ON Semiconductor Corporation (ON) Q4 2013 Earnings Report, Transcript and Summary

Parag Agarwal - Senior Director of Investor Relations Bernard Gutmann - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Chief Financial Officer of Semiconductor Components Industries LLC, Executive Vice President of Semiconductor Components Industries LLC and Treasurer of Semiconductor Components Industries LLC Keith D. 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

Ross Seymore - Deutsche Bank AG, Research Division Cole Patterson - Crédit Suisse AG, Research Division Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division Christopher Caso - Susquehanna Financial Group, LLLP, Research Division Craig A. Ellis - B. Riley Caris, Research Division Aashish Rao - BofA Merrill Lynch, Research Division James Schneider - Goldman Sachs Group Inc., Research Division Ian Ing - MKM Partners LLC, Research Division Christopher Rolland - FBR Capital Markets & Co., Research Division Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division Michael C. Lucarelli - Evercore Partners Inc., Research Division Craig Hettenbach - Morgan Stanley, Research Division Betsy Van Hees - Wedbush Securities Inc., Research Division

Good afternoon. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Mr. Parag Agarwal, Senior Director of Investor Relations for ON Semiconductor, you may begin your conference.

Thank you, Sharon. Good afternoon, and thank you for joining ON Semiconductor Corporation's Fourth Quarter 2013 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 2013. The script for today's call is posted on our website. Additional information related to our end markets, business segments, geographic and channel splits 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 Form 10-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the fourth quarter of 2013. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors. Moving forward, our business segment formerly known as SANYO Semiconductor Product Group will be referred to as System Solutions Group, or SSG. This name change has been necessitated by the expiration of our license to use SANYO name. Later this quarter, we will be attending Goldman Sachs technology conference in San Francisco on February 13 and Susquehanna Financial Group conference in New York on March 4. Now let me turn it over to Bernard Gutmann who will provide an overview of the fourth quarter 2013 results. Bernard?

Thank you, Parag, and thank you, everyone, for joining us today. Let me start by providing an update on overall business results. Our business is gaining momentum as our design wins in our targeted areas of automobile, smartphones and select areas of industrial end markets begin to translate into revenue. At the same time, improved -- improving global macro environment, especially in developed markets, and favorable supply-demand dynamics are contributing to improving trends in our business. Most importantly, we have achieved much awaited success in stabilizing System Solutions Group, formerly known as SANYO Semiconductor Product Group. Our cash flow performance has improved significantly, and we have returned substantial portion of this cash to the shareholders in form of stock repurchases. Let me provide you a brief update on System Solutions Group. For the first time since the 2011 Thailand floods, which drastically hampered SSG's back-end manufacturing operations, we have achieved breakeven on non-GAAP operating income basis for SSG. We define non-GAAP operating income as non-GAAP gross profit less non-GAAP operating expenses. SSG's contribution to consolidated adjusted EBITDA was approximately $5 million in the fourth quarter. We remain confident that SSG will be accretive to our net income in 2014. We are making progress in completing restructuring measures announced in October of last year. We expect that the ultimate headcount reduction associated with such restructuring to be lower as compared to our targeted range. We are retaining a sizable part of SSG's manufacturing workforce to support manufacturing of product for our legacy business in the Niigata fab, which until recently had manufactured products only for SSG. We are currently running trial wafers on products for our legacy business in the Niigata fab, and we expect to begin commercial shipments of this products in the second quarter of 2014. Despite the lower-than-targeted headcount reduction, we expect to achieve cost savings within the range previously disclosed. With improving results and outlook, we also continue to focus on returning cash to stockholders. During the fourth quarter, we took advantage of attractive valuation of our stock and used approximately $59 million to repurchase approximately 8.3 million shares of our common stock at an average share price of $7.11. During 2013, we deployed approximately 60% of our free cash flow towards stock repurchases. At the end of the fourth quarter, approximately $143 million remained of the total authorized amount under the current stock repurchase program. We will continue to take advantage of undervaluation in our stock price and our improving cash flow to return cash to our shareholders. Let me now provide you with an update of the fourth quarter 2013 results. ON Semiconductor today announced that total revenue for the fourth quarter of 2013 was approximately $718 million, an increase of approximately $3 million over the third quarter. GAAP net income for the fourth quarter was $0.09 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 34.8%, flat as compared to the third quarter. Average selling prices for the fourth quarter decreased by less than 1% as compared to the third quarter. Non-GAAP operating expenses for the fourth quarter were approximately $165 million, up by approximately $2 million as compared to the third quarter of 2013. This sequential increase in operating expense was due to higher stock compensation and bonus accruals, driven by our improved results. We exited the fourth quarter of 2013 with cash and equivalents and short-term investments of approximately $626 million, an increase of approximately $72 million from the third quarter. Net cash provided by operating activities for fourth quarter was approximately $127 million as compared to $60 million in the third quarter. We spent approximately $20 million on the purchase of capital equipment. We used approximately $98 million for the repayment of long-term debt and capital leases and for the redemption of convertible notes. We received approximately $128 million from the issuance of debt, including $120 million drawn from our line of credit. As noted earlier, we used approximately $59 million for the repurchase of our stock. At the end of the fourth quarter, ON Semiconductor days of inventory -- or inventory on hand were 119 days, up approximately 4 days from the prior quarter. We believe that the current distribution inventory levels are low to support customer demand. Therefore, in order to adequately service our customer, we have raised our inventory levels. Included in our total inventory is about $32 million or 6 days of bridge inventory. Most of this bridge inventory is related to the consolidation of System Solutions Group's manufacturing operations. In the fourth quarter, distribution inventory was down by approximately $5 million quarter-over-quarter, while distribution resales were approximately flat quarter-over-quarter. In terms of days, distributor inventory declined to slightly below 9 weeks from approximately 9 weeks in the third quarter. Now I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?

Thanks, Bernard. Let me start with laying out priorities for ON Semiconductor for 2014 and then I will address the overall business environment and various end markets. For 2014, there are 3 main objectives for us: First, we have to realize our full cash flow generation potential; second, we should accelerate our momentum and targeted growth segments of automobile, smartphones and select areas of industrial; and third, complete the transition of SSG to be accretive to our consolidated results on a sustained basis. Now let me expand on each of these objectives, starting with our capacity to generate substantial free cash flow. We believe that in a normal growth environment for the semiconductor industry, ON Semiconductor can generate annual free cash flow of approximately $300 million to $400 million in the near to mid-term. We define free cash flow as a net cash provided by operating activities less capital expenditure. We characterize year-over-year growth of low- to mid-single-digit percentage points as normal growth for the industry in the current macro environment -- economic environment. This growth, coupled with margin expansion, substantial progress in restructuring activities related to our SSG and lower working capital requirements, are the key contributors to our improved free cash flow outlook. Moving on, in 2014, we are aiming for mid to high single-digit growth in our targeted segments of automobiles, smartphones and select areas of the industrial end markets. We have made substantial investments in these markets over the last few years, and our design wins have now started to convert to revenue. Specific product lines that should drive growth in 2014 include intelligent power modules, autofocus and image stabilization and motor drivers from the System Solutions Group, ESD protection, common mode filters, automotive-related products and power conversion products from the Standard Products Group and in-vehicle networking, LED lighting, power management for mobile devices and applications for smart homes from our Applications Products Group. Lastly, in 2014, System Solutions Group should achieve a cost structure to deliver sustained profitability and we expect this group to be accretive to our earnings in 2014. Now let me address the current business trends. The overall business environment continues to improve steadily, as evident in our improved order rates. Macroeconomic environment, especially in developed economies, continues to improve. We have not yet seen any negative impact on our business from recent trepidations in the global financial markets, but we remain cautious. For the fourth quarter, our lead times declined by less than a week as we eliminated supply constraints in a few areas. We expect lead times to remain at the current levels. In the fourth quarter, our global factory utilization was in the mid 80% range as compared to the high 80% range for the third quarter. Utilization declined in the fourth quarter due to holidays-related shutdowns of our manufacturing facilities. Now I'll provide some details of the progress on our various end markets. The automotive end market represented approximately 27% of revenue in the fourth quarter and was up by approximately 4% quarter-over-quarter. Revenue in the fourth quarter were driven by robust increases in every region, with the exception of Japan. The strength was broad based across product lines, but was most notable in protection, power MOSFET, drivers, ignition IGBTs and switch mode power supply solutions. We continue to experience solid growth within our focused customer base, especially in front-lighting applications, in which our LED driver and motor control solutions are supporting new vehicle releases in Europe. In the Americas, our rear lighting solutions continue to be adopted by several key OEMs across a broad range of vehicle offerings. Key design wins for the quarter included a significant power driver win for a seat control at a key industry leader. Also, our integrated power module solutions have been selected by leading Japanese motor manufacturers for use in drive fans and pumps in European and Japanese vehicles. As a testimonial to our strength in the automotive market, I am pleased to announce that ON Semiconductor received the Supplier Quality Excellence Award for 2013 from General Motors. Revenue for the first quarter for our automotive segment is expected to be up quarter-over-quarter. The communications end market, which includes both networking and wireless, represented approximately 18% of revenue in the fourth quarter, down approximately 4% quarter-over-quarter. The sequential decline was driven by a broad-based inventory correction in the smartphone market. During 2013, our wireless-related revenue grew approximately 10% year-over-year. We continue to gain market share with our battery protection, battery chargers, protection devices, filtering and power management ICs. Traction remains strong for our autofocus and image stabilization products. Also, we saw strong demand in smartphones and base station applications for many of our standard components, such as protection devices, EEPROMs in chip scale packages, high precision LDOs, logic, operational amplifiers and discrete devices. Revenue for the first quarter for our communications segment is expected to be down quarter-over-quarter due to normal seasonality. The consumer end market represented approximately 20% of revenue in the fourth quarter and was up approximately 2% as compared to the third quarter. During the quarter, we saw strong demand for our intelligent power modules in the consumer white goods. We also had strong orders for our standard products and power management devices, driven by volume production ramps of next-generation gaming systems, wearable electronics, portable video cameras, digital media players, LCD televisions and white goods. Also, we captured a significant growth opportunity in white goods with 2 key design wins, including our first design win with a key European customer. Revenue for the first quarter in our consumer segment is expected to be down quarter-over-quarter due to seasonality. Our industrial end market, which includes military, aerospace and medical, represented approximately 20% of revenue in the fourth quarter and was down approximately 2% quarter-over-quarter. Timing of shipments in our medical business and softness in certain areas of our military and aerospace business contributed to the quarter-over-quarter decline. During the fourth quarter, we saw ramps for our newest ASICs for both medical and mil/aero applications, ranging from ultrasound equipment and diagnostic monitors to aerospace engine control and military guidance applications. Products for mobile point-of-sale equipment also remained stronger in the fourth quarter. We secured our first motor control design win in North America for one of our intelligent power module solutions. During the fourth quarter, we secured multiple design wins from medical industry leaders for custom products, which integrate medical-grade discretes and miniature system package solutions. Also, our new image sensor was selected by a leading manufacturer of high-speed digital imaging systems. Revenue for the first quarter for our industrial segment is expected to be up quarter-over-quarter. The computing end market represented approximately 15% of revenue in the fourth quarter and was up approximately 1% compared to the third quarter. VCore power management share gains on Haswell notebook platforms contributed to above-market performance in computing segment during the fourth quarter, as this new platform ramped into volume production. We experienced strong growth in MOSFET revenue from several motherboard and hard disk drive manufacturers. Revenue for the first quarter for our computing segment is expected to be down quarter-over-quarter due to seasonality. In other news, I am pleased to announce our NCP6338 processor power converter for smartphones and tablets won the Leading Power Devices and Module Award from EDN China. Now I'd like to turn it back over to Bernard for other comments and our other forward-looking guidance. Bernard?

Thank you, Keith. Now for first quarter of 2014 outlook. While booking trends and end market demand outlook remain healthy thus far in the quarter, we are being cognizant of a rather mixed macroeconomic outlook in our first quarter guidance. Based upon product booking trends, backlog levels and estimated turn levels, we anticipate that total ON Semiconductor revenues will be approximately $695 million to $725 million in the first quarter of 2014. Backlog levels for the first quarter of 2014 represented approximately 80% to 85% of our anticipated first quarter 2014 revenues. We expect that average selling prices in the first quarter of 2014 will be down approximately 2% compared to the fourth quarter of 2013. We expect inventory at distributors to rise on a dollar basis. We expect total capital expenditure of approximately $45 million to $55 million in the first quarter of 2014. For the first quarter of 2014, we expect both GAAP and non-GAAP gross margins of approximately 33% to 35%. The quarter-over-quarter decline in gross margin is primarily due to temporary closure of a few of our manufacturing facilities for infrastructure upgrades, preventive maintenance, lower utilization at Asia-based manufacturing facilities due to Chinese New Year holidays and fewer days in the first quarter of 2014 as compared to the fourth quarter of 2013. The first quarter of 2014 comprises of 87 days, making it the shortest first quarter we have had in the last 13 years. The fourth quarter of 2013 comprised of 95 days. We expect total GAAP operating expenses of approximately $171 million to $184 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairment and other charges, which are expected to be approximately $13 million to $16 million. We expect total non-GAAP operating expenses of approximately $158 million to $168 million. We anticipate GAAP net interest expense and other expenses will be approximately $9 million to $11 million for the first quarter of 2014, which includes 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 $5 million to $7 million and cash taxes are expected to be approximately $3 million to $5 million. We also expect share-based compensation of approximately $7 million to $9 million in the first quarter of 2014, of which approximately $1 million is expected to be in cost of goods sold and the remaining 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 2014 is expected to be approximately 445 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 Sharon, please open up the line for questions.

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

Keith, one question about the targeted areas of the company that you expect to grow, and I think you said the mid to upper single digits this year. Can you help us determine what percentage of your total business that represents? And then what sort of growth rate roughly you expect for the remaining portion of your business?

Yes. So that represents a little over 60% of the total. And again, we think the rest of the business will grow fairly similar to the overall market rates, would be in the low single digits.

Great. And I guess, as my follow-up, Bernard, in your commentary you talked about this quarter being the shortest quarter in 13 years. What sort of implications does that have for any semblance of seasonality for 2Q?

Well, in that sense, it should help a little bit. It should help our seasonality. Q2 should be the normal 91 days. Q2s are always 91 days.

Your next question comes from John Pitzer from Crédit Suisse. Cole Patterson - Crédit Suisse AG, Research Division: Patterson dialing in for John. Probably being a little too critical here, but relative to your December quarter gross margin, I would've probably expected a little bit of a better beat [ph] considering the revenue upside. Can you help us understand the puts and takes of that, that's in the quarter gross margin?

Are you talking about the first quarter or the December? Cole Patterson - Crédit Suisse AG, Research Division: December quarter. So what you guys just reported.

So in -- pretty much what we have is with fairly flat revenues, we have also the same flat gross margin. So it's pretty much, I would consider, in line. Cole Patterson - Crédit Suisse AG, Research Division: Okay. And then I guess you've guided the end markets mid to high single-digits year-over-year growth. Specifically within the SSG segment, how are you guys viewing revenue growth in that segment in CY '14?

Yes, we have stated that we think for SSG, their growth in CY '14 will be lower than the corporate average. They are doing some rebuilding. And while we're growing very quickly outside of Japan, there's not as much growth inside Japan. So as a division, that should grow slower. Cole Patterson - Crédit Suisse AG, Research Division: Got it. And then I know you guys put this inside your 10-Q, but what was gross margin within that segment for the December quarter?

The SSG gross margin was approximately 23. Cole Patterson - Crédit Suisse AG, Research Division: And do you guys kind of view that as being a linear progression to your low- to mid-30s target? Or will that be something you'll see a lot of -- quite a bit of pickup mid-year 2014?

Well, there is some lumpiness in that. There is obviously the seasonality on the top line and also some of the savings, including the closure of the KSS factories to come later in the year.

Your next question comes from Steve Smigie from Raymond James. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Keith, I was just sort of curious, on the pricing in the quarter, you -- so it's less than 1%. I mean, I think that's a lot better than I would typically expect to see. Was there -- anything unusual going on there?

No. Actually, we have seen the environment steadily improve as we went through the quarter, and we actually had the opportunity in a few areas to increase prices. And so the net of that was one of the most favorable environments we've had in several years. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, great. And then for your overall reporting guidance, you seem to have -- certainly in the guidance, you've seemed to perform somewhat better than comparables years since certain other people seem to have been caught by Chinese New Year or other impacts and guided below expectations. Just curious, is there anything specific you see here that might differentiate you from other guys in terms of the environment? Or do you think that some of it might be just revenue recognition where for many other folks, they're sell-in, you're sell-through?

Well, certainly the sell-through piece of it, I think, gives you a closer look to what the markets are actually doing rather than sell-in. So we think we're a good proxy for that. But frankly, I think it is the focus that we've had in the markets that we've been going after, frankly, are a little bit stronger. So people that have a different mix of markets may not fare as well.

Your next question comes from Chris Caso from Susquehanna Financial.

Just kind of following on with respect to the comments on order activity. I guess, the strengthening of order activity in Q4 seasonally just seems a little unusual and very encouraging. Could you talk about how much of this you think is unique to ON, how much of this you'd attribute to the markets, kind of what your customers are telling you about the environment as we go into 2014?

Yes. I would say without question on the computing side it is specific to ON. We outgrew the market significantly in Q4, and I expect that Q1 will be similar although lower than Q4. And that is the VCore story. I think we've talked about that quite a bit. So basically, Haswell continues to ramp. It will continue to ramp in Q1. And so you should see ON specific share gains going on in that market. You also probably have some share gains going on in automotive and industrial where we've had those focus for the last couple of years, which may be company-specific. So I guess, the way we would look at it is I think we're -- those markets are healthier than normal going into the first quarter, and we're doing a little better than normal in those areas.

Okay. And as a follow-up to that, I think last quarter, you termed the inventory levels in distribution at dangerously low levels. Do you still feel that at this point? And I guess, it's been one of the hallmarks of the last year, where distribution channel has been reluctant to restock. Do you think that's likely to happen? And then as a follow-on to that, what sort of visibility you might have into end customer inventories, I suppose some of the OEM customers that you serve? Do you think that they're following similar patterns?

I do think that. I think the supply chain is quite lean. And significant growth will cause some consternation. That's one of the reasons we've been carrying a little bit more inventory internally. I expect that we should start to at least level out in the distribution channel going forward, hopefully be able to restock a little. But at this stage, none of that has played into revenue forecast.

Your next question comes from Craig Ellis from B. Riley.

Bernard, I think in your prepared comments you talked about using SSG as a vehicle for manufacturing that it started at legacy ON fabs. Can you talk about what's possible intermediate to longer term, as you port more of the legacy ON parts over to that fab? And what are the implications for longer-term gross margins?

Well, it definitely is something that we're focusing on. It's not only for Niigata. We are also doing the same thing on some of our back-end facilities, like Vietnam. We are basically moving away from having SANYO factories -- SANYO-specific factories now or SSG-specific factories now. We are basically have 1 single manufacturing network. And the usage of the SSG factories for ON obviously is healthy in terms of capital avoidance and also allows to improve the gross margin on the SSG front by [indiscernible] overhead costs.

Okay. And as a follow-up to that, what's the export percent of the SSG business in the fourth quarter? And as you flex that manufacturing capability, where should investors expect it would go, say, exiting 2014?

When you say export, you're talking about revenues outside of Japan?

That's right.

It's now about 65% of the total footprint of SSG is outside of Japan in -- on a growing pattern.

Okay. And any stab for where it would be exiting this year?

It should be less than 50%. I mean -- excuse me, less than 30% inside Japan.

And then a follow-up on CapEx, Bernard. What should we think about with respect to CapEx this year? And I'm sorry if you mentioned that on the call, and I missed it.

No, we haven't made a prediction on that. We're still using the same model of 6% to 7% of revenue. In 2013, we did actually underspend some. We spent $155 million or 5.7%. But the long term, well, it keeps being the same, approximately 7%, when you look at it over a medium period of time.

Your next question comes from Aashish Rao from Bank of Conductor (sic) [Bank of America Merryll Lynch]

Bernard, could you talk about OpEx expectations over the course of the year and specifically timing of the warranty of retirement program savings and the magnitude of that? And any other puts and takes as we look ahead?

So the -- for the first quarter, our midpoint of our guidance is $2 million less than the current actual. So what we're seeing there is the benefit of the SSG restructuring coming to fruition -- or partially coming to fruition, offset by small increases in variable comp, and we expect that to continue throughout the year. In general, we'll see a reduction in SSG expenses offset by variable stock comp and some other minor expenses, in general, to have a yield that's fairly flat, maybe a smidge increase in the back half if results are very good.

Okay, got it. And then, Keith, you highlighted the expected free cash flow improvement in 2014 hitting the $300 million to $400 million or so. Do you still intend to pay down the maturing debt? Or do think it's a better use of the cash to do more buybacks given where the stock is -- where it is?

We certainly will be looking as we did in the fourth quarter for good times to buyback more stock. But in general, we will be paying off debt as it's due.

Your next question comes from James Schneider from Goldman Sachs.

I was wondering with respect to SANYO or SSG, could you state whether you still expect to take the breakeven level for SANYO to $150 million? And do you still expect that to happen in Q3 of this year?

Yes.

Correct.

Great. And then maybe Keith, an end market question for you. Specifically on the consumer white goods, washing machines, the air-conditioners, things like that, relative to normal seasonality you see at this point in time, do think that's a little bit stronger or a little bit weaker than normal for Q1?

A little bit stronger than normal. But again, it will be down from Q4 but it's stronger than normal. And what we're seeing there, again, is the push to the higher-efficiency models gaining share within the total sales of white goods.

Your next question comes from Ian Ing from MKM Partners.

ASP is expected down 2% in March. Does that reflect year-end price adjustments or more of a prevailing pricing environment going forward? It seems the gross margin guidance is pretty reasonable, given you've got a 1-point-plus headwind in March here.

Yes, that is basically implementing all of our annual contracts. They all go into effect January 1. So we get the biggest impact for the year in January on a regular basis.

Okay. So it's reasonable to think it could be not as aggressive going forward?

Yes. Actually that -- again, that is actually good results because normally those annual contracts have bigger impacts in the first quarter than 2%. So we're still seeing a continuation of a more favorable pricing environment.

That's good news. And then there's comments about raising inventory levels because of customer inventory, is this based on any specific feedback or signals that customers are going to replenish? Or is this just anticipating GDP is going to look good? Or -- and also could you update the China distribution business entering Chinese New Year, was it in sort of a burn or replenishment mode?

So distribution remains in a burn mode. There's no replenishment at this stage in sight. And in general, customers are -- have not yet, I think, started ordering more than they need out of fear, but there are certainly heightened concerns being given to us by the customers as they are looking at their 2014 and looking at growth and their levels and becoming a bit cautious.

Your next question comes from Christopher Rolland from FBR Capital Markets. Christopher Rolland - FBR Capital Markets & Co., Research Division: So can you guys talk about your optical image stabilization products? So how should we think about revenues currently? What kind of margins are we talking about there? And how do you view uptake this year? Would it be linear? Or are we perhaps talking about an infection point at some point during the year?

Yes. Margins are higher than corporate average. And we would expect to see growth in 2014 stronger in the second half. Basically, we've gotten a significant number of big wins in China Mobile handset vendors, and those are for new models that will start ramping here at the end of Q1 and Q2 and be in full production by Q3. Total revenues there, I don't know that I have just the OIS piece of that. So we can follow up with that at another time. Christopher Rolland - FBR Capital Markets & Co., Research Division: Okay, great. Just a follow-up on that. I was just wondering if there are any developing developed -- excuse me, world handsets. And then my second question is you guys talked a bit about the compute market. How do you sort of view your share there now? How many points do you think you could sort of take in 2014? And then given the competitive dynamics in the market, do you like your prospects to pick up more share in '14 or in '15?

So on the computing front, I -- we like our prospects both years. We think we'll continue to increase. We've got some great products at great prices there and great positioning with the processor platforms. I think we still have another 10 points of market share to go in the notebooks. We're kind of in the low to mid-30s right now. I think that number can get up into the 40s over the next 12 to 18 months, I think is a reasonable expectation. On the camera side, yes, there's developed country phones with that in there, several of the Windows phones that are made by the big European company use those and several other phones made by North American suppliers use them.

Your next question comes from Vijay Rakesh from Sterne Agee. Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division: I was wondering on the automotive side if you could give some color on the design wins and how you see that picking up through the year. And also on your SANYO business, how that looks in terms of design wins for the year?

Okay. So design wins in automotive, we had record design wins 2013. Those were after very good year in 2012. So from a production perspective, you see most of those gains happen in the fourth quarter of the year with the new model ramps. And so we're feeling pretty good about continued automotive increases as we get to the end of '14 and then even stronger based on the '13 wins we had in 2015. SSG, we've mentioned several times, we're getting great traction outside of Japan, with our key focus areas there and no major changes in Q4 from a momentum perspective. We continue to strengthen that and see that as an opportunity for us to really return to at or above market in 2015. Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division: Got it. And last question here, I joined late, but any thoughts on how you look at your operating -- OpEx going out, what level is there?

So OpEx, they should be fairly flat with a minor increases in the back half of the year associated with variable comps.

Your next question comes from Patrick Wang from Evercore.

This is actually Mike for Patrick. In the prepared comments, you talked about increasing channel inventory. How much of a bump are you baking into your guide from that?

Okay. So we're on a sell-through, so the answer is none.

All right, easy answer, was perfect. For SANYO, where is the upside coming from last quarter? And maybe how should we model it in the first quarter?

So last quarter, as we mentioned, we saw stronger-than-expected pickup in our power module business for the consumer white goods. And again, it was just -- it was unseasonably stronger than we expected. And as you go into first quarter, there's normal seasonal patterns that will bring both consumer business in general and then the white goods business also down a bit. But in general, that continues to exceed expectations.

Your next question comes from Craig Hettenbach from Morgan Stanley.

Just following up on SSG and the comments for slight growth. Can you talk about what applications you do expect to drive that growth and then what applications are still lagging a bit at SSG?

So the mobile handset business should lead the growth with the intelligent power module business right behind it. Those should be the strongest 2. What continues to not grow as quickly is the balance of their consumer entertainment businesses.

Okay. And then as my follow-up, you talked about improving free cash flow, can you just talk about your increasing the buyback a bit, what your thoughts about dividend longer term and then if M&A could come back into the mix at some point?

Okay. So in terms of share buybacks, as I said, we still have $143 million available under the approved program. And we think it is still a good way to return cash to shareholders, it's our primary way to do it right now. We intend, as Keith mentioned, to continue paying down the debt as it matures. It's about $100 million or so for this year, and that will get us closer to a net debt, which -- at which point of time we could look at other means, including the dividend. But for right now, pretty much it's share buybacks and pay the debt as it gets -- as it matures. On M&A, our first priority was to fix SSG. We have mentioned in previous occasions that small tuck-in M&A or areas where we could increase our value to our customers are things that we would consider.

[Operator Instructions] Your next question comes from Steve Smigie from Raymond James. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Keith, in the renaming of the SANYO business it's called the Systems -- it had the word Systems in the name there. Why did you choose to put Systems? Are they more system-oriented than standard semiconductor businesses?

Yes. It is, these are internal nomenclatures. We don't market those externally. The team spent a lot of time on it. There's lots of advantage to keeping the same initials, and I wouldn't read much into it. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, great. Just on the discussion of the fab. I was just trying to -- the SANYO facility, you're just -- you're basically putting -- you're using those facilities for other ON products. It's not necessarily that you're changing anything relative to what you're seeing on the core SANYO in terms of ultimately taking cost out. Or is there some change? I guess, it seems like maybe there are some change, but you're...

Yes, let me explain. So as part of the reductions, when the guys first look at the program, they looked at basically all the capital spend for that group. And the wafer fab in Japan was a big piece of the cost and they had targeted taking a lot more cost. Well, since our business activity across the board has been going up dramatically, we relooked at that and said it's a much less -- or much better cost effectiveness for our growth to put ON products into that factory to absorb the cost with the other growing businesses. So the net impact to SSG will be the same, and for the corporation we should save capital and be able to grow faster in an easy fashion because we had underutilized space. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, great. And then just a quick one on the auto business. I think 10 years ago, it seemed like for the auto business, you'd have to get a design win many years in advance and then ultimately you'd finally get the payoff. Have we seen that time to payoff for your investment shrink? And it seems like maybe -- you talked about some wins here recently that's only a year, so from when you got the design win to when it's showing up in models.

Yes, it really depends where that application win is, and things like engine and powertrain is still a 3-year cycle. There's not much that's changed there. But in more of the customer convenience or consumer experience pieces of the automobile, that can go quicker, that can be a 1-year or 18-month cycle as opposed to the traditional 3.

Your next question comes from Betsy Van Hees.

I just had a follow-up question on the gross margins. Bernard, you talked about the puts and the takes, and I just wanted to make sure that as we're looking forward, we're going to kind of get back to more of a gross margin expansion, especially given the strong performance you guys have with the new SANYO operations. And then my follow-up question would be in regards to the ASPs being down 2%. How does that track in line with typical seasonality for you guys?

So let me address first the second one. The ASP decline of 2% is low, as Keith mentioned earlier, compared to our normal first quarter decline where we have the annual contracts coming. It's normally 3% to 4%, now it's 2%. So it's a more benign environment. On the gross margin, yes, our plans are to continue expanding gross margin. The focus on the higher than -- on the areas of automotive and smartphones and industrial are areas where we have higher-than-average gross margin. The first quarter, indeed, has some peculiar items, including the shortness of the quarter and the fact that we have some shutdowns associated with Chinese New Year, as well as some preventative maintenance that are making the absorption of overhead of the factory activities a little bit less than normal. But in general, we should be seeing improved gross margin as we go throughout the year.

Okay, great. And then can you remind us please what your long-term gross margin model is?

So our long-term gross margin model is at 41% at about [indiscernible] of revenue.

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

Just a quick follow-up. Bernard, you mentioned earlier that you thought OpEx would be pretty flattish through the year but ramp a bit in the second half with variable comp. How do we reconcile that with the timing of some of the cost cuts that you put in that, I think, the $40 million savings that were supposed to be fully realized in the back half. I would think that would be an offset against an otherwise rising OpEx?

It is a big offset. Otherwise, we would see a bigger increase. The back half growth is based on our assumption of a substantial improvement in the top line. If that doesn't materialize, then you will not see that increase I mentioned.

[Operator Instructions] We have no further questions at this time. Mr. Agarwal, I'll turn the call back over to you.

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

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