ON Semiconductor Corporation
Q1 2014 Earnings Call Transcript

Published: 2 May 2014

[Operator:]

Good afternoon. My name is Candis, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2014 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Mr. Parag Agarwal, Senior Director of Investor Relations. You may begin.

[Parag Agarwal:]

Thank you, Candis. Good afternoon, and thank you for joining ON Semiconductor Corporation's First Quarter 2014 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 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 2014. The script for today's call is posted on our website. Additional information related to our end markets, business segments, geographies and channels is also posted on our website. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliation 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 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 2014. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors. During the current quarter, we will be attending the Robert W. Baird Conference in Chicago on May 7. Now let me turn it over to Bernard Gutmann, who will provide an overview of the first quarter 2014 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. We continue to see steep acceleration in our order activity, driven by a robust design win pipeline across multiple end markets. Our current order rate is at the highest level it has been in the last 2 years. We're seeing robust order activity from the distribution channel. Distribution orders are up by approximately 20% as compared to the prior quarter. Keith will provide additional details on business trends in his prepared remarks. Along with heightened order activity, operational improvements put in place over the last few quarters are beginning to show results, and our margins on a non-GAAP basis improved significantly despite a slight decrease in revenue in the first quarter. Our design win momentum is being further aided by continuing improvements in global macroeconomic environment and a favorable supply-demand dynamics currently prevailing in the semiconductor industry. Now let me provide you an update on our first quarter 2014 results. ON Semiconductor today announced that total revenue for the first quarter of 2014 was approximately $706.5 million, a decrease of approximately 1.6% as compared to the fourth quarter of 2013. GAAP net income for the first quarter was $0.13 per diluted share. Excluding the impact of amortization of intangibles and restructuring and other special items, non-GAAP net income for the quarter was $0.17 per diluted share. Non-GAAP gross margin for the quarter was 35.5%, up approximately 70 basis points quarter-over-quarter. This strong gross margin performance was driven by improved operating performance and a richer mix resulting from strong growth in higher margin industrial and automotive businesses. Average selling prices for the first quarter decreased by approximately 1% as compared to the fourth quarter. Our non-GAAP operating margin for the first quarter was 12.4%, up 50 basis points as compared to the fourth quarter of 2013. Non-GAAP operating expenses for the first quarter were approximately $163 million, down by approximately $2 million as compared to the fourth quarter of 2013. The sequential decrease in operating expenses resulted from previously announced restructuring measures in our System Solutions Group and fewer days in the first quarter of 2014 as compared to the fourth quarter of 2013. We exited the first quarter of 2014 with cash and equivalents and short-term investments of approximately $617 million, a decrease of approximately $9 million from the fourth quarter of 2013. Operating cash flow for the first quarter was approximately $75 million. We spent approximately $48 million of cash on purchases of capital equipment. During the first quarter, we used approximately $24 million for repayment of long-term debt and we used approximately $19 million to repurchase approximately 2.2 million shares of our common stock at an average price of $9.12. At the end of the first quarter, approximately $123 million remained of the total authorized amount under the current stock repurchase program. At the end of the first quarter, ON Semiconductor's days of inventory on hand were 123 days, up 4 days from the prior quarter. This increase in inventory was driven by anticipation of improving demand and the likelihood of restocking in the distribution channel, as indicated by significantly higher order rates from distributors. Included in our total inventory is about $33 million or 7 days of bridge inventory. Most of this bridge inventory is related to the consolidation of System Solutions Group manufacturing operations. In the first quarter, distribution inventory was up by approximately $18 million quarter-over-quarter, while distribution resales were approximately flat. In terms of days, distributor inventory increased to slightly over 9 weeks in the first quarter from slightly below 9 weeks in the fourth quarter of 2013. For the first quarter, our lead times were approximately flat quarter-over-quarter and we expect lead times to continue at the current level. In the first quarter, our global factory utilization was in the low 80% range as compared to the mid 80% range in the fourth quarter. Now let me provide you an update on performance of our 3 business units or segments. Revenue for our Standard Products Group for the first quarter of 2014 was approximately $293 million, up approximately 1% quarter-over-quarter. Automotive and industrial end markets were the key drivers of above seasonal revenue for the Standard Products Group. Revenue for Applications Products Group was approximately $280 million, up approximately 3% quarter-over-quarter. Again, automotive and industrial were the key drivers for the Applications Products Group's growth. Revenue for the first quarter of 2014 for the System Solutions Group was approximately $134 million. The greater-than-seasonal decline in revenue for System Solutions Group in the first quarter was driven by certain program transitions. We believe that underlying business for SSG remains stable and current booking trends thus far in the current quarter points to a healthy growth for the SSG in the second 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. I am very encouraged by our first quarter results. Our bookings momentum continues to strengthen, and currently, our bookings rate is at a level we haven't seen in the last 2 years. Activity in the distribution channel has picked up momentum, and as Bernard noted in his earlier comments, distribution orders are up approximately 20% quarter-over-quarter. Based on heightened distribution activity, we believe that much-anticipated restocking in the distribution channel has started and distributors are increasingly optimistic about the second half of the year. As we recognize revenue on a sell-through basis, the benefit of this improved quarter activity from the distribution channel is not immediately reflected in our revenue. However, the heightened order activity from distributors and improving commentary on demand trends from our customers significantly raises our optimism for the second half of the year. In line with our stated goal, we continue to see significantly increased traction in our targeted growth segments of automotive, smartphones and select areas of the industrial end market. We're not only benefiting from increased semiconductor content in automotive and industrial applications but also from share gains across our targeted end markets. We expect our momentum in these markets to further accelerate as our design wins begin to convert into revenue. Along with increased design win traction, our operating performance continues to improve, driven by efficiency improvement measures we put in place during last year. This improvement in operational efficiency, coupled with strong growth in our margin-rich segments, has enabled us to deliver solid margin expansion in the first quarter despite a sequential decline in revenue. Our current operation structure should enable us to deliver strong operational leverage as our revenue grows. In addition to operating leverage, our richer product mix, driven by growth in our targeted segments, should provide additional tailwind to our margins. While we're pleased with the performance of our Standard Products Group and Applications Products Group, performance of our System Solutions Group slightly lagged our expectations. Unexpected ramp down of certain customer programs was the primary contributor of the greater-than-seasonal decline for SSG in the first quarter. However, booking trends and backlog for SSG point to healthy growth in the second quarter. Based on SSG's design win pipeline and impending ramp of multiple new programs in the second half of the year, we remain confident that SSG's revenue will continue to grow for the remainder of the year. This revenue growth, coupled with benefits from previously announced restructuring measures, should enable SSG to be accretive to our earnings in 2014. Let me reiterate that we remain committed to running SSG in a manner that is profitable on a sustained basis. We believe that the cost structure is now in place to achieve sustained profitability for SSG. However, if needed, we're prepared to implement any and all measures to drive sustained profitability. We closed our acquisition of Truesense Imaging on April 30. It's my pleasure to welcome the Truesense team to ON Semiconductor family. The team at Truesense established a clear leadership in high-performance imaging market. And I'm excited about the opportunities that the combination of the 2 companies will create for our customers, shareholders and employees. The acquisition of Truesense is in line with our stated strategic intent of growing select segments of our margin-rich industrial business. This acquisition is highly complementary in terms of technologies, products, customers and channels. Truesense brings approximately 200 new customers to ON Semiconductor and vastly expands our image sensor portfolio with the addition of both CCD and CMOS devices. Truesense also provides us access to new channels, such as camera makers and system integrators for the most demanding and critical imaging applications. Now I'll provide some detail on the progress in our various end markets. The automotive end market represented approximately 30% of our revenue in the first quarter and was up by approximately 5% quarter-over-quarter. Revenues in this segment were driven by strong product sales across our complete automotive portfolio. We saw strong sales for our ignition IGBTs, LED drivers, motor control ICs for advanced front lighting systems, in-vehicle networking products, low drop out regulators and switch mode power supplies. In our Standard Products Group, we saw solid growth for automotive in every focused product area as compared to the fourth quarter. Leading automotive-related revenue drivers for our Standard Products Group include rectifiers, small signal diodes, MOSFETs, protection devices and diodes for body electronics, safety, infotainment and powertrain. Additionally, we gained significant share year-over-year as a result of our annual contract negotiations with our key automotive customers worldwide, and we expect these share gains to translate into revenue during the remainder of the year. As I've indicated in my earlier comments, our design win momentum in the automotive sector continues to accelerate. Key design wins secured in our first quarter include wins with key European automakers for low side octal relay drives, in-vehicle networking products, LED drivers and motor control ICs for front lighting. In the Americas, we secured wins for body control, engine control, LDO and MOSFETs for rear light applications, SmartFETs for instrument cluster and ASICs for in-vehicle networking. In Korea, we secured wins with a major auto OEM on numerous rear and front lighting programs. In Japan, we continue to drive success with a recent design for our intelligent power module wins for electric oil pumps for hybrid electric vehicles at a key automaker. Revenue for the second quarter in our automotive segment is expected to be up quarter-over-quarter. The communications end market, which includes both networking and wireless, represented approximately 17% of our revenue in the first quarter and was down approximately 6% quarter-over-quarter due to normal seasonality. On a year-over-year basis, our communications revenue was up by approximately 7%, driven by new product introduction and design wins in smartphones. We continue to gain market share on smartphones with our battery protection, battery chargers, protection devices, filtering and power management ICs. Traction also remains strong for our autofocus and image stabilization products. We continue to see strong demand in smartphones and base station applications for many of our standard components, such as protection devices, EEPROM in chip scale packages, high precision LDOs, logic, operational amplifiers and discrete devices. During the quarter, we ramped and shipped DC-DC power management and protection products for 2 premier customers in the wireless market. And we saw growth at a key Chinese smartphone maker for our protection, filtering and other standard products. We secured multiple design wins on Chinese smartphone platforms for display, camera modules and battery solutions, and we expect revenue from these wins to ramp beginning in the second quarter. We won additional designs at 3 key smartphone makers for our image stabilizer and autofocus controller and driver solutions for cameras. We also secured a major design win for wireless charging in the smartphone space. Revenue for the second quarter for our communications segment is expected to be up quarter-over-quarter. The consumer end market represented approximately 17% of our revenue in the first quarter and was down approximately 14% quarter-over-quarter due to normal seasonality, which was further exacerbated by the end of initial production ramp of new gaming platforms. The white goods market showed steady growth during the quarter, with exceptionally strong demand for our intelligent power module solutions, specifically for our 2-in-1 intelligent power modules with integrated AC inverter and power factor correction. Orders for our standard products and power management devices slowed with seasonal production decline for gaming systems, digital media players and LCD televisions. Yet, design win momentum for the next generation consumer electronics systems and white goods remain strong. We secured wins for a broad range of our power and standard products at a key customer for a new streaming TV device. We also secured new design wins for set-top boxes and brushless DC motor drivers for white goods, such as refrigeration fan drivers, battery-powered hand tools and other pumps and blowers. Also during the quarter, we entered into a joint development agreement to develop ICs utilizing Studio One's award winning AfterMaster audio technology and ON Semiconductor's DSP product expertise for audio solutions to deliver unprecedented performance for consumer and industrial electronics. Revenue for the second quarter for our consumer segment is expected to be slightly up quarter-over-quarter. The industrial end market, which includes military, aerospace and medical, represented approximately 21% of our revenue in the first quarter and was up approximately 8% compared to the fourth quarter. Within the Industrial segment, we saw especially strong growth in our medical and Mil/Aero end markets as our design wins translated into revenue. We began to see revenue from the first of many major design wins on our flagship Ezario 7100 DSP hearing aid platform, and we launched our new Rhythm DSP system for hearing aids, with full production anticipated during the second quarter. Our sought-after hearing health DSP solutions are now being utilized by customers to enable wireless interface with specific smartphone models to better service the baby boom generation. We also ramped production of a CRM solution for one of our key implantable medical device customers. We saw good growth for our image sensor products, especially in the high-speed and cinematography market segment, and we secured initial design wins for our new Python CMOS image sensor platform for machine vision, intelligent traffic control and surveillance applications. Industrial-related revenue for our Standard Products Group was up, with strong demand for our ESD production solutions at a leading high brightness LED lighting maker. Revenue for the second quarter for our Industrial segment is expected to be up quarter-over-quarter. This guidance includes contribution from our recent acquisition of Truesense. The computing end market represented approximately 15% of our revenue in the first quarter and was down approximately 5% compared to the fourth quarter due to normal seasonality. Consistent with our SAM expansion strategy, we've successfully introduced and secured design wins for new Vcore controllers serving channel motherboards and AMD computing platforms, which should ramp during the year. We continue to gain Vcore share in the computing market, driven by our strong position on Haswell and Broadwell platforms and strong demand for our DrMOS power solutions. The design window for Intel's next generation platform, iMvP8, is now open, and we are well positioned to further increase our market share with higher content. Revenue for the second quarter for our computing segment is expected to be down quarter-over-quarter. In other news, ON Semiconductor has been named one of the 10 most popular semiconductor brands in China for 2013 by China Electronics News. 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. Now for the second quarter of 2014 outlook. Our guidance for the second quarter includes the contribution from our acquisition of Truesense Imaging, which closed on April 30. Based upon product booking trends, backlog levels and estimated turn levels, we anticipate that total ON Semiconductor revenues will be approximately $738 million to $768 million in the second quarter of 2014. Backlog levels for the second quarter of 2014 represent approximately 80% to 85% of our anticipated second quarter 2014 revenues. We expect that average selling prices in the second quarter of 2014 will be down approximately 1% as compared to the first quarter of 2014. We expect inventory at distributors to rise on a dollar basis. We expect total capital expenditure of approximately $50 million to $60 million in the second quarter of 2014. For the second quarter of 2014, we expect GAAP gross margin of approximately 34.7% to 36.6% and non-GAAP gross margins of approximately 35.1% to 37.1%. We expect total GAAP operating expenses of approximately $179 million to $192 million. Our GAAP operating expenses includes the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to be approximately $11 million to $14 million. We expect total non-GAAP operating expenses of approximately $168 million to $178 million. We anticipate GAAP net interest expense and other expenses will be approximately $9 million to $11 million for the second quarter of 2014, which include noncash interest expense of approximately $2 million. We anticipate our non-GAAP net interest expense and other expenses will be approximately $7 million to $9 million. GAAP taxes are expected to be approximately $9 million to $11 million, and cash taxes are expected to be approximately $6 million to $8 million. We also expect share-based compensation of approximately $11 million to $14 million in the second quarter of 2014, 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. The increase in stock-based compensation in the second quarter over the first quarter of 2014 is due to our annual grants and the higher stock price. Our diluted share count for the second quarter of 2014 is expected to be approximately 444 million shares based on the current stock price. Further details on share count 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 Candis, please open up the lines for questions.

[Operator:]

[Operator Instructions] And your first question comes from Ross Seymore with Deutsche Bank.

[Ross Seymore:]

I guess, the first question on the SSG side of things. Does it give you any problems that, that was weak? I know you said that there is some product or program transitions, but is this something that has been a similar problem in the past or is this something that you have, for whatever reason, more confident that it can snap back, and if that latter is the case, what gives you that confidence?

[Keith D. Jackson:]

Okay. So it was slightly weaker than we expected. We did expect it to be weaker. As you know, 40% of that business is consumer, which is off very significantly in the first quarter of each year. What we saw there is a couple of those consumer programs ended a little quicker than we expected and the new models weren't ramping until here in April. And so it really was a timing issue right there at the end of March more than anything else. We expect SSG to grow faster than the overall company in the second quarter based on backlog and design wins and specific customer input. So no, we think it was a little weaker in Q1 than we expected, but we expected it to be softer than Q4. And it really is product transitions, which are returning in the second quarter, so we should see a very nice growth rate here in Q2.

[Ross Seymore:]

Great. And I guess, as my follow up, switching over to the OpEx side of things, the guidance is a little bit higher than I had expected. I know, Bernard, you said there is an annual grant in there and the stock price rising, et cetera. But how should we think about the leverage on that line going forward, on an absolute basis, is this kind of the new run rate? Or are there other things that can influence it to the upside or downside as the year progresses?

[Bernard Gutmann:]

On a net basis, we've expected it to be pretty much at that -- continuing at that level for the rest of the year.

[Operator:]

And your next question comes from John Pitzer with Crédit Suisse.

[John William Pitzer:]

Keith, maybe just a follow-on to Ross' question around SSG. I'm just kind of curious, you made comments in your prepared remarks that you still think it's going to be accretive to full year '14. One, how dilutive was it at this revenue level in the calendar first quarter? And I think you've talked about sort of that $150 million kind of breakeven level. Can you just update us on the accretion comment you made, to what extent is that wholly based upon revenue growth expectations from here? Are you doing more in that division to try to get the breakeven lower?

[Keith D. Jackson:]

Okay. So Q1, it was roughly $0.02 dilutive. And we believe the full year will be in excess of $150 million a quarter average. So we're expecting growth. From a cost perspective, though, we are not fully executed on the programs we initiated last year. We'll be exiting our factory in Japan in June, and we still had headcount transitioning out here through Q2. So that breakeven point, we're targeting 140 as we exit this year. And so, again, I think we're going to have widening positive margins as you go through the year, with costs going down and revenues going up slightly.

[John William Pitzer:]

And Keith, just for the June quarter specifically, should we still kind of model SSG as dilutive to the overall earnings?

[Keith D. Jackson:]

It will be very close to breakeven, plus or minus.

[John William Pitzer:]

Perfect. And then, Keith, I think you also said in your prepared comments, you expect computing to be down in the June quarter. To what extent do you think that's just market forces? Or can you help me understand the kind of the competitive dynamics? Because we've heard some very differing views on that compute business, sequential growth from some of your competitors. I'm just kind of curious, is it market or is it market share?

[Keith D. Jackson:]

So we expect our Vcore business to continue to grow, in fact, grow very nicely. We are selectively not participating in some of the commodity sales into computing where there is some very low margins. And frankly, we have better uses for our capacity. So it's really a margin enhancement approach we're taking. And I wouldn't read that to be significantly down, it'll be just very slightly down.

[John William Pitzer:]

My last question, you did a fairly strong buyback program in the calendar fourth quarter. I think it was $59 million. And it was about $19 million this quarter. How do we think about buybacks going forward, and kind of what should we think about as your target to try to get cash back to shareholders?

[Bernard Gutmann:]

So currently we do have still our $123 million program. We have $300 million, we still have $123 million that will expire in about 5 quarters. We expect to utilize it fully in that timeframe.

[Operator:]

Your next question comes from Gabriela Borges with Goldman Sachs.

[Gabriela Borges:]

I wanted to ask on the gross margin guidance for 2Q. Could you give us a sense for how much of that expansion is being driven by high utilization, and if there are any other impacts from mix shift or from the ongoing operational initiatives that we should be aware about in the quarter?

[Bernard Gutmann:]

For the most part, in the second quarter, it's high utilization and continuing mix improvement, as we continue growing our automotive and industrial areas. The cost reductions that Keith mentioned associated with the SSG Group will be more a second half and 2015 story as we close down the factory in June.

[Gabriela Borges:]

That's helpful. And just as a follow up, if I may, could you help us quantify how much Truesense is contributing to the sequential revenue growth or the OpEx growth in the second quarter? And then if you could elaborate on your revenue and cost synergies that you expect to see from that acquisition?

[Bernard Gutmann:]

So the revenue in the second quarter guidance is $10 million to $12 million. And right now, it is -- in 2013, it was a business that ran in the low to middle 40s percent gross margin. And we don't see a reason why that would change. This, we are not expecting a significant amount of R&D savings. And on the OpEx front, in general, it's going to be adjusted by a modest SG&A savings.

[Operator:]

And your next question comes from Steve Smigie with Raymond James.

[Jonathan Steven Smigie:]

Keith, I was hoping you could talk a little bit about the share gains in the automotive market. First of all, can you talk about how you got the wins versus the competitors, what did you do differently? And then does that change the growth profile for that business over the next 12 months?

[Keith D. Jackson:]

Okay. So in essence, our businesses, both on the Standard Products side and on our Applications Products side, are both gaining share there. There are separate phenomena I will work through. The Applications side is really expertise that we've been developing in some areas that are growing pretty rapidly in the cars, and we win there basically on technology at competitive prices and continue to do very well. On the Standard Products side, we continue to be a larger player there with significant volumes and new technologies that specifically reduce energy leakage in the car so that they get better battery performance, et cetera. So that combination of good products with good prices, we think, is a winning formula in automotive.

[Jonathan Steven Smigie:]

Okay, great. And then just with regard to Truesense, as we look into September, it seems like you had maybe 2/3 of the revenue in the June quarter. So should we expect obviously a little bit more than a seasonal September, as we add in the extra month there? And also, should we expect growth in Truesense? So if we just took like the -- multiply the -- got 1 month's worth and would have grown off that base as well?

[Keith D. Jackson:]

Yes, we would expect -- I mean, you're math is not far off. I mean, it's going to be a full quarter instead of a partial quarter. And certainly, we're expecting to see growth in that business, but I would not project a lot of growth right now.

[Bernard Gutmann:]

As a frame of reference, last year, we sold -- Truesense sold $79 million for the full year.

[Operator:]

And your next question comes from Chris Caso with Susquehanna Financial.

[Christopher Caso:]

Just following up from that last question, could you clarify the operating expense associated with Truesense and if there is an extra month on that, too, would we factor that into the third quarter as well?

[Bernard Gutmann:]

Yes, the amount in the second quarter is $3 million to $4 million. And yes, that's only a partial.

[Christopher Caso:]

Okay, great. Just with reference to your prepared comments on the distribution channel, you talked about that being a little above 9 weeks. Could you characterize that where that is versus historical norms and where your target levels are? And if you have any feel for the inventory at your customers, beyond the distributors, do you feel that they are doing some restocking as well here?

[Keith D. Jackson:]

We like to target between -- or approximately 11 weeks, so this is still below where we'd like to be and it is below norms. This looks very similar to 2009 on the distri side. So it's still quite lean. And even with the order patterns, we would remain lean by historical standards. From our OEMs, looking at their order patterns, we are seeing significant amount of inside lead time requests for expedites, and that indicates to us they are also still quite lean. However, as you know, it's pretty tough for us to judge that accurately. But at least, their behaviors right now are seeming to be quite lean.

[Christopher Caso:]

Great. And just as a final question, you guys had talked about some targeted share gains in handsets as you go into the second half of the year, could you give us an update on that and what that implies in terms of seasonality for the third quarter?

[Keith D. Jackson:]

Yes, our -- from a cellphone perspective, we're expecting to see seasonal units out there. So third quarter would be a better quarter than the second quarter. And within that, we've seen some really good design wins with some high dollar content in China. And it's our belief that the smartphones produced there at the more modest cost points to the consumers is going to drive a lot of volume. So we think the combination of the good wins and winning them where we see the customers growing the most rapidly, we think, is what's going to lead to those gains in Q3, so it should be a little stronger for us in Q3 than the overall handset volume change.

[Operator:]

And your next question comes from Craig Ellis with B. Riley.

[Craig A. Ellis:]

Keith, it sounds like from some of the prepared remarks that the company's feeling pretty constructive about the ability to grow through the year, in the back half. Can you just help us understand what you're seeing from a half on half growth standpoint by end markets, where are you seeing the most growth in the second half?

[Keith D. Jackson:]

I think end markets will look fairly seasonal. So the handsets should be up in the second half over the first half. Your computing and consumer should be up second half over first half. Automotive actually tends to be not a lot different half on half. They should be up steadily, but I mean, nothing significant from a half on half rate change. What did I miss? Industrial tends to be stronger first half. But net-net, we would see kind of at or slightly above second half over first half trends this year.

[Craig A. Ellis:]

Okay. And just a clarification on the earlier Truesense inquiries. What end market does that fit into? It looks like it's an industrial-based business, is that right or does it mix out into a number of different end markets?

[Bernard Gutmann:]

For the most part, it is industrial.

[Operator:]

And your next question comes from Aashish Rao with Bank of America.

[Aashish Rao:]

With regards to the voluntary retirement program in SSG, you had originally guided for about $9 million to $11 million in quarterly OpEx reduction and additional savings in gross margins. How much of that has kind of worked its way through the model and how much more remains? Also, shouldn't this be causing a downward bias to OpEx in the back half of the year?

[Bernard Gutmann:]

We have, from the headcount point of view, about -- as of the end of the first quarter, about 60% to 70% done. We're still going to see some further headcount reductions in the second quarter and a few more in the third quarter, and that articulates to the voluntary program. And we have seen some of those already going through the P&L, both in Q4 and in Q1, and we'll see some more in Q2. And we have mentioned that in the past, the downward pressure on OpEx is expected to be offset by increased stock-based comp and variable comp in general and keep the numbers roughly on a flattish basis for the rest of the year.

[Aashish Rao:]

Got it. And also with respect to -- I mean, if you assume, like a normal seasonal September quarter, I mean, you're going to begin to approach close to the $800 million revenue level. The last time you had discussed gross margin at your Analyst Day, I mean, you were thinking you could exceed 40%. What do you think the new -- like what the -- given the ongoing changes in SSG and stuff like that, so what do you think the new good gross margin number would be at, at that $800 million revenue level?

[Bernard Gutmann:]

I think in the medium term, we can still achieve that at that level, but there is a significant amount of mix impact that will play into getting to that level. So we're still expecting to fall through at around 50% on the incremental revenue. We're going to see some more savings coming from the SSG Group that will contribute to getting us closer. But the rest is a function of getting the mix to achieve that. And we are continuously focusing on the areas that have above corporate average gross margins.

[Operator:]

And your next question comes from Vijay Rakesh with Sterne Agee.

[Vijay R. Rakesh:]

Just want to go back on the System Solutions, the SANYO Group, what are the consumer products that you're seeing driving the growth in second half that you have visibility there to drive that year-on-year growth in that segment?

[Keith D. Jackson:]

Well, a significant piece is going to be the handset content that they've got, the white good content that they've got, and then just a variety of normal seasonality from there on the rest of the white goods, the televisions and entertainment piece.

[Vijay R. Rakesh:]

Got it. And obviously, when you look at your gross margins, they are improving. So do you think you can keep your OpEx flat into kind of next year also and if your margins improved, do you see your op margins get back to kind of the 15%, 20% level as you look at next year?

[Keith D. Jackson:]

Yes, if you look at this year, I mean, the change year-over-year, last year, there was extremely low variable pay based on the performance of the company. This year, that's being restored. There is no reason to believe that, that's going to go up substantially next year because you are basically fully restored there. And that was the biggest change. And then, of course, we've added in the Truesense here in the second quarter, which makes the growth look a little larger in the second quarter. But nonetheless, there is really, from Q2 of this year through all of next year, there's really no reason for it to be appreciably different.

[Operator:]

And your next question comes from Ian Ing with MKM Partners.

[Ian Ing:]

First question, just trying to understand the industrial performance in the March quarter, up 8%, that seems that's better than the analog peers and including distributor Avnet, also your commentary is more positive, what do you think is going on there?

[Keith D. Jackson:]

It's all specific design wins in that segment. We just had some really good products out there that are finally starting to go to production, technology-driven, we mentioned some of them in the specific script. But the medical team has basically been doing some great work, and those have now all gotten their FDA releases, and we're seeing our customers ramp them.

[Ian Ing:]

Great. And my follow-up, I mean, trying to get a sense of the opportunities left on gross margin improvements in the second half, it looks like with the topline for June, you're looking at utilizations maybe in the mid-80s. So pretty close to a sweet spot, just to see if there is any more operational efficiencies?

[Keith D. Jackson:]

There are. We mentioned the closure of the factory in Japan, that would add to the normal utilization piece. But then the other thing we think we have in the second half is continued improvement in mix. So the operational piece plus the mix piece.

[Ian Ing:]

Even with less industrial and flat automotive?

[Keith D. Jackson:]

Even less industrial and automotive, because remember, our handset business is also high margin for us. And that will overtake, if you will, any loss that you have in industrial. And automotive should still grow in the second half. So that's not a -- it doesn't cease growing.

[Operator:]

And your next question comes from Christopher Rolland with FBR Capital Markets.

[Christopher Rolland:]

So if we could talk about inventories for a second here. I think you guys had $35 million in bridge inventory. Remind us when that bridge works out. And then also, on the distri side, you mentioned more than 9 weeks there. What are you guys comfortable with there? When will you stop building internal inventory?

[Bernard Gutmann:]

So on the bridge inventory, let me address that one first, we're burning at a rate of about $2 million to $3 million a quarter. But in the couple of most recent quarters, we've also had to build more for the closure of KSS. So that kind of kept it flat. And after we complete the closure, we should see a gradual decrease of about $2 million a quarter for that inventory, $2 million to $3 million a quarter.

[Keith D. Jackson:]

And on the distribution side, as I mentioned earlier, we like to see about 11 weeks out there. We're at 9, so we do think there's some more room for growth. And then internally, I think you'll see, as we burn off this bridge, much more of a seasonal pattern, where we will take inventory down in the second half of the year, as the peak season is over, and then bring it up in the first half, like we're doing here this year.

[Christopher Rolland:]

Okay, great. And back to the OpEx, again. It seems like the contribution from Truesense was probably a little bit less than I had expected. It seems a lot more organic and also somewhat more permanent than I had expected here. Maybe you guys could talk a little bit more detail about why this is so permanent and why it was so needed and exactly where this is going, this incremental?

[Bernard Gutmann:]

For the most part, the biggest portion of the Truesense OpEx is in R&D. And these are R&D -- good technical people that we want to retain to faster the growth in the image sensing area. We will look at the normal synergies we can obtain on the SG&A. And on the sales and marketing, it's a set of different customers, so we probably will be less aggressive there just to make sure we have good coverage on the customer base. So the net-net, the reduction will come more from the regular G&A function.

[Operator:]

Your next question comes from Kevin Cassidy with Stifel, Nicolaus.

[Dean Grumlose:]

This is Dean Grumlose, calling in for Kevin. The automotive market has been strong for ON and the industry for multiple quarters now. Do you have any concern of inventory building up in this market or do you feel that inventory may be managed differently in this segment?

[Keith D. Jackson:]

Yes, I don't have any concerns. We are very close to those customers. And we have, basically, various JIT and vendor-managed inventory programs for them. So we see the draw rates, et cetera. And they are actually not excessive. They are actually a little leaner than where they would like to be. And so, I've got no concerns whatsoever on inventory there.

[Bernard Gutmann:]

There were concerns in the first part of the year for North America inventory. And the numbers have now shown that they have declined back to normal levels.

[Dean Grumlose:]

To the extent you can, could you shed some color on how long you think the Automotive segment will continue to be strong, and what your expectations are for this segment?

[Keith D. Jackson:]

I mean, we think it's got a nice, steady growth in global units in low single digits for some time. Absent major economic events on a global basis, there's no reason to believe that will change. The key for us, of course, is the content growth of electronics being much faster than that. And then specifically for us, we continue to expand share into Japan and China, where we've had relatively low percentages of our business in the past. So from our perspective, we think automotive is going to be a good market for us for many years to come.

[Operator:]

[Operator Instructions] And your next question comes from Craig Hettenbach with Morgan Stanley.

[Craig Hettenbach:]

Not to split hairs on the Truesense contribution, but if you look at the partial contribution, it would imply a quarterly revenue of $16 million to $17 million versus last year, it looked like maybe $20 million. So is there anything seasonal in their business or can you talk about how it kind of trends through the year?

[Bernard Gutmann:]

It looks like the shipments in April were quite strong, so it looks like there was a higher amount in that month. So we don't see any -- we don't have the experience about seasonality. And from our due diligence, we didn't see anything significant. But we don't see any reason to believe that the business is declining.

[Craig Hettenbach:]

Okay. Do you have a rough kind of long-term growth projection for the business relative to Semi's?

[Bernard Gutmann:]

It should grow at the same pace as the industrial segment, whatever that is.

[Craig Hettenbach:]

Okay. And then as a follow-up, that ASP really benign pricing environment last quarter to this quarter, Keith, can you maybe talk to kind of just the influence of the cycle and we have expedites, just what your expectations if you think you can hold this kind of benign pricing through the year?

[Keith D. Jackson:]

I think we're hopeful that it will continue. And it's based largely on the entire industry being at relatively good utilization rates and seeing demand improve. And so I think that combination plus any restocking that takes place in distribution should keep the lid on prices this year.

[Operator:]

And we have no further questions at this time. I'll turn the call back to our presenters for closing remarks.

[Parag Agarwal:]

Thank you, everyone, for joining the call today. Please feel free to call us with any questions. Goodbye.

[Operator:]

And this concludes today's conference call. You may now disconnect.