ON Semiconductor Corporation
Q2 2009 Earnings Call Transcript

Published: 6 Aug 2009

[Operator:]

Welcome to the ON Semiconductor second quarter earnings call. (Operator instructions) Thank you. I would now like to turn the conference over to Mr. Ken Rizvi. Sir, please go ahead.

[Ken Rizvi:]

Good afternoon and thank you for joining ON Semiconductor Corporation’s second quarter 2009 conference call. I'm joined today by Keith Jackson, our President and 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 second quarter of 2009. The script for today' call is posted on our website and will be furnished via a Form 8-K filing. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release and posted separately on our website in the Investor Relations section. In the upcoming quarter, we will present at the Piper Jaffray Semiconductor Summit on August 25th and Citigroup’s Global Technology Conference on September 9th and 10th. 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-Q’s and other filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors. Now, let’s hear from Donald Colvin, our CFO, who will provide an overview of the second quarter results. Donald?

[Donald Colvin:]

Thanks, Ken, and thanks to everyone joining us today. ON Semiconductor Corporation today announced that total revenues in the second quarter of 2009 were $419.8 million, an increase of approximately 11% from the first quarter of 2009. During the second quarter of 2009, the company reported a GAAP net loss of $3 million or $0.01 per fully diluted share. The second quarter 2009 GAAP net loss included net charges of $41.7 million, or $0.10 per fully diluted share, from special items, which are detailed in schedules to our earnings release. Second quarter 2009 non-GAAP net income was $38.7 million or $0.09 per share on a fully diluted basis. We exited the second quarter of 2009 with cash and equivalents of $403.4 million. During the second quarter of 2009, we reduced our total debt by approximately $27 million. We also exited the quarter with the lowest net debt position in the company’s history as a public company of approximately $501 million. At the end of the second quarter, total days sales outstanding increased to approximately 55 days. Days sales outstanding increased from the first quarter due to a sharp increase in revenues during the last month of the quarter as well as the discontinuing of asset backed financings secured by offshore receivables. ON Semiconductor total inventory was down approximately $30 million to $269.5 million or approximately 87 days. Included in our total inventory is approximately $8 million of inventory written-up to fair value related to our acquisitions and approximately $5 million to $10 million of bridge inventory built during the quarter in preparation for our announced closures of front-end manufacturing facilities. Distribution inventories came down by approximately $8 million in the second quarter and are at approximately 11 weeks. This is at the lower end of our historical range. Cash capital expenditures during the second quarter were approximately $15 million. The majority of the second quarter capital expenditures were related to capital equipment received in 2008 and paid for in 2009. During the second quarter, R&D and SG&A expenses were lower than expected due to continued aggressive cost control measures. We have reduced R&D and SG&A expenses excluding stock based comp and adjusted for the Catalyst acquisition by approximately 30% compared to the third quarter of 2008 through the hard work and effort made by all of our employees. This has enabled us to come through this difficult economic period with continued strong cash flow generation. 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 second quarter of 2009, our end market splits were as follows The Computing end-market represented approximately 27% of second quarter 2009 sales. The Communications end-market which includes wireless and networking represented approximately 20% of sales Industrial, Military and Aerospace represented approximately 18% of sales. The Automotive end-market represented approximately 17% of second quarter sales. The Consumer Electronics end-market represented approximately 13% of sales and Medical represented approximately 5% of sales. During the second 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, LG Electronics, Motorola and Samsung. On a geographic basis, our contribution from sales in Asia represented approximately 62% of revenue. Our sales in the Americas represented approximately 23% of revenue and Europe represented approximately 15% of revenue during the quarter. Looking across the channels, direct sales to OEMs represented approximately 47% of second quarter 2009 revenue. Sales through the distribution channel were approximately 42% of second quarter revenue and the EMS channel represented approximately 11% of revenue. During the second quarter, ON Semiconductor revenues broken out by our segments were as follows. The Standard Products Group represented approximately 32% of sales. The Digital & Mixed-signal Product Group represented approximately 24% of second quarter sales. The Computing and Consumer Group represented approximately 22% of sales and the Automotive and Power Group represented approximately 22% of sales. We will publish the quarterly revenue, gross margin and operating margin break-out of these segments in our Form 10-Q filing for this period. Now, I would like to provide you with some details of other progress we’ve made. After a very challenging period for the industry and ON Semiconductor, we are beginning to see stabilization in each of our end-markets and a resumption of seasonal growth patterns in our consumer-oriented end markets. The aggressive actions the company has taken to reduce our overall cost structure, including the rationalization of our manufacturing network, puts ON Semiconductor in a favorable position when the industry fully recovers from the current economic downturn. These actions also further improve our leadership position in manufacturing efficiency within the industry. During the second quarter, we continued to rationalize our inventory levels. Over the last two quarters, we have reduced internal inventories by approximately 20%, or $66 million. In addition, inventories in the distribution channel have come down approximately $33 million in the last two quarters. While there is still great uncertainty on the trajectory of the economic recovery, we believe the worst of the crisis is behind us. In the computing end market we saw a growth of approximately 25% from the first quarter of 2009. After two consecutive quarters of inventory depletion, we saw a resumption of orders and strong demand for our products. In the newest generation of desktop platforms expected to ramp in the back half of this year, we have content exceeding $4 per box with a top three global desktop supplier. During the quarter we also made significant inroads with one of the top two high-end graphics card manufacturers. We recently won a six phase VR11.1 controller, three additional controller wins as well as numerous MOSFET wins with this customer. Production from these wins will begin in the third quarter of 2009. We continue to expand our presence in the notebook controller segment having penetrated a new top five notebook supplier. With this customer we also won additional sockets in LED lighting, regulators, custom ASICs and SenseFETs, which combine thermal capabilities we acquired from Analog Devices along with our MOSFET technology. We have also recently introduced our next generation of MOSFETs for desktops, notebooks and netbooks that utilize our Trench 3 process enabling increased efficiency and faster switching performance in a smaller die. We are expecting to see strong demand for this product in the back half of this year and into 2010. In the wireless end-market, we are beginning to rebound from the market lows of the first quarter of 2009. In the second quarter of 2009, our handset revenue increased by more than 10% sequentially. We also continue to make progress with our handset OEM customers. During the quarter, we secured new design wins that more than double our content in all next generation multimedia phones of a top 5 global handset OEM. In the second quarter of 2009, we also saw a rebound of sales into the automotive end-market of approximately 8% from first quarter 2009 levels. While there is still great uncertainty as to the rate of recovery for the automotive segment and normally the third quarter is seasonally down, we believe the automotive end-market will show improvement in the third quarter of 2009, as production rates continue to increase at many global automotive manufacturers. We continue to expand our presence with Chinese auto manufacturers, having recently won new designs in audio and dashboard power supplies. We are also winning designs for infotainment and driver experience enhancement applications with our BelaSigna Audio DSPs, switching regulators and protection devices that are expected to go into production at the end of this year. In the second quarter we continued to win awards from our customers. We received the “First Quarter Support Award” from Huawei for our outstanding service. We also received the “Pinnacle Award” from Delphi for our commitment to quality, value and cost performance. 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. Third quarter 2009 outlook. Based upon current product booking trends, backlog levels and estimated turns levels, we anticipate that total revenues will be approximately $445 to $455 million in the third quarter of 2009. Backlog levels at the beginning of the third quarter of 2009 were up from backlog levels at the beginning of the second quarter of 2009 and represent approximately 90% of our anticipated third quarter 2009 revenues. We expect that average selling prices for the third quarter will be down approximately 1% sequentially. We expect cash capital expenditures of approximately $10 to $15 million in the third quarter of 2009. For the third quarter, we expect GAAP gross margin of approximately 35% to 36%. Our GAAP gross margin in the third quarter will be negatively impacted from, among others, expensing of appraised inventory fair market value step up associated with our acquisitions of approximately $3 and 4 million and stock based compensation expense of approximately $3 million. We expect non-GAAP gross margin of approximately 36.5% to 37.5%. Non-GAAP gross margin excludes special items, which we expect to be approximately $7 million. For the third quarter we also expect total GAAP operating expenses of approximately $120 million to $125 million. Our GAAP operating expenses include the amortization of intangibles, stock based compensation expense, restructuring, asset impairments and other charges, which total approximately $20 million. We also expect total non-GAAP operating expenses of approximately $100 million to $105 million. We anticipate interest and other expenses will be between $10 million to 11 million for the third quarter. We also anticipate non-cash interest expense of approximately $8 million from the adoption of FASB Staff Position Number-APB 14-1 relating to our convertible senior subordinated notes. GAAP taxes are expected to be approximately $4 million and cash taxes are expected to be $3 million. We also expect stock based compensation expense of approximately $13 million to $14 million in the third quarter. Our current fully diluted share count is approximately 435 million shares based on the current stock price. This includes the full impact from performance based restricted stock units that should vest over a three-year period based on meeting certain financial hurdles. Further details on share count and EPS 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. Can you open the lines for the Q&A session please?

[Operator:]

(Operator instructions) Your first question comes from Romit Shah of Barclays Capital.

[Romit Shah:]

Last quarter, if I remember correctly, you had guided with 80% backlog coverage and in this quarter you are guiding with 90% backlog coverage. Could you just give us a feel for why you are being more conservative with the outlook for the third quarter?

[Keith Jackson:]

Well. Two things 10% is our more normal filler rate Romit, if you look at our long-term trends and so we normally do go in that amount. In the second quarter we knew that things have been depleted and I had heard from customers that they were going to be doing more turns, I think Q3 will be a more normal pattern for us and so again we are back into that 10% range. Then secondly, again just looking at how these order patterns have come in we do believe that there was some concern in our customer base for supply during the seasonal up Q3 and a lot of those orders came in earlier than they would have on a comparable quarter in Q2.

[Romit Shah:]

And in terms of, you know what's driving your business in Q3. Is it similar to what we saw in Q2 at computing sort of leading the way?

[Keith Jackson:]

Certainly computing will be a strong piece of that as well as the other consumer areas like the gaming and consumer communications devices. So, really it's, it is a consumer led increase and that was indeed very similar to Q2.

[Romit Shah:]

Okay. And then, just my last question on operating expenses. Don, you said in the past that you had about $10 million in temporary savings. Are we seeing any of that come back here in the third quarter?

[Donald Colvin:]

Not really. You're right. I think it's fairly fair to say that we were very, very pleased with our operating expense performance in the third quarter. We have been guiding much higher than the numbers that came in. We've been guiding something like $108 million. We came in just under a 100, and so the guidance for the third quarter on a non-GAAP basis will be a little bit back, to maybe a couple of million, but not anything substantial get back albeit, of a much lower base than we had previously guided. So, I think we're seeing the additional benefit of the strong cost reduction actions. And as I mentioned in the formal part of the script, we have done approximately 30% in our operating expenses compared to the third quarter of last year on an apples-for-apples basis excluding non-cash based stock comp for revenue that’s been less than that. So we are actually seeing some leverage from very aggressive and fruitful operating expense control.

[Romit Shah:]

Would you expect adjustments like, the salary to roll back in Q4 or is it too early to tell?

[Donald Colvin:]

We don't give guidance for Q4, but obviously we are open to restore things as business conditions improve and so that’s something that’s not off the table.

[Operator:]

The next question comes from Craig Berger of FBR Capital Markets.

[Craig Berger:]

I guess one of the things I would like to understand better is how much, I know you guys have recently closed a couple of fabs; you are working on a couple more. How much gross margin benefit have we already seen from closing and consolidating your fab capacity and how much more might still be ahead of us?

[Keith Jackson:]

At this stage, we really only have one fab that was fully closed during the quarter, which closed at the end of Q1. So you probably saw something that was approximately $3 million of impact in Q2. We are expecting the second fab to be closed here, early this quarter, so you won't get full benefit but again another $3 million or so will come out of that. And then again the last factory which will be in the fourth quarter to stage another $3 million, and then in 2010 you are going to have the fourth factory which obviously will be bigger than all of those transactions. So simply put it is kind of layering in a bit at a time and it is with closure rates. We had hoped earlier in the year to accelerate closure of some of these factories. As it turns out the business has picked up much stronger than we anticipated and so we aren’t going to be closing them quite as quick as we thought.

[Craig Berger:]

Next question is on your CapEx, what you view as you're sustainable ongoing level of investment and how does that compare to the depreciation that we are seeing excluding amortization?

[Donald Colvin:]

Well we haven’t changed our method fully there. Our depreciation excluding amortization is about $32 million a quarter. We had historically been running at $30 million to $35 million of capital expenditures, recently we are running at 10 to 15. We probably think as business picks up, we may raise that up to 20 to 25 per quarter. So, we were running at 30 to 35, currently 10 to 15 and if business picks we'll go to 20 to 25 a quarter. So, under called circumstances, we will be running more than we have been running historically and that’s primarily because we see no need to invest as much as we did in the front end. In addition to that, it takes about nine months to empty the CapEx pipeline and we are still paying for stuff that we ordered last year. So, even as we show the price up, we will still benefit from the cash flow dividend of filling up the pipeline. So, even if we up take a little bit capital expenditures, which is not really on account for the year it will be about six to nine months before it hits the cash negatively.

[Craig Berger:]

Last question, can you just talk about the fab utilization rates at Gresham and across your network and how your gross margins might improve as utilizations come up and as you sell products manufactured with higher utilizations in coming quarters? Thank you and can you and congrats on the quarter?

[Keith Jackson:]

Love to do that Craig. We had utilization rates in the 60% range for the second quarter. I do expect that we will start closing in on the 70% range for Q3 and that's kind of a global number force on utilization rates. I think you saw about $0.66 on the dollar of additional revenue fall through in Q2. That number could approach as much as $0.70 on the dollar as we get into Q3 and really that's the impact of better utilization to our first approximation.

[Donald Colvin:]

So, just taking off from Keith's point. We had told you guys that we'll reset our corporate objective to $525 million of revenue per quarter where thought we could do something in the 43% gross margin, 43% to 44%, 20% to 21% operating income. So again on a 525 quarter we would expect our gross margin to be comfortably north of 40% when you forecast these things out.

[Operator:]

Your next question comes from Chris Danely of JPMorgan.

[Roy Tim:]

This is Roy Tim [ph] for Chris Danely. Just had a couple of questions. Are you seeing any lead times stretch out for any of your products?

[Keith Jackson:]

Our lead times have been moving out. They are in the 8 week to 10 week range now, which is what we'd call a more normal range as opposed to the shortened lead times we had in the first quarter.

[Roy Tim:]

Great and just wanted to ask about impact on your auto business, cash per conker [ph] from the government?

[Keith Jackson:]

It isn't just our government the folks in Germany had done it earlier in the year and all of this seems to be simulating the auto manufacturer to increase production. As I mentioned in my commentary, normally Q3 sees a reduction in our automotive sales as they change model years and do some ramp down. This year we are seeing stronger demand and more manufacturing activity coming our way. So simply put I think the global efforts on getting automotive kick -started are starting to have an impact.

[Roy Tim:]

Great, can you guys share how much of your auto business comes from U.S. versus others and globally?

[Keith Jackson:]

It is greater than 50% in Europe and the balance is split between the Americas and Asia. Asia at this point is approximately 5% to 10%.

[Operator:]

Your next question is from Craig Ellis of Caris & Co.

[Craig Ellis:]

Good job in the quarter guys. Keith first question, as you look at your end-markets, where at this point do you feel like orders are really backed to end consumption levels and where do you think orders have yet to catch back up with end consumption?

[Keith Jackson:]

I believe that we are approaching on a sell through basis end consumption rates in Q3. So I think we are actually getting pretty close to that. I also believe the distributors are trying to do some additional stocking in general. So, if you are looking at the absolute demand on the semiconductor system, I think the activity probably is actually starting to exceed end demand in Q3. For us, we think it's going to be pretty close to consumption in Q3, so we are expecting kind of neutral inventory changes with our guidance, both internally and in our distribution channel for Q3.

[Craig Ellis:]

Then as a follow-up, switching gears on to the pricing side. Pricing down 1% in the quarter, down a 1% in the outlook, that's very benign given what's happened with the global economy. Have you been surprised with the way pricing has behaved and are there any signs that pricing is heating up out there or not?

[Keith Jackson:]

There are no signs at this point of heating up of pricing pressures. They are always there. In our industry it's something you just live with, but right now there is no catalyst that is taking those to a more severe area and quite frankly, as demand picks up that normally lessens the pressure as opposed to when demand eases.

[Operator:]

Your next question is from John Barton of Cowen.

[John Barton:]

Keith, may be just a follow-up, lead times are stretching, the fabs are getting little more loaded, you feel there is any chance the coming quarter that prices would head up as opposed to down marginally?

[Keith Jackson:]

I am not anticipating prices heading up. Again, just looking at the macro environment our industry is down over 20% year-over-year, capacities are not that constrained on an equipment basis, they maybe on demand basis, but not in the equipment basis. So, the temptation is always there to be quite competitive. So, I really don’t see enough demand out there to start pushing them upper.

[John Barton:]

Your comments about end markets, you have made comments about auto end market. You made comments about the various consumer oriented end markets. I don’t think I heard you say anything about the kind of the traditional industrial end market. What are you seeing see currently and what you expect in the coming quarters?

[Keith Jackson:]

Normally, our industrial market is in the building and capital equipment sectors of the economy, so driven by the activity of building new buildings, whether that's housing or office space and then into the capital equipment. our experience continues to be that that market is still sluggish. There have been some signs of pickup there, but not appreciable. So I think we can safely say, it's kind of stopped going down at this stage, but we are not seeing an inflection upward.

[Operator:]

Your next question is from Tristan Gerra with Robert Baird

[Tristan Gerra:]

Following on your commentary regarding sell through expected to be about in line with end demand in Q3, is your revenue guidance embedding normal seasonality for OEM revenues sequentially or in part seasonal?

[Keith Jackson:]

It's about seasonal. It's slightly stronger, because we do know for example, I mentioned automotive. We do know that their supply chain has gotten skinny, we are doing a lot of expedites right now. So, there might be a bit more going on there, but in general it's going to look pretty seasonal.

[Tristan Gerra:]

Also in the previous call, you had mentioned that you had orders outside of your lead times for July, August, that was three months ago. Are those orders still holding and are you still seeing that trend into Q4?

[Keith Jackson:]

Yes. The orders are still holding, and at least, at this point in time Q4 actually is looking more robust in our early orders for the quarter. So, the trend would be continuing into Q4 from our look right now.

[Tristan Gerra:]

When you say more robust, you mean sequentially?

[Keith Jackson:]

Meaning, at the same time in Q2 versus Q3, we have more orders on the books for the next quarter, in Q3 then we did in Q2.

[Tristan Gerra:]

Great. Thank you.

[Operator:]

Your next question is from Steve Smigie of Raymond James.

[Steve Smigie:]

I was hoping if you could talk a little bit about the cash levels and debt levels as we go forward the payments you have to make sort of over the next 12 months. It seems like you kept cash here on 400. Well, down below that numbers you make payments with cash flow, you know as fast as you guys can be able to offset that?

[Donald Colvin:]

I think what's important is that the business is generating cash and if you look at the guidance we gave for the third quarter and take a mid point with the depreciation numbers then we should be generating $40 million to $50 million of free cash flow in the third quarter. And so what's our debt we had a big amortization of a Zero Coupon due in April of 2010, $260 million and since the fourth quarter of last year we have paid off about $200 million of them. So that remains about 100 million, 160 I was getting my numbers in there, 100 million remaining. So the total of amortization between now and the end of next year including the $100 million is about $200 million. So if you look at the cash we have available and the cash flow generating you see we have a very comfortable balance sheet and also again this quarter as we continue to generate cash each quarter we have a record net debt situation. So if you look on the balance sheet it's just over $500 million.

[Steve Smigie:]

Right. And sort of looking at that going forward, even this quarter doing $50 million cash flow that should be at least $200 million next year. You are all ready at net debt $500 million so that goes to something like 300 probably something better than that. How much of that goes to pin down debt you think versus other uses?

[Donald Colvin:]

Well I think what we have been doing recently especially going through this recent crisis is attributing paying off debt and so we have over $200 million of debt amortization. So we have to pay that, we have no choice. So, obviously if you look at the large part of the cash will generally will be used to pay the debt and we have also taken advantage on an opportunistic manner of any discontinuities in the market, for instance, the pricing of our converts where a bargain and we'll continue to look at an opportunistic manner and to use that to enhance our earnings, use the cash to enhance our earnings and improve our liquidity as we did by buying these new coupons back at a discount. But essentially it is generally cash and pay down debt as it comes to speak.

[Operator:]

The next question comes from Parag Agarwal with UBS.

[Parag Agarwal:]

Just wanted to circle back to question about Gresham. Can you please update us on the manufacturing transition for catalyst ADI and AMI. And can you just say how much of that's spend, how much is that?

[Keith Jackson:]

Okay certainly. So I'll start with the ADI portion of that, that's the first acquisition we made. We have largely got the products transitioned into that factory at this stage and they have been ramping during the second quarter and into the third quarter. So we expect to see again continued growth there but the products have all been moved from that particular transaction. From AMI we are still moving some of those things in. There's a lot of ASIC codes, lot of devices if you will per dollar of revenue. That process will continue into next year. But again, largely the bulk of the work is behind us. On catalyst, we are now in production, we've just started production here in the last week and expect to start ramping that quite hard in Q4 and Q1 of this year. So, largely making great progress there and so the combination there of how fast we ramp it is what's going on in the marketplace plus how long it takes us to burn off the buffer inventories that we're built prior to moving.

[Parag Agarwal:]

As a follow-up how should we think about the gross margin, gross margin impact as the products transaction to Gresham?

[Keith Jackson:]

We have seen a substantial product-by-product improvement in gross margin, it does depend which of those things we just referred to but certainly on a product basis, you should be getting improvements for the things that run from where they used to be run, anywhere from 15% to 25% or 30%. And that’s basis point, I should say there so you may require a bit.

[Donald Colvin:]

Where you see the visibility of that is if you look at what I said on gross margin looking forward or corporate objective. I said on $525 million revenue, it's something like 43% and if you looked where we were historically last year, we were just under $600 million with a gross margin of 41%. So, that translates to the point that Keith makes. We see ourselves being able to generate superior gross margins at lower revenue levels through a combination of factory closures and intensive use of the Gresham facility.

[Operator:]

Your next question comes from John Vinh of Collins Stewart.

[John Vinh:]

First question is, can you give us a sense of how kind of bookings trended on a month-over-month basis in 2Q and how is that trend looking heading into through July at this point?

[Keith Jackson:]

We have seen bookings continue to strengthen throughout the year. Traditionally the second quarter is more back-end loaded than the third quarter. The third quarter tends to be more front-end loaded. You may have heard my conversation earlier on turns rates typically in Q3. Folks are pretty well booked before they get there. So our expectation is that Q3 will be more front-end loaded than Q2 was i.e. July and early August will be where the bulk of that comes in and it will taper off as we get towards September.

[John Vinh:]

Okay. And at this point, can I just have a sense of how we should be thinking about Q4 at this point?

[Keith Jackson:]

We really don’t give guidance for Q4. The one data point that I did share earlier is that at this time of the quarter we have a stronger backlog built for Q4 than we did at the same time in Q2 for Q3.

[Operator:]

Your next question comes from Ramesh Misra of Brigantine Advisors.

[Ramesh Misra:]

First, a quick question for you Donald. What was the change in headcount in the quarter?

[Donald Colvin:]

I think the headcount is pretty flattish in the quarter, Ramesh. Flattish, we probably added a little bit of operators and some people were axed at the beginning of the quarter. But pretty much flattish.

[Ramesh Misra:]

Okay, so the cost savings isn’t coming really from …

[Donald Colvin:]

The cost savings in OpEx, Ramesh, we are coming from two elements. One, we had three things. One, we moved on to a new integrated IT system at the end of the first quarter where we fully integrated to AMI [ph] into our Oracle system and through the first quarter we had expenses associated with our integration that we had zero for in the second quarter. The second thing is we had people who left in the first quarter and they still had expense in the first quarter that was zero in the second quarter and the third thing that helped the OpEx was as we forced salary reductions and time off, the employees rallied to the cause and cut the discretionary expense to the bond. So, these three elements resulted in a very good operating performance as I explained, operating expense performance.

[Ramesh Misra:]

Okay. That sounds good. In regards to their fab consolidation, are you moving more and more, and how should think about moving production to Gresham versus outsourcing some of the production out of your older fabs?

[Keith Jackson:]

So, the factories we have been closing are all moving into other ON Semiconductor facilities. There is no outsourcing involved. But it’s not just Gresham. Our older technologies in the IC domain have been going into the Czech Republic and our discretes have been going into Malaysia. So, Gresham is getting the advanced products. The older products and the IC's go to Eastern Europe and then all the discretes are going to Malaysia.

[Operator:]

Your next question comes from Patrick Wang of Wedbush.

[Patrick Wang:]

Just a couple here, just on the fourth quarter, I know you guys don’t want to say too much. But with some visibility here some better bookings. What do you typically see for I guess the seasonal sequential change in the fourth quarter?

[Keith Jackson:]

So, typically our Q4s are kind of flattish they might be plus or minus 2% depending on what’s going in the macro cycles. So, if you are asking what is called "typically", it would be kind of flattish.

[Patrick Wang:]

Okay. And then I think, is it fair to also say that based on what you're seeing right now we're off to a better start than we easily are?

[Keith Jackson:]

We are off to a good strong start at this point and a lot of that is being led by again some markets like the automotive piece of it that got too lean and the folks are now looking to ramp production in response to the increased demand they are seeing. So, simple answer is, is this going to be typical? I don't know yet. But all we could tell you is right now we've got a stronger backlog and typically it's flattish.

[Patrick Wang:]

That’s it. The areas that you're seeing the stronger backlog, is that, is that our typical computing and consumer stuff into the end of the year or does that also extend into the industrial auto side of things?

[Keith Jackson:]

It definitely extends beyond consumer to the automotive and medical areas. It does not necessarily extend to industrial yet.

[Operator:]

Your next question comes from Kevin Cassidy with Thomas Weisel Partners.

[Kevin Cassidy:]

You mentioned on the notebook side that you've got a new top five notebook supplier. Can you say it was related to the transition from Montevina platform to Calpella?

[Keith Jackson:]

Definitely, as we mentioned before our product offerings favor the new platforms and so we are picking up there and in this particular case the new engagement does come in the new platforms.

[Kevin Cassidy:]

Do you have an ASP for just in general on the new platform versus the old platform?

[Keith Jackson:]

Well, again it does vary by customer and how many of our products they put into the boards but it could be anywhere from a $1.5 to $4 or $5 at this stage depending on which customer you're talking about.

[Kevin Cassidy:]

If I could ask one more about the mix, are you seeing it still heavy weighted towards a netbook and maybe a lower ASP mix going into the third quarter?

[Keith Jackson:]

I mean, again I think you can look at the end market sales, certainly the netbooks have picked up a lot of share, but we still see notebooks as being stronger than netbooks in total manufacturing and demand.

[Operator:]

Your next question comes from Gus Richard with Piper Jaffray.

[Gus Richard:]

Quickly on pricing you mentioned blended, its down about a 1%, could you just handicap cross standard product, mix signal et cetera. What you’re seeing in the market today?

[Keith Jackson:]

There is not one area that is dramatically different than another. At this stage they are all pretty similar in that range. Again, within a standard deviation they are all pretty close.

[Gus Richard:]

And then at last call you had mentioned that I think the end OEMs, et cetera, down at the end at the food chain had pretty lean inventories. at this point there is a lot of material going through the supply chain. Are the OEMs beginning to feel a little bit more comfortable that they are catching up and how much longer do you think it will take before they get to a point where they are comfortable?

[Keith Jackson:]

I guess again, I can't fully answer that, but I can say just in reference to another comment I made. I think the end consumption and what we are shipping are getting really close at this point, which would indicate to me that they should be getting very comfortable. We’re in an industry that doesn’t normally or doesn’t always behave rationally. So I can't answer it completely, but I think we’re pretty close to equilibrium.

[Operator:]

The next question comes from Suji De Silva, of Kaufman Brothers.

[Suji De Silva:]

First a house keeping question, do you have the stock comp broken out by R&D and SG&A?

[Donald Colvin:]

For what period?

[Suji De Silva:]

For the second quarter.

[Donald Colvin:]

For the second quarter I think it's essentially in the release. If you look at the details of it, but most of the stock comp actually goes to operating expense, and the comps portion is about $3 million to $4 million and the SG&A portion is about two thirds of the total operating expense mix.

[Suji De Silva:]

Perfect. Then on the gross margin, you guys put out a target there versus where you are. What's between here and there? You think those are coming back in the manufacturing restructuring. Is there some mix shift involved you need to get there?

[Donald Colvin:]

There's not really any mix function in there. That's something that we can't really model. Also, we don't things but assuming like pretty stable coming season and cost as well. So it's basically all driven by better utilization and better top line driving that utilization and rationalizing our manufacturing base. I think if you look at how we have progressed, since the beginning of the year, I mean we obviously started off the year with revenue down dramatically from where it was in the middle of the year, but our gross margin although it came down, we're still well above 30%. You see that's improved to just under 35% in the second quarter. The mid point of guidance is 37% for the third quarter. So I think if you chart that line to the $525 million and the 43% or so gross margin, I think you see we are pretty close to the line and we're making good progress. The key point as well there is that this gross margin is superior to what we achieved last year at revenue that was pushing on $600 million per quarter. That's the benefit of the factory shutdowns that Keith mentioned.

[Operator:]

Your final question is a follow-up question from Ramesh Misra of Brigantine Advisors.

[Ramesh Misra:]

Just a quick question in regards to acquisitions. You are just digesting two pretty large acquisitions and the markets begin to perk up, where would you be looking to as you look forward in your acquisition pipeline and thinking strategically?

[Donald Colvin:]

Well, we get asked that question whenever we have our meeting. We are currently not planning any large acquisitions. We don’t have anything material that we are working on. We're always looking at small things that can add to our revenue. When I say small, I’m talking about less than $5 million a quarter type revenue. So that's where we currently stand and we understand that our investors have placed a high burden of financial diligence on any acquisition that we would consider and so right now there is not really all that many sellers.

[Keith Jackson:]

I would add to that just to try and give you an idea of the strategy there though. As we look at our portfolio, we are looking for technologies and business access to compliment where we have segment opportunities for growth, and right now, that would be in more of the communications type sector, as we feel very comfortable in computing with our position there and we are very comfortable in automotive.

[Operator:]

That is the time allotted for the question-and-answer session. This concludes today's conference. Thank you for your participation. You may now disconnect.