Good day, ladies and gentlemen and welcome to the ON Semiconductor First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference, Parag Agarwal, VP of Corporate Development and Investor Relations. Please go ahead.

Thank you, Chris. Good morning and thank you for joining ON Semiconductor Corporation's first quarter 2019 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 of this broadcast, along with our earnings release for the first quarter of 2019, will be available on our website approximately one hour following this conference call, and the recorded broadcast will be available for approximately 30 days following this conference call. The script for today's call and additional information related to our end-markets, business segments, geographies, channels and share count are also posted on our website. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release, 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 from projections. 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 Form 10-Ks, Form 10-Qs and other filings with Securities and Exchange Commission. Additional factors are described in our earnings release for the first quarter of 2019. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors, except as required by law. During the second quarter, we will attend Bank of America Technology Conference in San Francisco on June 4th. Now, let me turn it over to Bernard Gutmann, who will provide an overview of first quarter 2019 results. Bernard?

Thank you, Parag, and thank you everyone for joining us today. Our first quarter results demonstrate our solid execution on the operations front in face of slowing business conditions. Secular trends driving our business remain intact, and we are well positioned to capitalize on these secular trends to deliver strong revenue and margin performance. Mid to long-term outlook for our business remains strong, and our design win pipeline in our key strategic markets, which include automotive, industrial, and cloud-power continues to grow. Despite near-term headwinds, we remain upbeat about our future. During the first quarter, we saw sub-seasonal trends across most geographies and end-markets, and these trends have continued into the second quarter. However, based on recent data, we expect to see improving business trends in the second half of 2019. Keith will provide further details on current business trends in his prepared remarks. We are managing our business prudently to adjust to this near-term slowdown. We have taken measures to control our operating expenses in line with relatively soft business conditions. We believe that a highly diversified customer base, exposure to the fastest growing semiconductor end-markets, and long life cycle of many of our products should help us better navigate the current slowdown in demand as compared to broader analog and power semiconductor industry. While we are seeing some softness in business conditions in the near-term, we are continuing to invest to strengthen and build our leadership in key strategic markets, and to improve our cost structure. In the first quarter, we entered into a definitive agreement to acquire Quantenna Communications, which we believe will strengthen our presence in connectivity applications for industrial and automotive end-markets. We also recently announced our plans to add the first 300 millimeter fab to our manufacturing network in a phased transaction over the…

Thanks, Bernard. Our execution momentum remains solid, despite relatively soft market conditions. We delivered strong margin and earnings performance, even in face of a slowdown in demand from most geographies and end-markets. With our exposure to secular megatrends in automotive, industrial and cloud-power end-markets, strong operating expense discipline, and solid execution on operations front, we are well positioned to navigate through current slowdown in market conditions. Furthermore, based on current order trends, distribution sell-through trends and macroeconomic data, we expect business conditions to improve in the second half of the year, and we remain upbeat about our mid to long-term prospects. With our planned acquisitions of Quantenna Communications and GLOBALFOUNDRIES’s 300 millimeter fab in East Fishkill, New York, we are making prudent investments to strengthen our market leadership and significantly improve our marketing cost -- manufacturing cost structure. Key megatrends driving our business remain intact and our customers are increasingly relying on us as a strategic partner for key technologies to enable major disruptive trends in automotive, industrial, and cloud-power end-markets. In the automotive market, accelerating adoption of electric vehicles and active safety should drive strong growth in our power semiconductor and sensor businesses. In the industrial market, we are seeing strong traction for our power semiconductors, driven by higher power efficiency requirements for industrial systems. In cloud-power market, we are seeing robust growth for our analog power management products for servers and power semiconductors for 5G infrastructure markets. Let me now comment on the business environment. Business conditions continue to be soft across most end-markets and geographies. However, we are seeing signs that point towards improving business trends in the second half of the year. Thus far, orders for the second half of the year have shown strong recovery, and we have seen meaningful improvement in distribution sell-through in…

Thank you, Keith. Based on product booking trends, backlog levels, and estimated turn levels, we anticipate that total ON Semiconductor revenue is expected to be in range of $1.36 billion to $1.41 billion in the second quarter of 2019. Included in our second quarter revenue guidance is approximately $15 million revenue from the manufacturing services provided by OSA. For second quarter of 2019, we expect gross margin to be in range of 36.5% to 37.5%. Our second quarter gross margin guidance includes the negative impact of approximately 40 basis points from manufacturing services provided by OSA. We expect total GAAP operating expenses of $322 million to $340 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be $27 million to $31 million. We expect total non-GAAP operating expenses of $295 million to $309 million in the second quarter. We anticipate second quarter of 2019 GAAP net other income and expense, including interest expense, will be $31 million to $34 million, which includes non-cash interest expense of $9 million to $10 million. We anticipate our non-GAAP net other income and expense, including interest expense, will be $22 million to $24 million. Cash paid for income tax in the second quarter of 2019 is expected to be $12 million to $16 million. We expect total capital expenditure of $140 million to $150 million in the second quarter of 2019. We expect capital intensity to subside in the second half of the year, and for 2019 we expect capital intensity of 9%. We also expect share based compensation of $26 million to $28 million in the second quarter of 2019, 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 second quarter of 2019 is expected to be 414 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 please open up the line for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Chris Danley with Citi. Your line is now open.

Hey, thanks guys. So this is still little on the weak side. Would you say business has gotten, I guess, any worse than it was three months ago or is it basically stayed at the same level?

No, it's actually improving here in the month of April, noticeably better than it was in the first quarter. And so definitely improving trend.

Okay. Thanks, Keith. And then as my follow-up, any commentary on lead times, anything changing there?

I think lead times will be stable for a while. Our power lead times remain extended, but everything else is in normal range.

Great. Thanks, guys.

Thank you. And our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Thanks, guys. Keith, I wanted to ask about the cycle side of the equation. If I just compared your transcript of your prepared comments from last quarterly call to this quarterly call, both of them express confidence about near-term bookings getting better, but yet the second quarter guidance is still weak. I know you just said April got better, but could you give us a little more color on why you’re confident in the second half of the year? And maybe specifically on the automotive and industrial side, given the importance of those especially given that those were weaker and especially industrial, I guess, in the quarter and the guidance expected to go down again.

Yes, we point to several things. One, resales and distribution have picked up significantly in April. So that is much different trend than we had going on in Q1. From the automotive side, specifically the inventory correction is going on in our direct customers. We can tell that because their orders for Q1 and into Q2 were much less than the automotive resales. So we are seeing orders now being placed by that direct channel out into Q3 and picking up nicely. So overall we are seeing big pick up in bookings for the second half and more current activity in our distribution channel.

Great. And then for my follow-up one for you, Bernard, on the OpEx side. You guys did a great job in the quarter coming in low and you’re holding it flat in the second quarter. Is that just cyclical belt tightening, which would be understandable given where revenues are? Is there something more structural about that and any sort of color on your full-year outlook of how you’re going to handle OpEx?

We have definitely been prudent in our deployment of OpEx and have taken some belt tightening in cost reduction items. We also modulate our variable comp based on business results, so there is also some impact of that. So for the year, we expect it still be prudent in, in terms of our approach towards that. So I expect the -- a good set of numbers.

Great. Thanks, guys.

Thank you. And our next question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is now open.

Thanks for taking my question. Actually I had two as well. Keith, you mentioned you were starting to see some distributor resale activity pickup. Can you help us quantify what that rate of growth or decline was in Q1? What are you seeing now and importantly where do you see distribution inventory exiting Q2?

So going in to Q1 or the Q1 data set that are resales and our sell-in distribution were approximately the same. And as we’ve entered April, there's a significant increase in the resales above our ship-ins in double-digit percentage range.

Got it. And as my follow-up, maybe Bernard one for you on cash generation. Q1 was somewhat lower, I imagine because of seasonal and macro trends, but how are you thinking about the recovery from here and any comments on how we should think about the full-year free cash flow outlook? Thank you.

So the first quarter is always seasonally low and we’ve also -- its driven by some things like the payment or annual bonus plan always occurs in the first quarter. Second half of the year is always our strong seasonal quarter. So we don’t expect to see any meaningful change from what we have been previously are talking about for our free cash flow generation. And as I -- as we said, we’re also keeping good control in our OpEx, which will also help us fuel that free cash flow generation.

Okay. Thank you.

Thank you. And our next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open.

Yes, hi. Just on the disti inventory comment that you made, I know you said inventories were picked up a little bit. How much of that is because of the industrial weakness that you’re seeing in Greater China? And how do you see that progress through the June quarter? Thanks.

Yes, so our inventories did not grow in dollars, they just grew in days as you calculate with the resales. And yes, certainly in Q1, the China industrial portion was a contributor.

And I know on the compute side your March quarter was up 1% year-on-year. Can you talk about some of the trends you’re seeing there into the back half between content share gains or units picking up? Thanks.

Yes, we do expect to see more units as we go forward in the server side of the business this year. The rest of it is apparently very stable.

Thanks.

Thank you. And our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Yes. Good morning. Thanks very much for taking the questions. I have two as well. One of your competitors, Infineon, reported about a months ago, and at the time they said they expected September quarter revenue to grow, but to be below seasonal. And I guess you have a good month of bookings in April, but I mean as you guys look today are you expecting more seasonal type trends in the second half of the year or just any directional color on 2H, I think will be helpful.

We -- yes, we only provide one quarter at a time. And I think it's a little too early to be calling the September quarter right now, but certainly encouraged with the data we’ve had this month.

Okay. That’s helpful. And Keith, in your prepared remarks you talked about silicon carbine, seen good momentum there. Can you just comment a bit more on the breadth of customer engagements and wins and how that may translate into revenue over what sort of the timeframe? Thank you.

Yes, we have a broad range of wins in the industrial market, in the automotive market. Geographically that is spread out fairly wide, Europe, North America and Asia with our strongest automotive wins in Asia.

Thank you. And our next question comes from the line of Craig Ellis with B. Riley FBR. Your line is now open.

Yes, thanks for taking the question. My first question is regarding the gross margin outlook. Its flat guys, but segment mix seems like it's actually a bit adverse with auto and industrial down. So it seems like there may be some good things happening either on an intra segment basis or company specific activity. What's going on there and how should we think about gross margin potential in the back half of the year?

The fundamentals that we talked about at our Analyst Day are still intact, so it's the same drivers basically fall through on incremental revenue mix manufacturing cost savings and some divestiture that will make up the improvement trend over time. In the short-term as you mentioned, we are having a slightly adverse mix impact with growth coming from our less stellar gross margin end markets. But we do have some pretty good control -- cost control measures that will also help shore up the gross margin.

Thanks for that. And then, Keith, following up on the base station comments and acceleration getting on the infrastructure side, can you just speak to the breadth of customer activity there? And as you look out through the year, what happens with the progression of that business as we go through 2019? Thank you.

Yes, we have strong wins across all of the players in the telecom infrastructure area and we're expecting that to almost double this year from our content from last year. So very, very significant trends and again its broad-based and across all customers. Relative to the rest of the year, it's kind of contained in my comment on the growth, we are expecting to see it continue to accelerate.

Thank you.

Thank you. And our next question comes from the line of Shawn Harrison with Longbow Research. Your line is now open.

Yes, morning. I guess in the context of ON didn't see a lot of pricing tailwinds when the market got tight last year. I’ve seen some stuff of some your competitors maybe on MOSFETs and discretes beginning to lower pricing. Are you seeing that out there as well and does that affect any way the gross margin expectations in the second half of the year as pricing begins to normalize in some of those products?

We’re not seeing any pricing declines at all. In fact, it's less than normal right now.

Okay. And then as a follow-up, the smartphone market, obviously, nice to see it up in the first quarter given the volume challenges. How do you expect kind of maybe smartphone volumes as you move throughout the years? Is this going to be a down market that maybe ON can grow because of content or will you more closely follow kind of the volumes of the market as the year progresses?

We certainly have continued content increases and as you know that market is very much back end loaded. So we are expecting to see increase from the first half, but overall total smartphone units we're expecting very flattish year-on-year.

Thank you. And our next question comes from the line of Christopher Rolland with SIG. Your line is now open.

Hey, guys. Thanks for the question. So, Keith, I know you guys got one quarter at a time, but last quarter you guys guided for growth year-on-year top line in 2019. And then, I think you guys also talked about gross margin expansion. I was wondering if you guys had any updates for 2019 relative to that?

Yes. We are still only doing one quarter at a time. Clearly, the growth of the markets in 2019 is going to be very muted. And so we're not expecting a significant growth in the market this year, but we believe we will be above the industry and our peers.

And then perhaps another follow-up comps. Can you give a rough -- also rough idea of what percent or comps or a dollar amount you think is coming from 5G at this point, and maybe what’s the contribution was in the quarter?

I don't have that number right now, sorry Chris.

Thanks, Keith.

Thank you. And our next question comes from the line of Matthew Ramsay with Cowen. Your line is now open.

Thank you very much. Good morning. Just a quick one on the data center power business. I just wondered how you guys might have factored into your commentary this morning in the data center space. The pretty sharply revised outlook from Intel last Thursday night and sort of what the design and lead times might be if you have data center power portfolio of products design into two products that that might feature other silicon, whether that’s Nvidia, AMD, Xilinx, any of the other folks that are ramping in that space? Any color there would be helpful. Thank you.

Yes, we do have a broad range of power solutions and we are expecting some growth there from a content perspective in total for the year. So, again, I think it's -- it goes beyond just the data center comment you hear from the processor guys, we’ve content gains and we are spread across all of the suppliers.

Thank you. And our next question comes from the line of Ari Shusterman with Needham. Your line is now open.

Hello. I’m taking the question for Rajiv Gill. First off, I want to say congratulations on your acquisition of the Fishkill fab and just like moving forward what is your strategic vision when it comes to expanding capacity in 300 millimeter, like any further plans there? How should we think about this expansion? Thank you.

That expansion we are very excited about it should fuel our growth for many years. We talked about the opportunity of doing well in north of $2 billion of revenue there. So we think that covers us and that's why we believe we will be able to save CapEx going forward.

Okay. And just a quick follow-up. In terms of China, have you seen any changes in the past few months? Some of your competitors have said there have been some signs stabilization, like any update, any color on that? Thank you.

Yes, the booking trends from China definitely picked up at the end of the first quarter and we are seeing that continue here in the second quarter. So we're encouraged that it may be their inventory correction period is past them.

Thank you. And our next question comes from the line of Harlan Sur with JP Morgan. Your line is now open.

Good morning. Thanks for taking my question. First question on consumer, primarily white goods has been weak since 3Q of last year. It's actually one of the first sectors we actually -- where you guys actually start to see the weakness first. It looks like it's flattening out quarter-over-quarter this quarter. Is this one of the areas where you’re seeing improving order and forecast trend as you move into the second half of the year?

It is and it is really in China seasonally we do normally see a pickup at this time. And so I would say that market is returning to more normalcy.

Thanks for the insights there. And then obviously industrial continues to be impacted by the weakness in Greater China. What have you seen in the other geographies, I’m curious there. And are you seeing the same sort of booking indicators, sell-through trends that also point to a more normalized second half for the industrial sector?

Actually we’ve seen what looks to be like a little inventory correction still going on there outside of China. And so our sub seasonal comments in the prepared remarks apply to the global area.

Thank you.

Thank you. And our next question comes from the line of Kevin Cassidy with Stifel. Your line is now open.

Thanks for taking my question. I wonder if you could give us a little more detail on what your CapEx spending has been on?

Our CapEx spending which was 11% in the first quarter, but we’ve said in the prepared remarks the full-year will be 9% is mostly for capacity. I would say, its skewed a little bit more towards the front end capacity this year, but fairly evenly split.

Okay. Your expansion for internal wafer manufacturing is that completed now?

It is ramping right now and it is from the CapEx spend, mostly completed.

Okay. Thank you.

Thank you. And our next question comes from the line of John Pitzer with Credit Suisse. Your line is now open.

Yes, good morning, guys. Thanks for me ask question. Can you just -- I’m kind of curious the comment about half-on-half-growth in the second half, is that a half-on-half ended year-over-year comment. And an answer to the earlier question, you said that you expect to outgrow an industry that should show little bit of growth. There are some other that thinks the semiconductor industry could actually decline this year. Are you comfortable in full-year growth or is it just too early to tell?

Yes. So it's too early to tell, John. My comment is, I think we will outgrow the industry and I actually didn’t give you an industry number. So we're confident about the numbers we're seeing from the design wins and feedback from our customers that we're going to have continued share gain this year. But it's too early for me to call a full-year.

That’s helpful. And then -- but as a follow-up, notwithstanding that margins all its kind of the seasonally slow quarter for free cash flow for some seasonal reasons you did suspend the buyback. Just help us understand use of cash from here and when you might think is the earliest you will be back in the market looking to buy stock.

Well, we are committed to our $1.5 billion buyback program and as we said, we did $75 million in the first quarter. So that commitment will continue. We will discuss with our Board at the upcoming Board meeting the re-initiation date. But in general, we are committed to continuing with that plan.

Great. Thanks, guys.

Thank you. And our next question comes from the line of Ambrish Srivastava with BMO. Your line is now open.

Hi. Good morning. Thank you. Keith, I was just trying to reconcile your comment about OEMs and your confidence about the second half. And maybe I’m missing something, but if OEM inventory is at healthy levels, why are they reducing inventory and does that not mean that they’re seeing a slower demand environment for the back half? And then how do you reconcile that with your confidence for the second half? That is my first. And then I had a quick follow-up.

Yes, I think on that we’ve looked at past trends, and particularly the automotive and industrial segments when you do go through a softer market, they over correct. And again we compare the sellout rates from our customers and look at their selling rates to get that. Certainly, there could be some anticipation of softer numbers, but the dialogue that we’ve with them does not indicate that. It does indicate they're trying to work on their cash flows and make sure that they continue to perform on a cash basis.

Okay. And then my follow-up on capacity, I have this concern and I’ve heard it, reflected in my investor conversations is that you were adding capacity and you’re doing it in a measured way, but with your competitors are adding capacity. Just give us some sense of overall industry capacity for discrete and what is it going to look like -- I know you’ve been tight for a while, but the concern is that there could be excess capacity coming on line which could linger on.

We certainly are careful and watch that. But we look at the growth rates that we’ve talked about with electric vehicles with the industrial and with the power segment out there for solar and wind etcetera. The capacity that we see coming online over the next few years still looks to me to be a little less than the industry demands. We’ve commented that with all the activity you heard about we continue to have extended lead times in power. So we're actually feeling that we're in pretty good shape.

Okay. Thank you.

Thank you. And our next question comes from the line of Tristan Gerra with Baird. Your line is now open.

Hi. Good morning. On the manufacturing side, how does the time it takes for you guys to get equipment these days compared with the equipment lead times exiting last year?

In some spots its coming a little. Most of the equipment was at a year kind of run rate and some of its now down in 9 or 10 month range, but it's nothing dramatic yet.

Okay, great. And then could you provide color on your utilization rates for the just reported quarter and your expectation for the June quarter?

So in the -- it was down in the first quarter in the middle [indiscernible] and we expect that to be about the same in the second quarter.

Great. Thank you.

Thank you. And we do have an additional follow-up with the line of Craig Ellis with B. Riley FBR.

Yes, thanks for taking the follow-up question. Typically when I ask about revenues, I focus on the end markets, but Intelligent Sensing did grow quarter-on-quarter at a business unit level. Guys, what’s going on in Intelligent Sensing that’s enabling it to overcome the cyclical pressures that we’re seeing out there?

Yes, that continues to be the automotive portion of the business. As you know, we were curtailing the consumer piece due to margin contribution and the automotive piece continues to grow for us. And so that's been a great growth story, but it's all automotive.

Thanks, Keith. And then the second question is related to the Quantenna acquisition. It's early days, but I imagine your sales people have been able to gather some feedback from customers on their reaction of the deal. Can you share what you’ve heard thus far with this?

Yes. It's been well-received. Customers are looking forward to having a large supplier with the great technologies that content has and so Quantenna and so been very well received so far.

Thanks, guys.

Thank you. And our next question comes from the line of Harsh Kumar with Piper Jaffray. Your line is now open.

Yes. Hi, guys. Two questions. First, Keith, if I can ask you for modeling purposes, auto and industrial are both down, but if I had to ask you to sort of venture as to which one would be down more on a percentage basis? And then I had a follow-up.

We think automotive will be slightly down to flat, so there's not much change there. Automotive might be down a little more.

Industrial.

Yes, industrial -- excuse me, industrial.

Okay. Industrial, flattish. Got it. And then …

No, let me start all over. Automotive is flat to slightly down, industrial is going to be slightly down.

Understood. Thank you for that clarification. And then, so you’re expecting to see reduced inventory in the disti channel. Is that a function of just demand picking up or are you still at this point today actively reducing your selling into the channel.

So the answer is we’re seeing resales pick up noticeably and we expect our shipments in to be flat to down.

Got it. Thank you.

Thank you. And our next question comes from the line of Chris Caso with Raymond James. Your line is now open.

Yes, hi. Just a -- first question on just what you would consider to be seasonality as you look in the back half of the year with different business mix. What do you consider that to be right now?

So I’m not sure the exact question there, but we see all of our businesses picking up in Q3. So generally that is a trend for us across the board.

So I would say for our general company seasonality with the mix of products we have right now for Q3 is probably in the 4% to 5% and flat for the fourth quarter.

Okay. That’s helpful. Thank you. And just with regard to the GLOBALFOUNDRIES deal, perhaps you could comment a bit on timing and magnitude of the cost and margin benefit you see there. I know that’s -- its a bit of a unique transaction the way that’s structured. Could you be a little more specific on when you see -- you start -- begin to see some benefits from that?

We will expect to start seeing benefits from that the middle of next year as we start shipping volumes of products out of there, and then it will grow and increase as we increase the total amount we run in that factory for the next three years.

All right. Thank you.

Thank you. And our last question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is now open.

Yes, just wanted to get back to the commentary about inventory and distribution, and the targeted 11 to 13 weeks. So just for Q2 kind of where you expect it to shake out and then how you’re thinking about managing that into the second half of the year?

We would be expecting it to get back to normal range in the second quarter. And then we will continue to prudently manage that into the second half. So normally we do see it drop a bit in Q3 as demand picks up and then slightly up in Q4.

Got it. Thanks.

Thank you. And that does conclude today’s question-and-answer session. I would now like to turn the call back to Parag Agarwal, VP of Corporate Development and Investor Relations for any further remarks. Please go ahead.

Thank you everyone for joining the call today. We look forward to seeing you at various conferences during the quarter. Thank you and good bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.