ON Semiconductor Corporation (ON) Q1 2011 Earnings Report, Transcript and Summary

Keith Jackson - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Semiconductor Components Industries LLC and President of Semiconductor Components Industries LLC Donald Colvin - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Chief Financial Officer of SCI LLC and Executive Vice President of SCI LLC Ken Rizvi - Vice President of M&A, Real Estate & Investor Relations and Treasurer

Michael McConnell - Pacific Crest Securities, Inc. Brian Piccioni - BMO Capital Markets Canada Bin Jiang Sujeeva De Silva - ThinkEquity LLC Parag Agarwal - UBS Investment Bank Christopher Danely - JP Morgan Chase & Co Ramesh Misra - C.E. Unterberg, Towbin Ross Seymore - Deutsche Bank AG Kevin Cassidy - Stifel, Nicolaus & Co., Inc. John Vinh - Collins Stewart LLC Craig Ellis - Caris & Company John Barton - Cowen and Company, LLC John Pitzer - Crédit Suisse AG Jonathan Smigie - Raymond James & Associates, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the ON Semiconductor First Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Ken Rizvi to begin.

Thank you, Chastity. Good morning, and thank you for joining ON Semiconductor Corp.'s First Quarter 2011 Conference Call. I'm joined today by Keith Jackson, our President and CEO; and Donald Colvin, our CFO. This call is being webcast on the Investor Relations section of our website at onsemi.com and a replay will be available for approximately 30 days following this conference call, along with our earnings release for the first quarter. The script for today's call is posted on our website and will be furnished via a Form 8-K filing. Our earnings release in this presentation includes certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release and posted separately on our website in the Investor Relations section. In the upcoming quarter, we will be attending the Deutsche Bank Semiconductor Conference on May 12 and the Cowen Technology Conference on June 2. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words believe, estimate, anticipate, intend, expect, plan or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially. The important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our earnings release Form 10-K, Form 10-Q and other filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other factors. Now let's hear from Donald Colvin, who will provide an overview of the first quarter results. Donald?

Thank you, Ken, and thank you to everyone joining us today. ON Semiconductor Corp. today announced that total revenues in the first quarter of 2011 were approximately $870.6 million, including SANYO Semiconductor. Excluding SANYO Semiconductor, ON Semiconductor's revenues were up approximately 2% sequentially. If ON were a sell-in company, we would have experienced higher growth in the first quarter. During the first quarter of 2011, the company reported GAAP net income of $74.8 million or $0.16 per fully diluted share. The first quarter 2011 GAAP net income included net charges of $46.4 million or $0.10 per fully diluted share from special items, which are detailed in schedules included in our earnings release. GAAP gross margin in the first quarter was 27.8%. Included in our GAAP gross margin is approximately $70.9 million of special items, of which approximately $50 million relates to the expensing of non-cash manufacturing expenses associated with the SANYO Semiconductor acquisition and approximately $20 million relates to the expensing of appraised inventory fair market value step-up. Non-GAAP gross margin in the first quarter of 2011 was 36%. This includes historical ON Semiconductor non-GAAP gross margin of 40.4% and SANYO Semiconductor non-GAAP gross margin of 26.5%. First quarter 2011 non-GAAP net income was $121.2 million or $0.27 per share on a fully diluted basis. Total gross margins and net income were negatively impacted by production disruptions and increased expenses associated with the Japan earthquake and resulting tsunami. We currently estimate the negative impact to net income to be approximately $10 million in the first quarter. We exited the first quarter of 2011 with cash and cash equivalents of approximately $766 million, after paying cash to SANYO Electric for the acquisition of SANYO Semiconductor and Cypress Semiconductor Corp. for the acquisition of its CMOS Image Sensor Business unit of approximately $160 million. At the end of the first quarter, total days sales outstanding were approximately 60 days, up compared with the fourth quarter of 2010 due to the acquisition of SANYO Semiconductor. ON Semiconductor's internal inventory also increased from fourth quarter levels on a days basis to approximately 111 days due to the acquisition of SANYO Semiconductor. Included in our total internal inventory is approximately $402 million of bridge inventory and inventory acquired as part of SANYO Semiconductor transaction. Distribution inventories remained relatively flat at approximately 10 weeks exiting the first quarter, but grew on an absolute dollar basis. Cash capital expenditures during the first quarter of 2011 were approximately $89 million, which included approximately $18 million related to SANYO Semiconductor. We currently anticipate total capital expenditures for 2011 of approximately $310 million to $340 million, which also includes SANYO Semiconductor. Now I would like to turn it over to Keith Jackson for additional comments on the business environment.

Thanks, Don. Now for an overview of our end markets, which include SANYO Semiconductor. During the first quarter of 2011, our end market splits were as follows: The consumer electronics end market represented approximately 27% of sales. The automotive end market represented approximately 22% of sales. The computing end market represented approximately 21% of sales. The industrial, military, aerospace and medical end markets represented approximately 17% of sales and the communications end market, which includes wireless and networking, represented approximately 13% of sales. On a direct billing basis, no individual ON Semiconductor product OEM represented more than 4% of first quarter sales. Our top 5 product OEM customers during the first quarter were Continental Automotive Systems, Panasonic, Delta, Samsung and Sony. On a geographic basis, our contribution from sales in Asia, excluding Japan, represented approximately 57% of revenue. Our sales in the Americas represented approximately 15% of revenue. Sales in Japan represented approximately 15% of revenue. And sales in Europe represented approximately 13% of revenue during the quarter. Looking across the channels, direct sales to OEMs represented approximately 60% of first quarter 2011 revenue. Sales through the distribution channel were approximately 34% of first quarter revenue, and the EMS channel represented approximately 6% of revenue. During the first quarter, ON Semiconductor revenues broken out by our product groups were as follows: SANYO Semiconductor represented approximately 32% of sales. The Standard Products Group represented approximately 20% of sales. The Automotive and Power Group represented approximately 17% of sales. The Digital Mixed-Signal and Memory Product Group represented approximately 16% of sales and the Computing and Consumer Group represented approximately 15% of sales. We will publish our quarterly revenue, gross profit and operating income breakout of these segments in our Form 10-Q for this period. Now I'd like to provide you with some details of other progress we have made, as well as provide further color regarding the financial impact of the SANYO Semiconductor acquisition and Japan earthquake. In the first quarter, we closed on the acquisition of SANYO Semiconductor. SANYO Semiconductor reported first quarter revenues of approximately $278 million and positively contributed to our earnings in the first quarter of 2011. Initial joint selling efforts are showing good traction in offering ON Semiconductor products to Japanese customers that were previously beyond our market reach. Established ON Semiconductor customers in the consumer, automotive and industrial end markets are also showing great interest in the new capabilities SANYO Semiconductor has added to our overall offerings, which range from microcontrollers and custom ASICs to integrated power modules and motor control devices. The SANYO Semiconductor division continued to make inroads in the first quarter with efficient power management ASICs for audio applications, USB switching solutions for smartphones and power management solutions for air conditioners. During the first quarter, a key win was secured at one of the largest air conditioner suppliers in China with the company's inverter modules for energy-efficient appliances. The inverter modules represent a new growth area for ON Semiconductor. We will provide further product line details for SANYO Semiconductor when we report our second quarter 2011 results. The integration of SANYO Semiconductor's business operations and manufacturing facilities continued as planned during the first quarter. We expect this process to be completed before the end of next year. As part of our SANYO Semiconductor consolidation plan, we intend to consolidate 3 of their Japan-based front-end manufacturing facilities into one facility and 2 Japan-based back-end facilities into one smaller site. We're also pleased to report that no SANYO Semiconductor or ON Semiconductor personnel were injured as a result of the tragic earthquake and resulting tsunami that occurred in Japan in March. Our 6 Japan-based facilities, 5 of which came with the SANYO Semiconductor acquisition, sustained only minimal physical damage, but did experience production disruptions. Five of our Japanese facilities came back to full production capacity and the sixth factory is ramping towards full production. Infrastructure services such as fuel, electricity, gases, water, chemicals and logistics in Japan continue to stabilize in the aftermath of the earthquake and tsunami. As a risk mitigation strategy, we have identified options for shifting production to other facilities should the need arise to support supply continuity for our customers. In addition to SANYO Semiconductor, we completed the acquisition of the CMOS Image Sensor Business unit from Cypress Semiconductor during the first quarter of 2011. This acquisition positions ON Semiconductor as a leading supplier of ultra high-speed CMOS image sensors. Now I'd like to discuss a few of our end market and product line results for historical ON Semiconductor business units. First quarter automotive sales were up approximately 10% from the fourth quarter of 2010 and up 32% compared to the first quarter of 2010. Sales in China, the U.S. and Europe remained strong. Our overall automotive strategy and newest automotive solutions engineering center in Asia continued to pay dividends. During the first quarter, we won another park assist custom ASIC for our Korean automotive OEM. Additionally, during the first quarter, we added a new leading Japanese car manufacturer for our LIN transceiver as part of our overall in-vehicle networking solution. In the industrial, military, aerospace and medical end markets, revenues grew sequentially in the first quarter by approximately 8%. During the quarter, growth in this segment was attributed to increased production within heavy industrial applications. Sales of our sensor interface products for flow, level and pressure sensing, as well as our factory communication bus products picked up as a result of the expanded investment in factory automation, oil drilling and refinement. Additionally, demand remained strong for our protection high-brightness LED products and standard components for general lighting customers. In the communications end market, revenues in the Wireless segment decreased seasonally due to lower overall unit sales during the quarter. We remain well positioned for growth within the smartphone applications. In the first quarter, we continued to ship our new power and thermal management products for smartphone market, as well as our first micro USB integrated circuits for this segment. Looking to the second quarter, we are expecting to ramp our EMI filtering and chip scale standard products for a number of leading feature phone and smartphone manufacturers. We're also seeing early traction at major mobile phone power amplifier module manufacturers for several of our integrated passive devices. In the computing end market, revenues in the first quarter were better-than-normal seasonality. Sales of our core power management products grew sequentially in the first quarter. Recent power management successes, including the winning of our sixth consecutive generation of VCore controllers and drivers with 2 leading desktop computing customers and recent successes with SANYO Semiconductor's efficient power FET solutions at 2 of our key tablet customers. We've also won designs in more than 10 tablet platforms with product ranging from protection devices and power management solutions to audio and system management solutions. Additionally during the quarter, we shipped our first custom multi chip module developed by our ASIC and MOSFET teams to a leading notebook suppliers which is respected to ramp during year. To maintain our leadership position in power management for the computing end market, we continued to expand our core controller and power stage solutions for every segment, offering high energy efficiency, low-cost turnkey solutions. We are focused on providing products to address energy-efficient power management including buck and boost conversion, audio amplification, circuit protection, thermal management and bus switching devices. Currently, we have approximately $3.50 of addressable content for tablets, more than $8 for notebooks and more than $11 for desktops. Now I'd like to turn it back over to Donald for other comments and our other forward-looking guidance. Donald?

Thank you, Keith. Second quarter 2011 outlook. While the full impact from the earthquake and resulting tsunami on our customer's ability to obtain all of the necessary parts to build products is not fully understood, based on our current assessment, we believe the effects of the earthquake and tsunami could negatively impact our sales by approximately $50 million and gross profit and earnings in excess of $30 million in the second quarter of 2011. This anticipated impact is already included in our second quarter 2011 outlook. Overall, the underlying demand trends around the globe remain strong with the historical ON Semiconductor business expected to grow sequentially in the second quarter. Despite the headwinds to revenues, gross margins and earnings from increased expenses, supply chain disruption and reduced production, SANYO Semiconductor should once again be accretive to our second quarter earnings. Longer term, after we begin to see a full recovery and stability in the overall supply chain in Japan, we believe we can improve SANYO Semiconductor's gross margins to be comfortably in the low to mid-30% range. Our second quarter 2011 outlook includes SANYO Semiconductor. Based upon product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $860 million to $900 million in the second quarter of 2011. Backlog levels for the second quarter of 2011 represent over 90% of our anticipated second quarter revenues. We expect the average selling prices for the second quarter will be flat to down approximately 1% compared to the first quarter. We expect total cash capital expenditures of approximately $80 million in the second quarter. For the second quarter, we expect GAAP gross margin of approximately 31% to 33%. Our GAAP gross margin in the second quarter will be negatively impacted from, among other things, expensing of the appraised inventory fair market value step-up associated with our acquisitions and non-cash manufacturing expenses of approximately $45 million. The non-cash manufacturing expense will have no further impact to results after the second quarter. We expect non-GAAP gross margin of approximately 36% to 38% in the second quarter. We also expect total GAAP operating expenses of approximately $198 million to $208 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to total approximately $20 million. We expect total non-GAAP operating expenses of approximately $178 million to $188 million. We anticipate GAAP net interest expense and other will be approximately $21 million for the second quarter of 2011. This includes noncash interest expense of approximately $9 million. We anticipate our non-GAAP net interest expense and other will be approximately $12 million. GAAP taxes are expected to be approximately $8 million to $10 million and cash taxes are expected to be approximately $7 million to $9 million. We expect cash taxes to decline in the third quarter to approximately $4 million. We also expect stock-based compensation expense of approximately $14 million in the second quarter of 2011, of which approximately $3 million is expected to be in the cost of goods sold and the remaining in operating expenses. This expense is included in our non-GAAP financial measures. Our current fully diluted share count is approximately 460 million shares based on the current stock price. Further details on share count and EPS calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K. With that, I would like to start the Q&A session.

[Operator Instructions] Our first question comes from the line of Christ Danely with JPMorgan. Christopher Danely - JP Morgan Chase & Co: First question. It seems as though your print is a little bit better than the updated guidance during the quarter. Can you just point to a couple of areas that were better than expected from when you updated the guidance?

Yes. There were a couple of areas that were better than our updated guidance. One is the amount of product that we were able to ship out exceeded our first fears. We actually did have some pretty good inventory positions which allowed us to make up for most of the revenue during the quarter. As you saw, we showed about $10 million short. So that's a very, very small gap compared to what we originally expected. Christopher Danely - JP Morgan Chase & Co: And then in terms of the impact of $50 million on overall and then $30 million on the gross profit, et cetera, can you guys just detail where that's coming from? Also do you expect that to go away by the time the third quarter rolls around? And do you would expect any of the, I guess, the missed sales this quarter to help the second half?

So a lot of questions there, but I'll give you my overall picture. There was approximately, on the SANYO Semiconductor side which does have a significant portion of the sales inside of Japan, there's a combination of customers that do not have their full kit of parts that are postponing their purchases, which would indicate the second half may be better when they get those complete kits in places. And of course, the impact of not having the fabs running full steam at the end of the first quarter, so it's a combination there of capacity -- effect of the capacity and customer demand. On the ON side, there's about a $10 million impact for similar reasons. So we definitely expect that the second quarter will see the majority of this impact. We think there's opportunity for the entire supply chain to recover in the third quarter and fourth quarter, but we certainly are too far away from that to call it at this time.

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

In your guidance going forward, can you give us any end market color? Which market do you expect to grow? Are there any big outliers that you expect to be up or down versus the kind of flat to slightly up guidance you gave?

If you look at our traditional channels, we're actually up in the 5% to 6% range, so we're seeing or expecting good growth in automotive, in our computing and industrial sectors. So not unlike some of the first quarter strength we saw, clearly, the smartphones will pick up as we go through the year, including second quarter as well. So in general, I would say things are trending up with the exception of the impact directly from the Japan earthquake.

So is the right way to do just take the revenue shortfall that you're talking about in the second quarter directly out of the SANYO portion?

The majority of it. I think 40 of the 50.

And then the one quick follow-up. How should we think about the gross margin improving from the 26.5% at SANYO that you just reported to that low to mid-30s range, Donald? Is that a linear improvement or are there some stair [ph] stuff and benchmarks that we should be aware of?

That probably will improve over time, so I think you can expect it to certainly be moving towards the 30 or plus at the end of the year. And we will work, as we start to get the benefit of synergies and cross-sellings to improve that further next year.

Our next question comes from the line of Steve Smigie with Raymond James. Jonathan Smigie - Raymond James & Associates, Inc.: So Donald, could you indicate what the gross margin in SANYO could be like if you didn't have the impact of the $50 million revenue and the $30 million?

Well, I think what we said was the total P&L impact from the earthquake and the tsunami for total ON was about $30 million in the second quarter. And so as Keith mentioned, part of that is traditional ON because we also had a factory in Japan, in Aizu, and that factory has had production difficulties for the reasons that Keith explained. So approximately 2/3 of the P&L impact could be attributed to our SANYO Semiconductor operation and that would give you approximately 6% or 7% of gross margin. And so if you look at roughly where that would take us if we had it back, it would take us comfortably into the oh, 30% range, which we alluded to on the guidance. Jonathan Smigie - Raymond James & Associates, Inc.: Okay. And just looking out to your sort of comfortably in the low to mid-30s, you guys typically under promise and over deliver. Is that sort of how should we be thinking this year? I mean it seems like you guys are pretty good at executing or you guys -- so I guess my question is, is there potential for upside to that gross margin outlook there?

Well, I think as Keith mentioned, if we see a recovery in the revenue we have lost, which is substantial in the second quarter. If we see that coming back in the second half, then that will obviously accelerate the gross margin improvements. Jonathan Smigie - Raymond James & Associates, Inc.: Last one. Quick housekeeping item. Going forward with regard to the product segment breakouts, will you be continuing to break SANYO out separately or you'll be sort of blending that into the overall mix?

We will continue to give you guys the detail of the SANYO separately.

Our next question comes from the line of John Pitzer with Credit Suisse. John Pitzer - Crédit Suisse AG: I just want to make sure I understand. Your commentary on end markets going into the June quarter, did that include or exclude the $50 million impact you see from Japan? I guess maybe another way to ask the question, the $50 million shortfall, what end market is that concentrated in, if any?

It is concentrated predominantly in consumer. That would be the bulk of it. There is some of it that goes into power supplies, but the vast majority is consumer. John Pitzer - Crédit Suisse AG: And then Keith, post the earthquake, there's been a lot of conversations on Wall Street on how the earthquake might impact kind of the supply chain, and I guess there's 3 vectors. One, do you think this will force customers to want to hold more inventory? And then secondly and thirdly, there's been conversations about is this an event that will allow certain companies to gain share or lose share as customers think about diversification of supplier base and geography. And I'm just kind of curious when you look at the situation, what your view is on the puts and takes around potential share gains or share losses now that you've acquired SANYO?

We are seeing a large number of the customers in Japan looking for alternative sources, including wherever they can cross on the ON products produced outside of Japan. So we're definitely seeing activity for qualification to expand the supply base in Japan. We think this is a good thing certainly for our overall corporation. We have a lot of strengths to add to that. But to the extent that there is the capacity and the ability to quickly qualify, there certainly could be share gains coming. It will be, again, a good thing, I think, for the overall company, but that's possible. The other side to remember is that generally companies are much slower to qualify new components into their electronics. So this may not be a quick process. But I would guess over time, there'd be more diversification of supply based on geography.

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

Keith, you had talked about consolidation manufacturing in Japan. You're bringing down the number of facilities, et cetera. Could you elaborate on that a little bit? Is it just getting out of the leased facilities? Or will you be vacating some of the ON facilities, potentially taking some cash from selling them over the long term? And then what kind of timeframe we could expect to see that?

So on the wafer front ends, we are consolidating into our one factory -- our own factory in Niigata and so that will continue to be our largest factory in Japan. The other ones are on SANYO Electric campuses, and we will let those go to SANYO Electric for disposal. This process will take us into next year certainly, comfortably inside the full year of 2012, perhaps a little sooner than that. But we should see that consolidation in Japan take place over the next year into an owned facility in Niigata.

You also touched on your prepared remarks the sales leverage as opposed to acquisition meaning SANYO product of outside of Japan and traditional ON product into Japanese customers. A little more color, if you could, on the gating items there. Is it purely waiting for customer design cycles? Do you expect to see any significant supply line management quals, audits, et cetera to the whole [indiscernible], et cetera.

We're already seeing demand move pretty quick on the -- what I call the standard product side. We're seeing qualifications underway and again partially in response to some of the shortages that may have been caused by the earthquake. We're seeing some near-term opportunities, I would say, for the standard products. For the more application-specific products, there will be design cycles required, but we are seeing very strong activity again in getting those products into the evaluation and the engineering teams of our customers. So it's been pretty exciting.

But no significant load with respect to the customers having a qual with the facilities in Japan or any strange gating items like that?

No, nothing unusual at all.

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

This is Bin speaking for Terence. When SANYO was acquired, you gave a operational target in the $30 million operating income in 18 months. Could you give us some update on that target? And also the tsunami -- did the tsunami delay or accelerate the profit or the COGS reduction?

Well, I think we'd also indicated that due to the redraft of the support from the seller, we would expect to improve upon that 18 month target. And I think it's fair to say that if you strip out the nonrecurring costs, et cetera, that we will be operating at or above the 10% contribution in the second quarter of this year. And this is after the negative impact of the tsunami and we have enumerated what that is. So I think we would have comfortably accelerated and beaten that objective by the second quarter, and we will beat it even after taking into account the negative impacts -- materially negative impact of the tsunami and earthquake.

A quick housekeeping question. Is there going to be more restructuring costs and industry write-up for the next quarter?

No. There is a bit of residual expensing of an asset. It's a noncash cost. We alluded to that in the earnings. But a large part of the restructuring will be paid for by the seller. So we're not anticipating any big restructuring costs going forward. Maybe some minimal, but nothing too material that I can see. And once we get into the second half of the year, the numbers will be relatively clean with the exception of the fair market value step-up, which in the third and fourth quarter, probably something in the region of $10 million or $12 million. But we're not anticipating any big write-offs. And for those of you who have had the chance to study the balance sheet, you will see that we have included a lot of intangible assets or massive amounts of goodwill on the balance sheet. So I think numbers should be a lot cleaner going into the second half.

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

Donald, first question for you. On your P&L statement, you have a $61 million gain on the SANYO Semiconductor acquisition. Can you help clarify what exactly that is from?

The main driver on that gain, Ramesh, was the accounting recognition of approximately $18 million of support from the seller as an asset, and this will be expensed over the first and second quarter. So essentially, that was a main driver of the gain. And a large part of that gain was actually expensed as a noncash manufacturing cost in the first quarter, approximately $50 million, I believe, and the remaining $30 million should be expensed in the second quarter.

Okay. So you will have a gain again of this nature in Q2...

Sorry, Ramesh. We had a gain in the first quarter, which is a bargain purchase gain, and part of that was offset by a noncash manufacturing cost of approximately $50 million. And the remaining noncash manufacturing cost of approximately $30 million for the second quarter, but unfortunately, no more gain.

I see. Okay. All right. That helps. In regards to your headcount addition from the SANYO Semiconductor business, how much was that?

Approximately 6,000 employees.

And the acquisition price of the Cypress Image Sensor division, have you enumerated what that was?

We did not disclose for the normal reasons the full gory details of the transaction. But I think we did state and we can repeat that it was approximately 1x historical revenues.

Okay. So $30 million or so. Have you paid off SANYO everything that you need to pay them? Or will there be more pavements incurred in Q2?

We took on a note from the parent, which we're paying off over time. And so a 7-year note at LIBOR plus 175 basis points. And that's part of our debt liabilities. And we amortize 10% of that every year with a bullet at the end. And on an ongoing basis between now and the end of next year, the server will provide ON with support to execute the restructuring onto price products at market levels. So this will continue, the support will continue, and we will continue obviously to service the ON we received from the seller.

Our next question comes from the line of Craig Ellis with Caris & Company. Craig Ellis - Caris & Company: Keith, just back on the product side of the equation, as you look at the PC business, how do you think about market share with Sandy Bridge for ON Semi in 2011.

Yes, that should drive continued gains. Our position there is quite strong and that carries from both the desktop to the notebook platforms. So I would expect from a motherboard and onboard power perspective to see continued share gains this year. Craig Ellis - Caris & Company: Any sense of how significant the share gains would be?

I don't know that I can quantify those with the forecast that I have at this point, but we talked about moving up in the desktops comfortably over 50% share, which is where we're at and getting into the 35% or so share on the notebooks. Craig Ellis - Caris & Company: Nice job on that. Don, on the expense side, as you think about 2Q, one, did Cypress add anything meaningful as we think about your expense outlook? And then beyond 2Q if we think about the business growing relatively seasonally in the back half of the year, how should we think about the expense equation?

Well, I think most of our expenses are already baked in to our guidance. And the profile of the Cypress Image Sensor actually fits very well into our historical business. So I don't think we see any earnings dilution either in the gross margin or the operating income coming from that. We are happy it's a business that's got some very good synergistic fit with our existing businesses. So I don't think there's any profound changes there. And early indications are that for the core business, we see continued strength going into the second half and indications are very encouraging for a seasonally strong third quarter. And we continue to prepare ourselves for that. As Keith mentioned, we see strength coming from computing and automotive, and we continue to invest in production equipment, particularly to support our automotive customers who are demanding strongly and requiring continued investment, which we continue to execute. Craig Ellis - Caris & Company: Okay. That's helpful. And then lastly for me, just on the ASP side. It looks ASPs are trending a little bit better than normal. Is any of that related to the SANYO business and anything that we should be aware of that would be coming up on the calendar? I think the annual OEM renewals are fourth quarter, so that wouldn't be there, but anything notable would be helpful.

Yes. We do our annual negotiations. They all show up in the first quarter, so those are behind us for the rest of the year. And we're seeing relative strength in pricing, not enough to take them positive, but much better than normal markets. And again I think some of the disruptions in Japan have kept the supplies tight enough that we should see some stability.

Just one additional observation and I put it in the script is that ON Semiconductor is a sell-through company, so we only recognize revenue when it's sold through. So we are encouraged by the start of the year on our traditional business where we did grow slightly our distribution inventories. So our sequential growth would have been higher if we had been a selling company. And so again I think that positions us well for the second half of the year, and we have certainly been very encouraged by the strength, both from our OEM customers and from our distribution customers.

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

Just wanted to get some idea about your lead times and your ability to meet the demand. And I was just wondering other than the impact from the Japan earthquake, were there any delinquencies from the traditional ON operation?

Our delinquencies actually continue to come down. We've able to bring those down over the last 3 quarters on a fairly steady basis. Lead times did creep up a little bit to the mid-teens in spite of bringing on more capacity. So as Don alluded to earlier, strong backlog and a strong indication from our customers that the back half of the year will continue to ramp. So we're seeing relative stability in those lead times, but they are up higher than we would traditionally like.

Okay, fair enough. As you're adding more capacity, where is most of the capacity addition coming -- I mean going to? And when do you think your lead times would normalize going forward?

From a market perspective, most of it's headed to automotive and industrial. And that's a mixture of both wafer fabrication and assembly test packages. So it is kind of across the board from a location perspective, but predominantly, reflecting the strength in those 2 markets. For the other markets, we are continuing to increase capacity, but it is less of our capital expense.

Okay. Last question. Does this mean that going forward, the mix of hardware industry should increase relative to your computing and CMOS? And would that add some tailwind to gross margins as well?

We have seen those 2 segments strengthening and the numbers we reported for the first quarter do indicate stronger position in those 2 markets. And they are favorable to the overall company gross margins. So that's a favorable and positive trend as you head into the second half.

Our next question comes from the line of John Vinh with Collins Stewart.

Just a follow-up on the seasonality question as you get into the second half. The way I'm looking at it is you expect SANYO to recover and get back to pretty close to full capacity in Q3, Q4. And also you've talked about share gains where you're going through qualifications with your customers right now and assuming those start to ramp in the second half of the year, is there any reason why you possibly could be better than seasonal going into the second half of the year given those tailwinds?

I really think that's going to depend on our customers who are dependent on full kits of products from a variety of sources, making it -- if that ability is there, I think the strength will be there as you suggest. On the ON side our capacity, certainly, will be willing to -- or able to support stronger than seasonal growth. It's really all about the demand side, and I think that's all about getting the entire kit.

Okay. Then my follow-up is on geography. I think you've given the splits by regions. Do you have a sense on what your splits are, exposure to Japan is on an end market basis or how much of your products ultimately get sold through in the Japan market?

The numbers -- the splits we give you actually are sales into the country. So the 15% of sales in Q1 is what actually gets sold into the country. The more difficult one is figuring out the influence, if you will, for the Japan-based customers on a global basis. We would estimate that to be another 5 points or so basically go to Japan-based companies on a global basis.

Our next question comes from the line of Kevin Cassidy with Stifel, Nicolaus. Kevin Cassidy - Stifel, Nicolaus & Co., Inc.: Going back to distribution list, they took more product this quarter. Was that -- are you suggesting that they need to hold more product? Or are they asking to hold more?

The answer is yes to both of those things. I think we're much more comfortable with 11 weeks of supply than we are at 10. That allows us to have a more stable supply chain and particularly make up for any kind of disruptions that there is in the supply chain. So our distributors would like to have a little more on the shelf. We're trying to provide that without exceeding our targets because frankly again on a sell-through basis, it does us no good to have extra inventory. Kevin Cassidy - Stifel, Nicolaus & Co., Inc.: Right. And the SANYO product, is that going into distribution?

The bulk of that is OEM sales. There is some distribution business inside of Japan today. One of the benefits we're going to get in sales expansion is putting that into the ON distribution network on a global basis in the second half of this year.

Our next question comes from the line of Brian Piccioni with BMO Capital Markets.

I had some audio issues, so you might have already addressed this, but looking at the balance sheet, accounts receivable plus inventory minus accounts payable almost doubled from December. Is this reflective of just simple sort of accounting issues associated with the transaction? Does it reflect the nature of the SANYO business being less efficient than use of working capital? And do we expect this to normalize and over what time period?

The answer is yes. Most of the changes is coming from SANYO and the core ON was relatively flat. Slight increase in days of inventory, but one day or so pretty flat in payables. But if you look at our overall cash conversion cycle, receivables, inventories minus payables, ON was running about in the low 80s and SANYO was running over 110, and the average is about 94. And so obviously, the Japanese have traditionally had higher levels of inventories and receivables offset with higher levels of payables. And we will probably manage the inventories down over time and use the payables to hedge against the receivables. But the last thing you want to do when you buy a business, an important business in a foreign jurisdiction, is to walk in and start laying down [indiscernible] and payment terms that are out of step with your competitors. So we are being sensitive to that, but what we can certainly work at is as we harmonize the manufacturing base, it's certainly to reduce the inventories and that's something we'll work over the next 2 years. And so you should expect to see the inventory days coming down.

And it's completely understandable that you would be sensitive to Japanese business practices. Do you have an objective with respect to a target combined cash conversion cycle? Or can we expect kind of a steady reversion to the mean over the next 2 years?

I think you can expect the days of inventory outstanding for SANYO, which are well above 100 days and mid-100s, like 150, 160. I think you can expect that, that will come down to 100, 120. And as far as the receivables are concerned, I think as I mentioned, I would be more nervous about being tough on that because it could have a negative impact on our business. And the extended receivables financing is offset by extended payables. So I think that's what you certainly can expect the inventory to come down, a reversion to the mean, over the next 4 to 6 quarters.

Our next question comes from the line Sujee De Silva with ThinkEquity.

In the inventory comment, Don, is there any inventory left in SANYO that is marked up because of the acquisition that's being worked through, or are we through that at this point?

We identified, I think, approximately $50 million to $50 million [ph] or so of fair market mark up -- mark up to market value, which we will be cycling through the P&L in 4 quarters. And I think I alluded to the fact that there will be approximately $12 million of that going through in the third quarter. The total amount, I've got the exact figure here, was $52 million. $19 million was written off in the first quarter, $15 million in the second -- actually $11 million in the third, and $7 million in the fourth quarter. So that's what will be cycled through.

That helps. And then in your assumption that SANYO's gross margins barely improved, somewhere in there, your forecast assumes some success in the cross-selling. What's the timeframe when you think some of the efforts you're doing now in cross-selling starts to materialize? Is it second half of the year or does it take longer?

I think you'll see the first gains in the fourth quarter of the year, but with significant strengthening as you get into next year. And that's a combination of the qualification cycles on the standard products and the design cycle for the new platforms for the application-specific products.

And lastly, can you tell if SANYO has strong position in the Japan auto market? Or if not, what the opportunities in the next few years, given your strong position in autos outside Japan?

They've got a strong position in the auto infotainment market in Japan. Very good position there in that side. I think what together we bring is the total car. And their access to the customers there, we think, gives us a very significant leg up in that process.

Our final question comes from the line of Mike McConnell with Pacific Crest Securities.

Donald, just looking -- I know it's a difficult question, but just looking at the $50 million top line impact from the Japan earthquake and obviously the COGS impact, could you just kind of assess the probability that you'll see some type of benefit maybe back in the second half of the year. Is that Q3, Q4? Just for modeling purposes, should we just assume that, that benefit doesn't necessarily come back in the back half of the year?

Sure. I think there's 2 components to the dynamic for the second half. One, we'll continue to see strength in the core ON business and so far the signs are good. The core ON business is in excess of $600 million, so any growth in the mid-single digits is a meaningful part of that $50 million we're talking about. And then as far as SANYO is concerned, I think it's fair to say that it looks like there will be continued disruption in July from what we've sold and what our competition sees as well. But certainly going into August and September, we should see a recovery. And so early indications are yes, the low level of activity in the June quarter will be improved upon in the second half. But again there was a tremendous amount of disruption in the supply chain, and that is a major component of the revenue mix as customers have revised down their build plans. And so we're not seeing confirmation of an uptick in these build plans yet. Certainly, it's not unreasonable to simulate some of that. But you think you can appreciate that we are prudent and gaiting strongly to something we have no visibility on.

Thank you for joining today's ON Semiconductor First Quarter Earnings Conference Call. You may now disconnect.