed portions.

[Donald Colvin:]

I think the trouble we have with this, Craig, is you got to baseline something. So if you baseline two or three activity, a fab closure and the ones we have announced, are roughly on average $10 million, $8 to $10 million a quarter savings, but that’s based upon Q3 activity leveling and that would be an approximate 1.5% gross margin improvement. But the activity levels in the first quarter at 40% down on Q3. A lot of these savings are going forward. So that’s why going forward, the gross margin expansion isn’t so much a fab closure story as a revenue return to growth story and that’s what we have to factor in our models. We can also see and I compared to the Q3 run rate. Keith mentioned fixed cost. We have taken $30 million, we are projecting $30 million of fixed cost reductions from the fab closures compared to a base Q3 run rate. So again, as we made in a pre-announcement at the beginning of January, these actions were taken, would be $30 million on fixed, $20 million on operating expense. In addition to that, additional cost savings from the closure we announced, which would be approximately $8 to $9 million savings compared to the Q3 run rate.

[Keith Jackson:]

Craig, we’re not beating around the bush, but the reality is we have such a small fixed cost base relative to the total cogs. You get a very big drop and so when you’re trying to calculate percentages, the revenue level is the most determinant factor.

[Operator:]

Your next question comes from Tristan Gerra with Robert Baird.

[Tristan Gerra:]

Following the factory shutdowns in January, what will be your sell-in in Q1 sequentially?

[Keith Jackson:]

The early reports we’re getting from Asia right now, Tristan, indicate a favorable bias post Chinese New Year. We’re hearing that some of the consumption rates were a little higher than they were planning on and therefore we’re starting to see some more orders, but I want to emphasize we’re talking a couple of days back now from Chinese New Year. So I don’t want to declare a victory and move on yet, but it does seem like we’re seeing a little better sell through and January was not as bad as we feared. We mentioned earlier if that includes our sell through, there actually was pretty reasonable, other than of course the Chinese New Year week, which goes down dramatically. From a sell-in, sell-through perspective, our estimate is that we’ll do approximately $25 million or so less on sell-in than sell-through. In other words, there will be a bleed of inventory of that kind of magnitude. Of course, we don’t know that yet. All the orders aren’t in, but that would be our best estimate as of today.

[Tristan Gerra:]

Also, where are you in terms of outsourcing right now and what would be your target by end of year if this has changed from what you previously said?

[Keith Jackson:]

It’s a little over 20% for us, including the acquisitions which were higher percentages of outsource. We are moving aggressively to get more of that inside. Based on the Catalyst piece and the AMIS piece, I would say that we have a chance of moving that model down 300 or 400 basis points by the end of the year.

[Operator:]

Your next question comes from Harold Arowall - UBS

[Harold Arowall:]

A question on manufacturing consolidation. Just wondering where are we in the process and how much is done and how much needs to be done and if you could provide a roadmap as to how we should think about it.

[Keith Jackson:]

Sure. So the four inch line that we have in Europe should be closed around the end of March timeframe. We’ve got a six inch line in Europe that should be closed somewhere around July and then we have a five inch line here in the U.S. that should be certainly by September, see closure on that. Then as we mentioned today, the last factory, which is a six inch factory here in Phoenix, would be in the first quarter in 2010.

[Harold Arowall:]

Second question is about your gross margin for March quarter. Just wondering what are the moving parts, dilution or anything else?

[Keith Jackson:]

Well again, prices were not a significant factor. We have been offsetting those with our normal cost reduction activities. It’s really utilization. We’re pulling back very, very hard to get the inventories down, both in the distribution channel and internally, plus the lower end demand. So it’s really going to a mid-40’s kind of utilization rate that has 90% of the impact.

[Operator:]

Your next question comes from Steve Smigie - Raymond James

[Steve Smigie:]

I was wondering if you could give some color on inventory channel, not so much in terms of weeks or days of inventory so much as on a unit base to a level where it’s kind of surprises you how low it is or are your distributors being reasonable relative to the current demand?

[Keith Jackson:]

I actually think they’re being very reasonable and if anything, Steve, they have surprised me at how much inventory they’re still keeping. This could have ballooned a lot more than it has. They’ve actually kept up fairly well, but it was clear in the fourth quarter, they weren’t reacting quick enough. I think now in the first quarter looking at their orders on this, they have done very appropriate actions to get us back into that, you know, 11 to 13 weeks of their model, but back toward the lower end of the model. So, in general, just surprised they haven’t reacted more strongly in getting the inventory out.

[Steve Smigie:]

Donald, you mentioned some hope for a measurable recovery in the back half. Is that just related to the fact that you think you’re under-shipping demand or is there something else that would make me feel a little bit better about that?

[Donald Colvin:]

I think that’s exactly the first point. We look at the down trend quarter-on-quarter for the major end market segments. It certainly would appear to us from reconciling that the consumption of Semiconductors is still behind the consumption of finished products and we think that certainly will be a meaningful second half recovery.

[Operator:]

Your next question comes from the line of Kevin Cassidy with Thomas Weisel.

[Kevin Cassidy:]

I wonder if we could shift gears a little bit and talk about the notebook position. You said you’re improving by 20%. I wonder if you could put some framework around that.

[Keith Jackson:]

We of course measure ourselves by the number what we’ll call major board platforms that we win, excuse me, at the key manufacturers of notebooks largely in Taiwan and so just kind of generation-on-generation, we’ve got about 20% more of those platforms. Again, I think it’s self explanatory. What I can’t tell you is how many notebooks are going to sell.

[Kevin Cassidy:]

Any new customers or same customers and just deeper penetration?

[Keith Jackson:]

Deeper penetration for the most part.

[Kevin Cassidy:]

Do you have an ASP?

[Keith Jackson:]

That I don’t have a single ASP, because again it’s blended, everything from the little low end books to the high end books and it definitely varies by platform dramatically.

[Operator:]

Your next question comes from the line of Patrick Wang with Wedbush Morgan Securities.

[Patrick Wang:]

I know you guys talked about closing that six inch you’ve got down in Phoenix and the $9 million quarterly impact. Could you help remind us some of the ongoing programs that you’ve got going on right now that permanently lower OpEx over the next year or so?

[Keith Jackson:]

Okay, so we’ve got three other wafer fabs. A four inch, a five inch, and a six inch that are being closed in 2009, and I think Donald already gave you some numbers of approximately impact of $8 to $10 million per quarter each and I’ve already given timing on that earlier in the call. So those are factory closures on a permanent basis. We’ve also had significant leaning out from a headcount perspective. Looking across the company for ways to get more efficiency and we announced that again there was over 10% reduction in headcount before the latest announcement for the factory. Everything we’ve put in writing, it’s salary reductions right now of equivalent of two weeks per quarter across the company and elimination of bonuses across the company. No merit increases this year for anyone in the company. What am I missing, Donald?

[Donald Colvin:]

Discretionary actions as well. So as Keith said, if you look at our non-GAAP operating expense in the third quarter, the reason why I say that, because it takes out the amortization of intangibles, non-cash base stock and things. It was $151 million in the fourth quarter of last year, which is a reference point and have about a $5 million of operating expense that we acquired. So adjusted EBITDA becomes $156 million and if you look at the mid point of the guidance we gave for the first quarter, it’s $115 million. So again, that is a substantial reduction. Now, as I stated, some of the actions taken we hope will only be temporary like salaried reductions, approximately $8 million a quarter savings. So the idea will be as other economies kick in because some of the people haven’t had the full benefit of the headcount reductions. We’re going to eliminate an SEP system, which will give us cost savings by the second quarter. As these things kick in, we are hoping that we will be able to restore some of the takeaways on the salary. That’s the current model. So we’re not seeing any dramatic incremental savings forward. Marginal savings, just big ones on operating expense, but we remain vigilant as we stated, and that’s all predicated on a meaningful second half recovery and if necessary we will take other actions if that recovery is not there.

[Patrick Wang:]

We think about OpEx over the course of the rest of the year and I’m clearly not asking you guys to provide any guidance here, but directionally is it something that we should think about trending downward slightly over the year?

[Donald Colvin:]

Marginally downward, yes. Not dramatically, but marginally.

[Patrick Wang:]

Second question here. In terms of your utilization here, I know that you said that kind of mid-40’s expected here in Q1. If we think about going forward here, based on what we do know about Q2 and such, is Q1 likely going to be the trough for utilizations?

[Keith Jackson:]

Right now the data would point to Q1 most likely being the trough. Obviously as predicated on whether the end markets, but at least with the look we have right now, because we’re doing such a dramatic inventory reduction in distribution, it will probably be the trough.

[Operator:]

Your next question comes from Craig Berger from FBR Capital Markets with a follow-up.

[Craig Berger:]

Just a housekeeping here. You know first call has you including stock OpEx expense and so the numbers you lay out in your pro forma can’t match our pro forma numbers. You’re aware of that, right?

[Donald Colvin:]

Well, we give all the different elements, Craig, but I hear what you say and we try to make things as explicit as possible. So we have given all the different ingredients, including our estimate of the non-cash base stock compensation going forward.

[Craig Berger:]

Any plans to stop excluding that as a pro forma charge?

[Donald Colvin:]

We’re going to look at that when we do next quarter results.

[Operator:]

There are no further questions in queue.

[Keith Jackson:]

Thank you very much.

[Donald Colvin:]

Thank you.

[Operator:]

This concludes today’s conference call. You may now disconnect.