ON Semiconductor Corp (ON) — Q1 2018 Earnings Call Transcript

Thank you, Sarah. Good morning and thank you for joining ON Semiconductor Corporation's first quarter 2018 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 2018, 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 include 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-K, Form 10-Q, and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the first quarter of 2018. 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 synergies-related discussions on this call, we have used Fairchild's 2015 results as the base for all comparisons. We will host our 2019 Analyst Day on March 8 in Scottsdale, Arizona. We will send the invitations for the event shortly. Now let me turn it over to Bernard Gutmann, who will provide an overview of the first quarter 2018 results. Bernard?

Thank you, Parag, and thank you everyone for joining us today. We delivered yet another quarter of strong financial results which exceeded our guidance and street consensus on all key metrics. Near to midterm outlook for our business remains strong. Furthermore, long term outlook for our business continues to improve as we are seeing an inflection in long term demand for our products. We continue to expand our gross and operating margins, and we are making prudent investments to drive future revenue growth and margin expansion. With strong revenue growth coupled with margin expansion, our free cash flow generation remains robust. We are making strong progress towards our target financial model. We continue to see solid strength in our business. Indications from our customers and macroeconomic data point to continuing strength in demand for our products in near to midterm. Our design win pipeline continues to expand, driven by a strong product portfolio for emerging and fast growing applications in the automotive and industrial end markets. Global macroeconomic environment remains highly favorable, and we are seeing strong demand from all geographies. We see an upwards inflection in long term demand for our products, especially for automotive and industrial end markets. This inflection in demand is driven by strong traction of our power management products for medium and high voltage applications. We continue to further strengthen our position in imaging market for automotive and industrial applications, and demand outlook for our imaging products continues to strengthen. We have established ourselves as a strategic long term partner for our customers and our customers are increasingly relying on us to meet long term demand for power management and sensor semiconductor products. With increasing strategic engagement with us, many customers are now asking us to enter into long term supply agreements. Accelerating long term demand for our products and customer requests for long-term supply agreements necessitate us to increase the level of investment in our manufacturing capacity. We continue to invest to drive our revenues and margins. We are also increasing our investment in our captive raw wafer manufacturing capacity in Czech Republic. The primary objective of our increased investment in our raw wafer manufacturing capacity is to offset the impact of steep rise in market prices for raw wafers. This investment should help us expand our margins as we don’t expect any moderation in raw wafer pricing for the foreseeable future. I must point out that we are among a very few semiconductor companies with the capability to manufacture their own raw wafers. As a result of our increased capital investment, our capital intensity for 2018 and 2019 will likely be in the 8% to 9% range as opposed to our target of 7%. As I indicated earlier, the increase in capital expenditure is driven by the need to make investments to adjust to a higher growth environment and to further improve our manufacturing cost structure. We believe that after making higher capital investments in 2018 and '19, our long term capital intensity should come down to 7%. Free cash flow generation remains a key priority for the company. Despite higher capital investments, we expect to generate approximately $800 million of free cash flow in 2018. We intend to use this free cash flow for deleveraging and share repurchases. I am very pleased to announce that we have reinitiated our stock repurchase program in the second quarter. Given our accelerating momentum in key strategic markets and our roadmap for margin expansion and free cash flow generation, we are very upbeat about our future outlook and we believe that repurchase of our shares at current price levels is a very attractive use of our cash. Now let me provide you additional details on our first quarter 2018 results. Total revenue for the first quarter of 2018 was $1.378 billion, a decrease of 4% as compared to GAAP revenue of $1.437 billion in the first quarter of 2017. Our revenue for the first quarter increased by 7% as compared to non-GAAP revenue of $1.282 billion in the first quarter of 2017. Recall that in the first quarter of 2017, we had a one-time benefit of $155 million to our revenue due to a change from sell-through to sell-in revenue recognition. GAAP net income for the first quarter was $0.31 per diluted share as compared to $0.18 in the first quarter of 2017. Non-GAAP net income for the first quarter was $0.40 per diluted share as compared to $0.27 in the first quarter of 2017. GAAP and non-GAAP gross margin for the first quarter was 37.6%. On a GAAP basis, our first quarter gross margin improved by 260 basis points year over year, and on a non-GAAP basis, gross margin improved by 220 basis points year over year. This strong gross margin performance was driven by solid operational execution and improved mix resulting from higher contribution from our automotive, industrial, and server businesses. With tailwinds from additional manufacturing synergies from Fairchild, mix improvement, and portfolio optimization, we expect to make strong progress towards our target model in the current year. GAAP operating margin for the first quarter of 2018 was 13.5% as compared to 12.7% in the first quarter of 2017. Our non-GAAP operating margin for the first quarter of 2018 was 15.7%, an increase of approximately 250 basis points over 13.2% in the first quarter of 2017. On a year-over-year non-GAAP revenue increase of 7% for the first quarter of 2018, our non-GAAP operating income increased by 28%. This strong operating income performance demonstrates the leverage and strength of our operating model. GAAP operating expenses for the first quarter were $332 million as compared to $320 million for the first quarter of 2017. Non-GAAP operating expenses for the first quarter were $301 million as compared to $285 million in the first quarter of 2017. Operating expenses for the first quarter were higher than the midpoint of the guidance due to higher revenue and increased R&D investments to support newly emerging opportunities in automotive and industrial end markets. We expect our non-GAAP operating expenses as a percentage of revenue to continue to decline for the remainder of the year, and we expect to make strong progress in 2018 towards our target non-GAAP operating expense intensity of 21%. First quarter free cash flow was $127 million and operating cash flow was $226.5 million. Capital expenditures during the first quarter were $100 million, which equates to a capital intensity of 7%. We continue to de-lever our balance sheet, and in the first quarter, we used $136 million to pay down our debt. We exited the first quarter of 2018 with cash and cash equivalents of $925 million as compared to $949 million in the fourth quarter of 2017. At the end of the first quarter of 2018, days of inventory on hand were 123 days, up by eight days as compared to 115 days at the end of the fourth quarter of 2017. The increase in inventory was driven by the expectation of continuing strong demand for our products in the near to midterm. Semiconductor industry supply has been strained in recent months due to a strong demand environment, and by maintaining an adequate level of inventory in line with expected demand, we want to ensure that we are able to meet our customer requirements. We expect our internal inventories to decline in terms of days during the second quarter of 2018. After successive declines in the last three quarters, distribution inventory went up in the first quarter. This increase was driven by expectations of strong distribution sell-through in the second quarter. We expect distribution inventories to remain within our normal range of 11 to 13 weeks in the near term. To mitigate the risk of excessive inventory in the channel, we are proactively managing inventory in the distribution channel. We have implemented systems to ensure that distributors do not carry more inventory than that is needed to support 11 to 13 weeks of resales. For the first quarter of 2018, our lead times were up slightly quarter over quarter. Our global factory utilization for the first quarter was slightly up quarter over quarter. Now let me provide you an update on the performance of our business units, starting with the power solutions group, or PSG. Revenue for PSG was $693 million. Revenue for the analog solutions group for the first quarter of 2018 was $496 million, and revenue for the image sensor group was $189 million.

Thanks Bernard. First quarter of 2018 was another successive quarter of strong results and solid all-around performance. We continue to deliver strong revenue growth along with solid margin expansion and robust free cash flow generation. Our momentum in key strategic markets continues to accelerate driven by new products and our exposure to the fastest growing sub-segments in automotive and industrial markets. We are seeing strong ADAS, LED lighting, machine vision, and energy efficiency applications. With tailwinds from increasing favorable macroeconomic conditions and strong momentum in our business, we are well positioned to make strong progress towards our target financial model in 2018. Business conditions remain favorable and demand continues to strengthen across most end markets. Pricing continues to be benign as compared to historic trends. We are seeing strong demand for our products in automotive and industrial end markets. As I have indicated in recent earnings calls, our business today is driven by sustainable secular growth drivers in the fastest growing semiconductor end markets, as opposed to being driven by macroeconomic and industry cyclicality a few years ago. Through our investments over the last many years in high growth segments and in highly differentiated products in automotive, industrial, and communications end markets, we have radically transformed the nature of our business. Customers are increasingly relying on us as a key provider of enabling technologies for newly emerging and disruptive applications in automotive and industrial end markets. The sustained demand for semiconductors over several past quarters has put pressure on the industry’s ability to meet demand. We expect this strength in demand to continue for the foreseeable future, driven primarily by structural changes in the end market dynamics and a strong global macroeconomic environment. We expect demand for semiconductors from automotive and industrial end markets to continue to grow at a steady pace for the next few years. Furthermore, revival of computing end market by artificial intelligence and data centers and emergence of new applications such as IoT should result in strong demand for a broad array of semiconductor products. Given the increasingly strategic nature of our engagement with our customers and a generally tight semiconductor industry supply environment, many customers now want to enter into a long-term supply agreement with us. To ensure that we are well positioned to address our customers’ demand, we intend to put in capacity to address areas of strategic thrust in automotive and industrial end markets. We are also making strong progress in expanding our capacity in our 8-inch joint venture fab in Japan. As Bernard noted in his remarks, prices for raw wafers have increased substantially in the last few months. We are among a very few semiconductor device manufacturers with captive wafer manufacturing operations. We have been able to moderate the impact of the rise in cost of raw wafers. Given our outlook for semiconductor industry growth for the next few years, we believe that prices for raw materials for semiconductor manufacturing will continue to be a challenge for the semiconductor industry. We are raising our investment to further extend our competitive advantage from our captive raw wafer operations. With a higher level of investments in strategic capacity for fast growing products and in our captive raw wafer manufacturing operations, we expect to see a rise in our capital intensity for 2018 and 2019. We expect capital intensity of 8% to 9% for 2018 and 2019, slightly higher than our target model of 7%. As Bernard indicated in his remarks, this higher level of capital intensity is driven by the need to make investments to adjust to better expected demand for our products. We expect capital intensity to subside to 7% after 2019. Our margin performance continues to be stellar. Our operating model has shown strong operating leverage. As Bernard mentioned earlier, on a year-over-year revenue increase of 7% for the first quarter of 2018, our non-GAAP operating income increased by 28%. In-sourcing of Fairchild’s back end operations remains on track, and this in-sourcing should drive meaningful margin expansion in 2018 and 2019. At the same time, mix shift towards margin-rich automotive and industrial end markets and further divestiture of non-core businesses should drive additional margin expansion despite increases in prices for raw material. Now I’ll provide details of the progress in our various end markets for the first quarter of 2018. Revenue for the automotive market in the first quarter was $445 million and represented 32% of our revenue in the first quarter. First quarter automotive revenue grew by 8% year over year. For the first quarter, we again saw strong broad-based demand for most product lines. We continue to see strong demand for our image sensors for ADAS applications. With a complete line of image sensors, including 1, 2, and 8 megapixels, we are the only provider of a complete range of pixel densities on a single platform for the next generation ADAS and autonomous driving applications. We believe that a complete line of image sensors on a single platform provides us with significant competitive advantage, and we continue working to extend our technology lead over our competitors. Our design win pipeline for ADAS continues to grow at a rapid pace. We are actively engaged with our ecosystem partners for the development of next-generation ADAS systems, and we remain the primary image sensor partner for leading ADAS and autonomous driving technology leaders. Driven by our technology lead, we are seeing strong traction for our image sensors for ADAS applications in China. Our silicon carbide development remains on track and we expect to see silicon carbide-related revenue from the automotive market in the second half of this year. In addition to image sensors, we experienced strong growth in our mixed signal ASIC, power modules, and MOSFETs. Growth in our LED lighting business continues to accelerate driven by ramp of design wins and increased penetration of LEDs in automotive lighting. Our design win momentum continues to be strong in the automotive market. As car makers are increasingly focusing on reducing carbon dioxide emissions, they are relying on us to provide highly efficient IGBTs and other power management devices. Revenue in the second quarter for the automotive end market is expected to be up quarter over quarter. The industrial end market, which includes military, aerospace, and medical, contributed revenue of $362 million in the first quarter. The industrial end market represented 26% of our revenue in the first quarter. Our first quarter industrial revenue grew by a solid 11% year over year. The strength in the industrial market was very broad-based with all the sub-segments posting robust year-over-year growth. We continue to benefit from demand for our power modules and power management semiconductor solutions for the industrial markets. Our power module business for industrial applications continues to grow at a tremendous pace and we expect this momentum to continue for the next few years as we launch new products with higher efficiency. With a focus on energy efficiency around the globe, our design win pipeline for our power modules continues to expand at a rapid rate, and we expect power modules to be a long-term driver for our industrial business.

In the machine vision market, we continued our momentum with our Python line of image sensors. According to a leading market research firm, ON Semiconductor is the leader in image sensors for industrial applications. With leadership in industrial and automotive markets, ON Semiconductor has emerged as a powerhouse for the most demanding and challenging imaging applications. As I indicated on previous earnings calls, we continue to develop synergies with our expertise in the automotive imaging market to accelerate our growth in the machine vision market as both of these markets are driven by artificial intelligence and face similar challenges, such as low light conditions, dynamic range, and harsh operating environments. Revenue in the second quarter for the industrial end market is expected to be up quarter over quarter. The communications end market, which includes both networking and wireless, contributed revenue of $240 million in the first quarter. The communications end market represented 17% of our revenue in the first quarter. First quarter communications revenue declined by 3% year over year due to weakness in the smartphone market, but with higher content and increasing penetration at large global OEMs, we were able to mitigate the impact of softness in the overall market. Revenue in the second quarter for the communications end market is expected to be flat to down quarter over quarter due to softness in end market demand. The computing end market contributed revenue of $149 million in the first quarter. The computing end market represented 11% of our revenue in the first quarter. First quarter computing revenue grew by 20% year over year. This year-over-year growth was driven primarily by ramp in our cloud and server business and a generally healthier client PC market. Momentum in our server business continues to accelerate. As we indicated earlier, we expect our server business to be a meaningful part of our computing business in 2018. We are engaged with leading cloud and server players and are working with leading CPU providers on their next-generation platforms. Revenue in the second quarter for computing end market is expected to be up quarter over quarter due to normal seasonality and continuing ramp in our server business. The consumer end market contributed revenue of $182 million in the first quarter. The consumer end market represented 13% of our revenue in the first quarter. First quarter 2018 consumer revenue was up 7% as compared to consumer revenue in the first quarter of 2017. Revenue in the second quarter for the consumer end market is expected to be approximately flat quarter over quarter. In summary, demand for our products continues to strengthen and we are putting in additional capacity to ensure that we are able to meet customer demand for the next few years. At the same time, we are making investments in our captive raw wafer manufacturing capacity to extend our competitive advantage. Our execution remains solid on all fronts. We established leadership in highly differentiated power, analog, and sensor semiconductor solutions. Customers are increasingly relying on us as a key provider of enabling technologies for newly emerging and disruptive applications in automotive and industrial end markets. Along with strong revenue performance, we are driving significant margin expansion. We solidly remain on track to make strong progress in 2018 towards our target financial model. Now I would like to turn it back over to Bernard for forward-looking guidance. Thank you, Keith. Based on product booking trends, backlog levels, and estimated turn levels, we anticipate that total ON Semiconductor revenues will be $1.405 billion to $1.455 billion in the second quarter of 2018. For the second quarter of 2018, we expect GAAP and non-GAAP gross margin in the range of 37% to 39%. Factory utilization in the second quarter is likely to be down as compared to that of the first quarter. We expect total GAAP operating expenses of $333 million to $351 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be $28 million to $32 million. We expect total non-GAAP operating expenses of $305 million to $319 million. The quarter-over-quarter increase in operating expenses in the second quarter is driven primarily by the seasonality of our stock-based compensation grants. We expect our non-GAAP operating expenses as a percentage of revenue to continue to decline for the remainder of the year, and we expect to make strong progress in 2018 towards our target non-GAAP operating expense intensity of 21%. We anticipate second quarter GAAP net other income and expense, including interest expense, will be $32 million to $35 million, which includes non-cash interest expense of $8 million to $9 million. We anticipate our non-GAAP net other income and expense, including interest expense, will be $24 million to $26 million. Cash paid for income taxes in the second quarter of 2018 is expected to be $11 million to $15 million. We expect our 2018 cash tax rate to be 10% or lower. We expect total capital expenditures of $130 million to $150 million in the second quarter of 2018. We also expect share-based compensation of $24 million to $26 million in the second quarter of 2018, of which $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 GAAP diluted share count for the second quarter of 2018 is expected to be 445 million to 447 million shares based on the current stock price. Our non-GAAP diluted share count for the second quarter of 2018 is expected to be 432 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. For the full year 2018, we expect to generate free cash flow of approximately $800 million.

Hi guys, this is Philip Lee on behalf of Chris Danely. Just wanted to ask you on the higher capital investments for the next calendar ’18 and ’19, what is the impact on the model in terms of gross margins, operating margins, and other changes to your long-term model? Thanks.

It should have no impact on that. As a matter of fact, it will enable us to have more strength and power for revenue growth, but it will not change any of our models in terms of margins.

Got it, thanks. Then as a follow-up, can you talk about the pricing environment now and how it trended last quarter, and how you expect it to trend for the rest of the year?

Yes, it was much better than normal Q1s that we saw, so it’s very benign, and we expect that to continue for the rest of the year.

Great, thanks for the color.

Hi guys, thanks for letting me ask a question. Keith, I wanted to talk about the cycle dynamic. Investors seemingly are increasingly concerned about the semi cycle once again. I know you talked about in your script that you believe ON is exposed to a lot more secular and a lot less cyclical dynamics, whether that be because of mix or some of these long-term agreements that you alluded to today. Can you talk a little bit more about why you think you’re more secularly exposed, and what does that mean that the cycle won’t impact you or is it just a lot less than it did in the past?

We’re not predicting the end of cycles in the industry, but there are a couple of dynamics now that were not present in the last two decades, and that really is the acceleration of dollar content for power in automotive and industrial. The advantages that are being given in those two markets are really significantly increasing the amount of content per unit, which we think gives us a lot of moderation in any cycles that may be coming, so what we’re seeing is just a stronger overall demand for power semiconductors going forward.

Great. I guess as my follow-up, one for you, Bernard. Basically, both questions are going to be on inventory, internal and external. I remember you guys thought, at least on the internal side, you’d be flat to down on your days of inventory, and it went up, so I just want to see how is inventory going up as demand is so tight, and then why did utilization go up in the first quarter but now it’s going down in the second? It seems like there’s a lot of mixed messages there.

The inventory position is we’re really trying to position ourselves to be able to take advantage of demand, and as such we basically ran our factories very, very high during the first quarter to really position ourselves to have the inventories to serve the markets. When we talk about utilization in the second quarter, it’s marginally down - it’s virtually flat, so I don’t see that as a statistically meaningful change. It’s pretty much about the same level.

Great, thank you.

Thanks for taking my question. Keith, on automotive, your Q1 growth year-on-year was quite decent, up 8%. On a sequential basis, it was up about 2%, which I think has been somewhat below the seasonal trends that you have seen. Any specific reason for that? I think as part of that, we also saw image sensors only grow 2 or 3% year on year, but you have seen that as a strong growth opportunity for ON, so if you could give us some more color on what’s happening in autos and then in image sensors in terms of these growth rates, that would be very helpful.

The image sensor piece, overall we’ve been managing the consumer part down as a margin play, so growth in total was much higher for the automotive image sensors than is reflected there in the division. The actual sequential for automotive up 20% year over year, yes, so that’s actually substantially higher for that piece of the business. Then sequentially, there’s nothing significant. There was some shifts in customer patterns that happens from time to time, but there is no significance overall to the sequential.

Also noteworthy is that the fourth quarter sequential was very high, so we’re coming off a very high base. Where normally fourth quarter is modestly up, it was about 6% up sequentially.

I see. For my follow-up, another one on end markets in communications. I think it’s generally well understood that there is weakness in some high-end smartphone demand. Do you think June is sort of the bottom of this cycle and we should start to see more seasonal patterns in the back half, and if you could also give us some color in terms of where do you think the rebound could come from - could it come from your U.S. customers or Korean customers or Chinese customers? Any color on geography would also be very helpful, thank you.

We do expect the second half to resume growth very significantly. We have new model launches from most of the cell phone manufacturers occurring in Q3, and so therefore we actually should see a nice pick-up in the second half.

Yes, thank you. Good morning. A question on wafer capacity that you’re building. Can you talk about the magnitude of the capex there and then how much of that raw wafer capacity that you have internally, and how does that change with that new capacity that you put in place?

It’s approximately a $60 million investment this year and should take our internal capabilities up about 15%.

What’s the cost savings that you get from doing that?

It should be in the order of 15 to 25%, depending on the type of wafers.

Okay. Just as a follow-up on capacity in general, can you talk in general terms, perhaps look out over the last year or so, how much additional capacity you’ve put in place? I know that’s a tough question because there’s differences between front end and back end capacity, but I guess the nature of the question is how capacity has been expanding as related to how demand has been increasing.

I could only give you estimates. That would be calculations that I don’t have in front of me. Certainly we have been adding capacity for the double-digit growth we’ve been getting, and so with the exception of the raw wafer capacity, it is all additive to a revenue perspective.

Yes, thank you, and congrats on the solid results. Just a follow-up again on the wafers. You talked about that you’re one of the few companies that actually has internal manufacturing for raw wafers. Can you talk a little bit about how that can give you a competitive advantage going forward, both from a cost savings perspective but also from a product delivery? I kind of view that as a unique advantage that you have in the marketplace.

Yes. In addition to pricing going up fairly significantly for external wafers, we also have capacity limitations. It’s a very, very tight market, and I think that’s well known, so we get to protect our top line growth as well as improve our gross margins. It is not our intent to produce all of our wafers internally, but it is in the specialty areas where we think there might be constraints for the industry, we’re making those investments to make sure we’re not constrained in our growth and to have a price advantage. As I mentioned earlier, it’s anywhere from 15 to 25%, depending on the type of wafer.

Very good. Bernard, the capex intensity is increasing. We’ve been in kind of a supply constraint environment for several quarters, actually starting at the beginning of last year, so I’m just wondering, have the entire industry underestimated the level of demand that’s coming from auto industrial, now that we’ve had many quarters where we’ve seen increasing dollar content for auto industrial machine vision applications? I’m just trying to get a sense of - it seems like the demand environment is coming in much stronger than expected and this has been happening for several quarters, and the industry is trying to catch up as fast as they can. Just wondering if you could elaborate a little bit on that as well, thank you.

I think we agree with your statement, with your assessment. Definitely the demand environment for us has been very strong for those end markets, for automotive and industrial and as such we are trying to make sure we have the capacity to serve those needs. We believe we are also gaining share, so as a result we are definitely increasing our capex investments to make sure that we are in a position to serve those demands.

Do you see capex investments increasing across the industry?

Slightly.

Hi, good morning. If I may follow up just on the capex outside of the raw wafers, with the Fujitsu investment announced last year and now the increase in capex outside of the raw wafers, is there a way to highlight what dollar of capex going in would represent in terms of revenue opportunity for you coming out on the other side, in terms of just the return on that investment?

I would say our 7% model we put in place was for something in the low to mid-single digit growth rates, and as we go to the 8 or 9, we’re now looking for something in the high single digit range.

Okay, thank you. As a follow-up, with $800 million-plus of free cash forecast for calendar ’18, that implies give or take around $700 million for the rest of the year. Could you split between buyback versus debt reduction? Is it a 50/50 split? Just some type of range we should think about for the next three quarters of the year.

We haven’t given the details on that, but we will continue de-levering in a meaningful way and at the same time have some share buybacks to have a full picture.

Is there a minimum level of leverage that you’d not like to go below, Bernard?

At this moment, not really. Obviously we don’t really want to get to zero, and for that we need still a lot of money to pay down our debt, but we are also trying to risk manage the rising interest rate environment we are currently under.

Thanks for taking my question. I’ll echo the congrats. Keith, I wanted to follow up on a couple comments that were made in the prepared script. On a couple of instances, the company addressed the long-term demand environment and stated it was very positive and also indicated that customers are interested in long-term supply agreements, which I don’t recall hearing in at least the recent past. So the question is, one, if you were to engage in more long-term supply agreements, what would that do for manufacturing efficiencies given the visibility you would have; and two, what would the implications be for pricing?

Generally it stabilizes our manufacturing environment, which is more efficient for us, so we can plan more level rather than peaks and valleys. Generally speaking, we would only do this for margin products that enhance our situations, so the two together we see as a very positive move for the company.

How quickly can you move on those deals, and how material could they be as a percent of revenue?

We’re moving on them actively all the time, and they would never be more than 50% of our capacity in any market.

Okay, thank you. The follow-up is for Bernard. Bernard, nice to see the midpoint of gross margin guidance at 38%, a real milestone for the company. The question is, as you look at where the business is from a portfolio optimization standpoint with your carve-outs and bridge inventory built, which you had been saying last year was not possible due to the demand environment, where are we on those two items as we look out over the next year or two? Thank you.

We’ll continually look at opportunities for portfolio enhancing and small divestitures that are not strategic and at the same time help us on a gross margin point of view. We don’t expect anything big, but we continue looking at doing some work in that area. We continue being in the same situation with the inventory bridge build. As we talked about earlier, we see long-term demand being pretty strong, so at this moment we are not able to build bridge inventories but we are getting the fall-through on the incremental revenues, and that’s showing up in the gross margin improvement that we have seen historically and will continue seeing, and that’s shown through our upcoming guidance at 38%.

First of all, congratulations. Very good results and guidance. Keith, I had a question. Every time previously we have talked to you and you guys have publicly spoken, you’ve said you were more tied to macro. Now, it seems like greater than 55, almost 58% of your revenues are coming from automotive and industrial. Should we think of as maybe not so tied to macro and maybe more tied to these end markets?

Clearly we can’t distance ourselves from the macro environment. We are a broad-based supplier, but even without those two markets there’s still an economic tie. The difference is just the dollar content and how rapidly it’s rising, particularly in industrial for us, and so that certainly is providing a boost to the overall macro demand.

Fair enough. Keith, I wanted to understand the long-term commitments you’re talking about. Would this be that a customer would commit a certain amount of dollars, fixed dollars that they have to buy per year, and again would that not lower your seasonality to some degree?

It is for amounts that extend beyond the year, and it would maybe moderate it slightly, but not necessarily. We do take into account the customers’ patterns into those contracts.

Hi, good morning. Given your outlook for continued strength in demand and tightness, what would be your initial Q3 visibility? Also, could you talk about any other manufacturing bottlenecks that you see outside of raw wafers, including potential back end tightness?

On the visibility, obviously we don’t guide out. Our normal seasonality for the third quarter is approximately 4% up.

Just a little color on that. We would see the handset market coming back in the second half, which is not present in Q2, that is what provides some of the impetus, as well as the consumer side also increasing in the third quarter.

Great. Congrats on the nice results, guys. My first question, on the raw wafers, are they only silicon or are you guys doing specialty, like silicon carbide? Are you in-sourcing that as well, and perhaps talk a bit more about that ramp that you guys see coming in the second half for silicon carbide.

The investments include both the pure silicon and specialty wafers, so it’s the mix that supports our growth.

Great. I don’t know if you have any details on silicon carbide, perhaps what percent of sales that could be a few years down the road?

Well, we are expecting tremendous growth. Today, it’s a very low percentage. I would imagine it would show up even with high growth as being something that’s in the 4 or 5% range in three years.

Lead times are in the middle teens, and they increased slightly over last quarter. As we mentioned in previous occasions, we saw a lead time expansion in the first half of last year, and since then they have been relatively constant with a slight uptick in the second quarter.

Thank you everyone for joining the call today, and please feel free to reach out to us with any follow-up questions. Goodbye.