Good day, and welcome to the Fairchild Semiconductor First Quarter 2014 Earnings Conference Call. Just a reminder that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dan Janson. Please go ahead, sir.

Good morning, and thank you for dialing in to Fairchild Semiconductor's first quarter 2014 financial results conference call. With me today is Mark Thompson, Fairchild's Chairman and CEO; and Mark Frey, our Executive Vice President and CFO. Let me begin by mentioning that we'll be attending the Robert W. Baird's Growth Conference on May 7 in Chicago, the JPMorgan's Global Technology Media and Telecom Conference in Boston on May 20, as well as the Bank of America Technology Conference in San Francisco on June 3. We'll start today's call with Mark Frey, who will review our first quarter financial results and discuss the current status of second quarter business. Mark Thompson will then discuss our product line results, end markets and operational performance in more detail. Finally, we'll reserve time for questions and answers. This call is scheduled to last approximately 60 minutes and is being simultaneously webcast from the Investor Relations section of our website at fairchildsemi.com. The replay for this call will be publicly available for approximately 30 days. Fairchild management will be making forward-looking statements in this conference call. These statements, including all statements about future results and performance, are made based on assumptions and estimates that involve risks and uncertainties. Many factors could cause actual results to differ materially from those expressed in forward-looking statements. A discussion of these risk factors is provided in quarterly and annual reports we file with the SEC. In addition, during this call, we may refer to adjusted or other financial measures that are not prepared according to generally accepted accounting principles. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses that should be considered by investors in conjunction with the GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures at the Investor Relations section of our website at investor.fairchildsemi.com. The website also contains a variety of useful information for investors, including an extensive financial section to facilitate your investment analysis. Now I'll turn the discussion over to Mark Frey.

Thanks, Dan. Good morning and thank you for joining us. I'm sure most of you have had a chance to review our earnings press release, so I'll focus on just the key points in my comments. We delivered better than expected gross margin in the first quarter while reaching our lowest inventory levels in three years. Demand is strong across a broad range of our products giving us the higher starting backlog position entering the second quarter. We are increasing factory loadings in response and expect continued improvement in margins and earnings. Let's review some of the details starting with the income statement. For the first quarter of 2013, Fairchild reported sales of $344 million, up 1% sequentially and slightly higher than the first quarter of 2013. If we had shipped in line with distribution consumption and not reduce channel inventory, we would have exceeded the midpoint of our sales guidance range in the first quarter. Adjusted gross margin was 30.3%. Recall that we expected gross margin to be between 28% and 29% due primarily to the low utilization in the fourth quarter, resumption of some payroll-related taxes and ongoing manufacturing streamlining costs. Gross margin was better than expected due to higher factory loadings in the first quarter and improved product mix. R&D and SG&A expenses were $96.6 million which were higher than forecast due to increased legal spending and additional costs associated with our recent sensor business acquisition. First quarter adjusted net income was $5 million and adjusted EPS was $0.04. The adjusted tax rate was 25%. Now, I'd like to review first quarter sales and gross margin performance for our two major product groups. Sales were up 3% from the prior quarter for our MCCC business driven by a partial quarter of revenue from the newly acquired sensor…

Thank you, Mark. Good morning, everyone. Demand has been robust all year as Fairchild focused on improving energy efficiency in a wide range of industrial, appliance, automotive and mobile applications accelerates our growth. The strength in orders is broader based than a year ago especially in the mobile end market. We booked 375 million in new orders in Q1 and our current backlog is up 20% from a quarter ago. Higher backlog coupled with our lean inventory position enables us to guide for strong sales growth in the second quarter. I'll begin my prepared remarks with a review of the demand environment and provide more color on what is driving the strength in bookings. I'll then update you on our efforts to improve operational efficiency and increase our manufacturing flexibility. Finally, I will review some current quarter results and operations metrics. Turning to demand by end markets, sales in the automotive sector were up 14% sequentially in the first quarter. Demand was strong for all of our powertrain solutions including ignition power management and electronic power steering controllers. Order flow was strong in the first quarter, signaling a strong sales growth in the second quarter. We have a great pipeline of business opportunities and a variety of existing and new powertrain applications that should drive continued growth in 2014 and beyond. The industrial and appliance end markets, which accounted for 41% of our first quarter sales, continued to benefit from strong demand. We won additional designs with our extensive portfolio of high-voltage power management solutions at a number of leading Chinese appliance manufacturers. In the solar end markets, we benefited from growing demand for our advanced IGBT power switches which are used in the power invertors. We expect continued growth for our high-power discrete and module solutions during the second…

Thanks Mark. We'll now open the call to questions. I would ask that in order to allow more of you to ask questions, we limit each person to one question and one follow-up. Thanks, and let's take the first question, please.

We'll go to Ross Seymore with Deutsche Bank.

Hi, guys. Thanks for letting me ask a question. I guess a question on how backlog and bookings have gone. You talked about them being strong. At least for the first quarter you mentioned that the backlog at the time was sufficient to hit the high end of the range. Even if I put in the channel inventory burn, you guys still would have – you would have been above the midpoint, so solid but not at the high end. And the 20% increase in backlog also seems like you could have lead to a little better guidance in the second quarter. I guess what are you seeing from the demand side of the equation to the first and second quarters that has led to good news but not really significant upside as some investors had expected?

So, Ross, probably the biggest thing – I mean certainly the current trajectory of incoming orders points to the high end of the range that we put out. As I think you know, for the last three years, everybody has seen the softening in demand in the second quarter in terms of incoming order rate, and so that's the thing that causes us to put a bit of a bigger range out there. We have seen no evidence of it yet, but by the end of Q2 for the last three years there has been a significant pullback in incoming orders. The other piece of it is, is that we are very careful to ship not to backlog but to point-of-sale, and so point-of-sale forecast are always a little bit rough in the form that we get them from our distributors and the end customers, and so we also want to be very meticulous about not growing the channel at all in the second quarter which creates some cleanup in the back half of the year. So those are the caution elements, so they're more a planning nature and not at all about the current observe dynamic in the market.

Got it, that seems prudent. I guess as my one follow-up, just shifting to one of your sub-segments. The mobile market, you did better than expected in the first quarter. You sound pretty optimistic going forward. Can you talk a little bit about what you see for the second half there? And maybe a general question, do you expect to be able to grow revenues in that segment year-over-year for full year 2014? Thanks.

Sure, Ross. I guess two key moving parts there. So the first is that we feel very – we as others have been a bit whipsawed by the big two in terms of shifting demand and so forth. So, for example, last year if we look at the strength of incoming orders in the first half, it was heavily driven by the big two. We don't plan on much incremental growth for the big two in the second half, although if it comes we can support it. What we have done is concentrate a lot of effort on the Chinese players where we think a lot of the volume growth is going to occur. And there we see both steady gains in content as well as steady gains in the total volume of phones that are being built. And so we do think that that will provide an opportunity to grow across the year.

Okay. Thank you.

We'll go to our next question from Chris Caso with Susquehanna Financial Group.

Thank you. Good morning. I wondered if you could talk about the impact of the sensor acquisition both on revenue and OpEx for both the first and second quarter and what we should expect on that as the year progresses.

Sure. The revenue is in the few million dollars per quarter range and a high margin profile and generally higher OpEx ratio than the rest of the company, but yielding strong EBIT. So it's coming out of the gate contributing strong profits.

But between the first and second quarter in terms of organic Fairchild revenues against the acquisition, was there any significant impact on that?

Well, in the first quarter it was only part of the company for two months and so in the second quarter, obviously it will be a full quarter. So it will ramp up by a third more in all of those categories.

Okay. Yes, yes. Okay. As a follow-up to that then, perhaps you can talk about OpEx and you mentioned the goal to keep the OpEx below 95 million and it's obviously – looks like it's guided higher than that. And I think you knew about the acquisition impact at the time when you set those goals. So what's different here and what should we expect going forward with respect to OpEx?

Yes. Although we had concluded the acquisition, most of our preparation work for the quarter had been done, so we went with the guidance we had which didn't really factor in. And so when we approach it, we take that 95 and add the OpEx from the acquisition. We are also trending – approaching 1 million more in legal expenses because of the ongoing IP dispute more than we had planned. And then as we see in the year as a totality, be better than our basic planning model, we are accruing. We have done so in Q1 and plan to continue to do so in Q2, accruing variable compensation for those results. Obviously, we don't produce the EBIT to qualify for the payouts we would end up reversing those notes.

And so then bottom line of the guidance for Q2, the sort of 97 million and 99 million, that's what we should expect for the rest of the year?

Well, Q2s tend to beat the peak for the year if you look back at the last few years and there's a couple of reasons. The merit hits on April 1. We do a special grant that approaches $1 million that has to be fully expensed in the quarter and people don't tend to take vacations. So, by the time you get into Q3 and Q4 you get to see some of the natural headwinds of the FICA contributions falling out, the vacation time being taken and the equity comp actually trends down a bit too. So I would expect this to be the high point.

Okay. Thank you.

We'll go next to Craig Hettenbach with Morgan Stanley.

Thank you. In the wireless space, can you talk about your sales and design efforts? You mentioned some traction in the Chinese market. I mean typically you've had exposure to the big two, so just wanted to get a sense of kind of what you're doing differently and the focus you're putting on the Chinese market and kind of the trajectory you see in that space?

Sure. A couple of different things. The first is that on the reference design side, we have been in the past very concentrated on U.S.-based chipsets and we have expanded that a lot to include some of the leading Chinese chipset providers, and that has provided a really good path into a broad base of applications. The other thing that we know is that many of the designs, the product designs that have been done for the big two have a lot of relevance to the sub-Chinese manufacturers which tend to be less highly integrated in a lot of the functions, so it's really the combination of those two things that has put us in a good position to have that be in aggregate as important as the big two if you look over the next year.

Okay. And just staying on wireless, you mentioned the rapid or adaptive charging. Can you talk about implications for kind of content and what that means for growth?

Sure. So, there's obviously a very high level of interest in adaptive charging. No one is satisfied – everybody wants to get a bigger battery and no one is satisfied with the current charge designs. So that's one that I'm very confident will be ultimately implemented everywhere. So there's still work going on wide communication protocols between charger IC, how the charger IC talks to the fuel gauge. Does the fuel gauge get integrated or not? And we already have a strong position in the adapter. So, we expect to see the first wave of implementations in the second half. We think that those will be careful effort – everyone is making them in careful effort because you always have a big learning cycle the first time you completely change an architecture like this. But in terms of content, it's I think a minimum of $1 content between the charger IC, the potential for fuel gauge integration and the adapter.

Okay. And then as my follow-up, on the inventory side it's nice to see that that worked down. It looks like you're set up much better than the peer group where inventory remains elevated. That said, I just think about business picking up. Any risk of being caught short product or how are you managing that?

Well, there's always a risk of being caught short. It really depends on how long an up cycle lasts and whether shortage has emerged in other places. We've actually – for example, we have seen lead time extend a little but only from like six to seven weeks, so there is nothing that looks like overeating in that sense. We've put in a great deal of work into our supply chain forward-looking models looking at what we call our pressure [taps] (ph) for availability of supply in a variety of demand scenarios. So, we feel comfortable that we're in a good position to keep up with any increase in demand in what I'll call the foreseeable range.

Got it. Thanks for that.

We'll go next to Christopher Rolland with FBR Capital Markets. Christopher Rolland - FBR Capital Markets & Co.: Thanks for letting me ask a question. So, I'd like to drill down a little bit more on CapEx here. So it's come down really nicely in 2013 and '14 is starting off really well here. How should we think about intermediate CapEx needs here? Is this at all sustainable at these levels here? And what do you see in terms of CapEx that you might need to, let's say, equip the Korean fab and just to institute this whole fab consolidation plan more generally that you guys have?

We're comfortable thinking that we can sustain at around the current level in the $80 million range including finishing off the bottlenecks in the 8-inch fab in Korea. Remember there is a lot of [reaves] (ph) of equipment that's available from our core capacity and we will be moving a fair amount of capacity to foundries and therefore that's a lower – just an inherently lower capital model. So when we look into the foreseeable future, we don't see a change for that. We're sort of in the – our classic band is 6% to 8% of sales but we've been operating on the very low end of that and expect to continue to do that. Christopher Rolland - FBR Capital Markets & Co.: Okay, great. I guess flipping it around a little bit when we think about depreciation, how do we sort of think about linearity of that? First of all, is it a one-time step-down that we're going to see when you write off all of that old equipment? And then also what might the trade-off be on the depreciation side when you start equipping the Korean fab, let's say? What are the puts and takes over the next few years? Thanks.

Well, most of the equipment in Korea is being depreciated right now. We do have some other equipment that would increase the current wafer capacity in Korea that's not been put in service yet, but it's not a huge impact. You'll see all of the things. When we do get a final determination that we can close the facility, then you'll see accelerated depreciation on those assets for the remainder of their lives. And from time to time you'll see one-time impairments although accounting makes that kind of hard to do. And then you'll then see the gradual bleeding down of other depreciation as it naturally falls of. Christopher Rolland - FBR Capital Markets & Co.: Great. Thanks guys.

We'll take our next question from Tristan Gerra with Baird. Tristan Gerra - Robert W. Baird & Co.: Hi, good morning. You mentioned that OEM and EMS revenue was up 2% sequentially in part due to mobile. How should we quantify the incremental revenue from the mobile design wins for Q1 and Q2? Any quantification that you could give us?

So we think that we'll be at least that or better. Tristan Gerra - Robert W. Baird & Co.: And so is it fair to assume that OEM, EMS would have been settled down in Q1 sequentially excluding those wins?

Let's see, I mean consumer was the only thing that was materially down in Q1 relative to Q4.

In Q1 the OEM mix tends to be mobile in automotive, so automotive obviously had a good step-up in Q1. And mobile was a bit better than seasonal as well. But when you do it with some of the Chinese houses, we'll do that to distribution. If you do it with the big two then we'll tend to do it direct. So, it's hard to exactly answer your question. Tristan Gerra - Robert W. Baird & Co.: Okay. That's actually very useful. And then in terms of the product that potentially you're infringing on patents, what percentage of revenue could be potentially impacted? And does any of this pertain to any of your AC/DC products at tier 1 OEMs or adaptive charging?

So first I'll answer the second half of that is no, there was no accusation of any of the current business in the tier 1 mobile for any of the mobile nor any future products are not involved either. So the total revenue impact we believe is very small for the company. In fact the total amount accused was very small, so by definition it tends to be a small overall impact. Tristan Gerra - Robert W. Baird & Co.: Great. Thank you.

We'll take our next question from [Aashish Rao] (ph) with Bank of America.

Hi. Thanks for taking my question. Hi, Mark Frey. A question on the revenue contribution from Xsens. So if I recall correctly, the acquisition was completed on January 22, the day before you announced results and any revenue contribution was not included in guidance you provided. So if I assume a few million in sales from Xsens, that would suggest that sales came in pretty much at the low end of guidance. Given the improving outlook for autos, industrial and appliance into Q2, I mean why the mid-quarter decision to drawdown channel inventory?

We don't 100% control that. The distributors also have a say on it and the orders that we received were very late in the quarter. So although we went into the quarter expecting to be channel neutral, $5 million is not a huge amount of uncertainty and it made the difference between whether that $5 million of product left on – or formulated in this case left on a Wednesday versus a Tuesday. And so had we adjusted for channel neutrality we would have been slightly above the midpoint.

Got it. And also could you quantify the impact of underutilization charges on 1Q and 2Q gross margins? I thought we would expect a little bit more than the typical 50% incremental gross profit fall-through given the improving – the higher revenue levels, but why are we not seeing that in the first half of this year?

Well, in the fourth quarter you're seeing about 150 basis points of write-off of the underutilization related to essentially what went on in Q4. And you'll see a small number build into our guidance in Q2 but it's still a net drained on margin which kind of sets Q3 up for another move up. So, the way it works is actually as you begin to build your load plans, if they continue to increase, let's say, multiple quarters in a row, you're always moving some kind of benefit into some future quarter.

Got it. Okay. Thank you.

We'll take our next question from John Pitzer with Crédit Suisse. John Pitzer - Crédit Suisse AG: Good morning. Thanks for letting me ask the question. I guess my first question is what is the expectation for channel inventory going into the June quarter? And I guess I'm trying to understand given how much channel inventories worked out, it seems like every quarter you guys are doing a better job. You're either keeping that flat or down. Am I supposed to view that as just a structural improvement or should we at some point see some sort of cyclical recovery where growth and channel inventory will actually start to help the top line?

There's a couple of things. First is, I think it's always prudent to operate at the lowest inventory level as you can for your service targets. And so that's really what we've been trying to do. And so it might cost you a little bit in the short term, but it robustens your performance through the cycle. So, that said, I think we are probably reaching the bottom of where we think we can constructively operate. And so we think something in the nine to ten weeks which is where we are is the optimum place to be. So, certainly, as the market strengthens, we're going to need to keep track in others words not keep dollar flat but keep weeks flat for service reasons. So, if the current strength that we see keeps up, certainly we're going to have to keep up with the inventory levels in the channel in terms of weeks. John Pitzer - Crédit Suisse AG: Got it, that's helpful. And then Mark, can you talk a little bit – you mentioned in your prepared comments, backlog up about 20% sequentially. If I'm doing the math right, it means that your backlog coverage is north of 40% of the guided midpoint for June. If that's not right, can you help me understand where that backlog coverage stands absolutely? And relative to a normal Q2, would you put that backlog coverage as better than normal, in line with normal or worse than normal?

So, the difficult period in answering that question is that last year, we did a lot of work on our planning systems and in bringing down our lead times. And so if we were to compare our lead times to – as I said there were currently about seven weeks, they would have been more like ten to 12 weeks in Q2 of last year. And so we know that the backlog that you carry winds up being proportional to your lead times. So the only real comparison that we have is Q2 versus Q1 because that's where we're basically operating in the same lead time environment. And we are – I mean obviously if you look at the 20% statement of backlog versus Q1, we're obviously not guiding up 20% on the top line. So the backlog coverage of our Q2 guidance is significantly higher than the backlog coverage of our Q1 guidance. That's not necessarily reflected in thinking about going over the top in terms of revenues but it does – as Mark said, we had a few cutoff challenges late in the quarter. Q1 is often rear-end loaded and so what it does is I think it makes it a much more straightforward for us to service the demand without disrupting our supply chain. John Pitzer - Crédit Suisse AG: Thanks guys.

So backlog coverage for our guidance in Q2 is definitely healthier than the backlog coverage for our guidance in Q1. John Pitzer - Crédit Suisse AG: Thank you.

We'll go next to Steve Smigie with Raymond James. Jonathan Steven Smigie - Raymond James & Associates, Inc.: Great, thanks a lot. Mark Thompson, I was hoping you could comment a little bit on some of your recent rebranding of the company, March 17 where you changed the logo and you changed your motto. You guys presented at a conference where you laid out that your focus going forward is going to be cloud, mobility and industrial. And I'm just curious what – and it seemed like from the conference that you're going to do maybe more focus on ICs and on systems versus just maybe discrete. So, I was hoping you could talk a little bit about what we should expect in terms of product changes going forward and also end market changes, what will be not focused on anymore?

So, I think it's – any rebranding effort is image-related and somewhat forward-looking by nature. So we have the same logo for a long time and there's a couple of things about it. One is, is that we wanted it to be a bit simpler, a bit more dynamic, so that's the logo. The power to amaze I think embraces the concept of us moving beyond just power. So, if you look for example at the things that we're doing and sensing, position sensing, motion sensing, those things coupled with power to provide some really, really unique solutions and you'll see more over the next couple of weeks on our sensor offerings which are going to be rolled out in Europe in May. And so I think we're really trying to emphasize that while we are specialists in power, we're also doing much more than power and providing things that really have a lot of impact to the user and that's the amaze part. We've been on a steady trajectory away from tiny discrete standard product kind of things towards things that are much more architectural in nature. So if you look at what goes into one of our sensor solutions, for example, or what goes into one of our power steering modules is more and more of the things that we do are actually integrated subsystems either at the die level or integrated at the package level. And so we see that trend continuing and again just try to embrace that we aren't just selling tiny little devices to people, we're actually really comprehending – while the battery is a perfect example, really comprehending all aspects from the plug all the way to the battery in conceiving products that are integrated both from application point of view and also from a physical implementation point of view. Jonathan Steven Smigie - Raymond James & Associates, Inc.: Okay. And then as you said that you have your new end markets, one of which is cloud which I think is – I don't know, you've never really specifically laid out cloud. Is that just going to be – you're going to try to do more business on server? And then again, since you're doing this sort of focus on these three end markets, what gets cut out; consumer?

Yes, consumer is the thing that we've seen steadily shrinking and we expect to continue to steadily shrink. We don't think that there is enough value in those that we can provide or that people are willing to pay for to make that a focus segment. Jonathan Steven Smigie - Raymond James & Associates, Inc.: If I could sneak one more in just on the PCIA business, it was I think flattish here sequentially, a typically seasonal strong quarter there. And I think you may be touched on some of the points, but I just want to clarify. So part of that's probably why it's not up more seasonally is because of inventory. And then the other part was there was some sort of power conversion part that was a little bit soft in the quarter. First of all, is that accurate? And then as far as the power conversion stuff being soft, could you give a little more color on what exactly that means?

Yes. So power conversion was a little bit soft. So there's a couple of things. So there have been some inventory reductions on the adapter side that have been a part of that and also if you look at some of the China business for power conversion, that also has been a little bit soft for some of it, so I mean that's the only place that we've seen softness. Jonathan Steven Smigie - Raymond James & Associates, Inc.: Okay, great. Thank you.

We'll take our next question from Shawn Harrison with Longbow Research.

Hi. Two brief questions. Just on the consumer weakness in the quarter, it was down almost I think high teens year-over-year. Was any of that Fairchild walking away from business or was all that market weakness? And then the second question is tied to the higher-than-normal legal fees right now, about $1 million. How long should we project that $1 million to continue to negatively impact the P&L?

So, on the consumer side, it's a little bit of each I would say. For example, big displays are one of the areas that represent a lot of the consumer piece for us and there have been some huge pricing moves in those and some content reductions in terms of the – on the engineering side, just less to look in some of the new implementations. But also just from a volume point of view, they are pretty challenged. Those markets are – they're certainly not growing and in many cases they're shrinking. Large displays have a very long life. There really hasn't been since 1080p anything compelling that caused people to go do upgrades. And so that's just some of the – it isn't a thing that we're planning to stop doing, there's some good content and some good technology in those things, but there is no compelling upgrades out there and the equipment that kind of everybody bought some years ago is still running just fine.

On the legal OpEx, although the expense tends to vary with the court date, so we do have a court date either very late this year or early next year. In general, we would expect that $1 million to continue for a while.

Okay. And just a brief follow-up. Pricing this quarter, my guess is it was relatively flat. What was it?

That was typical.

Okay. Thanks a lot.

There are no further questions at this time.

Okay. Then with that, we'll conclude the call for today. We appreciate your interest in Fairchild.