ON Semiconductor Corporation (ON) Q2 2014 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 Vivek Arya - BofA Merrill Lynch, Research Division Gabriela Borges - Goldman Sachs Group Inc., Research Division Craig A. Ellis - B. Riley Caris, Research Division Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division Ian Ing - MKM Partners LLC, Research Division Christopher Rolland - FBR Capital Markets & Co., Research Division Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division Michael McConnell - Pacific Crest Securities, Inc., Research Division Craig Berger - FBR Capital Markets & Co., Research Division Craig Hettenbach - Morgan Stanley, Research Division Michael C. Lucarelli - Evercore Partners Inc., Research Division

Good afternoon. My name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2014 earnings conference call. [Operator Instructions] I would now like to turn the call over to Parag Agarwal. Sir, you may begin your conference.

Thank you, Rachel. Good afternoon, and thank you for joining ON Semiconductor Corporation's Second Quarter 2014 Quarterly Results Conference Call. I'm joined today by Keith Jackson, our President and CEO; and Bernard Gutman, 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 second quarter of 2014. The script for today's call is posted on our website. Additional information related to our end markets, business segments, geographies, channels and share count is also posted on our website. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to 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 of other forward-looking statements regarding future events or future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should, or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. Important factors which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our forms 10-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earning release for second quarter of 2014. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors. Please mark your calendar for our 2015 analyst day, which we plan to host on February 26, 2015, in Scottsdale, Arizona. We will be mailing formal invitation and other further details for our 2015 analyst day in a few weeks. Also, during the current quarter, we will be attending the Pacific Crest Technology Conference in Vail, Colorado on August 12 and the Deutsche Bank Technology Conference in Las Vegas on September 9. Now let me turn it over to Bernard Gutman, who will provide an overview of the second quarter 2014 results. Bernard?

Thank you, Parag, and thank you, everybody, for joining us today. Let me start by providing you an update on overall business results. During the second quarter, we saw an accelerated sell-through in the distribution channel, and we continued to see strength in our key end markets. Distribution sell-through increased by approximately 10% quarter-over-quarter in the second quarter. Recall that in our first quarter 2014 conference call, we pointed to strong overall activity from the distribution channel, which we believe was the precursor to the strong sell-through we saw in the second quarter. Our margins continue to expand, driven by improving operating performance and a richer mix. Our design win momentum in our target markets of industrial, automotive and smartphones remain strong, and we are well positioned to benefit from prevailing secular trends and share gains in these markets. Global macroeconomic environment continues to be increasingly favorable, with improving trends across all geographies. Furthermore, supply demand dynamics currently prevailing in our markets continue to be benign with lean inventories, no significant expansions in capacity and a steadily improving demand environment. Now let me provide you an update of our second quarter 2014 results. ON Semiconductor today announced that total revenue for the second quarter of 2014 was approximately $758 million, an increase of approximately 7% as compared to the first quarter of 2014. GAAP net income for the second quarter was $0.20 per diluted share. GAAP net income for the second quarter was aided by a one-time benefit of approximately $21.5 million or $0.05 per diluted share, which resulted from the reversal of our previously established valuation allowance against U.S. deferred tax assets which, in turn, was the result of a net deferred tax liability recorded as part of the Truesense acquisition. Non-GAAP net income for the second quarter was $0.20 per diluted share. Non-GAAP net income for the second quarter was favorably impacted by approximately $0.01 due to lower-than-expected cash taxes. The lower cash taxes in the second quarter will likely be offset by higher tax -- cash taxes in the third quarter of 2014. GAAP gross margin for the second quarter was 36% as compared to 35.5% in the first quarter of 2014. Non-GAAP gross margin for the second quarter was 36.2%, up approximately 70 basis points quarter-over-quarter. Non-GAAP gross margin in the second quarter was negatively impacted by 40 basis point as compared to the first quarter due to the higher cost for overhead absorption related to the closure of the Systems Solution Group's back-end facility, which is also known as KSS. As operations at KSS have now stopped, we don't expect any further material negative impact on our non-GAAP operating results from KSS. On a year-over-year basis, our non-GAAP gross margin improved by approximately 250 basis points. This strong gross margin performance was driven by improved operating performance and a richer mix resulting from strong growth in higher margin industrial, automotive and smartphone businesses. Average selling prices for the first quarter decreased by a little over 1% as compared to the first quarter. GAAP operating margin for the second quarter of 2014 was 10.8% as compared to 10.4% in the first quarter. Our non-GAAP operating margin for the second quarter was 13.4%, up approximately 100 basis points as compared to the first quarter of 2014. On a year-over-year basis, our non-GAAP operating margin improved by approximately 390 basis points in the second quarter. GAAP operating expenses for the second quarter were approximately $191 million as compared to approximately $178 million for the first quarter of 2014. Non-GAAP operating expenses for the second quarter were approximately $173 million, up approximately $10 million as compared to the first quarter of 2014. This sequential increase in non-GAAP operating expenses was driven by the inclusion of Truesense and previously announced increases in variable compensation, which resulted from improved operating performance during the first half of the current year. We exited the second quarter of 2014 with cash and equivalents and short-term investments of approximately $601 million, a decrease of approximately $16 million from the first quarter of 2014. Operating cash flow for the second quarter was approximately $152 million as compared to approximately $75 million in the first quarter. We spent approximately $49 million of cash for the purchase of capital equipment and approximately $91 million net of cash received for the purchase of Truesense. During the second quarter, we used approximately $38 million for the repayment of long-term debt and capital leases, and we used approximately $11 million to repurchase approximately 1.1 million shares of our common stock at an average price of $9.59. As we were involved in advanced stages of discussions related to the pending acquisition of Aptina Imaging, we halted our repurchase program during most of the second quarter. At the end of the second quarter, approximately $113 million remained of the total authorized amount under the current stock repurchase program. We intend to utilize this remaining amount of $113 million before the end of the current stock repurchase program in August of next year. At the end of the second quarter, ON Semiconductor days of inventory on hand were 119 days, down 4 days from the prior quarter. Included in our total inventory is about $31 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 second quarter of 2014, distribution inventory was up approximately $13 million quarter-over-quarter, and distribution resales increased by approximately 10% quarter-over-quarter. In terms of days, distribution inventory decreased by approximately 0.5 weeks from the first quarter to approximately 9 weeks in the second quarter of 2014. For the second quarter of 2014, our lead times were approximately flat as compared to the first quarter. In the second quarter, our global factory utilization was in the mid to high 80% range as compared to the low 80% range in the first quarter. Now let me provide you an update on our 3 business units. Revenue for our Standard Products Group for the second quarter of 2014 was approximately $304 million, up approximately 4% quarter-over-quarter. Industrial and consumer end markets were the key drivers of revenue growth for Standard Products Group. Revenue for our Application Products Group was approximately $301 million, up approximately 8% quarter-over-quarter. Wireless and industrial were the key drivers for Applications Product Group. Growth in Applications Product Group was also driven by Truesense, which was incorporated in the Applications Product Group at the end of April. Revenue for the second quarter 2014 for System Solution Group was approximately $153 million, an increase of approximately 14% over the first quarter. This strong quarter-over-quarter growth was in line with our expectations and was driven by a ramp of new programs and strength in consumer, including white goods. We continue to make strong progress towards our goal of stabilizing the System Solutions Group, and we remain confident that SSG will be accretive to our non-GAAP EPS in 2014. Now I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?

Thanks, Bernard. The results of the second quarter clearly demonstrate the strong progress we are making towards achieving our key strategic goals, which are set at the beginning of the year. Our key strategic priorities for 2014 are to drive year-over-year revenue growth in the mid to high single digit range for our key targeted end markets of automotive, smartphones and a select area of the industrial; generate strong free cash flow; and stabilize System Solutions Group to be accretive to our non-GAAP EPS in 2014. Let me begin with the growth in automotive, smartphones and industrial end markets. I am pleased to report that our momentum in these markets continues to accelerate, and our year-over-year revenue growth in these markets, thus far in the year, has been in the double-digit percentage range, well ahead of our stated target of mid to high single digits. This strong growth is being driven by market share gains along with secular trends of increasing semiconductor content in these applications. Our design win momentum in our targeted end markets remain strong, and we believe that we will continue to add to our momentum in these markets. We believe that our systems knowledge, scale and broad product portfolio, along with the most competitive product offerings will enable us to become the supplier of choice for our customers. We expect our momentum in these markets to further accelerate as our design wins begin to convert into revenue. Our cash flow generation continues to improve, as System Solutions Group-related restructuring costs have been subsiding. We remain on track to generate annual free cash flow of $300 million to $400 million in the near to mid-term. Despite our continuing growth, we should be able to maintain capital expenditures in the current range of 6% to 7% of revenue. The recently announced foundry agreement with Fujitsu Semiconductor should further help us optimize our capital expenditures. Moving on, after hitting a small speed bump in the first quarter, our System Solutions Group delivered a stellar performance in the second quarter by posting quarter-over-quarter revenue growth of 14%. SSG second quarter results were in line with our guidance and were driven by strength in smartphones, consumer electronics and white goods. SSG's design win pipeline remains strong, and we expect to see increased contribution from ramps of new programs in the second half of the year. We remain on track to ensure that SSG is accretive to our EPS in 2014. With the restructuring measures implemented in the last few quarters, we are confident of achieving significant improvement in SSG's profitability in the second half of the year. During the second quarter, we saw broad-based strength across most of our end markets, driven by the healthy order trends and strong sell-through in the distribution channel. Distribution sell-through in the second quarter was up approximately 10% quarter-over-quarter, following strong order activity from a distribution channel in the first quarter of 2014. Based on the current booking trends in our design win pipeline, we remain optimistic about near to mid-term business trends. Along with strong top line performance, we continue to post significant improvement in our operating performance. Our gross and operating margins improved significantly during the second quarter, and we expect to see additional improvements in the near term. We believe that we now have in place an optimal operational structure which will enable us to generate significant operating leverage from revenue growth. In addition to the operating leverage, restructuring measures related to SSG should continue to contribute to margin expansion in the near to mid-term. As previously announced, we closed down the back-end facility in Japan, and we should now begin to see savings, which should reach $4 million per quarter by the first quarter of 2015. We recently announced signing of a foundry and investment agreement with Fujitsu Semiconductor. These agreements help us secure strategic manufacturing capacities for our future growth at attractive economic terms without straining our balance sheet and income statement. Furthermore, these foundry and investment agreements enable us to further strengthen our industry-leading manufacturing cost structure. As a result of these agreements, we don't expect to see a steep -- step function rise in our capital expenditures to support our revenue growth. Now I'll provide some details on the progress in our various end markets. The automotive end market represented approximately 29% of our revenue in the second quarter and was up by approximately 4% quarter-over-quarter. We saw a broad-based strength in our automotive segment with strong sales across all product areas. In particular, we saw record sales for our standard products in a number of automotive-related applications, such as lighting, infotainment, transmission and control applications. We believe that we are gaining share for Standard Products in the automotive market. In the second quarter, we saw continued traction for Ignition IGBT business, voltage regulators, switch mode power supplies and application-specific ICs or ASICs for customer-specific applications such as antilock braking systems, engine management and position sensing. We continue to increase our sales for our igniter products, as design wins with a tier-1 Japanese customer begins to ramp in our commercial production. Our design win momentum in the automotive market continues to be strong. Key design wins in the second quarter include a win at a Japanese customer for our integrated power module for an oil pump. Additionally, we have been selected by a key German luxury vehicle manufacturer as a partner in the development of next-generation integrated power modules for fan and pump applications. The integrated power modules come from our System Solutions Group. Finally, our momentum in LED lighting continues to accelerate, with wins in Korea and Europe, for front and rear LED drivers for model year 2016 vehicle launches. I am pleased to report that earlier this month continental Automotive Group awarded ON Semiconductor its 2013 Supplier of the Year award in the Electronics category. Continental conducts a wide-ranging appraisal every year. Suppliers are assessed and awards are given based on a list of predefined criteria including quality, technology, logistics and purchasing conditions. This award from Continental is additional proof of the strength of our product portfolio and customer relationships in the automotive market. Revenue for the third quarter for automotive segment is expected to be approximately flat to up slightly quarter-over-quarter due to normal seasonality. The communications end market, which includes both networking and wireless, represented approximately 17% of our revenue in the second quarter and was up approximately 6% quarter-over-quarter due to normal seasonality, ramp of new programs and continued momentum in the Chinese smartphone market. We continue to gain share in the smartphone market with our battery protection, battery chargers, protection devices, filtering and power management ICs. Traction for our autofocus and image stabilization solutions for smartphone camera modules remain strong with the ramp of new wins at Chinese smartphone OEMs. Demand for our lithium-ion battery MOSFETs continue to accelerate, led by broad-based adoption across various smartphones OEMs. Our DC-to-DC power management protection and filtering products continue to maintain their momentum with strong ramps at global OEMs and at Chinese smartphone vendors. We gained multiple design wins on Chinese smartphone platforms for display power, LED drivers, camera modules and battery solutions. Revenue for the third quarter for our communications segment is expected to be up quarter-over-quarter despite the negative impact from much publicized weakness in a few spots of the market. The consumer end market represented approximately 18% of our revenue in the second quarter and was up approximately 11% quarter-over-quarter. The white goods market grew strongly during the second quarter, driven by strong demand for intelligent power module solutions. We saw accelerating demand for our fan driver solutions for refrigerators, in our ASIC, IGBT and 8-bit microcontroller solutions for applications such as induction cooking. We replaced a competitor, a key air conditioner maker, which is now using our energy-efficient IGBT modules. Overall, consumer-customer orders for our Standard Products rebounded nicely during the second quarter. The largest standard product revenue ramps upside came from demand in China for our EEPROMs, OpAmps, comparators and MOSFETs. We also saw production ramps of our LDOs and rectifiers by a major Chinese air conditioner maker during the second quarter. Revenue for the third quarter for our consumer sector is expected to be slightly down quarter-over-quarter due to seasonality of our white good business. The industrial end market, which includes military/aerospace and medical, represented approximately 22% of our revenue in the second quarter and was up approximately 12% compared to the first quarter. In addition to solid organic performance, growth was driven by Truesense, which contributed revenue for 2 months during the second quarter. Within the industrial segment, we continue to see strong demand for industrial circuit breakers, medical imaging and magnetic card swipe readers for mobile point-of-sales applications. Production ramps during the quarter included an ASIC for circuit breakers for residential and commercial buildings at a key customer. We also had strong sales for our newly introduced PLC modem for meter-to-meter communications for the smart grid market in China. Within our now-expanded image sensor business, second quarter revenue growth was driven by our CMOS and CCD image sensors targeting high-speed surveillance and intelligent traffic applications. Currently, our image-sensor business does not include the pending acquisition of Aptina Imaging, which is expected to close in the third quarter. Industrial-related revenue for our Standard Products was up again this quarter, led by general distribution customers in China and by a major power supply customer for rectifiers and small signal devices. In the medical market, we received strong orders for newly launched R3110 hearing aid processors. In the cochlear implant space, a key customer launched a new product based on our DSP chips, and we now serve 100% of the players in this niche market. Revenue for the third quarter for our industrial segment is expected to be up quarter-over-quarter. In the third quarter, our industrial segment will benefit from contribution from one full quarter by Truesense. Second quarter results incorporated Truesense's results for only 2 months, as the acquisition closed at the end of April. The computing end market represented approximately 14% of our revenue in the second quarter and was up approximately 3% as compared to the first quarter. Sales in the computing end market benefited from stabilizing PC unit shipments and Vcore market share gains as Haswell and Broadwell platforms continue to ramp. We also benefited from our SAM expansion strategy with initial sales of Vcore controllers commencing for channel motherboards. Vcore shipments increased by more than 10% sequentially, driven by a richer mix of Haswell and Broadwell platforms. In addition, we continued to see strong demand for our MOSFETs and protection products in PCs and hard disk drives. Revenue for the third quarter for our computing segment is expected to be up quarter-over-quarter due to seasonality. In other news, ON Semiconductor was awarded the 2013 Best Partner Award from ASUSTeK Computer Inc., a leading global provider of notebook computers and motherboards. The award recognizes ON Semiconductor for its innovative solutions and outstanding performance in technology, quality, service and delivery. Now I'd like to turn it back over to Bernard for other comments and our other forward-looking guidance. Bernard?

Thank you, Keith. Before I get into the details of guidance for the third quarter, let me draw your attention to the changing seasonality of our business. As mix of our business has shifted towards automotive, industrial and white goods, which now comprise of approximately 55% to 60% of our total revenue, the seasonality of our business is much more balanced between the first half and the second half of the year. The impact on seasonality for the second half of the year is further compounded by moderation in historically strong second-half seasonal patterns for computing and consumer markets due to secular trends. Therefore, the impact of seasonality for the second half of the year in our business will likely be minimal as compared to historical trends, and our guidance for the third quarter is indicative of changing seasonality of our business. Now for third quarter 2014 outlook. Our guidance for the third quarter does not include any contribution from our pending acquisition of Aptina Imaging. I must point out that a comparison between our guidance and consensus number for the third quarter may be challenging, as consensus numbers include a few estimates that incorporate contribution from Aptina in the -- for the third quarter. Based upon product booking trends, backlog levels and estimated turns levels, we anticipate total ON Semiconductor revenues will be approximately $765 million to $795 million in the third quarter of 2014. Backlog levels for the third quarter of 2014 represent approximately 80% to 85% of our anticipated third quarter 2014 revenues. We expect that average selling prices in the third quarter of 2014 will be down by approximately 1% to 2% as compared to the second quarter of 2014. We expect inventory at distributors to rise on a dollar basis. We expect our total capital expenditures of approximately $55 million to $65 million in the third quarter of 2014. For the third quarter of 2014, we expect GAAP gross margin of approximately 35.6% to 37.6% and non-GAAP gross margins of approximately 35.9% to 37.9%. We expect total GAAP operating expenses of approximately $184 million to $196 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges which are expected to be approximately $14 million to $16 million. We expect total non-GAAP operating expenses of approximately $170 million to $180 million. We anticipate GAAP net interest expense and other expenses will be approximately $9 million to $11 million for the third quarter of 2014, which include noncash interest expense of approximately $2 million. We anticipate our non-GAAP net interest expense and other expenses will be approximately $7 million to $9 million. GAAP taxes are expected to be approximately $8.5 million to $11 million, and cash taxes are expected to be approximately $6.5 million to $8.5 million. Cash taxes are expected to be higher for the third quarter as compared to the second quarter due to the timing of certain cash payments which were pushed out into the third quarter from the second quarter. This pushout results in a headwind of $0.01 to our third quarter non-GAAP EPS as compared to the second quarter. Beyond the third quarter, we expect our cash taxes to normalize in the range of approximately $5 million to $7 million per quarter for the near term. We also expect share based compensation of approximately $11 million to $13 million in the third quarter of 2014, of which approximately $2 million is expected to be in cost of goods sold, and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial measures. Our diluted share count for the third quarter of 2014 is expected to be approximately 444 million shares based on the current stock price. Further details on share count and earnings per share calculations are provided regularly in our annual -- 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 Rachel, please open up the line for questions.

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

First question is on the System Solutions Group. Can you talk a little bit about what your growth expectations are for that going forward? And maybe, I know it's in your 10-Q, but can you maybe tell us what the gross margin was for that segment and how you expect that to progress going forward?

Of course. We do expect continued growth into that business segment. We expect the 360 -- excuse me, $160 million kind of range per quarter as you get into 2015, but to remain in the $150-plus million range throughout the rest of this year.

So the gross margin for the third quarter was 20.3% on a non-GAAP basis.

Great. And I guess as a bigger picture question, Keith, you talked a little bit about your changing seasonality. So I wanted to see what that means not only for the fourth quarter but also the first quarter, which I assume the first wouldn't go down as much. But even a little bit bigger picture than that, there's recently some concerns about the cycle peaking. People worry that demand is going to start to slow down from here. Can you just talk about what you're seeing out there and how it compares to other cycles? And basically, where do you think we are in a fundamental cycle?

Yes, we have not seen the order falloff that we normally see as a cycle peaks, and so we're encouraged by the continued strength of new orders. I do think from a -- we're seeing seasonality. And maybe the seasonality has changed, where it's a bit more muted second half over first half. So our expectation, I guess, would be a little better Q1 and a little less growth in Q3, with Q4 being kind of flattish is still a normality there. But we're just not seeing a big falloff in the order patterns like we normally see before the market turns over.

Your next question comes from Vivek Arya.

I had a clarification and then a question. How much was Truesense in June? And what do you expect it will be in the September quarter?

It was approximately $13 million of revenue in the second quarter. And we expect it to be in the $19 million to $20 million in the third.

Got it. And then for my question, you know your stock is trading at a fairly low valuation relative to this sector and you are expecting to generate very strong free cash flow, right? Close to 9% free cash flow yield. My question is, what will it take to accelerate some of the buyback activity?

So we remain committed to buying back the amount that we have out there. And obviously, as we mentioned in the prepared script, we had to halt our trading due to the impending Aptina Imaging acquisition. That is obviously now out in the air, in the public, so that basically gives us the opportunity to continue resuming. And we plan on exhausting that plan, as we have said in the past.

Your next question comes from Gabriela Borges.

Maybe I'll ask a follow-up to the earlier question on the cycle, but specifically, what you're seeing at distributors. Maybe if you could just elaborate on the prepared remarks on refills and inventory as we try to reconcile the orders being up 20% in 1Q and the refills being up about 10% in 2Q. So maybe you can just comment broadly on what you're hearing as you're going to the back half in terms of distributor resale forecasts.

Yes. So our distribution sector continues to forecast growth into the second half. As we mentioned, we did shift the more total dollars in the second quarter, but the resales increased at a faster pace. So the net of it is less weeks of inventory, and that's normally how they manage their business. So we expect the second half to continue strong and be increased over the first half.

That's very helpful. And as a follow-up, if I may. Specifically on the communications segment in 3Q, maybe you can talk about what's driving the growth there, whether it's the cost that we have exposure to and maybe some on-specific market share gains. And any commentary either by region or the performance segments where you're seeing the strength.

Yes, we're seeing good growth in our China handset makers offsetting some of the more public lack of growth other places. And just in general, see continued growth of the smartphone segment at the expense of other cellphones. So the net of that is good for us. We have more content. And we believe we've got much better positions in the folks that are growing in the third quarter.

And your next question comes from Craig Ellis.

I'll start with a follow-up to the earlier question. With the leverage that you have to China smartphone OEMs, Keith, is that both in 3G and 4G models or is your content biased to one or the other?

No, we have good penetration in both places. Higher dollar content in 4G.

Okay. And then on the consumer white goods opportunity, you've been talking about increasing your refrigerator penetration. It looks like you're starting to see that. Can you size where you are relative to the air conditioners? And how do we think about the relative growth rates of those 2 businesses going forward?

Air conditioners, from a dollar content, is still much larger for us. And so what we've got in some of the other applications like induction cooking and refrigerators is a very high rate of growth from a small base. And in the air conditioner side, we are seeing good growth, but it's from a very large base.

Okay. And then last one is a question related to this morning's announcement with Fujitsu. What are the products that would be manufactured with Fujitsu? And what's the timing with which we should think about you really being engaged with that partnership?

Yes. So we have already begun to qualify and transfer products over there. I expect to be in manufacturing next year, so nothing this year, with basically CMOS, ICs and some of our discrete MOSFETs.

Your next question comes from Tristan Gerra. Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division: A quick follow-up on the Fujitsu acquisition. By how much does this sway your total production if it does? And is there any potential impact on gross margin going forward?

So very competitive costs. In fact, I would say there -- I don't know that we've done the calculation on margin changes, but they would continue to provide competitive costs for us. From a volume perspective, next year, it adds another roughly 10% of our 200-millimeter wafers. Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then a quick follow-up. Given the level of tightness that we're seeing in the channel and lead time's still a little bit above normal levels. Given the order patterns that you're seeing, when do you think there is an opportunity -- or the first opportunity for the supply chain to start replenishing inventories?

That's still a mystery to me, Tristan. It continues to get leaner. Some of the recent data I just looked at says it is at its leanest point in a couple of years now after the second quarter. So the question is how much longer can that go on? I am not sure. If there's, I guess, moderate end economy growth, it can continue a little longer. But again, I don't know where the practical limits are. It's got to break at some point.

Your next question comes from Ian Ing.

So given the comments on changing seasonality and being more balanced, how long do you think the auto, smartphone and industrial markets can run ahead of their target of mid to high single digits year-over-year? Do you expect it to sort of revert back to target in the second half?

I think I'll have to take them separately. The industrial market seasonally is down in the second half. So certainly it won't be sequentially up as much, but year-on-year, it should still be running very close to the direction we've been headed. And I would say the same thing is true for automotive and handsets. So if you're doing a year-on-year comparison, that should continue, but sequentially, it won't be quite as strong as you saw in the second quarter.

Okay. And then for the Fujitsu deal. I mean, it is known that Fujitsu is trying to get out of the fab business and try to sell their fabs. Are there scenarios where you eventually would own the whole fab or do you want to co-own the fab? And to help address investor questions, Spansion disappointed yesterday. They were supply constrained at Fujitsu. Anything you can do to better control or -- the execution on the fab relationship?

Yes. So I will -- we'll say we're in different factories than Spansion is, so I can't, of course, comment on them. But we don't see any issues with the factory that we've done the JV on. The JV does allow for ownership changes over time. But where that goes, we don't have a clear idea right now.

Your next question comes from Christopher Rolland. Christopher Rolland - FBR Capital Markets & Co., Research Division: I know you guys had lead times were approximately flat. We had them up a little bit in the quarter from our checks. But where are we on those average lead times? And then we also heard about some constraints, perhaps, in the back end on the packaging side. Is there anything to that as -- at all?

Okay. So lead times were around 10 weeks. That is not a big change. We do have certain products that have some constraints, and those are in the back end. But it's really relegated to a very specific product lines and is not broad-based. Christopher Rolland - FBR Capital Markets & Co., Research Division: Okay, great. Also on the Fujitsu deal, from what I understand, I think it's still 200 millimeters. Some of your competitors have moved to 300. Some are in the process to moving to 300-millimeter wafers. Can you guys consider this at all, and do you have any sort of a timetable at all?

No, we still like the economics of the 200-millimeter for the types of products we do, and so we don't have a timetable for changing. Christopher Rolland - FBR Capital Markets & Co., Research Division: Great. And just one last one. Maybe back-end and front-end utilizations.

We're kind of mid to high 80s across the board.

Your next question comes from Steve Smigie. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Bernard, you commented a little bit on some people sticking Aptina in. Did you do any math on adjusting those guys out, and what you think consensus would have been without the people who adjusted for Aptina?

[indiscernible] What is the consensus number at Aptina? 784, I think.

Yes, we think it's about 784. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay. And if I look at -- I mean, I know you talked about changing seasonality. But it looks to me, on assets, seasonality is about 1.6% and you guided 3%. So it seems like you're guiding better than seasonal. Does it make sense? You seem to have a pretty bullish tone. Just general order trends are pretty decent overall.

We, I mean, obviously, are feeling pretty good. Orders continue to grow. But part of that, as we mentioned, is the full quarter of Truesense. So it's not all just organic. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay, that's fair. And then if I could, just on the Fujitsu deal. What should we think about it in terms of any revenue contribution, et cetera, will you guys get from that? I mean, how should we -- is that -- how will that be handled?

So that will be next year's -- in next year's revenue growth. Again, we won't get any wafers out of it this year. But next year, it should enable us to get some significant growth in our CMOS and MOSFET areas. So I don't know that I can give you a specific number from a revenue perspective, but it does allow us to get another 10% of our 200-millimeter wafers. Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division: Okay. And then last, if I can sneak one more in just on Aptina. I know it hasn't closed yet, so I'm not sure what diligence you've been allowed to do since you announced the deal. But I understand you do want to focus more on the industrial side, but there's still a decent piece there that's non-industrial, I think it's more of handsets. Do you still like that business? You just want to emphasize the industrial? Or can you just help me understand your thoughts there?

Yes, we manage for profits. And so we're not anti or for any specific market, we just like getting returns. So after we close, we'll see the situation and see what directions we need to take.

Your next question comes from Mike McConnell.

Looking at OpEx, starting off here, we obviously had a nice big step up in Q2 which, at the time, was kind of surprising to some folks. How do we kind of view that trending here versus kind of the mid-point of $175 million that you gave out for Q3? Are we looking at flattish from here? Anything we should be thinking about going forward regarding OpEx?

Yes. In general, we don't expect a significant change. We just have to look at the number of days in the quarters that, in Q4, I think we have a few more days. Other than that, it should be in line with what we have for the third quarter.

Okay, great. And then, Bernard, can you just give us a breakdown on SANYO, just how much now sales are outside of Japan and how much are in Japan? I think last update you had said roughly, I think it was down almost 1/3 was in Japan. But I wanted to make sure if we had that breakout?

Yes, I think that we continue increasing the share outside of Japan. Although in this quarter, consumers in Japan were a little bit stronger, so the numbers are very similar to what we communicated last time.

Is there a goal you've stated on the split you'd ideally like to have?

No, we don't have a specific goal. We do continue with our focus outside of Japan, but there's no specific goal.

Your next question comes from Craig Berger. Craig Berger - FBR Capital Markets & Co., Research Division: I wanted to -- just since there are moving parts, you're still doing some restructuring stuff, can you just remind us what the benefits are? Is it still the $4 million a quarter in Q1? Is there anything more beyond that?

For the most part, the $4 million from the -- in COGS from the quarter KSS. The OpEx reduction are, for the most part, is done. There is a few drips and drabs, but nothing material. Craig Berger - FBR Capital Markets & Co., Research Division: And can you remind us when Aptina is expected to close?

What we said is that it's sometime in the third quarter. Craig Berger - FBR Capital Markets & Co., Research Division: Okay, great. And then regarding sort of your M&A strategy, you've done some bigger ones and some smaller ones. Kind of what's your appetite at this point towards consolidating the discrete sector further or looking at other things?

Yes, we have been -- I guess, if you look at the pattern we've set, we're really looking at bringing in new technologies to the company that have content specifically where we think there's good margins and good growth. The absolute just acquisitions for consolidation purposes have not been on the radar screen.

Your next question comes from Craig Hettenbach.

On the computing market, you saw a little bit of a lift there and that market stabilized. Can you talk about what you're seeing into the back half? And then also, last quarter, you talked about just managing that business, focusing on profits, just kind of the approach you're taking in computing here.

Okay. Yes, so the second half should be stronger than we've seen in the first half. That is the normal seasonality. I mentioned that we grew about 10% in Q2 versus Q1 on our Vcore, and that is really the mix of processors that is being sold and our share gains on that. We expect that to continue into the second half. And then relative to the balance of the business with the MOSFETs, et cetera, again, we just manage that for profit. So net-net, we expect to be outgrowing the market. And, from a gross margin perspective, continuing to increase our margins from that sector. Craig Berger - FBR Capital Markets & Co., Research Division: Okay. And if I can follow up, you talked about some inventory in the channel. What's going on there? How about internally in terms of how you're managing that, you still have some bridge inventory. What do you expect kind of from a days basis looking out a couple of quarters?

So we should be seeing a slow burning of that 6 days of inventory, as we have concluded the restructuring of the factories. And for rest of the business, it'll probably stay around the same days except for that bridge reduction.

[Operator Instructions] Your next question comes from Mike Lucarelli.

On the distribution side of things, is there any one of your segments, whether it's the SANYO business or application, that's more exposed or use your distributors more than another?

So on a business unit basis, our Standard Products Group has the highest concentration of distribution at a little over half of their business.

That's helpful. And then the strength you guys saw in the SANYO business, was there one standout segment in the quarter? I mean, if you look out for the rest of the year and into early next year, which areas of growth are you most excited about?

So yes, in the actual Q2, it was the white goods segment and the handset markets that did most of the sequential changes. We like both of those through the rest of the year, but we also see some growth as we get into the second half on the more traditional industrial side with motor control.

Then last one here. On that business, was it a loss last quarter, still? And do you think it will be profitable next quarter?

Actually, for this quarter, we were breakeven at EBIT level and just a few hundred thousand loss at net income. And we should be accretive for the third quarter.

And I am showing that there are no further questions at this time. I will now turn the call back over to Mr. Agarwal.

Thank you, everyone, for joining the call today. We'll be around to take your follow-up questions. Thank you very much.

And ladies and gentlemen, that does conclude today's conference call. You may now disconnect.