ON Semiconductor Corporation
Q1 2013 Earnings Call Transcript

Published: 3 May 2013

[Operator:]

Good afternoon. My name is Kyle, and I will be your conference operator today. At this time, I'd like to welcome everyone to the First Quarter 2013 Financial Earnings Conference Call. [Operator Instructions] Thank you. Mr. Agarwal, you may begin your conference.

[Parag Agarwal:]

Thank you, Kyle. Good afternoon, and thank you for joining ON Semiconductor Corporation's First Quarter 2013 Quarterly Results Conference Call. I am joined today by Keith Jackson, our President and CEO; and Bernard Gutmann, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay will be available at our website approximately 1 hour following this live broadcast and will continue to be available for approximately 30 days following this conference call, along with our earnings release for the first quarter of 2013. The script for today's call is posted on our website. 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, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. Important factors, which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the first quarter of 2013. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors. In the upcoming quarter, we will be attending the Bank of America Conference on June 4 in San Francisco. Now let me turn it over to Bernard Gutmann, who will provide an overview of the first quarter 2013 results. Bernard?

[Bernard Gutmann:]

Thank you, Parag, and thank you, everyone, for joining us today. Let me begin by updating you on the progress we're making towards the financial objectives for the company. Let me start with our SANYO Semiconductor Products Group. We have further lowered the revenue needed to achieve breakeven on a non-GAAP net income basis for SANYO Semiconductor to approximately $170 million per quarter from an estimated $190 million per quarter. With this lowered break-even level, we continue to be on track to achieve breakeven for our SANYO business by the third quarter of this year. Rationalization of our SANYO business is the key driver for lowered break-even point, although devaluation of the yen has been a contributing factor as well. Revenue for our SANYO business has continued to be below our expectations, primarily due to a combination of a weaker yen and softness in the Japanese consumer electronics manufacturers. We do, however, believe that revenue for our SANYO business has bottomed, and we should see improving revenue trends going forward. Now moving onto the ON legacy business. Our design win momentum remains strong, and we are targeting investments in faster growing end markets, such as wireless communications and automotive. Our ON legacy business is well positioned to benefit from an improving demand environment. Keith will provide more details on design win activity and business trends in his prepared remarks. Our third area of focus is returning cash to stockholders. This quarter, we did not buy back any shares of our stock, but we do remain committed to opportunistic repurchase of our stock in a disciplined manner. We did, however, use approximately $77.5 million of cash to retire our 1.875% senior subordinated convertible notes. Now let me provide an update of our first quarter 2013 results. ON Semiconductor today announced that total revenue for the first quarter of 2013 was $661 million, a decrease of approximately 3% from our -- the previous quarter and 11% from the same quarter a year ago. GAAP EPS for the quarter was $0.05. Excluding the impact of amortization of intangibles and restructuring and other special items, non-GAAP EPS for the quarter was $0.10. Non-GAAP gross margin for the quarter was 32%, an increase of 100 bps quarter-over-quarter. Higher utilization at our ON legacy operations was the primary driver of our improved gross margin. We expect this trend to continue, driven by increased utilization, not only for our ON legacy operations, but also for our SANYO group. Non-GAAP operating expenses for the quarter were approximately $158 million, down by approximately $8 million as compared to the prior quarter. Favorable currency movements, selective headcount reductions and short-term tactical actions, such as mandatory time-off, were among the key drivers of lowering operating expenses. Average selling price during the first quarter declined by approximately 2% sequentially. We exited the first quarter with cash, cash equivalents and short-term investments of approximately $614 million, a decline of $17 million over the last quarter. Approximately $85 million of cash was provided by operations, and we spent approximately $39 million of cash on purchase of capital equipment. We used approximately $77.5 million to retire our 1.875% senior subordinated convertible notes, as mentioned earlier. In March, we exchanged approximately $60 million in principal value of our 2 5/8% senior subordinated convertible notes due 2026 for $58.5 million of 2 5/8% senior subordinated convertible Series B notes due in 2006 (sic) [2026]. This transaction extends the first put date of the exchanged notes from December '13 to December '16. At the end of the first quarter, ON Semiconductor days of inventory on hand were 114 days, up approximately 1 day from the prior quarter. Included in our total inventory is about $43 million or 9 days of bridge inventory, primarily related to the consolidation of certain factories. Distribution inventory was down approximately $5 million quarter-over-quarter. In terms of days, distributor inventory was approximately 10 weeks, flat as compared to the prior quarter. Now I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?

[Keith D. Jackson:]

Thanks, Bernard. Let me start with comments on the overall business environment, and then I will address various end markets. In line with our peers, we have seen steady improvement in the business environment. Our customers appear to be ordering to keep pace with a steady improvement in demand. Yet, they continue to maintain lean inventory levels. We saw improving bookings throughout the first quarter, and the bookings have continued to be strong thus far this quarter. Key areas of strong bookings are wireless, automobiles and white goods end markets. Our average lead time continues to expand as well and is approximately 9 weeks currently as compared to approximately 7 weeks at the end of the fourth quarter. We continue to make progress in improving the performance of our SANYO group. We are bolstering our overall sales efforts for SANYO products outside of Japan to drive design wins in the automotive, white goods and wireless end markets. As Bernard indicated in his remarks earlier, we have lowered the quarterly revenue needed to achieve break-even profitability on a non-GAAP net income basis for our SANYO group to $170 million from $190 million. We remain on track for achieving this break-even target for our SANYO group in the third quarter of the current year. Along with our revenue growth driven by design wins, our highly efficient factory network should drive operating leverage and substantial gross margin expansion. This meaningful upside to gross margin should come both from our ON legacy business and SANYO. Our global fab utilization was approximately 80% for the March quarter and should increase going forward. Now I'll provide some details of the progress in our various end markets. Automotive end market sales for the quarter represented 28% of revenue, up approximately 6% quarter-over-quarter. Growth in this segment was driven by strength in both the North American and Chinese vehicle markets and worldwide luxury light vehicle sales. We saw strong demand for our in-vehicle networking products, including CAN and LIN transceivers. Standard component sales alone into this end market increased by more than 12% quarter-over-quarter, driven by applications such as body electronics, safety systems, infotainment and power train. Strong customer interest continued for our LED driver solutions, for advanced front lighting systems, rear combination lamps and cabin lighting. Additionally, our interior and rear lighting products are gaining traction in production vehicles in North America, China and Korea. Key design wins for the quarter included tuners and VICs for car navigation at a key Japanese audio customer and LDOs for tire pressure monitoring and power windows. Our communications end market, which includes both wireless and networking, represented approximately 13% of revenue and was down 9% quarter-over-quarter. In addition to normal seasonality, platform transition at an OEM contributed to the decline during the quarter. However, new design wins in upcoming smartphone models, which are ramping in the second quarter, should drive solid double-digit growth. Key drivers for our smartphone revenue include optical image stabilizers, auto focus ICs for smartphone cameras, battery chargers and DC-DC power management ICs. Our DC-DC converters have started ramping in devices based on reference designs of major baseband chip providers. Our audio amplifier solution has been adopted by a leading smartphone customer in the Asia-Pacific region. I'm excited to report a strong ramp for our tunable RF components. We have secured multiple significant wins for this product with key smartphone customers in North America and the Asia-Pacific region. We are already seeing strong design win traction at other key smartphone customers for this tunable RF components product line, which facilitates smaller volume antennas, reduces power consumption and supports increasing mobile data demands for LTE-enabled mobile devices. The consumer end market represented 21% of revenue and was down 4% from the fourth quarter. Within the consumer market, white goods were an area of strength, up double digits quarter-over-quarter. Key drivers for the quarter including an increased adoption rate for our SANYO inverter HIC solutions and intelligent power modules by a number of leading white goods manufacturers and share gains for our HIC fan motor drivers. Industrial end market, which also includes military, aerospace and medical, represented 20% of revenue, and was down 5% sequentially. Customer orders were steady, and design wins thus far this year have been strong, reflecting optimism in the market. Orders for our switchgear and circuit breaking solutions are seeing slight increases, as residential and commercial building starts to improve in the U.S. and China. Design wins for our latest KNX building automation device are gaining momentum. Computing end market represented 18% of revenue and was down 6% compared to the fourth quarter, significantly better than the computing market decline of 12% to 14%. This strong relative performance was driven by share gains, which should accelerate with the ramp of the Haswell platform in the second half of the year. While the overall industry news in this segment is not upbeat, we remain well positioned in this market with leadership positions in V-core power and notebook adapters. We continued to secure design wins at leading computing customers with our VR12.5 controllers, MOSFET drivers and DDR system rail FETs, LDO regulators and a myriad of standard components, including ESD protection, CMF and standard logic. We had a key win for tablet reference designs from -- for our switching battery charger IC. I'm pleased to report that ON Semiconductor has recently won some additional supplier awards. ASUSTeK Computer, a leading supplier of computing, communications and consumer electronics, has honored us with their 2012 Best Supplier Award. Additionally, we were the only semiconductor supplier to be honored by Yanfeng Visteon Group, a leading automotive components supplier in China, with their 2012 Best Project Collaboration Award for excellence in solution, technology, service, quality and delivery. Now I'd like to turn it back over to Bernard for other comments and our other forward-looking guidance. Bernard?

[Bernard Gutmann:]

Thank you, Keith. Based upon product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $675 million to $715 million in the second quarter of 2013. Backlog levels for the second quarter of 2013 represented approximately 80% to 85% of our anticipated second quarter 2013 revenues. We expect average selling prices in the second quarter of 2013 will be down approximately 1% to 2% compared to the first quarter of 2013. We have recently seen moderation in pricing pressure, and the pricing environment is becoming increasingly benign. We expect inventory at distributors to rise slightly on a dollar basis in anticipation of a better demand environment. We expect total capital expenditure of approximately $45 million to $55 million in the second quarter of 2013, and total capital expenditures of approximately $170 million for 2013. For the second quarter of 2013, we expect GAAP and non-GAAP gross margin of approximately 32.5% to 34.5%. We also expect GAAP operating expenses of approximately $173 million to $183 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to be approximately $15 million. We expect total non-GAAP operating expenses of approximately $158 million to $168 million. A quick note on the yen. Our guidance for the second quarter of 2013 is based on an average exchange rate of JPY 97 per U.S. dollar. We had previously mentioned that we get a benefit of approximately $600,000 on a non-GAAP net income for every point that the yen devalues against the U.S. dollar. As we have significantly reduced our expenses for the SANYO operations, the benefit to non-GAAP net income for every point that the yen devalues against the U.S. dollar is now expected to be approximately $400,000 to $500,000. The weaker yen is expected to have a negative effect -- or negative impact of approximately $8 million on second quarter revenues. However, it should have a net positive impact of $0.01 on the second quarter fully diluted EPS. We anticipate GAAP net interest expense and other expenses will be approximately $11 million to $13 million for the second quarter of 2013, which includes non-cash interest expense of approximately $3 million. We anticipate non-GAAP net interest expense and other expenses will be approximately $8 million to $10 million. GAAP and cash taxes are expected to be approximately $2 million to $4 million. We also expect stock-based compensation of approximately $10 million to $12 million in the second quarter of 2013, of which approximately $2 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 second quarter fully diluted share count is expected to be approximately 455 million shares based on the current stock price. Further details on share count and EPS calculations are provided regularly in our quarterly and annual reports on Forms 10-Q and 10-K. With that, I would like to start the Q&A session. Thank you. And, Kyle, please open up the lines for questions.

[Operator:]

[Operator Instructions] Your next question comes from the line of Ross Seymore from Deutsche Bank.

[Ross Seymore:]

So for -- the question, first, on the SANYO side of things. Forgive me if I couldn't find it in the press release, but did you give the product breakout in the 3 new segments that you have and, most specifically, what the SANYO revenues were in the quarter?

[Bernard Gutmann:]

The SANYO revenues in the quarter -- in the first quarter were $151 million.

[Ross Seymore:]

And, Keith, in your commentary, where you talked about the first quarter being the bottom, do you believe that's a structural bottom, or is your confidence mainly driven by the fact that seasonality should be a tailwind for SANYO going forward?

[Keith D. Jackson:]

No, it's a structural comment. We were still, if you will, getting rid of some of the last-time buys from the Thailand flood, and those last-time buys are largely exhausted at this point. And so, that had a decreasing value to the P&L each quarter. That's all pretty much flushed. And what we're seeing now is upticks in our wireless, white goods and automotive sectors. So at this stage, we think it is a structural bottom and should see improvement, obviously, not independent of the economy, but certainly not counting on an improvement in the market.

[Ross Seymore:]

Good. And I guess, my last question is just -- in your guidance, any color you could give by your end market segments as to what would be growing faster or slower than the company average would be helpful.

[Keith D. Jackson:]

Certainly. So our automobile section should be up nicely; our communications sector, which the wireless piece is driving, up in double digits; consumer, kind of flat to up; computing, very flattish; and our industrial business, kind of flattish as well.

[Operator:]

Your next question comes from the line of Jim Schneider from Goldman Sachs.

[James Schneider:]

I was wondering if you could maybe give us some color -- more color on the bookings trends you're seeing so far this quarter? And specifically, are you seeing any of your customers booking out longer in time with longer-dated backlog? And can you see anything in terms of bookings that stretched into Q3 at this point?

[Keith D. Jackson:]

Yes. Very similar to what we had going into the current quarter and Q2 as well. We definitely saw a trend starting in the fourth quarter of last year of placing more orders in the Q plus 2. And that trend continues. So we're seeing some pretty robust numbers going out into Q3.

[James Schneider:]

That's helpful. And then, can you maybe quantify for us how much you expect utilization to potentially increase in the current quarter?

[Keith D. Jackson:]

So It should go somewhere from the 80% to 85% range in our wafer fabs this quarter.

[James Schneider:]

Got it. And last one, if I can just sneak that in, can you maybe talk a little bit about the industrial segment? And for you, I think it was down in Q1, and that seems to be a little bit at odds with some of your peers. Can you maybe talk about what was driving that and why you think you're different from some of your peers there?

[Keith D. Jackson:]

Yes. There's a couple of things there. One of them is what we put in industrial category versus some of our peers. Some of the peers put the white goods piece of the market in there. We saw very substantial gains in our white goods market. So air-conditioners and so forth for buildings, we would include in consumer rather than industrial. And we did see very, very strong upticks there, but we included that in consumer as opposed to industrial.

[Operator:]

Your next question comes from the line of Aashish Rao from Bank of America.

[Aashish Rao:]

Any color on what the growth in operating margins were in the SANYO division? And are there any specific design wins? And there are, like, big game consoles, in which, I'm guessing, you guys have content, consumer electronics or autos, et cetera, that are likely to drive sales back from the low $150s million to, like, the $170-plus million revenue level in the back half of the year?

[Keith D. Jackson:]

I'll address the market side of that, and then I'll let Bernard talk to the margins. We do have major design wins in the game consoles, pretty much across-the-board as they recover in the second half. We would expect to see increases there. As you know, that market drops off pretty precipitous in Q1. So certainly, we'll see that pick up. But frankly, the big excitement there from a building of the revenue side is in the wireless market, with the camera modules in the white goods and building industries with the HIC modules and in the automotive arena, where we participate both in the entertainment section and in the ignition portions of automobiles.

[Bernard Gutmann:]

And on your question about SANYO financials, the non-GAAP gross margin for SANYO is just a tad bit above 10%, and the EBIT is about 21% loss.

[Aashish Rao:]

Got it. And then, just -- I mean, could you provide some additional color on capacity utilization in SANYO and your legacy ON wafer fabs and back-end facilities? And, Keith, are there any incremental actions that you can take to be more efficient, especially in the back end? You guys have consolidated the front-end wafer fabs from 3% to 1%, but you still seem to have a lot of back-end facilities. So are there additional actions that you can take to get more cost out of your model?

[Keith D. Jackson:]

Well, our model basically is a continued -- continuous rationalization of our factories. Going for fewer larger factories has been a trend for us for many years. We'll continue that. There's nothing that will impact 2013 that's in the works right now, but there are certainly opportunities, as you mentioned, in the back-end, specifically, to get some more gains from that consolidation. And utilization rates, was the other thing you asked again, is about 80% for the first quarter, and we're down to 1 wafer fab for SANYO. And so, you should see similar pickups from utilization gains on the gross margin contribution as we go forward.

[Operator:]

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

[Christopher B. Danely:]

Anyway, I know you said you expected improvement in SANYO in the second half. And obviously, if, say, the breakeven is $170 million, you're expecting pretty decent improvement. Let's say that we have this, sort of, slow, steady slog in the second half like we've had in the first half. Would you -- or could you do anything to change the cost structure of SANYO to get it more in line with the overall company cost structure? Or what would be the plans there?

[Keith D. Jackson:]

Yes. We -- as I mentioned before, of course, on a bigger scale, we're not going to announce anything larger right now and certainly won't impact the second half. But the way we're bringing it down from $190 million to $170 million now is really getting at that size and piece of the equation. And so, if there was any signs of continued weakening, we certainly have more room to go there. We've been giving guidance that we expect breakeven in the third quarter, and I think we've got the flexibility to make that happen.

[Christopher B. Danely:]

Okay. Great. And then, so if we add all that together after this quarter, assuming some -- we get continued seasonal growth, what would your, sort of, gross margin and operating trends for the overall company -- or, at least, your gross margin and OpEx trends for the overall company look like?

[Bernard Gutmann:]

Well, again, we don't guide more than 1 quarter out. But what we have said is, we should see some good seasonal growth if it ends out the normal way in the 5% to 8% in the third quarter and 2% to minus 2% in the fourth quarter. Our fall-through on those incremental revenues should be in the 50% for our regular business and 60% for SANYO. And the contribution of all the actions we are making on the SANYO, including headcount reductions, pay cuts, as well as the harmonization of our systems, which should improve our inventory management, should give us some pretty good leverage on gross margins.

[Christopher B. Danely:]

Great. And then, last question just on lead times. So it sounds like that it's gone from 7 to 9 weeks so far this year. Do you anticipate -- or could they stretch out any further, or do you think they could come in this quarter? And I think you guys and Microchip were the only 2 companies seeing that. Would you anticipate other companies to start seeing their lead times stretch out over the summer? Are you hearing of anybody else's lead time stretching out?

[Keith D. Jackson:]

Yes. I think a lot of that really depends on what happens in the macro economy. If we get to have normal seasonality, I would expect to see more stretching. A big piece of our equation is we introduced a significant number of new products that have gone into designs in 2012, and those are all ramping as we go through this year. So it's really more of making sure we manage our capacity expansions for some of the newest products that impact the lead times the most, and I would expect they would be fairly stable through the -- this quarter at those levels. And based on our plans, they should not expanding during the year or contracting during the year.

[Operator:]

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

[Terence R. Whalen:]

You did specify that you've seen some improvement in white goods within your consumer division. Can you just give us an idea of how much white goods account within that business segment? And also, remind us what the seasonal profile of that business would be in a normal environment into the second and third quarter.

[Keith D. Jackson:]

From a seasonality -- I'll start with that one. Typically, you do see a little stronger first half if there is such a thing as a typical year. But basically, our expectation there is we've got a lot of design win traction. So that may or may not be a typical year, but, hopefully, a little better than that. From a percentage of our total consumer, it's now in the 6% to 8% range for the total company. And again, that's been ramping pretty quickly from negligible rates in 2011.

[Terence R. Whalen:]

Okay. And then, the follow-up question is on gross margin, perhaps for Bernard. You're guiding gross margin up about 1.5 points. Obviously, utilization is probably the main driver of that. You said, "I think it might go from 80% to 85%." Can you just help elaborate on some other puts and takes? It sounds like the SANYO gross margin actually might be a little bit of a headwind into the second quarter. So can you just help us delineate these factors to understand the puts and takes in gross margin?

[Bernard Gutmann:]

Yes. Definitely, Terence, the utilization is the biggest key driver. But we do have a -- we do continue with our headcount reduction plans at SANYO, and we had a sizable amount of manufacturing people that left at the end of March that will contribute to an improved bottom line for the total company. Definitely, there is a small effect on gross margin, much bigger effect on OpEx as a result of the yen devaluation, which the average rate in the first quarter was about 87% and going to 97%. So pretty much the biggest driver is still factory utilization.

[Operator:]

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

[Jonathan Steven Smigie:]

Keith, you guys had a pretty significant jump in handset content, I think you said $3 to $6 on your last call. And you have a ton of parts out there that you're putting out on these phones now. How should we think about growth for this business over the next couple of years? Is it continuing to add parts to that? Or is this a strategy to maybe do some integration to create sort of higher value parts? So I guess, does it go to -- from $6 to $8 or something like that? And how is that accomplished?

[Keith D. Jackson:]

So the answer is, yes, we're continuing to invest there. We are looking at that market is a continuous integration and shrinking value profile. And so, we are continuing to invest in that. We're doing more and more combination products. And so, those combination products typically get us a little better pricing leverage. And so, the content should just continue to move up each year. We are not going to be doing the doubling in the content like we did in 2012. But certainly, a much more than market growth should be expected.

[Jonathan Steven Smigie:]

Okay. Great. And then, on the auto side, you guys have done really well there. That's the biggest percentage of your revenue at this point, I believe. And I think what's in the coverage universe that I look at, mostly analog and discrete guys, think you have the highest mix of anybody out there. Just strategically, do you continue to drive that up as a percentage of revenue? I mean, does that create a risk of exposure in one market? Do you view it as a pretty stable market, good visibility, high barriers to entry? Just any thoughts on auto as a percentage of your mix.

[Keith D. Jackson:]

Yes, we do consider automotive to be a very good place to be. We continue to drive good margins with value-added technology. It does tend to be quite stable. And as we've mentioned many times, we think the electronic content is going to significantly outgrow most of the other marketplaces. We don't really target a percentage of the company. However, we're certainly not uncomfortable in the 30% range or so. I do expect the wireless piece to grow. So those 2 should become the largest portions of the company over the next 3 years.

[Jonathan Steven Smigie:]

Okay. And just 1 housekeeping item, and I'm sorry if I missed this, but I think you typically provide a geographic and channel breakout? And I'm not sure if you did imply that you could?

[Bernard Gutmann:]

So on a geographic basis, the Americas represented 16%; Asia, excluding Japan, 58%; Europe, 15%; and Japan, 11%. And on the channel split

[Operator:]

Your next question comes from the line of Craig Ellis from B. Riley.

[Craig A. Ellis:]

Bernard, first question on operating expenses. It sounds like you're making really good headway bringing down the cost structure at SANYO. So I'm wondering what the drivers are for an increase in operating expense quarter-on-quarter? What's going on in the ON business that would help that out?

[Bernard Gutmann:]

There is a couple of things. One is stock-based comp, which was around $5.8 million in the first quarter, goes up to $10 million to $12 million in the second quarter, mainly driven by the annual grant that we have this year. And second one is we did have some one-off, belt-tightening items that we implemented in Q4 and Q1, including forced vacation, that reduced the numbers by a good amount in those 2 quarters but cannot continue on a forever basis. And third one, on the SANYO front, it is going down as mainly headcount and the currency.

[Craig A. Ellis:]

Okay. That's helpful. And then, in your prepared remarks, you indicated that pricing was actually firming up and was very benign. Where are you seeing pricing improve? And as you look in the backlog, what does the backlog pricing imply from a quarter-on-quarter percent change basis?

[Bernard Gutmann:]

Well, the quarter-on-quarter we're guiding is 1% to 2%, and that's predicated on looking at that backlog. The trends there -- in essence, as I mentioned, we've got exposure to the standard product segment. That's typically where you'll see most of the activity. We have been driving, frankly, our product mix there in a very favorable direction. And so, we see a little less pricing pressures than some of our peers on their standard products business, just in general. But specifically, again, the demands have picked up in the wireless segment, which drives a tremendous number of units, and in the automotive sector, which, again, tends to be a more controlled environment.

[Operator:]

Your next question comes from the line of Vijay Rakesh from Sterne Agee.

[Vijay R. Rakesh:]

Just a couple of questions here. On the OpEx side, I know you got it up slightly into June. How do you see it longer term once the effect of some of these options has gone down?

[Bernard Gutmann:]

It pretty much should be fairly stable, a smidge higher as we may introduce some variable comp associated with improved business results. But in general, fairly stable.

[Vijay R. Rakesh:]

Right. So kind of flattish from these levels, or is that how you look at the back half?

[Bernard Gutmann:]

I would say flattish to a smidge up.

[Rob Young:]

Got it. Okay. And the second question is around -- on the share count, it looks like it's going up again similar to what you just talked about. How do you -- how aggressive are you on the buyback, and where do you see the longer-term share count go to?

[Bernard Gutmann:]

Well, we do have a $300 million program approved. In this last quarter, we did not buy any back. We'll be opportunistic in buying them. In the $455 million guidance right now, there is nothing played in there. So anything that we do would reduce that number.

[Operator:]

Your next question comes from the line of Aalok Shah from D.A. Davidson.

[Aalok K. Shah:]

If i could ask a couple of quick questions. Keith, I know, at Analyst Day, you mentioned the Chinese New Year's potential benefit starting to ramp up again after inventories have been burned down. Can you kind of characterize what this -- kind of what you're seeing out of China right now by end market even, if possible?

[Keith D. Jackson:]

Yes, we did see the pickup post-Chinese New Year as we expect to. Generally, each year, with the Chinese New Year being pretty silent, as I mentioned in my prepared remarks, we saw continued building after that point, so I think it's very consistent. From a perspective of markets, again, the white goods segment showed significant improvement. So basically, you're seeing a little more building activity going on there. And the wireless segment saw a very significant improvement.

[Aalok K. Shah:]

Okay. And then, on the tunable RF front, it seems like you're pretty excited about that part of the business. I'm trying to get a sense of how big we should be thinking about that part of the business, kind of, getting to? And it sounds like you've got some major design wins kind of ramping in the second half of the year. Is that correct?

[Keith D. Jackson:]

That is correct, and we are expecting significant ramps. We're in the early stages of that. But we should be looking at several million dollars of improvement quarter-on-quarter, as we go through the next couple of years.

[Aalok K. Shah:]

Okay. And the last question, Bernard, just in terms of CapEx trends, what should we be thinking about in 2013 and 2014?

[Bernard Gutmann:]

Right now, we're looking at about $170 million for the year -- for 2013, 2014. But in general, it should be the 6% to 7% of revenues, which is our normal typical model.

[Aalok K. Shah:]

Okay. And then, are you -- do you worry about being 80% capacity utilized? And if things start to ramp, I mean, are you concerned that you won't have enough capacity at some point?

[Keith D. Jackson:]

No. Our sweet spot is about 85%. At 85%, we have, we believe, good flexibility for any market upswings in the near term and enough time to address it with new capacity if it does grow very rapidly. And we also get some pretty good fall-through on the gross margins at that stage. So really, the 85% point is where we'd love to see it operate all the time. And we do have approximately around 1/5 of our capacity that we're still outsourcing. So there is still some flexibility there.

[Operator:]

Your next question comes from Ian Ing from Lazard Capital.

[Tyler Radke:]

This is Tyler Radke calling in for Ian. Just wanted to touch on the comment with respect to the yen devaluation. I think that you said, for every point it used to be $600,000 of benefit. And now, it changed to about $400,000 to $500,000 per point. So I'm just trying to understand if this is a function of maybe some of your hedging contracts? And then, if you could kind of provide us some color on where your cost versus revenue stand on SANYO in terms of the denomination and then just how we should be thinking about that cost structure, as it relates to lowering the break-even revenues for SANYO?

[Bernard Gutmann:]

Okay. Tyler, thank you. The impact has nothing to do with hedging. It is a function of -- the reduction is a function of us having taken significant actions to reduce yen-based costs. Most of the cost reductions we have implemented are in Japan and are denominated in yen, so that reduces the benefit as we -- as the yen devalues. The split, we're still about the same as we communicated in the past. The revenue of the SANYO business, approximately 40% is yen-denominated. The COGS is approximately 50%, and the OpEx is in the 70s.

[Tyler Radke:]

Okay. And so, if the yen were to continue to devalue, would you think it'd be possible to -- I mean, would that be a tailwind in terms of reducing the SANYO break-even revenue?

[Bernard Gutmann:]

Definitely, it does help. Any time it goes down, we see a tailwind, yes.

[Tyler Radke:]

Okay. And then, just switching gears real quickly. Obviously, you talked a lot about getting some nice design wins in smartphones. Where would you kind of characterize the market right now? I mean, are we kind of in a relative pause mode? And then, what gives you some confidence -- or what are you seeing in terms of second half prospects?

[Keith D. Jackson:]

Yes. I think the key things for us is those design wins and the model changes. You get model changes there every 6 months or so. And so, the confidence we build is really our position in the next set of models that are coming out and ramping up, really not based on a change, if you will, in the total number of smartphones being built.

[Operator:]

[Operator Instructions] Your next question comes from the line of Steve Smigie from Raymond James.

[Jonathan Steven Smigie:]

And sorry if I missed this too, but did you provide a breakout for revenue for APG and SPG and margin?

[Bernard Gutmann:]

The revenue for APG was $265 million and SPG, $245 million. Sorry, I had that backwards. It's $265 million for SPG and $245 million for APG.

[Jonathan Steven Smigie:]

Okay. Great. And then, with regards to the CapEx, I thought you were sort of $160 million to $170 million. Now it sounds like you're $170 million, if I'm remembering that correctly. Is that the higher side now because of the handset sales ramping pretty nicely, and you're adding extra capacity to support that? Is that the right way to think about that?

[Keith D. Jackson:]

That's exactly the right way to think about it. We have done very well with those new smartphone designs. They use some of our most advanced packages. And so, most of that is going into ultra small packages for the wireless business.

[Jonathan Steven Smigie:]

Okay. And it may be difficult to really know, but could you talk a little bit about what your share might be on Haswell in, say, the desktop, notebook and server categories?

[Keith D. Jackson:]

I don't know that I can break them out that fine. But I'll just say, in general, we tend to be 40% to 50% on the, desktops, running about mid-30s to 40% on the notebooks, and -- what was your other category? Servers?

[Jonathan Steven Smigie:]

Server? Yes.

[Keith D. Jackson:]

Very small, very small in servers, less than 5%.

[Jonathan Steven Smigie:]

Okay. And if I could sneak one more in. Just looking at your 10-K, you have some unallocated costs in the gross margin area. How do you decide whether to put something, say, in SANYO versus legacy ON versus unallocated?

[Bernard Gutmann:]

The identification to division, in most cases, is direct -- you have a direct line of sight of where the cost belongs. There are certain costs that, on a strategic basis, we have decided to keep at the corporate level for various different reasons. But the majority was directly identified. There is, on the manufacturing side, very little that's allocated.

[Operator:]

Your next question comes from the line of Chris Caso from Susquehanna Financial Group.

[Christopher Caso:]

I wonder if you could talk a little bit about the PC market. And I think we probably have a good handle on what's going on there now, but I guess I'm even more interested on the expectations going into the second half. What -- you talked about some share gains, but you were obviously balancing that from what I think a lot of people have a little more conservative estimates on the end market. Where are you guys on that right now?

[Keith D. Jackson:]

Well, we actually are looking at the end markets fairly conservative as well, certainly not expecting any pickup in the end markets in Q2. In talking with our customers, the real hope, I guess, I'd give you that there might be some growth in the second half is all around less-expensive ultrabooks with the touchscreens. And the belief there is if you get those to the right price point, you might actually reverse some of the declines that we've been experiencing in notebooks here for the last several quarters. So in general, I'd say we've got a fairly conservative outlook. We're hopeful that the Haswell ultrabooks will be picking up in the second half. But really, it's all about getting appropriate models out there with touchscreens at good price points.

[Christopher Caso:]

Okay. And just as a follow-up then. So with respect to SANYO, maybe you could talk a little bit about the extent to which the recovery of that business is dependent on some of domestic Japanese business, which is historically some of consumer electronics companies as opposed to selling those products outside Japan and how that goes into thinking of the proper revenue levels that you guys have targeted for that business?

[Keith D. Jackson:]

Yes. The simple answer to that is, we're not -- we're counting on continued declines domestically in Japan. So all of our growth that we've got factored in is in design wins outside of Japan.

[Operator:]

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

[Terence R. Whalen:]

This question has to do with the comment that distributor inventory declined in the first quarter, yet lead times expanded a couple of weeks. Can you help us reconcile the opposition of that? And also, what are you doing now that lead times are expanding a bit? Are you going to be bringing on more back-end assembly and tests to help alleviate that?

[Keith D. Jackson:]

Yes. I'll start with the last part of it. That is a big piece of the reason we've gone from the $160 million range to $170 million on CapEx is to address the key areas where we're seeing more rapid expansion. The disti comment and the lead times actually aren't at opposition, as you might think. They're actually in conjunction. So the distributors continue to be very, very tight with their weeks of inventory, particularly in Asia. And so, that means, basically on our side, we're seeing more of that demand coming directly to our factories as it picks up. So they actually reinforce as opposed to being an opposite.

[Terence R. Whalen:]

And then, my last follow-up was with regard to the handset business. You made a comment specifically saying that you're gaining the power slot for an application processor. Can you just elaborate a little bit more on that win, and maybe talk more broadly about the sort of the gestation involved in initially building block components and then making your way into more crucial components? Can you talk about where you are in that stage?

[Keith D. Jackson:]

Yes. Well, that comes from, frankly, gaining reference design position that does take the products, and those have to come out continuously. As I mentioned before, about every 6 months or so, we have to have new platforms. We've done some good gains there, and we've got good position in all of the reference designs now with our DC-DC kinds of products. So I'm not sure exactly what you're looking for. But the key is those are actually ramping here currently in the second quarter and are widely adopted in China. As you know, those reference designs get fairly well distributed in China. And then outside of China, in Korea and North America, we also see a good adoption.

[Operator:]

There are no further questions at this time.

[Keith D. Jackson:]

Thank you.

[Bernard Gutmann:]

Thank you.

[Operator:]

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