ON Semiconductor Corporation
Q2 2015 Earnings Call Transcript

Published: 3 Aug 2015

[Operator:]

Good morning and welcome to the ON Semiconductor Second 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’ll now turn the call over to Parag Agarwal, Vice president of Investor Relations and Corporate Development.Please go ahead.

[Parag Agarwal:]

Thank you, Laurie. Good morning, and thank you for joining ON Semiconductor Corporation's second quarter 2015 quarterly results conference call. I'm joined today by Keith Jackson, our President and CEO; and Bernard Gutmann, our CFO. This call is being webcast on the Investors section of our web site, at www.onsemi.com. A replay will be available on our web site approximately one 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 second quarter of 2015. The script for today's call is posted on our web site. Additional information related to our end-markets, business segments, geographies, channels, and share count is also posted on our Web site. 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 Web site in the Investors section. 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, 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 forms 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 2015. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors, except as required by the law. During the third quarter, we will be attending the Citi Technology Conference in New York City on September 10, and Deuches Bank Technology Conference in Las Vegas on September 17. Now, let me turn it over to Bernard Gutmann, who will provide an overview of the second quarter 2015 results. Bernard.

[Bernard Gutmann:]

Thank you, Parag, and thank you everyone for joining us today. Let me start by providing an update on overall business results. Although the second quarter started with strong booking trends, we noticed a deceleration in order towards the end of the second quarter. We believe that global macroeconomic uncertanties were the primary drivers of slowdown in the order pattern - in the order trend. As customers exercise increased caution related to their inventory levals. Despite an overhang of current macroeconomic uncertainties the fundamentals of our business remains strong and we continue to make progress towards achieveing our fiancial target model. Despite loer than expected revenu we were able to deliver strong earnings performance, driven largely by strong execution and sharp focus on managing costs. Now, let me provide you an update of our second quarter 2015 results. On Semiconductor today announced that toatl revenue for the second quarter of 2015 were approximately $880.5 million an increase of approximately 1% as compared to the first quarter of 2015. GAAP net income for the first quarter was $0.12 per diluted share. Excluding the impact of amortization of intangibles and restructuring, and other special items, non-GAAP net income for the second quarter was $0.22 per diluted share. GAAP and non-GAAP gross margins for the second quarter were 34.6%, as compared to 34.5% in the first quarter of 2015. The 10 basis points of sequential improvement was largely driven by slightly higher revenue. Lower factory utilizations negatively impacted margins, we lowered the utilization of our factories in the second quarter to reduce invenory levels in reaction to increasing level of macroeconomic uncertanties. Average selling prices for the second quarter decreased by a little less than 1.5% as compared to the first quarter. However, excluding the impact of currency, average selling prices declined by approximately 0.5%. GAAP operating margin for the second quarter of 2015 was approximately 7.7% as compared to approximately 7.9% in the first quarter. Our non-GAAP operating margin for the second quarter was 12.3%, up approximately 80 basis points as compared to the first quarter of 2015. Lower operating expenses and slightly higher gross margin were the key drivers for sequential increase in the non-GAAP operating margin for the second quarter. GAAP operating expenses for the second quarter were approximately $237 million as compared to approximately $232 million for the first quarter of 2015. Non-GAAP operating expenses for the second quarter were approximately $196 million, down approximately $4.6 million as compared to the first quarter of 2015. We exited the second quarter of 2015 with cash, cash equivalents and short-term investments of approximately $577.9 million, an increase of approximately $148.5 million for the first quarter. We spent approximately $5 million of cash for the purchase of capital equipment. A meaningful part of the CapEx was deployed for expanding our backend capacity to support the increasing demand in our automotive business. During the second quarter, we used approximately $427.5 million for the repayment of long-term debt and capital leases, $56.9 million for our hedge and warrant transaction on a net basis, and issued debt of approximately $749.4 million. We used approximately $131 million to repurchase approximately 10.4 million shares of our common stock at an average price of $12.59. At the end of the second quarter, approximately $748 million remained of the total authorized amount of $1 billion under the current stock repurchase program, which was announced on December 1, 2014. At the current pace, we are tracking significantly ahead of the rentable repurchases on our stock repurchase program. We remain on track to generate annual free cash flow of $400 million in the near to mid-term, We define free cash flow as cash flow from operations less capital expenditures. We’re cognizant of the recent moderation in macroeconomic conditions, however at this time, we see no evidence to suggest any meaningful deterioration in global macroeconomic conditions. At the end of the second quarter of 2015, ON Semiconductor days of inventory on hand were 118 days, down approximately one day from the prior quarter. As noted earlier, we reduced utilization in the second quarter in phase of a slowing demand environment. In the second quarter of 2015, distribution inventory decreased by approximately $15 million quarter-over-quarter and distributor re-sales increased by approximately 1% quarter-over-quarter. In terms of days, distributor inventory was down moderately quarter-over-quarter at slightly less than 10 weeks. For the second quarter of 2015, our lead times were approximately flat as compared to the first quarter. Our global factory utilization for the second quarter was in the high 70% range as compared to the mid-80% range in the first quarter. As I had indicated earlier, we lowered factory utilization in the second quarter in response to macroeconomic uncertainties. Now let me provide you an update on performance of our business units, starting with Image Sensor Group or ISG. Revenue for our Image Sensor Group was approximately $173 million as compared to approximately $171 million for the first quarter. Aptina was nicely accretive to our non-GAAP EPS and we remain on track to generate $0.08 of non-GAAP EPS accretion from Aptina in the current year. Revenue for our Standard Products Group for the second quarter of 2015 was approximately $308 million, up approximately 2% quarter-over-quarter. Revenue for our Application Products Group was approximately $264 million, approximately flat as compared to the first quarter. Revenue for the second quarter of 2015 for the System Solutions Group was approximately $136 million, up approximately 2% quarter-over-quarter. SSG has now been accretive to our non-GAAP EPS for four consecutive quarters. 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 business trends in the second quarter. The quarter started with strong bookings and bookings continued to accelerate through the first half of the quarter. However, towards the end of the quarter, we noted a significant slowdown in bookings. From a revenue perspective we saw pronounced weakness in Europe and Japan. There were certain signs of macroeconomic softness in China as well, but our strong gains in the China smartphone and industrial markets helped us offset much of the weakness. However, current trend suggest that the bookings have trophed and we’ve recently seen stabilization in the booking trends. Despite the overhang of prevailing macroeconomic uncertainties we’re able to deliver strong results in the second quarter, driven largely by strong execution and our sharp focus on managing costs. Although the current macroenvironment is not ideal, we believe that we’re well positioned to outgrow the semiconductor industry. We have an attractive product portfolio and a world-class manufacturing and operational organization, which enable our industry leading cost structure. We continued to leverage these assets to generate revenue growth and strong cash flow. Customer interest in our product offerings for the automotive, industrial and smartphone end-markets remain strong. We continued to increase our presence at key strategic accounts and our revenue footprint with leading global OEMs is expanding. Based on our design win pipeline and investment in secular growth areas such as A-dash and wireless charging and increasing exposure to industrial, automotive and smartphone markets we remain well positioned to deliver strong results going forward. We’re seeing increased momentum in wireless charging with high level of interest from customers across multiple end-markets. In the smartphone market we’re actively engaged with leading OEMs from models for year 2016. In A-dash our design win pipeline continues to expand with our image sensor solutions for automotive applications. We are seeing a strong benefits from combination of ON Semiconductors’ strong relationship in the global automotive market and Aptina’s market leading automotive image sensor technology and software capabilities. We’re seeing a very high level of interest in our A-dash offerings from automotive OEMs at A-Dash adoption continues to accelerate. As Bernard indicated earlier, we’re tracking significantly ahead of our $1 billion four year share repurchase program. We remain committed to creating significant shareholder value by generating strong cash flows from our operations and returning a large part of that cash to shareholders through stock repurchase. Now I’ll provide some details of the progress in our various end-markets. The automotive end-markets represented approximately 32% of our revenue in the second quarter and was down approximately 3% quarter-over-quarter primarily due to broad based inventory adjustment. As I indicated earlier during the second quarter we saw a weakness in Japan and Europe. We call the Europe is a largest region for automotive related sales. Our auto related revenue was also impacted by customer related production issue which contributed to the volatility in orders. I believe that the issue is largely behind and wish to see normal order patterns going forward. We continue to gain increasing traction with our image sensors in the automotive market. If you are seeing double-digit growth in attach rates for A-dash for model year 2016 vehicles. Our design win momentum continues to accelerate and we’ve secured additional design wins for A-dash and rear view cameras with leading OEMs in Americas, Europe and South Korea. We’re seeing higher than expected attach rate for our rear view cameras driven by consumer demand ahead of government regulations and mandates. Our channel based automotive OEM began to ramp production of vehicles incorporating our image sensors for rear view camera applications. We continue to maintain our leadership in the automotive image sensor market and we launched three new image sensors for A-dash and rear view applications. We launched a number of new products for automotive applications during the second quarter, among these was potentially revolutionary wireless smart passive sensors for the measurement of pressure, moisture, proximity and temperature. This sensor does not require either battery or microcontroller. We also expect to see a ramp for our new integrated power modules for our electric radiator fan applications at major global OEM’s and for our new integrated power modules and igniter modules for for applications in the world’s first brushless DC motor driven power sliding door. During the second quarter, we continued to see strong demand for image sensors, MOSFET’s, Smart FET’s, led drivers, parker sensor interface and power supply products. Revenue for the third quarter in the Automotive end market is expected to be up quarter-over-quarter despite weaker seasonality in the third quarter due to year end model changeover. The communications end-market which includes both networking and wireless represented approximately 18% of our revenue in second quarter, and was up approximately 16% quarter-over-quarter driven by strong design win ramps at China based smartphone OEMs. Our games and communications in the second quarter were driven by a broad range of OEMs and products. Among the key contributors of the solid revenue growth in the second quarter were our auto focus and image stabilization solutions, battery protection FET’s, EEPROM’s, battery chargers, ESD protection and power management ICs. As I indicated earlier, interest in our wireless charging solutions remained strong and we’re positioned to serve this market with integrated silicon and discrete solutions that address the power management needs of every critical power stage of a complete wireless charging solution. With our early investments and alignment with key ecosystem players, we believe that we’re well positioned to benefit from their rapid adoption of wireless charging. Revenues for the third quarter in the communications end-market are expected to be up quarter-over-quarter. The consumer end market represents approximately 15% of our revenue in the second quarter and was up approximately 2% quarter-over-quarter. White goods, sports action cameras, home electronics and consumer gaming electronics led sales in the consumer segment. Adoption of our intelligent power modules in white goods applications in China remained strong. During the second quarter, key design wins for our inverter IPM for air conditioner fan motors ramped into production. However, white goods sales were dampened by softness in the China market. We are seeing strong traction for our fast focused high resolution image sensors in the sports action camera market. Adoption of our three megapixel and two megapixel image sensors for digital video recorders for cars in China is accelerating. Our superior image quality has enabled us to differentiate our offerings and gain share in the car DVR market. Home monitoring applications and B2B conferencing again drove demand for our 1080p image sensor solution. Revenues from our standard products for this consumer applications grew strongly quarter-on-quarter driven by our E2PROMs, ESD protection, MOSFET and small signal solutions. Revenue for the third quarter for our consumer segment is expected to be up quarter-over-quarter due to normal seasonality. The industrial end-market, which includes military aerospace and medical represented approximately 24% of our revenue in the second quarter and was down approximately 1% quarter-over-quarter. We saw a weakness in Europe, Japan, and Asia- Pacific regions excluding China. The Americas was up slightly and China was up strongly driven mainly by our solid gains in image sensors for security applications. Robust growth in the security market again generated strong demand for our image sensing solutions during the quarter. As expected, we saw strong volumes in China as the country began to implement a large scale transition to 1080p security cameras which will utilize our two megapixel, 1/3-Inch and three megapixel 1/3-Inch sensors. We continue to see good penetration globally in the top-tier machine vision camera manufacturers for the Python VGA CMOS image sensor devices, which reported a 23% sales increase compared to the first quarter. In the medical market, we had a record quarter with strong growth from our imaging and hearing aid customers. To further the growth of our industrial end market we acquired AXOM, a provider of low power radio frequency RF chips, AXOM products enable wireless connectivity to support advanced functionality in the Internet of Things, automatic meter reading, home automation, sensor networks in the satellite communication markets. Adding AXOM’s low power RF chips, microcontroller technologies and system experience to our applications product group is another step towards expanding our presence in the high growth industrial IOT segment. Revenue for the third quarter for our industrial segment is expected to be down quarter-over-quarter. The computing end-market represented approximately 11% of our revenue in the second quarter and was down approximately 4% compared to the first quarter As anticipated, we have started receiving orders for Intel’s Skylake platform. Share gains on the Skylake platform coupled with significantly higher content should enable us to grow our computing revenue despite declines in the computing market. Revenue for the third quarter for our computing segment is expected to be up quarter-over-quarter. Now I would like to turn it back over to Bernard for other comments and our other forward-looking guidance. Bernard.

[Bernard Gutmann:]

Thank you, Keith. Now for the third quarter of 2015 outlook. Based on product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $890 million to $930 million in the third quarter of 2015. Backlog levels for the third quarter of 2015 represent approximately 80% to 85% of our anticipated third quarter 2015 revenues. We expect inventory at distributors to stay flat quarter-over-quarter on a dollar basis. We expect total capital expenditures of approximately $65 million to $75 million in the third quarter of 2015. For the third quarter of 2015, we expect GAAP and non-GAAP gross margin of approximately 34% to 36%. We expect total GAAP operating expenses of approximately $232 million to $244 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to be approximately $35 million to $37 million. We expect total non-GAAP operating expenses of approximately $197 million to $207 million. The increase in operating expenses in the third quarter as compared to the second quarter is driven by annual merit increases which become effective in the third quarter. We anticipate GAAP net interest expense and other expenses will be approximately $14 million to $16 million for the third quarter of 2015, which include non-cash interest expense of approximately $6 million. We anticipate our non-GAAP net interest expense and other expenses will be approximately $8 million to $10 million. GAAP taxes are expected to be approximately $8 million to $12 million and cash taxes are expected to be approximately $5 million to $8 million. We also expect share-based compensation of approximately $13 million to $15 million in the third quarter of 2015, of which approximately $2 million is expected to be in cost of goods sold, and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial measures. Our diluted share count for the third quarter of 2015 is 230 million shares, based on the current stock price. Further details on share counts and earnings per share calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K. With that I would like to start the Q&A session. Thank you. And Laurie, please open up the line for questions.

[Operator:]

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

[Ross C. Seymore:]

Hi guys. Congrats for solid results in a challenging time. I guess the first question is for Keith. Keith you mentioned a couple of times about bookings stabilizing. Can you talk a little bit about what you think is driving the weakness in bookings and what gives you the confidence that recent stabilization is something that’s going to persist?

[Keith D. Jackson:]

Yes our belief from talking with customers is that there was a lot of inventory reduction going on toward the end of the second quarter with some uncertainty as they headed into the back half of the year. We believe now that uncertainty is of a lesser concern to them and we’re starting to see much more normal patterns as we get into Q3. So I really think it was more uncertainty than any end macro drop in production rates.

[Ross C. Seymore:]

Great. And I guess as my follow-up one for Bernard, I know you guided the gross margin to be relatively flat in the third quarter, but given what you’re talking about in utilization, can you talk about how that flows through into the gross margin line and I guess specifically what I’m guessing is there a lag effect that what you do in utilization now is going to impact gross margin even out into the fourth quarter?

[Bernard Gutmann:]

What we see is again our normal fall through of 50% continues being the rule, we expect the moderately improved utilization, but not enough significantly, we’re still in the inventory control mode, so I expect that’s why we went to 34% to 36% for the third quarter.

[Ross C. Seymore:]

Great and is there a lag between the quarters as far as what you did in the second - what are you doing in the third will I guess, help incrementally in the fourth?

[Bernard Gutmann:]

Nothing in a very significant way, may be a little bit.

[Ross C. Seymore:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of Vivek Arya with Bank of America Merrill Lynch.

[Vivek Arya:]

Thank you for taking my question. Keith, one more on the booking trend, could you give us some more color by whether its end market or geography where you have started to see the improvement and which areas remain weak, because my sense is that when we look at all the headlines from China and Europe they have not stabilized, but we are heading little - more benign or a calmer tone from a lot of the semiconductor vendors and I’m wondering whether that’s a lack of visibility, whether that’s - I don’t know whether visual thinking is the right word, but if you could just give us some more comfort that you have the visibility and the resumption of booking trends is more sustainable?

[Keith D. Jackson:]

Sure and in my comments certainly our order patterns reflect not only the market but our specific company positioning and we have seen a significant uptick in our European automotive and the China backlogs in both automotive and industrial. So although I understand all the comments on the macro is not improving there, we’re certainly seeing that in our order patterns picking up strongly. The rest of the geographies again appear to be a normal order patterns for Q3 which are typically stronger than Q2.

[Vivek Arya:]

Got it and as my follow-up you’d highlighted strength in China smartphones in Q2 I believe, anymore color on inventory levels on that market because some other players MediaTek, Qorvo et cetra have offered some concern about some excess inventory of smartphone there so any color would be very helpful. Thank you.

[Keith D. Jackson:]

Yes, that always differs end-customer to end-customer or OEM provider to OEM provider and we’ve got such a broad positioning there that our overall numbers picked up nicely despite some pockets of inventory at some of the suppliers.

[Vivek Arya:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of John Pitzer of Credit Suisse.

[John W. Pitzer:]

Yes, good morning guys. Thanks for letting me to ask questions. Keith I guess just a follow-up to that question if I may, can you help me better understand when you look at both the smartphone market and the PC market. How we should think about on content as we move into the back half of the year whether that would be like Skylake on the PC side and or incremental applications that you might be getting on the smartphone side. What I’m really trying to do is differentiate how dependent you are on unit demand versus content growth in those two markets specifically?

[Keith D. Jackson:]

Yes, we get a very substantial bump in content growth for Skylake, it adds overall another roughly $1.50 or so to each PC sold and so it’s a very big bump for us moving to Skylake of all platforms. In addition, we think we’ve gained significant share there with having we believe something that will exceed 50% market share in all of the PC platforms with Skylake. On the handset side, we’re seeing increased number of phones using our image stabilization, autofocus and image sensor solutions, which again will add fairly significant dollars per unit sold probably in the $0.75 or so range.

[John W. Pitzer:]

Okay, that’s helpful and just may be a follow-up for Bernard on the gross margin side. Bernard just so I’m clear no unusual sort of utilization actions in the calendar third quarter, how should I think about inventory levels exiting Q3 and would you anticipate kind of going through the soft patch at the initial level without having to do much at utilization levels internally?

[Bernard Gutmann:]

So, on distribution we said our inventory, we’re expecting our inventories to be flat and for the internal inventories we’re expecting those to be flat slightly down which will result in also compared to what we have done in the last several quarters slightly less utilization, but nothing super major.

[John W. Pitzer:]

Okay. Thanks guys.

[Operator:]

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

[Christopher Caso:]

Thank you, good morning. For the first question, I would like to go back to the comments in industrial and based on your segment commentary it does look like that’s the main area of weakness as you look into the third quarter, can you talk about that broadly. You also mentioned that it looked like the China industrial order rates had picked up, I don’t know if that is having effect on Q3 revenue at this point, yet.

[Keith D. Jackson:]

Yes. So we are expecting slight amount of softness in Q3 for industrial overall. The biggest slowdowns were Europe and Japan in those industrial marketplaces we had what we believe to be a softer macro-industrial market in China. But that was offset by the security camera increases that we saw for our image sensor business. So in general I would say industrial is one of the areas where there is some inventory correction, a little bit of slowdown on a macro basis, it is pretty much global, but it is not significant. So we’re expecting just slight softness similar to what we saw in Q2.

[Christopher Caso:]

Right. And that’s security camera business that would be something specific to you not just a market?

[Keith D. Jackson:]

Correct. That would be a very specific thing, where we’ve gotten some great design wins for the next generation image sensors.

[Christopher Caso:]

Great, okay. As a follow-up, could you talk a little bit about where you expect Q4 seasonality would be right now, I know it’s been moving around for you now with different end-market content and then particularly given the softness that you’ve seen now, does that have any effect on what you think normal seasonal pattern should be for Q4?

[Keith D. Jackson:]

It’s too early to tell on Q4 typically our Q4s are very similar to our Q3s and at this stage I don’t have significant data that would indicate a major change.

[Christopher Caso:]

Great. Thank you.

[Operator:]

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

[Craig A. Ellis:]

Thanks for taking the question, guys. Keith, it sounds like you are expecting from an end-market standpoint four of your five end-markets to be up in the third quarter. Can you just give us a sense for of what you’re seeing in terms of the relative performance of those end-markets versus each other.

[Keith D. Jackson:]

Okay. So in the automotive piece, we should see a return to some good growth and again it’s really a platform dependant new product content story there for us. There is the model year change over which normally causes a little bit of a slowdown as they closed factories for a couple of weeks, but in this case, we think our new product share gains were more than offset that going into Q3. In the PC area, it’s really all about the Skylake platform, as I talked about earlier the dollar content increase is significant and even without any unit increases, we should see some nice content gains in Q3. In the communication sector, it really is cell phone content again, not that we’re looking for significant increases in the number of cell phones built. And then, in the industrial we said was down so I won’t go through that one again. Then consumer, consumer we do see the normal kind of seatbelt, I won’t see normal, we do see an uptick in Q3 albeit at a slightly more muted rate than normal in consumer as they get ready for the buys in the fourth quarter.

[Craig A. Ellis:]

Within communications, when do you expect wireless charging to generate material revenues for the company?

[Keith D. Jackson:]

I think we indicated that we’re really seeing significant number of models coming on in the 2016 builds, there is going to be some this year, but it’s going to be mostly next year.

[Craig A. Ellis:]

The follow-up is for Bernard, the company acknowledge that you’re tracking ahead of what would be a linear pacing on the buyback you’ve done I think it’s around $290 million to-date in a program given the guidance for the third quarter. Is there any reason you wouldn’t buy back as intensively as you have in the first half of the year when we look at the third quarter and use of the program?

[Bernard Gutmann:]

We are opportunistically looking at opportunities.

[Craig A. Ellis:]

Thanks, guys.

[Bernard Gutmann:]

Yep.

[Operator:]

Your next question comes from the line of Christopher Rolland of FBR Capital Markets.

[Christopher Rolland:]

Hi guys. You guys mentioned better image sensor trends in China, I think you guys pointed to auto DVR and backup. Can you dig in a little bit more there, is this a regulatory thing driving the uptick or just consumer trends over there and then also if you could sort of remind us or update us as to the global regulatory backdrop and where we are there either for backup cameras or DVR. Thanks.

[Keith D. Jackson:]

Yes. So it is really consumer driven in China completely, particularly the DVR piece that is actually not going to be mandated at all, it’s just a rear cameras that are being mandated globally. There are different adoption dates for government requirements around the world, but they start anywhere from 2016 to 2018 depending on countries.

[Christopher Rolland:]

Okay, great and SSG nice to see it accretive for four quarters now, can you give us few more details there. Is there anything that can get us back to $150 million a quarter that kind of a run rate, is there anything that you see either positively or negatively in the outlook for SSG?

[Keith D. Jackson:]

Yes it don’t have any negatives, on the positive side we’ve been talking about lot of the wins they have in automotive and industrial. Those give us much better margins for that business and we think much more stable growth. So we are really looking at next year as being a significant year for growth in SSG and again it’s driven by all the design wins we’ve had in the last two years in industrial and automotive.

[Christopher Rolland:]

Great. That’s great news. Thanks guys.

[Operator:]

Your next question comes from the line of Ian Ing of MKM Partners.

[Ian Ing:]

Hi guys, thank you for taking my question. Image sensors you talked about strengthened surveillance in automotive, but where are you in terms of turning more selective in the commodity types of market like handsets and consumer is that something that’s still has to play out?

[Keith D. Jackson:]

Actually we’re there, we’re participating the majority of everything in the handset piece which is the most commoditized is at the 13 megapixel rates, where we can still get some differentiation and in the more consumer pieces that you might see in the homes also again we’ve got instead of higher resolution products there and the lower resolution products are tailing off.

[Ian Ing:]

Thank you. And then Bernard could you talk a little bit more about the puts and takes on the September quarter, OpEx guidance, I know you’re talking about merit increases, but any benefits to the Aptina integrations some synergies there perhaps or do you have some temporary cost controls from Q2 going off in September? Thanks.

[Bernard Gutmann:]

Yes, so we will continue with our normal belt tightening that we have in times where revenues are not as strong, we do expect to see some improvement due to the finalization of the integration of Aptina and we will also be looking at based on business results a potential tailoring of various comp and that offsets the partially the merit increases that are focal point beginning of July.

[Ian Ing:]

Okay. Thank you.

[Operator:]

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

[J. Steve Smigie:]

Great, thanks a lot guys. Keith, jus to follow-up a little bit on the industrial, industrial is typically pretty seasonally soft in the third quarter for many companies, just curious if is it at all possible to parse the difference between maybe just normal seasonality for your soft or your comments for industrial to be down versus some sort of macro?

[Keith D. Jackson:]

I think again the macro is we’re not seeing that much different, we do have a little bit of upside over normal macro due to the security camera upgrades to the 1080P that I talked about earlier but otherwise there is really nothing much we’re seeing significantly different in macro.

[J. Steve Smigie:]

Okay. And then just on the consumer business particularly around some of the white goods going into China, again it’s not normally the accretive time of year going to Q3 for that anyway, I guess probably more seasonally stronger earlier in the year, but from that softness that you saw has that picked up a little bit of would you not even expect that just given the seasonality here?

[Keith D. Jackson:]

Yes we would expect kind of flattishness, Q2 was kind of under normal growth rates for the white goods and Q3 is kind of flattish

[J. Steve Smigie:]

Okay, right. Thank you.

[Operator:]

Your next question comes from the line of Kevin Cassidy of Stifel.

[Kevin E. Cassidy:]

Thanks for taking my question. Just some clarification. I think, hi you said the new automotive application is rear view mirror not just the backup camera is that correct?

[Keith D. Jackson:]

Actually, I don’t know that it was new, it’s expanded. We’ve been doing rear view cameras and including the surround view kinds of things for some time, we’re really just seeing a pick up in the attach rates.

[Kevin E. Cassidy:]

Okay, so it’s not the actual rear view mirror, it’s just expanded.

[Keith D. Jackson:]

In some cases our customers are putting them in the rear view mirrors.

[Kevin E. Cassidy:]

Okay, all right and do you think - you say it’s ahead of regulations, you think that it will go through safety regulations, I guess I’m not understanding how the process works, consumer can demand it and…

[Keith D. Jackson:]

Yes, I mean they have been appearing on cars effect, there is no country requiring rear view backup cameras in the world yet and yet they’re on all kinds of cars. So that is a consumer driven feature that they find value in and so the car makers provide that as a differentiating factor ahead of regulations.

[Kevin E. Cassidy:]

Okay, great and just one follow-up too on the security cameras in China are those are mainly commercial cameras?

[Keith D. Jackson:]

Those are mainly commercial correct.

[Kevin E. Cassidy:]

Okay thank you.

[Operator:]

Your next question comes from the line of Vijay Rakesh of Mizuho.

[Vijay Rakesh:]

Yes thanks guys. Just starting on automotive side again, I actually look at your pipeline there and all the regulatory tailwinds, I know you had said automotive is 32%, guess with 33% of revenues by 2016. 2017 do you see that being substantially higher now as you go through the year and you see this pipeline here?

[Keith D. Jackson:]

We do see increases in that as you go through the full-years of 2015 and 2016 approaching probably by the end of 2016 something in the mid-30%.

[Vijay Rakesh:]

Got it and on the, just looking at the OpEx and the buybacks here any target on your share count as you look towards end of the year and how do you see OpEx going out should be flat, do you think we can get it down to the $190 million kind of range. Thanks. That’s it.

[Bernard Gutmann:]

So for the fourth quarter our OpEx we expect those to be fairly flat, sequentially and share count obviously it’s a function of what the market will be out there and so I don’t want to speculate on what the number is going to be.

[Vijay Rakesh:]

Thanks.

[Operator:]

Your next question comes from the line of Rajvindra Gill of Needham & Company.

[Joshua Buchalter:]

Hi, this is Josh Buchalter on behalf of Rajiv. Thanks for taking my question. You talk about the content gains on Skylake, but could you may be talk about the cadence in timing of a ramp and how we should be looking at that? Thank you.

[Keith D. Jackson:]

Certainly, so those conversions have already started largely in the channel motherboard and desktop areas and then as we go through the quarter you will see the notebook builds pick-up towards the end of third quarter. So again we are seeing take ups, I cant give you exact percentages, but very clearly all of our customers are building Skylake at this point.

[Joshua Buchalter:]

Okay and would you expect some contribution in the third quarter and then I guess more in the fourth quarter?

[Keith D. Jackson:]

That’s correct.

[Joshua Buchalter:]

Okay. Thank you, and then looking at the audo end market, you mentioned there is one cutsomer where they had one larger - one larger customer with an issue, could you maybe charectorize how automotive would have looked had that issue not developed. Thank you.

[Keith D. Jackson:]

Yes, actualy it would have been flat maybe slightly up but pretty much flat had that issue not occurred.

[Joshua Buchalter:]

Okay thanks and congratulations on the solid progress.

[Keith D. Jackson:]

Thanks.

[Operator:]

Ur next question comes from the line of Tristan Gerra of Baird.

[Tristan Gerra:]

Hey good morning. Just to follow-up on your PC business, given that your Q1 PC revenue was about seasonality. How much of the share gain in PCs related to Skylake, is that already realizedfrom a market share standpoint?

[Keith D. Jackson:]

The answer is none, because there were no Skylake builds made prior to July.

[Tristan Gerra:]

So the overshipping in Q1 was related to something else, any feedback?

[Keith D. Jackson:]

Yes it was just all share gain in the previous platforms.

[Tristan Gerra:]

Okay great. And then the special recoginition featuring Windows 10, any sense of the adoption rate that you could see from a hardware standpoint in notebooks in second half and potential participation there?

[Keith D. Jackson:]

Certainly we've got some participation there, I think it’s a little too early to call specific numbers, but there was many of the consumer platforms that had that special recognition like in the Xbox previous to that so I guess it’s too early for me tell.

[Joshua Buchalter:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Gabriela Borges of Goldman Sachs.

[Gabriela Borges:]

Great. Thanks very much for letting me ask a question. Maybe just one housekeeping one to start, could help us understand how much revenue contribution there is from the AXOM deal, or whether this is more of a longer term revenue synergy opportunity.

[Keith D. Jackson:]

That’s really more longer-term revenue synergy, it gives us a gigahertz radio that we want to couple low power capability, so we want to couple with our IOT approximately $4 million a year in revenue run rate.

[Gabriela Borges:]

That’s helpful, thank you. And then, just as a follow-up on the back-end capacity increases in automotive, maybe just give us an update broadly on how utilization is tracking on the backend and then the longer term visibility do you hav into automotive what the growth rates could look like that you could grow into overtime. Thank you.

[Keith D. Jackson:]

Okay. From our perspective the average growth rates we’re giving I can’t differentiate those by market sector, but as we mention we took our utilization down in the second quarter to pull back on inventory, we’re taking them up slightly in Q3 with a flattish inventory in mind. So kind of high 70s to low 80s transition.

[Gabriela Borges:]

And that’s fair to say that’s the number on the back-end as well as the front-end.

[Keith D. Jackson:]

The number is back-end as well as front-end. We try and balance that as best we can.

[Gabriela Borges:]

Understood. Thanks very much.

[Operator:]

[Operator Instructions] Your next question comes from the line of Craig Hettenbach of Morgan Stanley.

[Craig M. Hettenbach:]

Yes. Thanks for the update on the Aptina accretion. Can you just talk about specifically to some of the gross margin initatives you have to kind of step up those gross margins, how that’s playing out in the type of visibility you have for Aptina gross margins going out into next year?

[Keith D. Jackson:]

Okay. I’ll start on that one. There is really a couple of big things there. One, we’ve done some in-sourcing as a part of that manufacturing and as we ramp that as it goes to this year, you should see increasing contribution from that in the several hundred basis point direction as you get into 2016. The second is relative to mix and where we target those sales, we have been in deed curtailing our presence in some of the low margin consumer areas and as you’ve heard me talk about, we’ve been getting significant traction in growth in the automotive sector that has much better margins. And then lastly, there is some consolidation work that’s going on from a cost perspective, and again it continues throughout this year and that’s got maybe another 100 basis points attached. So just on a natural basis you should see some very good accretion in those gross margins.

[Craig M. Hettenbach:]

Got it. And then, just a follow-up on the environment if I think about just some of the customer inventory reductions at quarter end for ON and some of your peers as well, it felt like inventory was on the lean side and you added customers are reducing again. So just curious to get your take just kind of there are certain threshold that you think or bear minimal level of inventory that you think customers can pump up against. We would love to get your thoughts there. Thanks.

[Keith D. Jackson:]

Yes. It’s been very interesting. We’ve had lean inventories for over a year now, we’re less than 10 weeks in the distribution channel, which traditionally would be very lean. My take on it is they’re doing it because they can right now and they can because there is no major drivers for a swift increase in markets. So as long as you’re bumping around with a relatively modest global growth around 3% or so, I think the current levels are actually fairly stable, but they certainly don’t have a lot of room to go down.

[Craig M. Hettenbach:]

Got it. Thank you. End of Q&A

[Operator:]

At this time, there are no further questions. I will now turn the call to Mr. Parag Agarwal for any additional or closing remarks.

[Parag Agarwal:]

Thank you for joining the call today. We look forward to seeing you at various conferences. Thank you and goodbye.

[Operator:]

Thank you for participating in the ON Semiconductor second quarter 2015 earnings conference call. You may now disconnect.