ON Semiconductor Corp (ON) — Q3 2018 Earnings Call Transcript

Thank you, Chris. Good morning and thank you for joining ON Semiconductor Corporation's third 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 third 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-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the third 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. As announced earlier, we will host our 2019 Analyst Day on March 8 in Scottsdale, Arizona. If you would like to attend the event and haven’t received an invitation, please let us know. Now let me turn it over to Bernard Gutmann, who will provide an overview of third quarter 2018 results. Bernard?

Thank you Parag, and thank you everyone for joining us today. We delivered yet another quarter of strong financial results. Our results for the third quarter and guidance for the fourth quarter of 2018 have exceeded expectations on all key metrics. The strong financial performance was driven by our multiple secular drivers in various end markets and by solid execution on the operational front. Our robust financial results over the last several quarters clearly demonstrate the strength of our business and our steadfast operational execution. Despite the overhang of trade tensions, rising bond yields, and fears of slowing global growth, the overall demand environment remains favorable. We have seen a few spots of weakness, especially in the greater China region in industrial and white goods segments; however, we have been able to offset this softness in greater China with strength in other markets. Our near to mid-term outlook for our business remains healthy, driven by a significant increase in our content in automotive, industrial, and cloud power solutions for datacenters and 5G deployments. Secular drivers powering our business remain intact and our traction in our strategic markets, which include automotive, industrial, and cloud power, continues to be strong. Although we are confident in our near to mid-term outlook, we are managing our business in a very prudent manner. Our channel inventory remains at the lower end of our target range of 11 to 13 weeks, and we have meaningfully reduced days of inventory on our balance sheet. At the same time, we continue to invest in our operations and in our R&D efforts to drive long-term growth in our key strategic markets and to improve our profitability. Now let me provide you additional details on our third quarter 2018 results. Total revenue for the third quarter of 2018 was $1.542 billion, an increase of 11% as compared to revenue of $1.391 billion in the third quarter of 2017. GAAP net income for the third quarter was $0.38 per diluted share as compared to $0.25 in the third quarter of 2017. Non-GAAP net income for the third quarter was $0.57 per diluted share as compared to $0.44 in the third quarter of 2017. GAAP and non-GAAP gross margin for the third quarter was 38.7%. On a GAAP basis, our third quarter gross margin improved by 100 basis points year over year, and on a non-GAAP basis, gross margin improved by 80 basis points year over year. This strong gross margin performance was driven by solid operational execution and by improving mix resulting from the higher contribution from our automotive, industrial, and server businesses. On a year-over-year basis, third quarter 2018 gross margin was negatively impacted by the rise in certain input costs. With the anticipated ramp in additional internal wafer capacity towards the end of this year, we expect to partially offset the impact of increased input costs. Our GAAP operating margin for the third quarter of 2018 was 15.7% as compared to 12.7% in the third quarter of 2017. Our non-GAAP operating margin for the third quarter of 2018 was 17.8%, an increase of approximately 120 basis points over 16.6% in the third quarter of 2017. On a year-over-year revenue increase of 11% for the third quarter of 2018, our non-GAAP operating income increased by 19%. This strong operational performance demonstrates the leverage and strength of our operational model. GAAP operating expenses for the third quarter were $355 million as compared to $347 million for the third quarter of 2017. Non-GAAP operating expenses for the third quarter were $322 million as compared to $296 million in the third quarter of 2017. Third quarter free cash flow was $228 million and operating cash flow was $358 million. Capital expenditures during the third quarter were $130 million, which equates to capital intensity of 8.5%. Recall that to meet increasing demand for our products and to mitigate the impact of the steep rise in prices of raw wafers, we expect a higher level of capital intensity for this year and next. We continue to de-lever our balance sheet, and in the third quarter, we used $65 million to pay down debt. We exited the third quarter of 2018 with cash and cash equivalents of $951 million as compared to $850 million at the end of the second quarter of 2018. We used $75 million of cash to repurchase 3.6 million shares of our stock in the third quarter. At the end of the third quarter, days of inventory on hand were 116 days, down six days as compared to 122 days in the second quarter. Distribution inventory in terms of weeks declined quarter over quarter in the third quarter, and currently distribution inventories are at the lower end of our target range of 11 to 13 weeks. We expect distribution inventories to remain within the 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 don’t carry more inventory than what is needed to support 11 to 13 weeks of resales. Earlier in the fourth quarter, we announced the purchase of an incremental 20% share of the manufacturing joint venture for an 8-inch wafer fab located in Aizu-Wakamatsu, Japan. With this purchase, ON Semiconductor now owns a 60% share in the joint venture, and consequently, we will report operational results of this joint venture in our consolidated financial statements beginning in the fourth quarter of 2018. We have named the joint venture ON Semiconductor Aizu Company Ltd., or OSA. As part of the joint venture agreement, we may provide manufacturing services to our joint venture partner for up to six quarters starting with the fourth quarter of 2018. We expect revenue from manufacturing services to be approximately $20 million per quarter at a nominal gross profit. Now let me provide you an update on the performance of our business units, starting with Power Solutions Group, or PSG. Revenue for PSG for the third quarter was $810 million. Revenue for the Analog Solutions Group for the third quarter of 2018 was $532 million, and revenue for the Intelligent Sensing Group was $200 million.

Thanks Bernard. The third quarter of 2018 was yet another strong quarter for ON Semiconductor. We continued on our trajectory of delivering strong revenue growth and robust margin expansion. Overall demand for our products continues to be healthy despite concerns related to trade tensions, rising bond yields, and expectations of slowing global growth. However, as Bernard noted earlier, we have seen a few spots of weakness, especially in the greater China region in industrial and white goods segments. The key driver of our business is significant content increase in many applications in automotive, industrial, cloud server, and 5G infrastructure end markets as opposed to underlying unit growth in these end markets. In the automotive end market, vehicle electrification and active safety are expected to drive steep growth in our addressable content for power devices and image sensors. In the industrial market, the need for power efficiency in industrial systems is expected to drive a manifold increase in power products from our PSG business unit. In the cloud server market, we continue to see solid growth for analog power management products from our ASG business unit. In the 5G infrastructure market, we are seeing a manifold increase in our medium voltage power content as compared to that in 4G and 3G systems. Our business today is driven by sustainable secular growth drivers in the fastest growing semiconductor end markets as opposed to being driven by macroeconomic conditions and semiconductor industry cyclicality a few years ago. Through our investments over the last several years in high growth segments and in highly differentiated products in automotive and industrial end markets, we have radically transformed the nature of our business. A significant part of our business comes from highly differentiated power, analog, and sensor products for automotive, industrial, and cloud power end markets. We continue to strengthen our position as a key provider of enabling technologies for newly emerging and disruptive applications in automotive and industrial end markets. Overall business conditions remain favorable and demand continues to be healthy across most end markets. We have noticed some weakness in the greater China region in industrial and white goods segments, but we have been able to offset that weakness with strength in other areas; in fact, we continue to sign long-term supply agreements with our customers. On the supply side, we believe that inventories in the semiconductor supply chain are generally healthy and we do not see any signs of excess inventory with our distributors and customers; in fact, as Bernard indicated in his prepared remarks, our inventory at our distributors is towards the lower end of our target range of 11 to 13 weeks. Pricing continues to be benign as compared to historic trends. Along with our strong revenue performance, our execution on the operational front continues to be outstanding. Our operating model has shown strong operating leverage. As Bernard mentioned earlier, on a year-over-year revenue increase of 11% for the third quarter, our non-GAAP operating income increased by 19%. We achieved this solid margin performance in spite of a significant rise in input costs. We remain on track to ramp our internal raw wafer capacity by the end of the current year, and with this ramp we should be able to partially offset the increase in input costs. At the same time, mix shift towards margin-rich automotive, industrial, and cloud power end markets should drive additional margin expansion. Now I’ll provide details of the progress in our various end markets for the third quarter of 2018. Revenue for the automotive market in the third quarter was $464 million and represented 30% of our revenue in the third quarter. Third quarter automotive revenue grew by an impressive 12% year over year. Despite some volatility in the automotive supply chain, we posted strong year over year and sequential growth in the third quarter. We believe that ongoing content increases, new production introductions, and share gains drove our strong revenue performance despite reports of volatility in the global automotive supply chain. We expect that the secular trend of meaningful semiconductor content increase in automotive will continue for the foreseeable future, regardless of temporary changes in market dynamics. With a strong portfolio of power, analog, and sensor products, we are well positioned to disproportionately benefit from the tremendous increase in semiconductor content driven by electrification, active safety, and fuel efficiency in automotive. Our momentum in automotive image sensors continues to accelerate. Key factors driving our growth in the automotive image sensor market are significant technology lead over competition and the industry’s most extensive product portfolio, giving customers more choices than before. With a complete line of image sensors, including one, two, and eight 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. Furthermore, with our recent acquisition of SensL we now have the capability to provide LiDAR sensors in addition to image sensors, radar, and ultrasonic sensors. We are the only semiconductor supplier with capability to provide all four types of sensors for ADAS and autonomous driving. We believe that this capability will not only drive significant content for us but will also provide a key differentiating advantage to us as the automotive industry moves to sensor fusion architectures for ADAS and autonomous driving. We recorded our first silicon carbide revenue from automotive end markets in the third quarter. We are actively engaged with leading global automotive OEMs on many silicon carbide projects. We expect silicon carbide will be a significant driver of our automotive content increase, driven by electrification of the drivetrain. We expect to see strong acceleration in our automotive silicon carbide revenue for the foreseeable future. Demand for our power products, 48-volt systems, and LED lighting products remains strong. We are also seeing strong adoption of switch mode power supply systems for camera systems and radar systems. In addition, we are seeing strong growth for our silicon-based power products in the EV HEV market. Revenue in the fourth quarter for the automotive end market is expected to be up quarter over quarter due to normal seasonality. The industrial end market, which includes military, aerospace and medical, contributed revenue of $400 million in the third quarter. The industrial end market represented 26% of our revenue in the third quarter. Our third quarter industrial revenue grew by a solid 12% year over year. Ever-increasing energy efficiency requirements continue to be key drivers of increases in power management content in industrial systems. We are seeing several-fold increases in our power content in many industrial systems. In the industrial end market, we are benefitting from our comprehensive power product portfolio encompassing the complete voltage range. Design activity for power products in the industrial market remains strong, and we are engaging with leading global industrial OEMs on their next generation designs. Within the industrial market, we are seeing strong traction for our power integrated modules for applications in the alternative energy market. Machine vision is another area of strong growth in the industrial market. With recently introduced X-class image sensors, we expect to further strengthen our leadership in machine vision and robotics markets. Revenue in the fourth quarter for the industrial end market is expected to be down quarter over quarter as opposed to seasonality of flat sequential revenue. Weaker than seasonal growth in our industrial business is driven primarily by softness in the greater China market. The communications end market, which includes both networking and wireless, contributed revenue of $314 million in the third quarter. The communications end market represented 20% of our revenue in the third quarter. Third quarter communications revenue increased by 13% year over year. In the third quarter, we benefitted from the launch of new smartphone models. It has been the case over the last few years our content in new generation smartphones continues to increase in a meaningful manner. On the infrastructure front, we are beginning to see ramp of our high-efficiency medium voltage power products for 5G systems. We expect that our power content in 5G infrastructure systems will be many times that in 4G or 3G systems. We have been designed in for significant power management content in 5G systems and we expect to see strong revenue ramps with increased deployment of 5G infrastructure. Revenue in the fourth quarter for the communications end market is expected to be flat quarter over quarter as opposed to the normal seasonality of sequential decline. The computing end market contributed revenue of $163 million in the third quarter. The computing end market represented 11% of our revenue in the third quarter. Third quarter computing revenue grew by 16% year over year. The year over year growth was driven primarily by accelerating strength in our cloud power business and the ramp of our analog power management solutions for graphics processors. As we have indicated in prior earnings calls, we are engaged with leading cloud and server players and we are working with leading processor providers on their next generation platforms. With the upcoming generation of processors, we expect to increase our analog content through the introduction of new products. Revenue in the fourth quarter for our computing end market is expected to be approximately flat quarter over quarter as opposed to normal seasonality of sequential decline. The continuing ramp of our cloud power business is the primary driver of a better than seasonal trend in our computing business. The consumer end market contributed revenue of $200 million in the third quarter. The consumer end market represented 13% of our revenue in the third quarter. Third quarter 2018 consumer revenue was down 1% as compared to consumer revenue in the third quarter of 2017. The decline was due to our selective participation in certain areas of the consumer electronics market. Revenue in the fourth quarter for the consumer end market is expected to be down quarter over quarter primarily due to softness in the white goods market and normal seasonality. In summary, the demand environment for our products remains healthy, driven by secular megatrends in industrial, automotive, and cloud power markets. The key driver of our business is a significant content increase in many applications in automotive, industrial, cloud server, and 5G infrastructure end markets, as opposed to underlying unit growth in these end markets. Trade tensions, rising bond yields, and expectations of slowing global economy have not impacted our business in significant manner. We have established leadership in highly differentiated power, analog, and sensor semiconductor solutions, and we believe that customers are increasingly relying on us as a key provider of enabling technologies for newly emerging and disruptive applications in automotive, industrial, and cloud power end markets. While our business remains healthy, we are fully cognizant of the risks arising from a potential slowdown in the global economy. We are very prudently managing our business with aggressive and proactive inventory management to respond quickly to any changes in market conditions. Our operational execution remains solid. We have continued to expand our margins and generate strong free cash flow.

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 the range of $1.48 billion to $1.53 billion in the fourth quarter of 2018. Included in our fourth quarter revenue guidance is approximately $20 million revenue from manufacturing services provided by ON Semiconductor Aizu, or OSA, which as I indicated earlier is our joint venture in an 8-inch fab. Excluding the impact of OSA, our fourth quarter 2018 revenue is expected to be in the range of $1.46 billion to $1.51 billion. Recall that as part of the joint venture agreement, we may provide manufacturing services to our joint venture partner for up to six quarters, starting with the fourth quarter of 2018. For the fourth quarter of 2018, we expect gross margin to be in the range of 37.1% to 38.1%. Our fourth quarter gross margin guidance includes the negative impact of 50 basis points from the manufacturing services provided by OSA. Excluding the impact of OSA, our fourth quarter 2018 gross margin is expected to be in the range of 37.6% to 38.6%. We expect total GAAP operating expenses of $348 million to $366 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges which are expected to be $29 million to $33 million. We expect total non-GAAP operating expenses of $319 million to $333 million in the fourth quarter. The quarter over quarter increase in our non-GAAP operating expenses in the fourth quarter is primarily driven by three additional days in the fourth quarter of 2018 as compared to those in the third quarter of 2018. We anticipate fourth quarter 2018 GAAP net income and expense, including interest expense, will be $32 million to $35 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 $23 million to $25 million. Cash paid for income taxes in fourth quarter of 2018 is expected to be $8 million to $12 million. We expect total capital expenditures of $135 million to $145 million in the fourth quarter of 2018. We also expect share-based compensation of $19 million to $21 million in the fourth quarter of 2018, 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 fourth quarter of 2018 is expected to be 428 million shares based on 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 of 2018, we expect to generate free cash flow in the neighborhood of $800 million.

Hey, thanks guys. I remember in previous calls, you’ve talked about some extensions in lead times. Can you just comment on what lead times are doing these days? Are they remaining stretched, or are they starting to come in?

They haven’t changed, so they’re remaining longer than normal.

Keith, when do we expect those to come back in?

Obviously, depending on market conditions. That can vary, but at this stage, we see them remaining stable at least through the first half of next year.

Okay, and then for my follow-up just on the OSA biz, were you contractually obligated to do this thing for six quarters, or maybe just give us some of the history behind that.

Yes, we are indeed obligated. That was part of the original deal.

Got it, okay. Thanks guys.

Thanks for taking my question. Keith, I’m sure you have looked at some of the weaker outlook from the peers, like Texas Instruments and Cypress, etc. What went through your mind when you contrast their weakness versus the stability or strength that you are seeing? Is it possible you’re not seeing the downturn now but perhaps could see it later, just because either you have the products or you had longer lead times? If you could just give us a sense of what’s on your dashboard, how are order cancellations looking, how is the book to bill ratio? How do we contrast this difference between what some of your peers are reporting versus the strength that you are seeing?

Our forecasting is done the same way. We look at our backlog and profiles that are going on from customers and our new orders, etc. as we get into the quarter. If you want to talk about contrast, I will point to the fact that our power content specifically in the markets I talked about, we believe to be substantial and different from many of our competitors, and that is indeed where most of the strength is. I think there’s a little bit of product mix between companies that shows up and also which customers are being served, but in our case we really do think it’s strong demand on a content basis in the markets we mentioned.

Got it. For my follow-up, could you help us quantify your rough exposure to the two problematic areas you mentioned, China industrial and white goods? When do you think those areas can start to stabilize, or we don’t have that visibility quite yet?

We don’t have visibility on that quite yet. We service the consumer segment of the white goods market in China through distribution, and they are not providing any indication of when that might resume at this stage, but it represents a relatively small part of our overall business.

Hi, good morning. This is Gausia Chowdhury on behalf of Shawn. Within auto, are you seeing any auto production weakness in any regions?

We’re not seeing any weakness. We are seeing this year, unlike last year, some shutdowns for them to have their maintenance periods that didn’t occur last year, but as I mentioned before, our content gains have far offset those.

Thank you. Regarding OSA, do you expect profitability to be impacted negatively throughout 2019? Any insights on timing would be appreciated.

So as we said in the prepared remarks, we may serve this for up to six quarters, i.e. through the first quarter of 2020, and I expect pretty stable business during that time frame.

Hi everyone, I wanted to follow up on the auto aspect. Keith, I know you have more insights on this. Could you provide some details on how that is developing? Historically, even companies that are overall gaining more content are still facing declines in SAR, so any further specifics on how you are managing to offset this, especially in the long term but also in the near term, would be appreciated.

Yes, of course you’re never immune from slowdowns in unit production, but our new designs and the models that are now ramping, 2019 models, the content gains there are in the double digit range, so therefore if your SAR comes down a percent or two, you still see strength coming on. The only other impact that you could have had there, Ross, is significant over-inventories, and we’ve seen no signs of that, so if you put it all together, we continue to see good growth.

Thanks for that. As my follow-up, switching over to the margin line perhaps for Bernard, if the weakness that others are pointing to ends up hitting you guys, either the duration or magnitude is greater than what you guys currently see for whatever reason, how should we think about how gross margin and Opex can be flexed proactively if that negative scenario plays out?

We would do what we have normally done in the past on the gross margin front. The fall-through on the decremental revenue, if there is such a decrement, is about 50%. In cases of a slowdown, you in-source more of the production that’s currently outsourced, so our mix would change towards that. On the Opex front, variable comp and variable commissions would also be directly proportional to or affected by the reduction on that front, and then you take the normal belt tightening actions that occur in any slowdown.

Thanks guys. Just on the industrial side, I know you mentioned slight softness here in December. Just wondering if you’re seeing anything out of the ordinary or is it just normal seasonality there.

In general it’s normal seasonality except some slight weakness in the China marketplace, as we discussed. It’s not significant, so it’s slightly down versus flattish normal seasonality.

Understood. Moving into the first half, there have been some concerns from your peers regarding visibility and the impact of tariffs, especially with the upcoming 25% increase on January 1. As you engage with your customers in Asia and particularly in emerging markets, are you noticing any concerns as they look ahead? I realize it might be a bit early, but thank you.

The only worries we’ve seen have been in China on some of the consumer type marketplaces. Basically concerns there, I think, are reflected in the weaknesses we’ve talked about, but otherwise we haven’t seen any significant impact to change in backlogs or order patterns.

Yes, thank you. Good morning. The first question is on distribution. Can you talk about sell-in versus sell-through in distribution for the third quarter and your expectations for the fourth quarter? In your prepared remarks, you said you were already at the low end of your target inventory range at distribution. Can you clarify what you mean by proactively managing inventory - are you seeking to bring down the level of distribution inventory further?

I think we’re happy at the low end of our range - in fact, we’re very happy at the low end of our range, and what we’ve done with our distributors there is help them with visibility in our systems and manage the order patterns so that we stay there. The real objective is to stay pretty close to the bottom half of that range as we go through the cycles, or through the seasonality, I should say.

And that would imply that sell-in equals sell-through.

Thank you for the clarification. Regarding OSA and the decision to acquire a majority interest, was this a necessary move? It appears that this will generate $20 million in revenue with minimal gross margins, so what advantage does ON gain from taking a majority interest?

The reason we own the majority interest, quite frankly, is we wish to use all of that capacity over time. This is a structured phase over to make that happen, and they have customers that need to be supported, so as part of the whole deal we had a preplanned phase over in that capacity. The real issue is we need to fill that up with our products, and of course as we do that, the margins for our products are significantly better.

Yes, good morning guys. Thanks for letting me ask the question, and congratulations on the strong results. Keith, I’m just wondering relative to being a cushion, within the comms business and the compute business today, what percent is sort of infrastructure and server cloud hyper scale in each? How that trend year over year compared to last year, and where do you think that’s going to be four quarters from now?

I’ll take them separately. On the computing side, the cloud server business has moved from a 20% of our computing business up at least 10 points from that year on year, and we see that trend continuing into 2019, so a very significant increase in the cloud server portion of the total business. On the infrastructure piece, it has always been the smaller portion of our communications business, but again from a percentage basis, it’s come up a couple of points year on year.

That's helpful. Maybe a quick question for Bernard regarding margins. You mentioned earlier a gross margin fall-through of about 50%. Looking at the last four quarters, excluding the recently reported quarter, it seems like you were above that, with an incremental gross margin averaging around 56% and an operating margin of about 38%. I'm curious about the extent to which impact costs affected results year-over-year, and could you provide a baseline for us? You indicated a 50% gross margin drop-through; how should we view the operating margin drop-through moving forward?

The 50% is obviously a yardstick. We think it is a good representation of a long-term thing. Yes, we do have some in between spikes where we are fluctuating or not. In the long run, we also have the mix impact that will also push us to have higher than 50%. The 50% is just steady state. On top of that, you can add the mix which should over time also get us some incremental amount. On the op margin, we’re still targeting to do our 19% from our target model. We have done some nice progress, gotten to about 17.8% in the third quarter, and expect to continue making progress towards that as part of growing opex at half of the pace of revenue growth and getting the gross margin leverage we just talked about.

Yes, good morning. Thanks for taking the questions. I’m hoping for an update on how many synergies may be left to achieve in COGS from Fairchild, and related to that, I think ON had planned product qualifications recently that would allow ON to consolidate factories somewhat faster in a future downturn, if necessary, than some of the past downturns. Can you give us an update on what ON may have done on that front and what it could mean for your cost structure?

Sure. Regarding the synergies, we previously mentioned that they would unfold throughout 2018 and extend into 2019. We are seeing good progress on that. I would say we are not entirely finished but are nearing completion. As for the other question, could you please remind me what it was?

I thought you had qualified certain products out of multiple factories.

Oh yes. We always like to have multiple source qualifications as a matter of business, and we discussed the possibility of consolidating our footprint. However, given the high demand we currently have, we are not acting on that right now. Still, it's something we keep in mind in case we experience a significant downturn.

Hey guys, my congrats on the strong execution as well. Bernard, can you give us what your capacity utilization was in Q3 and any thoughts on where you think it might be in Q4, and then lastly on silicon carbide, do you expect the bulk of your wafers to come from external sources or internal? Thanks.

Capacity utilization in the third quarter was in the mid to high 80s, and we expect it to remain similar, possibly decreasing slightly in the fourth quarter. Regarding silicon carbide, we are sourcing the raw wafers externally and have long-term agreements in place. For regular silicon, we produce our own raw wafers and have mentioned before that we are increasing our capacity to reduce dependence on these input costs, but we are not currently doing that for silicon carbide.

Yes, thanks for taking the question, and congratulations on the execution in the quarter. The first question is related to content gain. Keith, you pointed out good things happening in compute and server, and in smartphones, so the question is with Intel having three server product transitions in 4Q18, 4Q19 and then 2020, what do you expect will happen with on-server content with those transitions? Then on the smartphone side, is the content gain we’re seeing really more of a second half dynamic, or would you expect to be gaining content with first half model launches as well?

On the computing side, our content will continue to go up with the new processor releases, so we see that as a very positive trend. We believe also our share gains should be going up, so similar to what went on in the notebooks a few years ago, we are expecting a continued positive story on the compute side. In the handsets, the ones that will launch in the first half of next year will also have that increase gains, so that should also again be a good story relative to seasonality.

Great, thank you. Keith, if I can contrast just some of the markets in terms of what you’re seeing, so stability in automotive versus some weakness in industrial. Can you just talk about some of the demand signals you’re seeing in each of those instances from customers?

Again, we’ve seen very positive demand signals. Bernard mentioned a book to bill over 1, that is in aggregate and comprehends the weaknesses we’ve talked about in China consumer and industrial areas. Both of them, I would say are seasonal. The automotive piece is higher than seasonal because of content gains, and the industrial piece when you offset for the weakness in China is pretty close to normal.

Morning. Nice job on the quarterly execution, guys. Good to see the ramp in your 5G design wins, medium-voltage products. Can you guys just help us understand where these wins are situated? Is it primarily power supply or the compute PSP processor, power management, or signal chain? Any color here would be appreciated.

Yes, it’s almost exclusively the power-related products for 5G in all instances.

Thank you and congrats as well. Just some clarification on the previous question. Could you specify what the book to bill was for the September quarter, and more specifically for the month of September, any kind of clarity there?

We don’t normally spell out these numbers, but it was above 1.

Okay, and there weren’t any signs of abnormal order cancellations or rescheduling?

None at all.

Thank you, Keith. Our operational execution remains solid. We have continued to expand our margins and generate strong free cash flow. Now I would like to turn it back over to Bernard for forward-looking guidance.

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