ON Semiconductor Corporation
Q4 2009 Earnings Call Transcript

Published: 4 Feb 2010

[Operator:]

Good afternoon, my name is [Stephanie] and I will be your conference operator today. At this time, I would like to welcome everyone to the ON Semiconductor fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to Ken Rizvi. Please go ahead, sir.

[Ken Rizvi:]

Thank you, [Stephanie]. Good afternoon and thank you for joining ON Semiconductor Corporation's fourth quarter 2009 conference call. I am 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 fourth quarter of 2009. The script for today's call is posted on our website and will be furnished via a Form 8-K filing. Our earnings release in this presentation includes 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 Deutsche Bank Small and Mid-Cap Conference on February 9th, Morgan Stanley Technology, Media and Telecom Conference on March 3rd and we will be hosting our Analyst Day in Scottsdale, Arizona on February 26th. 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 results or events 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, change assumptions or other factors. Now, let's hear from Donald Colvin, who will provide an overview of the fourth quarter and 2009 annual results. Donald?

[Donald Colvin:]

Thanks Ken, and thanks to everyone who is joining us today. ON Semiconductor Corporation today announced the total revenues in the fourth quarter of 2009 were $497.1 million, an increase of approximately 5% from the third quarter of 2009. During the fourth quarter of 2009, the company reported GAAP net income of $68 million or $0.15 per fully diluted share. The fourth quarter 2009 GAAP net income included net charges of $16.9 million, or $0.04 per fully diluted share, from special items, which are detailed and scheduled to our earnings release. Fourth quarter 2009 non-GAAP net income was $84.9 million or $0.19 per share on a fully diluted basis. And includes stock based compensation expense. Stock based compensation expense was previously excluded in our non-GAAP net income and fourth quarter 2009 outlook. We intend to include stock based compensation expense on a go forward in our non-GAAP outlook, based upon practices of our industry peers and feedback from the analyst community. Net income during the fourth quarter of 2009 benefited from an accrued gain on our overseas pension plans and received a recession development grants during the quarter resulting on a net benefit to income to a fully diluted share of approximately $0.03 during the fourth quarter. We do not expect to see a similar benefit in the first quarter of 2010 and therefore our operating expense guidance reflects an increase over fourth quarter 2009 levels. We exited the fourth quarter of 2009 with cash, cash equivalents and short-term investments of approximately $571.2 million, a record high in the company's history. In addition, we exited the fourth quarter with the lowest net debt position in our history as a publicly traded company with approximately $362 million in net debt or less than one time on last 12 months adjusted EBITDA. At the end of the fourth quarter, total days sales outstanding decreased from the third quarter by approximately three days to approximately 48 days. ON Semiconductor's total internal inventory was flat with third quarter levels on a day's basis at approximately 81 days. Included in our total inventory is approximately $2 million of inventory written-up to fair value related to our acquisitions and approximately $27 million of bridge inventory related to our announced closure of front-end manufacturing lines. Net of the bridge inventory and inventory written up to fair value, our inventory days would have been approximately 73 days at the end of the fourth quarter. Distribution inventories were at the lowest level in the company's history exiting the fourth quarter on a week's basis at approximately eight weeks. Cash capital expenditures during the fourth quarter were approximately $9 million, which was approximately $15 million below our initial expectations. As a result, this $15 million delta will roll into our 2010 capital expenditures plan for 2010 therefore we anticipate approximately $135 million in cash capital expenditures. 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 2009, our end market splits were as follows, the computing end market represented approximately 26% of fourth quarter 2009 sales. The automotive end market represented approximately 19% of fourth quarter sales. Consumer electronics end market represented approximately 18% of sales. The industrial, military and aerospace end market represented approximately 18% of sales. The communications end market, which includes wireless and networking, represented approximately 15% of sales and medical represented approximately 4% of sales. During the fourth quarter on a direct billing basis, no ON Semiconductor product OEM customer represented more than 6% of sales. Our top five OEM customers were Continental Automotive Systems, Delta, Hella, Motorola and Samsung. On a geographic basis, our contribution from sales in Asia represented approximately 63% of revenue. Our sales in the Americas represented approximately 21% of revenue and Europe represented approximately 16% of revenue during the quarter. Looking across the channels, direct sales to OEMs represented approximately 43% of the fourth quarter 2009 revenue. Sales to the distribution channel were approximately 46% of fourth quarter revenue and the EMS channel represented approximately 11% of revenue. During the fourth quarter, ON Semiconductor revenues broken out by our segments were as follows

[Donald Colvin:]

Thank you, Keith. First quarter 2010 outlook. Based upon current product booking trends backlog levels and estimates terms levels, we anticipate that total revenues will be approximately $515 million to $525 million in the first quarter of 2010. Backlog levels at the beginning of the first quarter of 2010 were up from backlog levels at the beginning of the fourth quarter of 2009, and represent over 90% of our anticipated first quarter 2010 revenues. We expect that the obvious selling prices for the fourth quarter of 2010 will be down approximately 1% to 2% sequentially from the fourth quarter. We expect cash capital expenditures of approximately $30 million to $40 million in the first quarter. For the first quarter we expect GAAP gross margin of approximately 40% to 41%. Our GAAP gross margin in the first quarter we will be negatively impacted from among other things expensing over previous inventory, fair value step off associated with acquisitions of approximately $3 million. We expect non-GAAP gross margin of approximately 40.5% to 41.5%. For the first quarter of 2010 we also expect total GAAP operating expenses of approximately 172 million to 176 million. Our GAAP operating expenses include the amortization of intangibles, restructuring asset impairment and other charges of approximately $10 million. We also expect total non-GAAP operating expenses of approximately $122 to $126 million. As previously discussed on our last conference call, this is also slightly up from the fourth quarter 2009 levels due to reinstatement to full salary levels and bonus accruals. We anticipate GAAP net interest expense and other expenses will be approximately $19 to $20 million for the first quarter of 2010 which includes non-cash interest expense of approximately $9 million form adoption of FASB staff position number APB 41 relating to our convertible senior subordinated note. We anticipate our non-GAAP net interest expenses will be approximately $10 million to $11 million. GAAP taxes and cash taxes are expected to be approximately $4 million. We also expected stock based compensation of approximately $13 million to $14 million in the first quarter of 2010 of which approximately $4 million is expected to be in cost of goods sold and the remaining in operating expenses. This expense is included in our non-GAAP financial measures. Our current fully diluted share count is approximately 445 million shares based on the common stock price. 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.

[Operator:]

(Operator Instructions). Your first question comes from the line of Jim Schneider with Goldman Sachs.

[Unidentified Analyst:]

Hey, guys, this is [Ian] in for Jim. It seems like lead times you're stretching out across the industry and capacity is tide in, I assume you guys are no exception. Can just talk a little bit about your consolidation plans in that light and update the timing and the savings you expect if unchanged at all? Thanks.

[Keith Jackson:]

From a consolidation perspective we had announced four factory closures last call, the last of them was expected to close at the end of this quarter calendar quarter 2010. Three of those we did either earlier than we unannounced or on time so three of them did close in 2009. The one that was anticipated here in Phoenix to close in the first quarter because of the extreme strength in the demand we are going to delay that, at this stage it looks something that might be more close to the third quarter, but of course we will monitor to that as time goes on enough of demand stay strong adjust accordingly.

[Unidentified Analyst:]

I'm just on that closure, how much benefit would you expect in the third quarter from that closure?

[Keith Jackson:]

That's specific closure when it is fully realized, it takes about a quarter to work through some of the inventory numbers etcetera., it should be somewhere between $5 million and $8 million per quarter.

[Unidentified Analyst:]

And some follow-up, could you just talk a little bit about discreet pricing here it seems like just given again where the industry is at, you may expect commodity prices to be firming or maybe even rising here. Would you expect any of that benefit to accrue in 2010 or it's just not going to happen.

[Keith Jackson:]

The prices in the discrete areas have been forming, we did announce that we had less than 1% price erosion in the fourth quarter, I think that's indicative of a lessening of the normal trends there, which are closure to 2%. We did predict a little bit higher number here for Q1 that's when we do our annual contracts, so there is a little bit more leakage when we reprise our backlog. But in general, I'd give you the direction of firming prices not just in the discreets, but pretty much around all of the multiple sourced products.

[Operator:]

Your next question comes from the line of Craig Berger with FBR Capital Markets.

[Robert MacKenzie:]

This is Robert, stepping in for Craig. I just want to get your thought on channel inventory better than your guidance, do you guys think inventories in the channel are going to be replenished in the first quarter or do you think they are going to be roughly flat? Thank you.

[Keith Jackson:]

I expect that there will be some replenishment in the channel in Q1, but I think it will be quite minor. I believe we'll exit Q1 still with significantly low inventories below our normal expectations and frankly below where they need to be to get the customers the products they need.

[Robert MacKenzie:]

Okay. And going to your OpEx guidance for the first quarter, you guys were seeing quite a step up, can you guys kind of explain what do you plan to do with OpEx for the rest of 2010? Thank you.

[Donald Colvin:]

Well, I think I explained there is bit of a step up compared to the fourth quarter which benefited from an OpEx something like $0.02 or $9 million of goodness that R&D grants and pension evaluations. So actually the fourth quarter came in very well below our guidance and that's why there is may be more of a step up to the first quarter. But if you adjust the fourth quarter back to our guidance levels and where we were telling people to expect the run rate, I think you will find that we didn't expect that we would get an increase expenses due to the restitution of salaries and bonus which we said on our last call where something like $5 or $6 million. And I believe that that is fully encompassed in our guidance and there is no further step function move for the rest of the year.

[Operator:]

Your next question comes from the line of Parag Agarwal with UBS.

[Parag Agarwal:]

Congratulations on a great quarter, guys. I had a question about your ARPU. Needless to say you are seasonally strong and one might wonder that how much of that is a pull in from the June quarter. So if you could just provide little color on what order trends have you seen for the June and also if you could breakdown you guidance in terms of the end market?

[Keith Jackson:]

The question there I guess I'll paraphrase and basically how much of the strength in Q1 is really headed towards inventory building that normally we'd see in Q2. I know it's not exactly what you said, but I mean that's normally what people are worried about. At this stage, with the inventories where they are and our expectation for how much of the product we will able to deliver to the market place. We think we're still very close to the actual run rate. So borrowing a major change in the economy we would not expect to see inventory built in Q1 which would lead us to a drop in order rates in Q2. So right now I'd have to say we're definitely are not seeing anything that looks like getting ahead of the gain in the deteriorating Q2. I will also add just from a data perspective as I always do, our backlog for the second quarter at the same time in the quarter we're in is stronger than it was for the first quarter in the same time we were in Q4.

[Parag Agarwal:]

If we look at your gross margin going forward like other than inflation, is there any other drivers, especially you have pushed out the future of Phoenix perhaps in Q3. So the question is for the rest of the year, how should we think about your gross margin and also what is your utilization rate now?

[Donald Colvin:]

Well, our utilization rate has risen. I'd see approximately in the 80% to 90% range. Business backlog has been strong so that's helping drive and overhead. That's a positive on a negative, as Keith mentioned, the cost reduction plans are somewhat delayed because of this trends of business. So I'd say that one is more or less offsetting the other. On the last conference call I laid out a model that was $525 million in revenue and 43% gross margin. That was a full non-GAAP and as you all probably have noticed as a request of many of you, we're now including stock based compensation in our non-GAAP measures, so that has to be adjusted down for that. I think that is still be a good basis, approximately 43% gross margin adjusted for stock expense would be 42% on a $525 million run rate. So that is still where we are with the improved fact of the utilizations offsetting the delayed cost reductions.

[Keith Jackson:]

And this is Keith. I want to add to that, the pricing information we give you each quarter is also very important. We have normal cost reductions that we do in our factories all the time that do normally offset the 2% per quarter kinds of decreases in ASPs. So to the extent that pricing firms it gives us more opportunity to increase as we go through the year.

[Operator:]

Your next question comes from the line of (inaudible) with Barclays Capital.

[Unidentified Analyst:]

(Inaudible). Can we just get your read on each of the major end markets specifically what your expectation is for the computing business coming out of Chinese near year?

[Keith Jackson:]

We expect computing to be strong all year, the first half is mostly consumer led with some enterprise buying sneaking in the second quarter, but in general we're seeing some good pickup that's all based some outstanding pricing at the low-end of the computing spectrum driving a lot of sales. So from a semiconductor supplier's perspective we expect to see pretty good first half driven by consumers in a strong second half driven by enterprise. So, I think that's probably across the year going to be one of the strongest stories and our Q1 expectations are certainly low above normal seasonality. The wireless business we get questions on that one that is looking quite seasonal to us. We don't see any drivers that like I mentioned in the computing side that will lead us to believe that would be other than kind of a normal seasonal year of course this growth, of course there's interest in the high-end feature phones and multimedia phones and that will be good for that industry, but again it still look like a fairly normal seasonal pattern from our perspective. Automotive is normally strong in the first half of the year, it does look like that will continue in the strength that we saw going into Q4 it looks like it's spilling over into the first quarter and probably the second quarter. So again I think at least the first half for automotive will look quite good. Industrial for us, if you want me to finish to the whole gamut, industrial started strengthening for us in the fourth quarter and again, the first half of the year normally is the best time for that and again I would expect that to look seasonal in these stronger year in the first half than it was in the second half of last year.

[Unidentified Analyst:]

Okay. And just a follow-up on distribution, I know it's not as meaningful for you guys, because you recognize on the sell through, but you talked about [dusty] inventories being at record low levels, is eight weeks kind of a new normal or do you expect…?

[Keith Jackson:]

I don't think eight weeks as sustainable, we look at the manufacturing cycle times and the order patterns out there, we really do believe that even a lean distributor model for our types of products has been closer to 10 weeks then it is to eight.

[Operator:]

Your next question comes from the line of John Barton with Cowen.

[John Barton:]

Thank you. Keith, you've mentioned a couple times pricing trends, seeing a little bit of firming, they are not major swings, we did say a major downturn or major compression of pricing in the downturn, we're not seeing a major upswing now. I'm really curious of your thought over the long time, is this what we are dealing with going forward or are they just kind of two offsetting anomalies here and we go back to the more substantial price swings to cycles going forward?

[Keith Jackson:]

The answer to that lies in both the demand and the end market and the capacity or capital spending behavior of our industry. Traditionally, we see these rises, we over spend on capital, which creates a blot which gives buying power back to the customers et cetera. And this kind of between the end the [end] there is a medium, but they are always in one state to the other. I do see continued constraint or restraint I should say not constraint but restraint on the capital spending. Certainly, people will be spending more in the fourth quarter of '09 to the fourth quarter of 2010 than they did the previous 12 months. I haven't seen any, it looks like you are going outside of what I would call a normal range for our industry. So I am hopeful that we'll see a continuing economy that supports the kind of levels that we're looking at right now on demand and the capacities don't get out of hand and so it'll be a much lower data on that as we go through 2010.

[John Barton:]

Hoping at California Micro Devices, I believe you said that there was no impact to earnings in this quarter, could you give us some insight on how it might impact the OpEx line both during the March quarter and on the full June quarter?

[Donald Colvin:]

This is Donald, I think we're thinking of couple of million bucks of OpEx two to three range, the EPS in part will be minimum this quarter and then over time that OpEx will come down as we [entry] into our systems, that's certainly thinking of we should see mild accretion and we really get the benefit of the acquisition next year, John.

[John Barton:]

My last question, Keith, you talked about industrial, just starting to bounce back in the fourth quarter continuing here in the first half, do you believe you're currently shipping below true consumption rates in the industrial market, there is a bit of a end of inventory provided to catch up have you played there or are you matched currently?

[Keith Jackson:]

I think we're matched fairly well at the moment. I don't get an abundance of calls from customers saying we're not able to keep your lines running. But I know I'm not building inventories. So I think we're fairly well matched.

[Operator:]

Your next question comes from the line of Craig Ellis with Caris & Co.

[Unidentified Analyst:]

This is Brad for Craig Ellis, thanks for taking my question. Could you just discuss Ambient Light and Proximity Sensor ramp in 2010 a little bit?

[Keith Jackson:]

Well, I don't no what discussion you are after, we haven't and won't give you specific numbers, but we do expect that that business for us will move meaningfully during the year on a percentage basis, potentially even doubling over last year, I don't know if that's what you are looking for?

[Unidentified Analyst:]

Yeah, that's very helpful. And then just maybe a housekeeping, could you talk about your tax thoughts for 2010, still think around the $4 million cash level?

[Donald Colvin:]

I think, Donald here, as you can expect on a tax, I think we're looking at the tax is starting the year a bit high about $4 million, but we'd expect that to trend down to $2 or $3 million run rate for the other quarters, similar to the number were previously given. I think that's what we see this year planning out.

[Operator:]

Your next question comes from the line of Chris Danely with JPMorgan.

[Chris Danely:]

Can you just talk about what your lead times did during the quarter, did they go out or come back in and also can you maybe comment on your competitors lead time, are your lead times shorter than your competitors and is that an opportunity to gain some market share?

[Keith Jackson:]

Our lead times actually it help study through most of the fourth quarter, we got into kind of mid December and they started to move out of a bit. So right now through January, we are running slightly more than 12 weeks versus the 11 weeks we were going into the December. So we've actually gone out a bit more. As I had mentioned, backlog has continued to grow inside the 13 weak windows. So I guess simple answer is, I think that reflects the industry I believe that those pressures are pretty much everywhere. And if I had lots more capacity, I'd try to take advantage of that, Chris, but frankly we're going to ship everything we could make in the timeframes that we have and of course those numbers continue to accelerate as we get back to full staffing and put the equipment in our factories.

[Chris Danely:]

And when do you think you will be able to bring those down and do you think that your lead times are shorter than your competitors?

[Keith Jackson:]

I think we are very comparable to the competition and I don't anticipate being able to meaningfully bring them down before the end of the quarter. But most likely in the second quarter we should be able to.

[Operator:]

Your next question comes from the line of Ross Seymore with Deutsche Bank.

[Bob Gujavarty:]

Hi, this is Bob Gujavarty for Ross, thanks for taking my question. Just curious, on the OEM side do you have pretty good visibility, are you kind of on hub system in regards to inventory there. Can you talk about just relative visibility between distribution and OEM?

[Keith Jackson:]

We have good visibility in both channels, because with our distributors we're on sell through basis and we actually get information on a quiet real time basis that lets us know what's going on there. And of course on the OEM side, we do have a lot of service programs, which include hubs, inkjet programs and on-site warehouses et cetera and again we get daily feeds from that. So we've got pretty good visibility and in all cases we've got building demands.

[Operator:]

Your next question comes from the line of Ramesh Misra with Brigantine Advisors.

[Ramesh Misra:]

In regards to your industrial and automotive business, obviously kind of seeing decent strength. Can you talk a little bit how your AMI acquisition is playing out in that business are trends any particularly stronger at AMI? And can you provide an update in terms of the transfer of the production process from Idaho to your Oregon fab?

[Keith Jackson:]

I'll take those as two separate ones, we're seeing the similar strengths across our entire automotive business, so it's not just the acquired business, but it's also our (inaudible) business and they are up about the same amount. So we were shipping to end-demand and end-consumption and so really we're seeing the strength of the end market. And I don't have anything else on that one. The movement from Idaho to Gresham, actually the 5 inch line in Idaho is now closed and those things have been transferred, some of them into Gresham and some of them into other factories, so it wasn't all in Gresham. But we do find ourselves in Gresham now filling up quite nicely. Utilization rates above 80% and again all of those transfers have been affected at this point.

[Ramesh Misra:]

If I may just have a quick follow up. Your Q4 CapEx, Donald, why was that particularly lower than you had previously anticipated?

[Donald Colvin:]

Stay simple, Ramesh is just that we didn't rush to pay the invoices and I mean we could meet the target by paying faster in having lots of cash. So as you can imagine that's not an action that I would take with any enthusiasm. So we obviously try to manage our working capital at what way as possible and that means paying within reason, but as re-disposable and not accelerating payment. So that's one of the things we have that's always difficult to determine when payments have to be [affected]. So we're just at, say, good prudent balance sheet working capital management.

[Operator:]

Your next question comes from the line of Terence Whalen with Citi.

[Terence Whalen:]

Hi. Thanks for taking my question. This one relates to the cash flow statement do you expect operating cash flow to increase sequentially along with revenue next quarter?

[Donald Colvin:]

Yes.

[Terence Whalen:]

And then pertaining to cash use, can you just remind us what your expectation is in terms of upcoming debt pay down and how you think about cash use throughout 2010 from a capital allocation perspective? Thanks.

[Donald Colvin:]

Well, I think we have a [zero grouping] next year in April, so that's a $100 million or so that we expect to be put to us is underwater. So we're keeping cash available for that. And then as we continue to generate cash, we will see how we can apply in the shareholder friendly manner. In the past, we have paid down debt in advance, particularly convicts. Right now we will continue to monitor to see if there is any arbitrate on the market, but clearly our intention is to manage the balance sheet for shareholder value and at least when we see opportunities to improve that we will action them. I can't go into any more specifics, but I mean, happy position of having a good improving cash generation.

[Terence Whalen:]

And then my follow up, this for Keith, Keith you had mentioned that you think lead times actually coming may start coming in a little bit in the second quarter as some capacity comes on line, what's your expectation for how that might affect the behavior of your customers ordering patterns? Thanks.

[Keith Jackson:]

I mean customers are actually fairly predictable, when they perceive there is a shortage that gives you more orders in longer lead time and always they make sure they are getting inline well in advance when. And when the lead times come in then they stop giving you those longer term orders. To the extent, we continue shipping to in demand and not building significant inventories really the only change will be the horizon that we are seeing on booking and then horizon right now is greater than normal and is out at six months.

[Operator:]

Your next question comes from the line of Steve Smigie with Raymond James

[Steve Smigie:]

I think you guys talk a little bit about OpEx guidance here were between SG&A, R&D sit up little bit here, which areas, what are you expecting to increase more than others?

[Donald Colvin:]

I think the split has always been above 50/50 between SG&A and R&D, I think that's going to remain the case. So we will forward that's just probably a good, I gave a complete number. So I think that's as good as I would take it, I just put a 50/50 between R&D and SG&A.

[Steve Smigie:]

Okay. As we go forward, are there any other step ups that we have last year, is that pretty much at this point?

[Donald Colvin:]

I have stated that, when you analyze the restitution of salaries and bonus apart from that we don't see any big fundamental increases in any of the areas. We don't have any big, have R&D projects that are ready to launch. We don't have any big expensive programs in SG&A or whatever to undertake.

[Steve Smigie:]

Okay. And then just the last question, you guys obviously have been doing very well here in computing, getting strong orders. Can you talk a little bit about when you had big ramp ups in say computing or other type of business in the past where it's led to a position where it looked really good and then it sort of fallen off all the sudden and why it's different this time, why it's seems like the demand could potentially continue more steadily throughout the year versus all the sudden (inaudible) order, what it might look like, what's different here versus have you seen things drop off in the past?

[Keith Jackson:]

Yeah, very difficult question and then figuring out what normality is sometime is difficult. The global economic impact that we saw clearly caught us by surprise and we thought it was going to be strong market, it's not just computing but across the board and of course it turned to be extremely weak with the credit prices et cetera. So frankly we don't have a good way of predicting those, but if you take that kind of event out typically we are not surprised in the six months window that we normally comment on. Very, very few surprises where we think it's going to be really strong and it's turns out to be none. So again I would say just in general the difference if you want to go back to 99 and 2000 was something that didn't surprises us, but then we didn't have the tool that we had today looking at the channel inventories the end users, et cetera. So frankly in the last seven, eight years, have been lot surprises that we're not macroeconomic.

[Operator:]

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

[Kevin Cassidy:]

Keith, you had mentioned the Gresham fab was running at 80% utilization, is there more room in that fab that you can bring a new equipment or turn on more equipment?

[Keith Jackson:]

We get actually about double the factory size by brining in more equipment. So we've got substantially more room for that. Frankly, the current programs we're looking at now is moving out some of the mass sets we had used to build in the factory into other factories and making more room for ICs, mixed signal ICs which have a higher value output from the lithography in that factory. So I think we're going to get some more gains from a gross margin perspective just by shifting the mix in the factory first and then by adding capacity as the second step. And we do into non adding capacity in that factory this year.

[Kevin Cassidy:]

And is that the equipment you buy for that, can you buy that used in the market or?

[Keith Jackson:]

Absolutely, it's all used.

[Donald Colvin:]

But we have a history of doing this even before we bought Gresham facility we bought a whole tool set from Sony come back of a six years ago. So this is a kind of action that we would undertake. It's usually $0.10 in a dollar compared to new price.

[Kevin Cassidy:]

And I guess that leads to my next question about CapEx going forward, on an annual basis what do you thinking for CapEx as a percentage of revenue?

[Donald Colvin:]

This year we stated $135 million, so I'm not going to change that that's a best feel I have now. But I must remind you that within this there is about 30 million of buildings and building are quite effective cost reduction actions especially when you can get financing fall on like in Philippines, so not included in their, so equipment just over $100. And we've said in the past there is something like 67% rate make sense. So the other thing is depreciation is now running just approximately the same as our capital expenditure. So we're not really increasing the capital intensity, but something in that 6% or 7% on an ongoing basis would be something a normal. And we try to mange that so that we don't have a lot of excess capacity and that we have a very good near term cash flow return on all new investments.

[Operator:]

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

[Patrick Wang:]

Keith as I wondering if you could give us maybe talk about your views of if you think OEMs are actually building inventory out there right now?

[Keith Jackson:]

I've stated before, that's the most difficult thing for us to determine, we have to use kind of third party information to get out that or try and give it around it, which is kind of what we believe or what does other people believe, they're actually shipping out the door and then comparing that to the products we shipping the bill materials. So that is the least accurate feel that we've got, but within that again at least right now, I believe that the amount of that being built is relativity minor.

[Patrick Wang:]

You still feel pretty comfortable with the build out there it's seems like?

[Keith Jackson:]

We still feel very comfortable.

[Patrick Wang:]

And then also, I was wondering I know you entered the markets little bit here, but can you rank order for us on the magnitude in terms of which one you can kind of grow the most in the lease?

[Keith Jackson:]

On a absolute dollar basis, I do think computing will probably be the strongest growth in 2010. On a year-on-year percentage wise it's probably going to be automotive as number one so depending on how we want to look those market sizes. And then followed probably by your consumer communications, industrial and then I think medical and other all will be pretty similar.

[Patrick Wang:]

And then just last question here, in terms of your channel inventory you said that reach on sustainable, is this fair to imply that you think you can build that back to 10 weak for sometime in the second quarter?

[Keith Jackson:]

We are hopeful.

[Operator:]

Your next question comes from the line of Gus Richard with Piper Jaffray.

[Gus Richard:]

It seems like obviously capacity constraints backend, do you need more testers or wire bonders or something else?

[Keith Jackson:]

Yes

[Gus Richard:]

And are the lead times those items stretched out right now?

[Keith Jackson:]

They are not observed, but there all out 12, 13, 14 week range and unfortunately for us we've been ordering for longer than that. So we're seeing equipment come in and started to see in the Q4.

[Gus Richard:]

I get that PCs is going to be up probably in Q1 and I'm suspecting that you are benefiting from the platform transition at [Intel] and your increased market share, can you grow that business 10% sequentially in the first quarter, is that possible?

[Keith Jackson:]

I don't know the answer to that one, I have to fine, may be we can get back to you, I actually don't know, I'd have to look at not just the orders but also our ability to fill those orders.

[Gus Richard:]

Got it, and then on the automotive side, it seems a bit stronger than I would have expected and you suggested that it's going to be strong all year you are not selling gas-pedals to Toyota in the first quarters, things like that?

[Keith Jackson:]

No we are not. Now, basically there was, I do think the credit crunch is that market segment harder than any others, there is a lot of suppliers that do electronic sub assemblies, they all became to lean and now the automotive build rate are up and so that combination certainly led to what both you and I believe are a little stronger than expected demand for semiconductor components. But even with that just a pure math will say you that they are going to build more cars this year than last. And so it's still going to be a very good market.

[Gus Richard:]

Okay and I would imagine it will accelerate and pause sometime probably second, third quarter?

[Keith Jackson:]

Generally, third quarter is one that pause comes they idle our factory for model changes and so I would say that we're not looking for any breaks before the third quarter.

[Operator:]

Thank you. There are no further questions at this time. This concludes today conference call. You may now disconnect.