ON Semiconductor Corp (ON) — Q2 2017 Earnings Call Transcript

Thank you, Danielle. Good morning and thank you for joining ON Semiconductor Corporation's second quarter 2017 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 second quarter of 2017 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 and channels are also posted on our website. Our earnings release and this presentation include 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 or 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 risk 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 the Securities and Exchange Commission. Additional factors are described in our earnings release for the second quarter of 2017. 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. For all synergy-related discussion on this call, we have used Fairchild's 2015 results as a base for all comparisons. During the third quarter, we will be attending Citi Technology Conference in New York on September 7, and Deutsche Bank Conference in Las Vegas on September 12. Now, let me turn it over to Bernard Gutmann, who will provide an overview of the second quarter 2017 results.

Thank you, Parag, and thank you, everyone, for joining us today. We once again delivered solid financial results which exceeded our guidance and street consensus for all key metrics. Our second quarter results clearly demonstrate the consistent and strong execution on the operational front and strength of our broad range of product portfolio for automotive, industrial and communications end-markets. Strong operating leverage and free cash flow generation in the second quarter clearly demonstrate the strength of our operating model. Visibility into our business continues to remain strong as we benefit from our design wins in automotive industrial and communications end markets. Diversity in our customer base, product portfolio and end-markets have insulated us from the volatility caused by weaknesses in certain end-markets and geographies. With our largest end-customer contributing less than 5% of our revenue and the product portfolio weighted towards end-markets with the fastest growing semiconductor content, we generally have lower customer and product related risk. At the same time, we are well positioned to benefit from secular and macro trends in the semiconductor industry. We continue to make strong progress in the integration of Fairchild and remain on track to deliver the targeted synergies. At the same time, we have taken steps to optimize our product portfolio to drive margin expansion for the company. During the second quarter, we exited the mobile image sensor market as the margin profile for that business was not comparable with our target financial model. Furthermore, we monetized the value of highly differentiated mobile imaging technology through an intellectual property licensing agreement with a third-party. We have excluded the gain of approximately $24 million related to this transaction from our second quarter non-GAAP results. We delivered robust free cash flow performance during the second quarter. As we indicated earlier, we intend to use this free cash flow to de-risk our balance sheet, for 2017 we now expect free cash flow in the range of $600 million to $650 million higher than our earlier expectation of approximately $550 million to $600 million. As a comparison, we generated free cash flow of approximately $371 million in 2016. Now let me provide you details on our second quarter results. Total revenue for the second quarter of 2017 was approximately 1.338 billion, an increase of approximately 52% year-over-year, and a decrease of 7% as compared to GAAP revenue in the first quarter. Recall that our first quarter GAAP revenue included a one-time benefit of approximately $155 million due to the change in revenue recognition to sell-in method from the sell-through method. Second quarter revenue increased by approximately 4% as compared to non-GAAP revenue in the first quarter. GAAP net income for the second quarter was $0.22 per diluted share. GAAP income before income taxes for the second quarter was approximately $143.2 million as compared to $115 million in the first quarter. Non-GAAP income before income tax for the second quarter was approximately $171.1 million. Net cash paid for taxes in the second quarter was approximately $17.1 million and diluted shares outstanding were approximately $426 million. Non-GAAP income before income tax for the first quarter was approximately $133.2 million, net cash paid for taxes in the first quarter was approximately $18.4 million, and diluted shares outstanding were approximately 426 million. GAAP gross margin for the second quarter was 36.8% as compared to 35% for the first quarter. Non-GAAP gross margin for the second quarter was 36.9%, an impressive increase of approximately 150 basis points over 35.4% in the first quarter. Better than expected non-GAAP gross margin in the second quarter was driven by strong operational execution and higher than expected revenues. On the operational front, enterprise-wide manufacturing cost reductions and supply chain synergies from Fairchild were major contributors to gross margin expansion. With tailwinds from additional manufacturing synergies from Fairchild, mix improvement, and portfolio optimization, we remain on track to achieve our target non-GAAP gross margin of 40% by 2020. GAAP operating margin for the second quarter of 2017 was approximately 11.5% as compared to approximately 12.8% in the prior quarter. Our non-GAAP operating margin for the second quarter was 14.7%, an increase of approximately 150 basis points over 13.2% in the first quarter. On a revenue increase of approximately 4%, our non-GAAP operating profit increased by approximately 16%. This strong operating profit performance demonstrates the operating leverage and strength of our operating model. GAAP operating expenses for the second quarter were approximately $337.9 million, as compared to approximately $319.9 million for the first quarter of 2017. Non-GAAP operating expenses for the second quarter were approximately $296.8 million, as compared to approximately $284.9 million in the first quarter. Non-GAAP operating expenses for the second quarter were at the higher end of our guidance primarily due to the accrual for higher variable compensation resulting from significantly better results. We expect our OpEx intensity to decline in the third quarter of 2017. We had strong free cash flow performance in the second quarter. We define free cash flow as cash flow from operations less capital expenditures. Second quarter free cash flow was approximately $264.2 million as compared to approximately $155.8 million in the first quarter. Operating cash flow for the second quarter was approximately $333.2 million. Second quarter free cash flow and operating cash flow included approximately $24 million from a licensing arrangement related to the mobile image sensor business. Capital expenditures during the second quarter were approximately $69 million. Capital intensity, based on non-GAAP revenue during the first six months of the year was approximately 4.6%, significantly below our target model of 6% to 7%. We expect that capital expenditures in the second half will increase as capital intensity for 2017 is expected to be in the range of 6% to 7%. As I indicated earlier, we expect free cash flow for 2017 to be in the range of $600 million to $650 million, higher than our previous expectation of approximately $550 million to $600 million. We exited the second quarter of 2017 with cash, cash equivalents, and short-term investments of approximately $872 million, as compared to approximately $729 million in the first quarter. We used approximately $137 million in the second quarter of 2017 for repayment of debt. At the end of the second quarter of 2017, days of inventory on hand, adjusted for fair market value step-up were 108 days, down three days as compared to inventory days at end of the first quarter. Second quarter distribution inventory in days was approximately flat as compared to the first quarter. For the second quarter of 2017, our lead times were up moderately quarter-over-quarter. Our global factory utilization for the second quarter was slightly up sequentially. Now let me provide you an update on the performance of our business units, starting with Power Solutions Group, or PSG. Revenues for PSG was approximately $671 million. Revenue for our Analog Solutions Group for the second quarter of 2017 was approximately $468 million and revenue for Image Sensor Group was approximately $198 million. Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment.

Thanks, Bernard. Once again, I am very pleased with our results. Our second quarter results clearly demonstrate the strong momentum of our power, analog, and sensor portfolio for automotive, industrial, and communications end-markets. At the same time, our robust free cash flow generation, strong margin performance, and solid operating leverage demonstrate the strength of our operating model. While we have benefited from a favorable industry and macroeconomic environment, a significant part of our outperformance has been driven by company-specific factors such as accelerating traction in automotive, industrial, and communications end markets and solid execution on the operational front to realize synergies and cost savings. Our results over the last many quarters demonstrate the progress that we have made in transforming ON into a highly diversified and broad-based supplier of power, analog, and sensor solutions for automotive, industrial, and communications end-markets. As Bernard indicated earlier, this highly diversified base of customers, products, and end-markets has insulated us from demand volatility from certain end-markets and geographies. Customers are realizing the depth and breadth of our power, analog, and sensor portfolio, and they are increasingly relying on us for key enabling technologies that are disrupting existing business models. We are engaging at a very early stage with key players in artificial intelligence for automotive, machine vision, and robotics applications. Also, we continue to extend our leadership in the ADAS markets for automotive, and we are investing in sensor fusion solutions for ADAS. We believe that our exposure to secular growth drivers and emerging applications will enable us to continue to outgrow the semiconductor industry. We continue to make strong progress in the integration of Fairchild. The integration of Fairchild's IT systems is expected to be complete in the fourth quarter of 2017. Also, we are on track to begin realizing manufacturing synergies from Fairchild towards the end of this year as we start insourcing Fairchild's backend operations. We expect to exit 2017 with an annual synergies run rate of $180 million. Our target of annual synergies run-rate of $245 million by the end of 2019 remains unchanged. Performance of Fairchild continues to be strong, with continued strength in bookings momentum. We are realizing revenue synergies from Fairchild as our strategy of leveraging our sales reach and customer relationships to accelerate Fairchild's revenue is yielding strong results. We again had a record bookings quarter for Fairchild in the second quarter. During the second quarter, booking for Fairchild were at the highest levels for the last three years. Let me now comment on the business trends in the second quarter. During the second quarter, demand trends and bookings were strong across most end-markets and geographies. Also, supply and demand dynamics remained favorable in the second quarter as we didn't see any evidence of inventory build in the distribution channel, or of anomalous booking patterns. Commentary from customers and our booking trends point to sustained improvement in the demand environment for most end-markets. Customers continue to remain concerned about potential supply tightness as demand continues to grow at a steady pace. Now I'll provide details of the progress in our various end-markets for the second quarter of 2017. Revenue for the automotive market in the second quarter was approximately $410 million and represented approximately 31% of our revenue in the second quarter. Second quarter automotive revenue grew by approximately 30% year-over-year and was marginally up quarter-over-quarter on a non-GAAP basis. Our momentum in the automotive market remains intact, with leadership in fast-growing applications such as ADAS and LED lighting and exposure to a highly diversified customer base across the globe. For the second quarter, we again posted strong growth in our CMOS image sensor business for viewing and ADAS applications. We continue to gain market share in automotive image sensors, and our design win pipeline for our CMOS image sensors for automotive applications continues to grow at a rapid pace. As I indicated earlier, we are working with market leaders for the development of artificial intelligence based ADAS systems. Our power franchise for automotive continues to strengthen, and we are working with leading ecosystem partners on power management solutions for processors and other related applications in automotive. Other drivers for automotive in the second quarter included LED lighting, in-vehicle networking, mixed signal ASICs, and protection devices. Despite temporary softness in automotive demand in certain geographies, global demand for automotive semiconductors has shown no signs of slowdown. With the broad product portfolio and exposure to the fastest growing segments of the automotive market, we're among the best positioned companies to capitalize on increasing semiconductor content in automotive. Revenue in the third quarter for the automotive end-market is expected to be approximately flat quarter-over-quarter as opposed to normal seasonality of sequential decline in the third quarter. The industrial end-market, which includes military, aerospace, and medical contributed revenue of approximately $351 million in the second quarter. The industrial end-market represented approximately 26% of our revenue in the second quarter. Second quarter industrial revenue grew by approximately 59% year-over-year and approximately 8% quarter-over-quarter as compared to non-GAAP industrial revenue in the first quarter. Strength in the industrial end-market was broad-based across products and geographies. With the acquisition of Fairchild, our footprint for power management solutions for industrial applications has expanded in a significant manner. We're seeing a steep acceleration in demand for our power modules for industrial applications. Key drivers of demand for industrial end-markets include industrial power supplies, building automation, lighting, industrial automation, and alternative energy. We also saw strong growth in our medical business driven by implantable devices and hearing health. We continue to see strong growth in machine vision applications with our PYTHON line of CMOS image sensors. As I indicated earlier, we are engaging at the very early stage with key players in artificial intelligence for machine vision and robotics applications. Revenue in the third quarter for the industrial end-market is expected to be down quarter-over-quarter due to normal seasonality. The communications end-market, which includes both working and wireless, contributed revenue of approximately $252 million in the second quarter. The communications end-market represented approximately 19% of our revenue in the second quarter. Second quarter communications revenue grew by approximately 62% year-over-year and approximately 6% quarter-over-quarter. Our presence with market leaders in the smartphone market continues to strengthen, and our content in major smartphone platforms continues to grow with each generation. We recently achieved major successes with our power management devices and intelligent charging solutions for smartphones. Revenue in the third quarter for the communications end-market is expected to be up quarter-over-quarter due to normal seasonality. The computing end-market contributed revenue of approximately $131 million in the second quarter. The computing end-market represented approximately 10% of our revenue in the second quarter. Second quarter computing revenue grew by approximately 50% year-over-year and approximately 3% quarter-over-quarter. We remain on track for the ramp of our server-related revenue in the second half of this year. Recall that with products from Fairchild, we have won designs for power stages for cloud computing and server applications with an addressable content of more than $30. Revenue in the third quarter for computing end-market is expected to be up quarter-over-quarter due to normal seasonality. The consumer end-market contributed revenue of approximately $194 million in the second quarter. The consumer end-market represented approximately 15% of our revenue in the second quarter. Second quarter consumer revenue grew by approximately 96% year-over-year and approximately 7% quarter-over-quarter. Strength in white goods was a key driver of consumer-related revenue in the second quarter. Revenue in the third quarter for the consumer end-market is expected to be up quarter-over-quarter due to normal seasonality. In summary, our execution remains strong and we continue to deliver solid results. We have shown impressive expansion in our margins and our free cash flow generation is accelerating at a rapid pace. Fairchild integration is progressing on schedule and performance of Fairchild thus far has exceeded our expectations. While we have benefited from a favorable industry and macro-economic environment, a significant part of our outperformance has been driven by company-specific factors such as accelerating traction in automotive, industrial, and communications end-markets, and solid execution on the operational front to realize synergies and cost savings. With the strong pipeline of design wins coupled with favorable macro-economic environment and a healthy supply-demand dynamics in the semiconductor industry, visibility into business remains strong. Now I'd like to turn it back over to Bernard for forward-looking guidance.

Thank you, Keith. Based on product booking trends, backlog levels, and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $1.340 billion to $1.390 billion in the third quarter of 2017. The exit from the mobile image sensor business is slightly impacting the sequential revenue growth in the third quarter. Backlog levels for the third quarter of 2017 represent approximately 80% to 85% of our anticipated third quarter revenue. For the third quarter of 2017, we expect GAAP gross margin in the range of 36% to 38% and non-GAAP gross margin in the range of approximately 36.2% to 38.2%. Factory utilization in the third quarter is likely to be up sequentially. We expect total GAAP operating expenses of approximately $315 million to $336 million. Our GAAP operating expenses include the amortization of intangibles, restructuring asset impairment, and other charges, which are expected to be approximately $30 million to $37 million. We expect total non-GAAP operating expenses of approximately $285 million to $299 million. We anticipate third quarter GAAP net income, net other income and expenses, including interest expense will be approximately $35 million to $38 million, which includes non-cash interest expense of approximately $8 million to $9 million. We anticipate our non-GAAP net other income and expenses including interest expense will be approximately $27 million to $29 million. Cash paid for income taxes in the third quarter of 2017 is expected to be approximately $13 million to $17 million. We expected total capital expenditures of approximately $105 million to $125 million in the third quarter of 2017. As I indicated earlier, capital intensity in the second half of 2017 will be higher to compensate for the low level of capital intensity in the first half of the year. Our target of 6% to 7% annual capital intensity remains unchanged. We also expect share-based compensation of approximately $16 million to $18 million in the third quarter of 2017, 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 2017 is expected to be approximately 427 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 Danielle, please open up the line for questions.

Thanks guys, let me ask you a question. The first question is on margins in general, you guys said solid upside in the gross margin, but the OpEx was a little bit higher in the second quarter than expected. Can you just, Bernard, walk us through the puts and takes in the gross margin upside and then the OpEx side, the variable aspect of it? I think everybody understands if revenues are stronger, the OpEx can be higher. But just walk us through what drove it so high and why you have confidence that should we have more upside in the revenue side of the equation, the OpEx intensity will go down in the second half as you guided?

Thank you, Ross. So on the gross margin front, the puts and takes are the same we have articulated in our Analyst Day, mainly revenue fall through, cost reductions, mix, and synergies, those are the major ones. On the OpEx front, as we stated in our prepared remarks, pretty much all of the sequential increase is due to variable comp. As we go further up, there is a limit to that, so we expect that will not continue. Also, we guided our stock-based compensation to be slightly lower, which is just based on the normal calculation of our shares. So it's mainly stock-based comp and variable compensation for which we know we have limits based on our bonus plan.

Great, thanks for that. And I guess this is my follow-up, Keith one for you…

Sorry, furthermore, we also expect to still continue generating more and more synergies coming from Fairchild that will help us also moderate and reduce the intensity of our OpEx for the second half of the year.

I think there was a couple of things that put us in a good situation. One is, there has been a good discipline on capacity expansion in the industry in the last couple of years and what we have seen here is a relatively low amount of increase quarterly, but it's been a steady increase for the last several quarters. So, without capacity being added, you end up with fuller factories, a little more supply tightness, and a little better positioning on pricing. As opposed to something that has ramped quickly in response to some new market demands has really just been slow and steady with the controlled discipline on new capacity.

Thanks for taking my question and a good job on the results. Just follow up on that capacity utilization, if you could help quantify what utilization is right now? And then, importantly I think CapEx was sub-5% in the first half, but you are expecting a ramp in the second half to get back to your 6% to 7% outlook, what's driving that.

So, the utilization rates are high 80s right now and will remain there in the next quarter. From a CapEx perspective, it's really just the cycle times on getting new capital things that have been ordered for some time, lead times extended out on those and they just appear to be landing in the third quarter versus the second quarter.

Got it. And as my follow-up, good to see the strong free cash flow generation, I think in your prepared remarks you mentioned commitment to delevering the balance sheet, at your Analyst Day you had set out a target to getting to 2x leverage by the end of the next year. Given the strong free cash flow, do you think it's time to rethink that target and perhaps pull it in somewhat? Thank you.

Based on what we are seeing right now, the possibilities of pulling in are very real. And it is our priority number one to delever the balance sheet.

Hey, thanks guys. For the gross margin up surge, we assume that this is the new baseline for the synergies going forward and then maybe talk about the gross margins going forward, the other drivers?

In general terms, yes, it is the new mark. We have experienced increased revenue growth compared to our target model, which is beneficial for us. This new base will allow us to rely on our synergies, and we still anticipate about a 50% fall through on incremental revenue, along with the additional savings from the various plans we previously discussed.

Great. And then, my follow-up on lead times, can you just give us kind of where they are? Do you expect them to go down this quarter, when do you think you could bring them back to normal?

So, they are in the over the mid-teens and we expect them to be relatively flat even though we are bringing on significant new capacity in the third quarter.

Yes. Good morning and thanks very much for taking the question. First question is, another one on gross margin. Gross margin is guided up next quarter even though I think the end market mix gets a little bit more challenging with the industrial market down, wondering how much of that is some of the Fairchild COGS synergies starting to come through. I think you guys have planned for a little over $100 million in total of Fairchild COGS synergies, which would I think get you another couple of hundred basis points to gross margin. Are you seeing some of that already in the September quarter as most of the starting to come?

That's mostly still to come. We expect most of the Fairchild related manufacturing synergies to come towards the end of the year and in 2018. There were some supply chain related synergies in the second quarter and we expect that will continue. So, it is more others than Fairchild synergies that will help in the third quarter. Remember we also said we exited the mobile center business which has margins that we didn't like, that should also help. And in terms of the way we are guiding, we are guiding for a 50% fall through on the incremental revenues.

That's appropriate. The follow-up question about seasonality in the fourth quarter. Obviously, Fairchild, so maybe you can help us think about what combines seasonality is for the December quarter and the move to sell-in versus sell-through in terms of the revenue recognition through distribution. How is that also playing into the seasonality this year? Thank you.

I don't think sell-in to sell-through is affecting in any meaningful way. We have the controls in place to make sure we don't grow inventories in an abnormal way. Seasonality for the fourth quarter has typically been down. Fairchild historically has been down more than ON legacy and ON legacy in the 2% range. So, it's probably in that 2% to 4% range is what we are expecting that to be.

Yes. Thank you and congrats on solid results. The question on the automotive business, it seems that you are well-positioned on kind of two fronts, one the proliferation of ADAS systems with respect to your CMOS sensor portfolio and your radar portfolio, but also the trend towards electric vehicles on your power management portfolio. So, wanted to get your sense on how you are looking at total content for both sensors and power management modules and how you are kind of poised to specifically expand the sensor portfolio to incorporate or to support more higher levels of ADAS systems?

On the car content, there is quite a bit of difference between the electric vehicles and non-electric vehicles. It is as much as $300 per automobile increase for electrification, so that is very significant. On the image sensing or ADAS side, we are seeing like a 25% CAGR growth rate on that as cars adopt more cameras for more safety features and so we see that as being sustainable for at least three or four years, that kind of CAGR.

Okay. Great. And last question for me, in terms of the industrial side, on the machine vision, can you talk a little bit about the trends towards machine vision and factory automation and how that's driving your business going forward?

It's a big part of the outgrowth in the industrial market over years past. Basically, the advent of affordable sensors plus artificial intelligence being added to automation in the industrial side gives a real boost. We are also seeing from a power perspective in industrial automation, the new technologies we have provide significant increases in energy efficiency and so there is a replacement cycle that goes on with that.

And you had mentioned that you are working on artificial intelligence partnership or development, could you maybe elaborate further on that? Thank you.

Can't give any specifics on it. Just to say there are some partners that we are working very closely with to use both our power and sensor solutions in artificial intelligence at the moment.

Thanks for taking the questions and congratulations on the execution guys. Keith, I wanted to follow-up on activity in the compute areas specifically server power. That's a nice win that starting for the team, can you just talk about how server power could evolve over the next few years after getting in on the niche initial beachhead? What should investors expect from a share and content standpoint as subsequent server generations come?

Yes. So, we have stated our current power stage participation is about $30 per server. We expect that is not with significant market share. We do expect that the power will be increasing in new server platforms and so you'll get more dollar content perhaps another $15 over the next couple of years. And then from a market share perspective, we would be participating in that power stage market plus the control market would add more money to that. So, you should see similar kinds of performance as we had in the desktop, notebook ramps from a share perspective and a dollar content perspective.

That's helpful. And then a product question with regard to pricing and activity there, another company that is also based in the Phoenix area last week indicated that they are seeing improving pricing in their portfolio on the MC. So, I don't think that's a meaningful or a material part of the ON portfolio, but it brings up one of the trends that we're increasingly seeing in the semiconductor sector. Are you seeing any signs of improving pricing in your product groups, if so where and if not, do you think they could emerge either later this year or next year? Thank you.

No. We see the pricing environment improving across the board as you would suspect with little extended lead times and continued growth in the marketplace. The supply-demand dynamics have become more favorable for us.

And you've seen an environment where pricing would actually be flat quarter-on-quarter or just looking at more moderate decline, say in the half percentage claim area?

I think we are at the flatness stage.

Hi, good morning. Given some softness in the U.S. other market, what's your expectation for non-GAAP growth in automotive revenue this year?

So, auto revenue 2017 versus 2016 for the company should be up above around 30% year-on-year.

And excluding Fairchild?

About more than 10% if you exclude Fairchild.

Okay. Great. And then, is your Q3 revenue guidance based on the expectation that channel inventories remain flat in Q3 given some concern in the supply chain that there could be some tightness and if your outlook is for flat inventory levels, when do you think there is an opportunity for the channel to start replenishing inventories a bit?

So, we do expect it to be roughly flat. I think we had it in our guidance quarter-on-quarter, not much change and from a replenishment perspective actually, we think we're managing it quite well. So we're not looking for any replenishment cycle, just really managing our sell-through basis even though we are now selling in.

Yes, thank you. Good morning. Just to ask about the September guidance and the context of some of the stronger business conditions you are seeing now. I mean it seems like the guidance is on the lower end of what we would say to be normal seasonality, is that a function of conservatism on your part or is it perhaps a different definition of seasonality given Fairchild? Just for some perspective there, please.

So, as a reminder, the exit of the mobile business is indeed affecting the seasonality or the growth, the sequential growth of approximately 1%, also within our numbers not the most aggressive.

Okay, fair enough. As a follow-on to that, you talked about in your prepared remarks about no evidence of inventory build or enormous booking on the part of customers. I mean given your experience how high the lead times typically get when, you typically see that? I guess, perhaps as the way we're asking it is, what's different right now from prior years where we have seen some of those enormous bookings?

Well, lead times definitely had reached higher levels when we had the last peak. So this is more moderate at this stage. And I think the other piece of it is even though the lead times have gone now, generally speaking, the suppliers is keeping up with the demand. So there is not a tremendous imbalance there.

Hi, thanks guys. Congratulations on your margins, finally breaking out to the 37% level. Just on the automotive side, if you look at the automotive ADAS, can you talk about what are the tailwinds there especially, what is AB penetration in the U.S. and do you see any tailwinds from China in CapEx especially if you look at 2018?

Yes. So specifically on ADAS that continues to be a global phenomenon, not just Europe or U.S. phenomenon. There are fewer cars with advanced ADAS in China, but the share number that are being built there and the growth particularly in the SUV arena is contributing nicely to a very quick ramp. So what we do see is continued global demand. I mentioned earlier, we're expecting something in the mid-20s CAGR there as a result of not just more content in the higher-end cars but in China as well with the lower end.

Got it. And on the use of cash, I know you mentioned, delivering was the top priority, is there any update to that 2x net leverage that you talked about by end of 2018? Does that get pulled in now? Thanks.

It is very likely we will pull it in, yes.

Thank you. Going back to pricing question or comments, if you are seeing better pricing than expected and your estimated or your target for 40% gross margin, I guess what and when you are targeting 40% gross margin, what were your assumptions for pricing declines year-over-year?

We usually build, in our specific model area we used a 6% decline in ASPs to be offset with cost reductions to get to the 40% gross margin.

Okay. So we would just say you're cracking ahead of it and with, and it seems last few quarters you've been saying price pressure is lessening?

Price pressure is lessening and we would be doing better than our model if this continues.

Hey guys, really nice execution, nice to see it all come together. So exiting the mobile image sensor business during the quarter will impact this and impact for next quarter as well? And then finally are there other businesses that you guys see that don't meet that gross margin profile?

So, the revenue was approximately 1% of our total. And we continually look at opportunities and we articulated that in our Analyst Day that we are accounting on about 40 bps coming from exiting business and we'll continually look at divesting from non-strategic underperforming businesses.

The mobile image sensor was very, very low.

Good morning, guys on the results. Two questions, if I may. Just the mobile devices business, is there any different dynamic or the seasonality this year potentially because of the adapted charging dynamics on broader adoption that would mitigate some of the pressure Fairchild, do you foresee at the end of the year? And then, second, on 180 million of synergies targeted for this year, what do we add to-date through the first six months?

On the mobile business, we are actually seeing a favorable condition for the third quarter. We are expecting the China-based handsets to increase over the second quarter as well as preparation for new launches from the non-China based areas. So, seasonality actually normally should have been even for Fairchild up in the third quarter, when they launched those new models and it will continue being so this year.

On the Fairchild synergies, we are ahead of the plan. We have yet to complete the backend integration that ERP final steps are scheduled to happen in the fourth quarter, which we will see some incremental back office savings, and then, most of the rest will be coming from the COGS manufacturing line in 2018.

Yes. Fourth quarter, it tends to soften this year again based on specific phone launches there might not be as much softening.

Good morning, guys, and solid job on the quarter, the execution. Within the Industrial segment, you guys have talked about military aerospace related programs suction, given the focus on defense-related spending, what do you guys see either at design-win pipeline or sort of near to mid-term revenue contribution? Can you just remind us, are the margins for defense and aerospace, are they higher than corporate gross margins?

Yes. The margins are higher and we have seen a strengthening in that business overall. Design-win pipeline is as active as it's ever been.

Hi. This is Vinayak calling in for Craig. I just have a follow-up on the mobile side of things. You guys touched upon the content with opportunity you are seeing in mobile. Can you just elaborate on what are the key applications driving that content growth?

The move to fast charging, and the move to USB Type C, probably the largest dollar content contributors.

Got it. And just a follow-up on that, can you discuss the competitive landscape regarding the transition to USB Type C and how you are setting yourselves apart in that market? Lastly, which end markets or product segments within USB Type C are experiencing the most traction?

So, really it's about efficiency and bandwidth when you are talking about the USB marketplace and so you do differentiate basically on device performance. We participate in end-to-end, so we have the whole solution and that gets adopted by various customers in various ways.

Hey, good afternoon, guys. Thanks for letting me ask the questions, congratulations on the solid results. But, first question just had to do with the full year free cash flow guidance, even if I adjust for the one-time licensing gain in the first half and sort of higher CapEx in the second half, it looks like on an organic basis, you kind of guiding to flat half-on-half free cash flow despite revenue growth and better profitability in the second half. Or are there big one-time issues and I know that free cash flow can have some timing issues that hit in the back half of the year, or do I just chalk this up to you being kind of conservative?

Probably a little bit more of the second. We do have to that the bonuses that we accrued for in the first half, so you have a little bit of working capital leakage in the second half, but other than that, nothing more, no other one timers.

Perfect. You mentioned the revenue impact of exiting the mobile image sensing business; what was the impact on margins? How should I consider the margin from that business? Also, I know this was brought up earlier, but Keith, could you provide insight into other potential revenue reductions you might implement, including the timing and how we should view that in relation to the long-term gross margin and operating margin model?

So, the second part of your question there, Bernard indicated earlier, we had 40 bps in our model of improvement due to getting out of such businesses. There are three or four of them actively being discussed right now. And the timing frankly will be whatever we could do from a closing perspective. So, we are quite active in that area. But, really can't do a prediction based on the timing that customers take.

On the margin contribution for the mobile image sensor, it was very, very low.

Thank you, everyone, for joining the call today. We look forward to seeing you at various conferences. Goodbye.