ON Semiconductor Corporation
Q4 2014 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the ON Semiconductor fourth quarter earnings conference call. [Operator Instructions] Parag Agarwal, Senior Director of Investor Relations, you may begin your conference.

[Parag Agarwal:]

Thank you, Chris. Good afternoon, and thank you for joining ON Semiconductor Corporation's Fourth 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 fourth quarter of 2014. The script for today's call is posted on our website. Additional information related to our end markets, business segments, geographies, channels and share count is also posted on our website. Our earnings release and this presentation include 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 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 Form 10-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earning release for the fourth 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 except as required by the law. I take this opportunity to remind you of our 2015 Analyst Day, which we plan to host on February 26 in Scottsdale, Arizona. If you would like to register for the event, please go to our Investor Relations website at www.onsemi.com. Now let me turn it over to Bernard Gutmann, who will provide an overview of fourth 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. During the fourth quarter, we noticed a significant improvement in our order trends following a slowdown towards the end of the third quarter. The strength in orders has continued so far in the current quarter, and based on our design win pipeline and a generally favorable global macroeconomic outlook, we remain optimistic regarding our near to midterm outlook. Integration of Truesense is effectively complete, and integration of Aptina Imaging is progressing well. For the fourth quarter, Aptina was nicely accretive to our non-GAAP net income, which excludes the impact of such items as costs related to restructuring, fair market value, step-up of inventory, amortization of intangibles and other special items. We remain on track to deliver projected financial results provided at the time of announcement of our acquisition of Aptina. Keith will provide additional color on the progress on Aptina and Truesense. Now let me provide you with an update of our fourth quarter 2014 results. ON Semiconductor today announced that total revenue for the fourth quarter of 2014 was approximately $864 million, an increase of approximately 3.7% compared to the third quarter of 2014. Included in our fourth quarter results is a contribution for the full quarter from our acquisition of Aptina Imaging, which closed on August 15, 2014. GAAP net income for the fourth quarter was $0.01 per diluted share. Excluding the impact of amortization of intangibles and restructuring, step-up valuation of inventory and other special items, non-GAAP net income for the quarter was $0.07 -- $0.17 per diluted share. GAAP gross margin for the fourth quarter was 32.1% as compared to 33.7% in the third quarter of 2014. Non-GAAP gross margin for the fourth quarter was 34.1%, down approximately 110 basis points quarter-over-quarter. Non-GAAP gross margin for the -- in the fourth quarter declined quarter-over-quarter, mainly due to lower factory utilization, write-down of inventory related to a smartphone customer and other onetime reserves. The write-down of smartphone inventory was higher than our expectations. Average selling prices for the fourth quarter decreased by approximately 2% as compared to the third quarter. GAAP operating margin for the fourth quarter of 2014 was approximately 2.3% as compared to approximately 6.8% in the third quarter. Our non-GAAP operating margin for the fourth quarter was 10.3%, down approximately 230 basis points as compared to the third quarter of 2014. Lower gross margin was the key driver for sequential decline in non-GAAP operating margin for the fourth quarter. GAAP operating expenses for the fourth quarter were approximately $257.6 million as compared to approximately $224.1 million for the third quarter of 2014. Non-GAAP operating expenses for the fourth quarter were approximately $205.7 million, up approximately $16.7 million as compared to the third quarter of 2014. The sequential increase in non-GAAP operating expenses was driven primarily by inclusion of Aptina for the full quarter in our results. We exited the fourth quarter of 2014 with cash and cash equivalents and short-term investments of approximately $517.8 million, an increase of approximately $23 million from the third quarter of 2014. Operating cash flow for the fourth quarter was approximately $162.5 million as compared to approximately $92 million in the third quarter. We spent approximately $41.3 million of cash for the purchase of capital equipment and approximately $20.4 million for the acquisition of a noncontrolling interest in our Leshan joint venture. During the fourth quarter, we used approximately $39.5 million for the repayment of long-term debt and capital leases and issued debt of approximately $38.9 million. We used approximately $68.1 million to repurchase approximately 8 million shares of our common stock at an average price of $8.32. This is the highest amount of capital we have deployed for share repurchase in a quarter since we instituted our first buyback program in the third quarter of 2012. At the end of the fourth quarter, approximately $976 million remained of the authorized amount under the current stock purchase program, which was announced on December 1, 2014. For the full year 2014, we generated free cash flow of approximately $277 million, despite using approximately $51 million of cash for restructuring. We remain on track to generate annual free cash flow of $300 million to $400 million in the near to midterm. We define free cash flow as cash flow from operation -- operations less capital expenditures. We expect that our capital expenditures should remain in the current range of 6% to 7% of revenue in the near to midterm. At the end of the fourth quarter, ON Semiconductor days of inventory on hand were 116 days, down approximately 7 days from the prior quarter. Excluding the impact of fair market value, step-up of Aptina's inventory, days of inventory at the end of the fourth quarter were also 116 days, down approximately 5 days from the prior quarter. In the fourth quarter of 2014, distribution inventory was up approximately $6 million quarter-over-quarter, and distribution resales declined by approximately 6% quarter-over-quarter. In terms of days, distributor inventory was up by a week quarter-over-quarter to approximately 10 weeks. For the fourth quarter of 2014, our lead times were down approximately 2 weeks as compared to the third quarter. In the fourth quarter, our global factory utilization was in the low 80% range as compared to the high 80% range for the third quarter. Now let me provide you an update on performance by our business units, starting with Image Sensor Group, or ISG. Revenue for our Image Sensor Group was approximately $166 million as compared to approximately $104 million in the third quarter. The increase of approximately $62 million was driven primarily by the inclusion of Aptina for the full quarter. Revenue for our Standard Products Group in the -- for the fourth quarter of 2014 was approximately $297 million, down approximately 7% quarter-over-quarter. Revenue for our Applications Product Group was approximately $260 million, down approximately 2% quarter-over-quarter. Revenue for the fourth quarter of 2014 for the System Solutions Group was approximately $141 million, down approximately 4% quarter-over-quarter. Revenue for SSG was negatively impacted by the weakness of the Japanese yen. However, as we have a natural hedge in place with a sizable amount of cost base in Japanese yen, the net impact on earnings was approximately neutral. SSG was accretive to our non-GAAP EPS with contribution of approximately $0.01. Non-GAAP EPS and net income exclude the impact of such items as costs related to restructuring, amortization of intangibles and other items. 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 laying out our priorities for 2015, and then I will reflect on our accomplishments for 2014. Lastly, I will address the overall business environment and trends in various end markets. For 2015, there are 3 main objectives for us

[Bernard Gutmann:]

Thank you, Keith. Before I get into the guidance for our first quarter 2015, let me inform you that we have revised results for prior periods to record a deferred tax asset in a foreign subsidiary. The prior periods also include revised amounts from a change in application of an accounting policy related to manufacturing variances and other adjustments. We have determined that all amounts were immaterial to each of the reporting periods. Now for the first quarter of 2015 outlook. Based upon product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $840 million to $880 million in the first quarter of 2015. Backlog levels for the first quarter of 2015 represents approximately 80% to 85% of our anticipated first quarter 2015 revenues. In our first quarter revenue -- our first quarter revenue is being negatively impacted by approximately $6 million due to the strength of the U.S. dollar relative to European and Asian currencies. However, the impact to our bottom line from foreign exchange volatility is neutral, as we have a natural hedge in place due to significant cost base in Europe and Asia. We expect that average selling prices in the first quarter of 2015 will be down by approximately 2% as compared to the fourth quarter of 2014. We expect inventory at distributors to fall quarter-over-quarter on a dollar basis. We expect total capital expenditures of approximately $65 million to $75 million in the first quarter of 2015. For the first quarter of 2015, we expect GAAP and non-GAAP gross margin of approximately 33.4% to 35.4%. We expect total GAAP operating expenses of approximately $231 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 $31 million to $34 million. We expect total non-GAAP operating expenses of approximately $200 million to $210 million. We anticipate GAAP net interest expense and other expenses will be approximately $9 million to $11 million for the first quarter of 2015, 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 $7 million to $10 million, and cash taxes are expected to be approximately $5 million to $8 million. We also expect share-based compensation to be approximately $12 million to $14 million in the first 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 first quarter of 2015 is expected to be approximately 435 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 Forms 10-Q and 10-K. With that, I would like to start the Q&A session. Thank you, and Chris, please open up the line for questions.

[Operator:]

[Operator Instructions] Your first question is from Ross Seymore with Deutsche Bank.

[Ross Seymore:]

I guess, first of all, Keith, you were nice enough to give some guidance on what you thought would be the growth of sectors by end markets. Could you give us the same sort of growth trajectory for 2015 by your product segments?

[Keith D. Jackson:]

So our product segments -- I'm not going to be able to give you precise numbers, but I will say that we have brought participation by the SPG group in every segment. So I expect they have a strong placement in automotive, smartphones and industrial and should be pretty much in line with those numbers I just mentioned. Our APG group is heavily weighted to automotive and industrial. So again, I think you'll see maybe a favorable trend to the corporate average with that group. SSG has a good blend in the smartphone and industrial areas. They might be slightly lower than the corporate average in that growth in those 3 segments. And then, Aptina, of course, the majority of their business, automotive industrial, they should see slightly better than corporate average.

[Ross Seymore:]

Perfect. And I guess as my follow-up for Bernard, could you give us an idea of the sort of progression through the year? And I know you're only guiding for one quarter, but the progression through the year as you integrate Aptina and take it whatever sort of expenses out for both the gross margin and the absolute dollars of OpEx.

[Bernard Gutmann:]

Thank you, Ross. So on the OpEx front, last quarter, we talked about remaining fairly flat with our provided guidance, which was $210 million. We have reduced our guidance for the first quarter to $205 million. So I expect the first and second quarter to be fairly even. And then we should see a small increase in cost that will be partially offset with synergies. So in general, it's a fairly flat, slightly up trend, but still quite flat. Gross margin, it's also a function -- or a big function of the revenue progression by quarter, so that will be more a result of that. As we talked in the past, it's more a function of the fall-through about the 50% of that incremental revenue, so it will be a function of the growth by quarter. Synergies, we should see some of them coming gradually throughout the year, especially, as the -- with the integration of the CFA operations. And the mix will also be gradual, so it's more a function of the seasonality of the top line that will cause the fall-through to the bottom line.

[Operator:]

Your next question is from John Pitzer with Crédit Suisse.

[John William Pitzer:]

Keith, I want to talk a little bit about the PC business, in particular. I think in your prepared comments, you talked about that being down along seasonal line in the calendar first quarter. There's clearly been a lot of mixed data points on the PC front, Microsoft, the hard disk drive guys. I'm just kind of curious what gives you the confidence around the seasonal -- I mean, as you go throughout the year in the PC business, can you talk a little bit about where you think your potential share gains are going to come from Skylake because clearly, a lot of guys in the market today are claiming they're going to be gaining share as Skylake comes out in the back half of the year? I would love to get your perspective on that.

[Keith D. Jackson:]

Okay. So PC seasonality, we're really looking from a backlog basis and just doing a compare to sequential changes in our normal seasonal pattern. So right now, I guess the confidence is just based on backlog that's been laid out by our customers and orders that are on the books. From the progression during the year, I can't speak to the other guys. What I can tell you is we've done very, very nice with design wins on Skylake. And as we've mentioned before, they have more dollar content in the power rails there, and so we are expecting very nice gains. And we are expecting we'll move from kind of our low- to mid-30s% market share in notebooks today, with an opportunity to get to about half of the market in the Skylake platform. So the net of all that is as they ramp in the second half of this year, we're still expecting very substantial gains from current levels.

[John William Pitzer:]

That's helpful. And then Keith, maybe you can talk a little bit about capital allocation. Now that you've gotten some of these acquisition and integration behind you, I'm just kind of curious, how do you think about buyback versus dividends? And is there a point in time in sort of the maturation of the company where dividend starts to make a lot of sense? And if so, how do you come to that conclusion?

[Keith D. Jackson:]

Certainly. In the -- return of capital to shareholders can be done in many forms, and a lot of companies do it in several forms simultaneously. What we're looking at right now is we looked at the multiples the company is getting share price wise as compared to the marketplace and peers. And frankly, as long as that underperforms those metrics, share buybacks seem to make a lot of sense. As we get more normally valued as it were, then certainly, the dividend would be coming more attractive portion of it for either part of the capital return or all of it, depending on where that number sets.

[Operator:]

Your question is from Vivek Arya with Bank of America.

[Vivek Arya:]

Sounds like you're off to a good start with Aptina. Could you give us some color how much that is roughly off your Q1 outlook? And then more importantly, which applications are you seeing the most traction? And I believe you've mentioned rear-view camera, then sort of what are the next set of milestones that are on your integration progress?

[Keith D. Jackson:]

Okay, a lot of questions there. From an Aptina traction perspective, the automobile is -- current sales are mostly around the rear camera, and attach rate is there as more car companies put rear cameras in their cars. But from a design win traction perspective, the Advanced Driver Assist Systems hold a lot of promise for significant growth as we're going forward. And we've seen a lot of strong design wins that are now starting to ramp in the more high-end models here this year. So lots of momentum in automotive besides just the backup cameras, and that's pretty exciting to us.

[Vivek Arya:]

Got it. And then as a follow-up, I believe you mentioned that distri [ph] inventory was up by a week to 10 weeks, yet your lead times were down by 2 weeks relative to the last quarter. I'm trying to make sense of both these. Is this consistent with seasonality? Should we be reading anything else into it?

[Keith D. Jackson:]

So a couple of things are consistent with seasonality, and some of it are company-unique. The lead time contraction, very bluntly, is mostly due to some substantial capacity we installed in the fourth quarter in our small signal business, which drives a large number of units. That pulled the lead times in, and so that's the -- the lead time piece of it is pretty much just the additional capacity, which came on in a very large margin [ph] in the fourth quarter. Distribution tends to slow down year end. That's not a new phenomenon. So the weeks of supply there or days of supply there goes up slightly. 10 weeks is still low for us. We like to be closer to 11 to 12. And as Bernard, in his comments, mentioned, we expect those numbers on a dollar basis to go down. And you can see from our revenue guidance, you should be seeing a contraction, again, in Q1 to our inventories in distribution. So nothing really abnormal there, more normal seasonal behavior.

[Vivek Arya:]

Got it. One last question, if I may. You mentioned that communications market was impacted by some inventory correction and some segments. If you could give us some more color, and if you think that inventory correction is over now.

[Keith D. Jackson:]

Yes. It's predominantly handsets in response of China and other places. But handsets -- and we think it's largely behind us. The backlogs for Q1, look much more seasonal, and Q4 was more than seasonal.

[Operator:]

Your next question is from Christopher Rolland with FBR Capital Markets.

[Christopher Rolland:]

So if we could talk about auto quickly, great exposure there. Do you guys think you can hit double-digit organic growth again there this year? And how are you kind of looking at long-term organic growth rates there?

[Keith D. Jackson:]

Yes. We do think we can hit double-digit organic growth there this year based on design wins in the wide range of platforms we've been talking about. Long term, we think the market itself is kind of more a high -- mid- to high-single digits growth from a content perspective. But we've really done a couple of things there that have changed our dynamics. One of them is getting a very strong image sensor position. And then secondly, some of the big wins I just mentioned to you, just a reflective to -- of the share gains we've been getting in the marketplace.

[Christopher Rolland:]

Okay, great. And then also on the rate of buyback, should we roughly expect this sort of on a quarterly basis? And also, why not accelerate your buyback program with a little bit of debt here, particularly given that you think the stock is cheap here? And then also, what is the multiple in which you think you might switch to divvy? Is it -- should we think industry average, or how should we think about it?

[Bernard Gutmann:]

Yes. Well, so obviously, we're still learning in the process. We do think that with the $1 billion over 4 years, you can't not do fairly ratable at least, to start with. So that's how we are modeling it for right now. The industry average of our peers is probably a good measure to start looking at whether it makes sense to switch or do some partial. But obviously, we'll have to discuss that in and analyze that in a lot more detail.

[Christopher Rolland:]

And -- sorry, why not take out a little bit of debt and accelerate the buyback program?

[Bernard Gutmann:]

It's always our alternatives that can be looked at. We don't -- we consider all alternatives always. At this moment, I think it's -- prudent leverage is a good thing to still have, and we -- we're pretty happy where we are. We're not afraid of leverage, but we don't want to go overboard.

[Operator:]

Your next question is from Steve Smigie with Raymond James.

[Jonathan Steven Smigie:]

And on that point, actually, the guidance here, I think, is fairly good, considering some weakness we've seen in industrial from some other folks. And so Keith, I was wondering if you could comment a little bit on -- do you view your performance here as -- is better than average? And if so, is that driven by the acquisitions doing better than expected? Or it's just you had design wins, and they're paying off now? Any color there.

[Keith D. Jackson:]

It does vary by market. I will say in industrial, I mentioned a few of the wins we've had in building and construction, which are all -- they're not related to acquisitions. They are all big wins that have been out there and are finally starting to get a product cycle in a positive side. So -- and the medical ones we talked about, also new design wins. So just in general, I'd say we've had some really good design win performance in 2015 that are giving us some momentum, perhaps better than some of the competition as we go into Q1.

[Jonathan Steven Smigie:]

Okay, great. And then just curious on the Leshan investment there, what was the reasoning behind that?

[Keith D. Jackson:]

Basically, over time, we would love to own the entire assets. It gives us a little more flexibility without having to satisfy a partner as we expand that facility. So it's just another step towards that. It takes us up from 70% to about 80% of that asset.

[Operator:]

Your next question is from Kevin Cassidy with Stifel.

[Kevin E. Cassidy:]

The wireless charging, it seems like an exciting new product area. What -- I guess, what would the dollar content change be from the standard charging to the wireless charging?

[Keith D. Jackson:]

It's about $1 per handset, would be a round number approximation.

[Kevin E. Cassidy:]

Okay. $1 increase, I'd assume?

[Keith D. Jackson:]

Yes.

[Kevin E. Cassidy:]

Okay. And also on the PC, are you working on wireless charging for PCs also?

[Keith D. Jackson:]

Absolutely. The standard for wireless charging is usable, frankly, by all electronics. And we're very active out there working with things other than handsets, including PCs right now.

[Kevin E. Cassidy:]

Okay. And similar content -- dollar content increase?

[Keith D. Jackson:]

Similar content. It's a little different because there's a little higher power content in the notebook than there is on handsets. So it's about a little bit higher there.

[Operator:]

Your next question is from Tristan Gerra with Baird.

[Tristan Gerra:]

Could you talk about the expected equation that you expect for Q1 for both Aptina now that the inventory step-up is behind and also for SANYO?

[Bernard Gutmann:]

So basically, what we have said is that next year we should deliver about -- or this year, we should deliver about $0.08 for Aptina, which if you fairly ratably liberate, it's around $0.02 per quarter, maybe it's a little bit less because of -- that you should be able to have a little bit of acceleration towards the end. SSG, we delivered $0.01 -- approximately $0.01 in Q4. It is typically seasonally down in that quarter, so it should be probably around that same -- at same level.

[Tristan Gerra:]

Okay. And then is it fair to assume that your desktop content opportunity with Skylake is similar to what you're going to get in notebook? Or is it going to be higher?

[Keith D. Jackson:]

The only difference -- the difference is we're not looking for share gains in the desktop. We will get the power of rail content improvement, but we're already about 50% of the desktop market from a share perspective.

[Operator:]

Your next question is from Craig Ellis with B. Riley.

[Craig A. Ellis:]

A couple of clarifications just on some of the key businesses. On the Aptina business, Keith, with it in the portfolio for a couple of quarters now, and as you've had a chance to really go through all of the product lines, how are you feeling about the current portfolio versus what really fits with on longer term? Will there be some mix out or do you plan to keep everything that you've got there?

[Keith D. Jackson:]

There are areas that are being deemphasized. Basically, areas that are turning into kind of a commodities, the low end of it. But in general, we will be increasing our investments in the automotive and industrial segments over where they are today. So you can expect the portfolio to become increasingly automotive and industrial.

[Craig A. Ellis:]

And is that really a statement for this year or more calendar '16?

[Keith D. Jackson:]

That's a statement even for this year, although we still have some pretty good content in the consumer areas this year as well.

[Craig A. Ellis:]

Okay. The other end market question is a follow-up to the comments on pricing in PCs and walking away from some aggressive pricing. One, is that a change in tactics that we're on? And two, given that there is such a significant share gain in the next-gen Skylake platform, was that not at play when you were competing for new business? What was the dynamic then?

[Keith D. Jackson:]

There is a portion of that PC business, I'll call it the white box market, if you will, that is pretty much spot market performance. And we're very comfortable playing there and watching our margins as that goes through the seasonality.

[Craig A. Ellis:]

Okay. That makes sense. Lastly, on the margin comments related to your objectives for this year, any color on the degree to which you can close the gap gross and operating versus current targets?

[Bernard Gutmann:]

So basically closing the gap, as we are not going to increase our operating expenses in any meaningful way, so that should also help -- with the expansion in revenue, should also help close the gap.

[Operator:]

Your next question is from Gabriela Borges with Goldman Sachs.

[Gabriela Borges:]

I want to follow up on the commentary on strength in order patterns. It seems like that picked up around October, and it's continued into January and February. Maybe you could just compare and contrast how that compares to what you normally see out of Chinese New Year. Are there any geographies that stand out? And maybe then, what that implies for 2Q may be a little bit -- 2Q could be a little bit stronger than seasonal as well?

[Keith D. Jackson:]

Okay. So the order patterns we referenced there in the fourth quarter, we saw a larger-than-normal dropoff at the end of Q3 in order patterns. So that was bigger than seasonality, primarily in handsets. And then as we went through Q4, it started picking back up and looking much more normal. As we get into Q1, we don't see any abnormally down sectors at all and some pretty much seasonal behavior across all the markets. And generally, what happens from a Chinese New Year perspective is you have kind of moderate performance, pre-Chinese New Year, and then you get a lot of churn requests just after Chinese New Year. We're obviously not to Chinese New Year yet, but I can say that the order patterns so far this quarter have been a little stronger than most first quarters that we've experienced in the past few years.

[Gabriela Borges:]

That's helpful. I think as a follow up, if I may. On the wireless charging opportunity, I believe you mentioned the steep ramp going into 2016, to the extent you can comment on the breadth of your engagement with the mainly Tier 1s versus all this -- a little bit of both and then how comfortable you feel about your competitive lead in that market.

[Keith D. Jackson:]

Yes. It's pretty broad. It's Tier 1s. It's large Chinese OEMs. And as we mentioned earlier, it's not just handsets, it moves into notebook, computers and other electronic devices, wearables, et cetera. So a lot of activity right now. All of it is in the design win phase. So any kind of production units, frankly, can't come off until the second half of this year. And then we expect a very broad adoption in 2016. So yes, we expect some good growth this year but I think a substantial and material growth in '16.

[Operator:]

Your next question is from Chris Caso with Susquehanna Financial Group.

[Christopher Caso:]

Just a question regarding -- a little guidance clarification for Q1, and it does look like the guidance is a little better than typical seasonal. Is there anything in particular that's driving that? Or would you say that's fairly even across segments? And then, as you increase your exposure in industrial and automotive, should we expect that to change the seasonal pattern of your revenue?

[Keith D. Jackson:]

Yes, it should. And so the markets that are buoying up Q1 are automotive and industrial. And I would say we're seeing slightly better-than-normal seasonality in those 2 areas and kind of normal seasonality everywhere else.

[Christopher Caso:]

And then as we -- as auto and industrial increase as a percentage of the mix, what -- any guess at this point what that may have, how that may change the seasonality as we go forward?

[Keith D. Jackson:]

Well, obviously, it would flatten it out a bit. You're still going to have big quarters in Q2 and Q3, but what you'll have maybe is a little flatter performance in 4 and 1.

[Christopher Caso:]

Okay. And just a final follow-up with regard to your cash flow and the availability of cash for buyback. Can you talk about how much of the cash that you have now is onshore and available for buyback? And then, I guess, as you go forward, if you're talking about this sort of $300 million to $400 million in free cash flow, how much of that is onshore that becomes available for buying back stock?

[Bernard Gutmann:]

Yes. So we have approximately 50% of our cash -- a little bit more than 50% of our cash onshore. And the generation is probably skewed a little bit more towards offshore. But we do have a mechanism of bringing in with that are effective, so it shouldn't be a problem.

[Operator:]

Your next question is from Chris Danely with Citigroup.

[Shaon I. Baqui:]

This is Shaon Baqui, calling in for Chris. I guess I just want to ask a more of a broad question on the overall environment. Where do you guys see yourselves now versus maybe a quarter ago? And are we back to where we were a year ago where it's kind of a normal seasonal-type environment?

[Keith D. Jackson:]

Yes. The end markets, like I mentioned earlier, are looking much more seasonal than they were at the end of Q3 and beginning of Q4. We're seeing a little better, perhaps, than seasonal in automotive and industrial, but pretty much everything else is going to look very seasonal.

[Shaon I. Baqui:]

Okay. And just as a little follow-up, I want to ask about your expectations on the SSG unit this year. Do you think you can get it to grow again this year? Or do you see it kind of flatlining with the kind of the rate where it was last year?

[Keith D. Jackson:]

I would see some grow this year, without question. We're -- we've got some great design wins and in some markets, that should see some traction. Not as much growth as the rest of the corporation but return to growth in '15.

[Operator:]

Your next question is from Vijay Rakesh with Sterne Agee.

[Vijay R. Rakesh:]

I'm just looking at the gross margin, and you said 50% drop-through, how should we look at gross margin as we go through the year, the overall margins?

[Bernard Gutmann:]

Throughout the year, well, again, it's -- as I mentioned before, it is a function of how the revenue grows and the 50% fall-through added with the mix -- the gradual mix and some additional synergies. But it's, to a big extent, a function of the top line growth. And that, obviously, depends on how it progresses throughout the year, and I don't have a guidance for Q2 through Q4.

[Keith D. Jackson:]

Yes. We won't give guidance quarterly, but our normal patterns would be for good growth in 2 and 3, and then kind of flat -- flattish in 4 and 1.

[Vijay R. Rakesh:]

Got it. And long term, are you still expecting kind of the party -- what is the long-term gross margin target there? And second part there, on the automotive side, I know you mentioned rear-view cameras coming through, what's -- where are you seeing more traction? Is it U.S., Japan, Europe? If you can give some more color there.

[Bernard Gutmann:]

So on the gross margin target, we'll be updating everybody in more detail at the Analyst Day in 2 weeks.

[Keith D. Jackson:]

And on the automotive side, the earliest adopter, adopters, if you will, on the Adaptive Driver Assistance Systems (sic) [Advanced Driver Assistance Systems] are coming from Europe and Japan, and then the U.S. is a follower, and China after that.

[Operator:]

Your next question is from Mike McConnell with Pacific Crest Securities.

[Michael McConnell:]

Just 2 quick ones for me, again, on wireless charging. Was there -- has there been any impact from Samsung Mobile's decision to shift to [indiscernible] this year on the business? And could you remind us, looking at your charging platforms, which standards you are linked to and -- of the -- well, I guess now 2, given the merger?

[Keith D. Jackson:]

Yes. So on the Samsung thing, I guess, those are chipset decisions they make. And they have to decide whether they're going to have wireless charging or not. And so we really couldn't say anything customer specific around that one. Clearly, there was a well-known chipset platform that wasn't adopted. But again, we don't know what that is going to do to wireless charging. So I just can't answer that question, whatsoever. The second part of your question, I'm sorry, Mike?

[Michael McConnell:]

Yes. It was just on the standards, give -- if could you just remind us what standards your platforms are utilizing on the wireless charging. I know there has been a merger, but -- so I think there's 2 remaining, but if you can just remind us what standards are they?

[Keith D. Jackson:]

Yes. FC [ph] A4WP standard, so magnetic resonance.

[Operator:]

Your next question is from Betsy Van Hees with Wedbush Securities.

[Betsy Van Hees:]

You mentioned in your prepared remarks, Keith, that you saw a strong demand from the sports camera, which is one of the big drivers for Aptina. Was there anything else that possibly surprised you in the Aptina business? That's my first question.

[Keith D. Jackson:]

Really, positive surprises there have been mostly the momentum they've got with new ADAS designs in automotive. We were surprised, I guess, at how far along some of those were and how quickly they're rolling out.

[Betsy Van Hees:]

Great. And then wireless charging, you talked about the applications, end market smartphones, wearables, PCs, and you talked about 2016, really, being the revenue -- meaningful revenue growth. I was wondering if you could rank for us how you see those end markets. What's going to be the most meaningful for you?

[Keith D. Jackson:]

I believe the handsets will ramp first and then be followed by PCs from a dollar content and then wearables. The wearables may actually ramp with more units, but they're going to be lower power solutions with lower ASPs.

[Betsy Van Hees:]

Okay. And then my last question on wireless charging, if I believe with the design -- with the product that you guys have today, you don't have any near-term competition, is that correct? There's no one else out there that's competing with you? And I was wondering how well do you think your competitive advantage will be?

[Keith D. Jackson:]

Yes. I'm sure there are several competitors working on things. We haven't seen other things sampled yet with the standard, but, I mean, we're not relying on us being the only guy for a long time.

[Operator:]

Your next question is from Ian Ing with MKM Partners.

[Chris Hsuan:]

It's actually Chris Hsuan, in for Ian Ing. In prior quarters, you guys had a string of ASP declines of 1% a quarter or less. You guys are now guiding down 2%. Is this kind of a new normal or does it reflect annual price declines in standard products?

[Keith D. Jackson:]

Normally, our Q1 is larger than normal because we get all of the annual contracts that get repriced in the first quarter of the year by our large industrial and automotive customers. So it typically is one of the larger ones. But the other contributing factors, as you look at pricing and how we report those, we've got to look at currency changes, et cetera, this year.

[Chris Hsuan:]

Got you. And on your outlook for PC units this year, are you guys still seeing a stabilization in flattish units, just given some of the weakness we've seen from some of the PC players out there?

[Keith D. Jackson:]

Yes. We think for the year, it'll be roughly flattish. Obviously, it's some slightly different performance quarter-to-quarter. But for the year, we're looking at something that's very flat.

[Operator:]

Your next question is from Craig Hettenbach with Morgan Stanley.

[Craig Hettenbach:]

Had a question on SSG. Can you provide just kind of a rough break out in terms of the exposure today to Japan and outside Japan? And then, how you see that maybe shifting over the next year or 2?

[Bernard Gutmann:]

So it has been coming down. It is about now at low 30s, about 30%. We expect that as we focus on outside of Japan markets, it will continue drifting down on a percent basis.

[Keith D. Jackson:]

Yes. I don't know if we can give you an exact projection, but certainly, based on the design win profiles, that should move somewhat less than 30% by the end of the year.

[Craig Hettenbach:]

Got it. And then a follow-up on the gross margin. I understand that the core business and revenue drop through. On the Aptina piece, you have some mix as you change that business a bit and then as well as maybe some manufacturing savings. Can you just talk about Aptina, specifically, how you expect gross margins to trend?

[Bernard Gutmann:]

So yes -- we're starting from when we acquired them from a point where they are lower than the corporate average, and we'll be gradually moving it up. I expect some of the benefits from the synergy of CFA to start showing up in the first half. And the rest will be more gradual towards the end of the year.

[Operator:]

Ladies and gentlemen, this concludes the question-and-answer session. I'll now turn the call back over to Mr. Agarwal for any closing remarks.

[Parag Agarwal:]

Thank you, Chris. Thanks for joining our call today. Please feel free to contact us with any follow-up questions. Goodbye.

[Operator:]

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