Q3 2019 Earnings Call
Semiconductor third quarter 2019 earnings conference call at this time, all participants are in a listen only mode.
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Like the hand, the conference over to your Speaker today, Parag Agarwal, VP corporate development and Investor Relations. Please go ahead Sir.
I think you're spending.
Good morning. Thank you for a journey on semiconductor Corporation third quarter Bunker 19 quarterly results conference call.
I'm joined today right, good Jackson, our president and CEO , but not Goodman our CFO .
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Along with our bumping 19, Kurt Goddard, our new cities, maybe ever neighborhood on our website approximately one hour. Following this conference call.
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That's good for critical an additional information related to our end markets business segments geographies kind of share count also posted on our website.
Our earnings release and this presentation includes certain non-GAAP financial measures.
Because finishing up this non-GAAP financial measures. The most directly comparable measures undergo I didn't know what on the cities, which is supposed to separately on <unk> website under Investor Relations section.
During the course of this conference call.
<unk> projections or other forward looking statements regarding future events.
Oh, the future financial performance of the company.
We believe estimate project I anticipate concern me Im.
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My questions are intended to identify forward looking statements.
We wish to caution that first pick mr. subject to risk and uncertainties that could cause actual events or results to differ materially from production.
Important factors Christiana first got worse.
Business, including sector that was called extra results could differ from our forward looking statements are describing I went from bankers form 10, Qs and other filings with Securities Exchange Commission.
And if you're focused on describing our earnings are used for third quarter print Tonight.
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Hi.
Thank you Barag and thank you everyone for joining us today.
We saw stabilization in business trends in the third quarter.
He believed that much of the stabilization was driven by normalization. So im interested in the supply chain, that's both distributors and Oems have realigned their inventory in line with lower end market demand.
Well, we have seen normalization in supply chain inventory.
Market demand signals remain weak geopolitical and macroeconomic back the steel weigh on demand and visibility into the man remains poor.
Despite the loop weren't business environment, he secular trends driving our business remain intact, and we're making long term investments to improve our competitive position in our strategic end markets and to improve our industry, leading manufacturing cost structure.
We expect that the going down there will not detract from our long term goals and we will continue to invest to position the company for long term success.
Current bookings and trending along are trending along historical seasonal pattern, but as I indicated we're not seeing any strong evidence of recovery in end market demand.
Macroeconomic beat up the major economies points towards Pepe industrial activity global automotive market continues to be solved.
But we are continuing to see strong constant growth we're products in automotive market.
We believe the primary driver of stabilization in our business has been the normalization of channel in mid threes with our distributors and Oems.
Based on anecdotal data it appears that the supply chain hemostasis have normalized largely and we don't expect any more inventory digestion in the near term.
Well, the stabilization business trends and normalization looks like Green emitters are encouraging.
With some unforeseen geopolitical and macroeconomic events continues to be an overhead.
We're managing our business in line with prevailing with in business conditions.
We are tightly controlling our operating expenses and we have taken measures to lower our capital intensity in line with current market conditions.
We believe that are highly diversified customer base exposure to the fastest growing semiconductor end markets and long lifecycles of many of our products should help us better navigate the current slowdown in demand as compared to the broader analog and power semiconductor industry.
Now let me provide you additional details on the third quarter 2019 results.
Total revenues for the third quarter 2019 were 1.38 billion a decrease of 10% that's compared to revenues of one point quite what you billion in the third quarter of 2018.
The year over year declining revenue was primarily driven by well publicized macroeconomic and geopolitical factors, which have effect that the overall semiconductor industry.
So the 2019 third quarter revenue was impacted by a significant one time adjusted adjustment related to a customer issue.
GAAP net loss would have to water was <unk> 0.15, what do you live here, that's compared with net income for 38 in the third quarter of 2018.
Consistent with our expectations and that's disclosed in our recent SEC filings. The GAAP net loss in the third quarter of 2019 was driven primarily by a onetime payments <unk> all pending intellectual property litigation with power integrations in.
non-GAAP net income <unk> water was 33 cents per the literature as compared to 50 cents 57 cents either third quarter of 2018.
[noise] GAAP gross margin for the third quarter was 34.4 non-GAAP gross margin important during the quarter it was 35.8%.
Third quarter gross margin was impacted by onetime adjustment related to a customer issue in by either be pressure, primarily on non depending on the non differentiated part of our portfolio.
Furthermore, in order to reduce he went through on our balance sheet and distribution channel, we meaningfully lowered our factory utilization in the third quarter, we intend to keep our factory utilization at good levels until we see a meaningful recovery in demand.
Year over year, or where 2019 non-GAAP gross margin declined by 290 basis points.
Our GAAP operating margin for the third quarter of 2019 wasn't nearly 3.2% as compared to 15.7% into third quarter 2018.
GAAP operating loss for the third quarter was primarily driven by an expensive approximately 170 million related to that previously mentioned litigation settlement with power integrations.
non-GAAP operating margin for the do it would have 2019 was 13% as compared to 17.8% in the third quarter of 2018.
The.
Declining operating margin was driven largely by lower gross margin.
Our third quarter non-GAAP operating margin excludes the impact of the power integrations settlement.
[laughter] GAAP operating expenses for the third quarter were 519 million as compared to 355 million for the third quarter of 2018.
As I indicated earlier due or GAAP operating expenses include 170 million related to the settlement with power integrations.
non-GAAP operating expenses would have to water were 314 million as compared to 322 million in the third quarter of 2018.
The year over year decline in third quarter operating expenses was driven by aggressive expense control and zero bonus accrual.
Third quarter free cash flow was 131 billion in operating cash flow was 242 million.
Capital expenditures during the third quarter, we're hungry and 12 million, which equates to a capital intensity or 8%.
With the recent acquisition in the 300 millimeter.
Fab easy skill and with flowing into the market demand, we expect that'd be the needed to meet their capital intensity would continue at current levels going forward a sizable part of Capex will be spent on enabling that the skilled fab.
We exceeded the third quarter of 2019 with cash and cash equivalents of 929 billion as compared to 885 million at the end of the second quarter of 2019.
We used 13 billion of cash the repurchase approximately 764000 cheers.
So first off during the third quarter.
What a big part of it third quarter, we were restricted from buying stock.
<unk> buying back stock for two reasons.
First we were negotiating a settlement with BARDA integration insect than we were refinancing our debt.
At the end of the third quarter visa, even doing on hand, 128 days down by nine days as compared to 137 in the second quarter of 2019.
Excluding the impact of beer market that Bob you have even do believe it went there now these are even doing on hand would've hundred 20 days down seven days as compared to 235 days in the second quarter.
We intend to food or lower the days of inventory on our balance sheet in the fourth quarter.
Distribution, we sales increased in the third quarter over the second quarter.
Distribution he might do in terms of weeks decline quarter over quarter over quarter in the third quarter, we're very comfortable with the level of entering the distribution channel.
As we have noted in our previous earnings calls, we are aggressively managing or distribution imagery.
To ensure a healthy level inventory in the distribution channel.
Let me provide you an update on performance, where our business units, starting with our solutions group or PSG revenue for P.S.G. for the third quarter was 688 million.
Thank you for the analog solutions group for the third quarter was 2019 with 509 million and whether you for the intelligent sensing group 185 million.
Now I would like to turn the call over to eat Jackson for additional comments on the business environment you.
Thanks, Bernard well business conditions remain challenging we continue to execute on our strategy of focusing on our key strategic markets and investing in our operations to enhance our industry leading cost structure.
Current slowdown in demand, which is largely driven by macroeconomic and geopolitical factors does not change our view on our long term growth potential.
With ongoing investments in product development and in our 300 millimeter East Fishkill fab, we intend to emerge even stronger out under the current downturn.
He secular trends driving our business remain intact and our momentum in key strategic markets continues to accelerate.
Despite the current slowdown in end market demand, we continue to see meaningful increase in our content and automotive industrial and cloud power applications, we believe that automotive industrial and cloud power in markets will be among the fastest growing semiconductor end markets for a long time.
In the automotive market, we believe that accelerating adoption of electric vehicles and active safety should drive strong growth in our power semiconductor and sensor businesses.
In the industrial market, we're seeing strong traction for our power semiconductor products driven by higher power efficiency requirements in industrial systems.
In the cloud power market, we are seeing robust growth for analog power management products for servers and power semiconductors for Fiveg infrastructure markets.
In the near term, we continue to negate navigate through an improving although still challenging business environment.
Although revenue is stabilized end market demand visibility as low as macroeconomic and geopolitical factors continue to weigh on outlook.
Customers continue to be cautious based on commentary from our distribution partners. It appears that inventory correction in the distribution channel is largely complete.
With normalization of supply chain inventories, we are seeing some degree of normal seasonality in our business.
In the third quarter, we substantially reduced our balance sheet and supply chain inventory and we didn't outstanding job managing our operating expenses.
I'll near term business conditions are soft long term outlook for our business with exposure to secular mega trends in automotive industrial and cloud power end markets remain solid.
We're also making strong progress towards ramping our production at our 300 millimeter East Fishkill fab in upstate New York and nor solidly on track to begin production in the fab next year.
Process development is progressing at a solid page and currently we are in a final stages of tweaking and freezing our processes.
As we've indicated earlier, we expected our 300 millimeter east Fishkill fab will accelerate our progress towards our 2022 target model.
Enable efficiencies in our manufacturing at work and further strengthen our industry leading cost structure.
We believe that ramping of our 300 millimeter production will be a major inflection point in our manufacturing strategy and in or manufacturing cost structure.
Our 300 millimeter east Fishkill fab affords us significant flexibility in optimizing our front end network and we're taking measures to improve.
Deficiency of our manufacturing network. We're currently in the process of closing down one of our smaller six inch Fabs in Rochester, New York and expect that this action will result in nominal cost savings.
Now I will provide details of the progress in our various end markets for the third quarter.
Revenue for the automotive market in the third quarter was $446 million and represented 32% of or revenue in the third quarter.
Third quarter automotive revenue declined 3% year over year.
Asia, including Greater China remains the primary contributor to this year over year decline.
But on a quarter on quarter basis, we saw meaningful increase in the automotive revenue from the greater China region in third quarter.
We continue to see weakness in the EMEA automotive markets, which also contributed to the year over year decline.
Our leadership in Adas continues to strengthen in our design win pipeline continues to expand at a rapid rate.
We have 116 of 17 to Mega pixel and eight Mega pixel platforms awarded year to date in 2019 and for level too in level three vehicles.
During the third quarter, we achieved landmark of shipping more than 100 million. They are a 132 image sensors for Adas applications.
Vehicle electrification is quickly emerging as a key driver of our automotive revenue during the third quarter. We commenced production of E V. Pim modules for customer shipments in the fourth border 2019.
During the third quarter, we secured design wins for seven E V traction inverter platforms.
Our silicon carbide products are continuing to gain momentum in our global customer engagements are growing.
During the third quarter, we launched our 1200 volte low Rts on and 900 volt silicon carbide fed product families.
Our momentum in automotive analog power management remains strong we secured design wins for our analog power management products for Adas instrument clusters, as well as end vehicle networking solutions.
Well for advanced lighting power management, and L.E.D. driver solutions remains healthy.
Revenue in the fourth quarter for the automotive end market is expected to be up quarter over quarter.
Industrial end market, which includes military aerospace and medical contributed revenue of $351 million no third quarter.
Industrial end market represented 25% of our revenue in the third quarter.
Year over year or third quarter industrial revenue declined 13%.
On year over year basis, we saw broad weakness in the industrial end markets across most geographies.
While we are seeing soft market conditions in the industrial market he secular trends driving our business still remain intact.
Summers are continuing to invest in improving power efficiency of industrial systems, our mid and high voltage power semiconductor products, such as pets and I'd be keys and modules continue to see increased momentum within the industrial end market.
Revenue in the fourth quarter for the industrial end market is expected to be flat quarter over quarter.
The communications end market, which includes both networking and wireless contributed revenue of $275 million in the third quarter.
Communications end market represented 20% of our revenue in the third quarter.
Third quarter communications revenue declined 8% year over year.
Year over year decline in communications was driven by weakness in the handset related revenue.
We continue to see strong traction for our medium voltage power products for Fiveg infrastructure.
Revenue in the fourth quarter for communications end market is expected to be down quarter over quarter.
The computing end market contributed revenue of $154 million in the third quarter.
Computing in market represented 11% of our revenue in the third.
Third quarter computing revenue declined 8% year over year.
We continue see strong growth in our server related computing revenue on sequential basis using supply of Intel's processors also contributed to growth in computing revenue.
Revenue in the fourth quarter for the computing end market is expected to be up quarter over quarter.
The consumer markets contributed revenue of $157 million no third quarter.
Consumer end market represented 11% of our revenue in the third quarter.
Third quarter consumer revenue declined by 26% year over year.
Year over year decline was due to continuing broad based weakness in the consumer electronics and white goods markets. We continue to be selective in our participation in these markets.
Revenue in the fourth quarter for the consumer end market is expected to be down quarter over quarter.
In summary business conditions have stabilized the supply chain inventories of normalized however visibility into end market demand as low as macroeconomic and geopolitical factors continue to weigh on the outlook.
Despite current weakness in business trends across the industry secular mega trends driving our business remain intact and we are upbeat about our medium to long term prospects.
We're focused on the fastest growing end markets of the semiconductor industry and with our design wins, we expected our content in automotive industrial and cloud power applications will continue to grow.
To adjust to slowing macroeconomic environment, where prudently managing our business with sharp focus on controlling expenses.
In these challenging times, our operational execution remains strong we were continuing to invest in our product development efforts and in improving industry cost leading structure.
We expect to emerge even stronger out of the current downturn.
Now I'd like to turn it back over to Bernard for forward looking guidance Bernard.
Thank you Keith.
Based on product bookings trends backlog levels and estimated earnings levels, we anticipate that pool on semiconductor revenue is expected to be in the range of $1.35 billion to $1.4 billion in the fourth quarter of 2019.
For the fourth quarter of 2019, we expect gap and non-GAAP gross margin between 35.7.
At June 36.7%.
We expect total GAAP operating expenses of 344 364 million. Our GAAP operating expenses include the amortization of intangibles restructuring asset impairments and other charges, which are expected to be the duty to be duty due to 36 million.
We expect all non-GAAP operating expenses of 300, and well 328 million in the fourth quarter.
Just to be this quarter over quarter, increasing operating expenses for the fourth quarter were those in the third quarter. What is driven primarily by four extra days in the fourth quarter as compared to those in the third quarter.
We anticipate fourth quarter 2019, net other income and expenses, including interest expense will be 30, 841 million, which includes non cash interest expense of nine to 10 million with DCP non gap GAAP net other income and expenses, including interest expense.
We will be the 20 931 million.
Net cash before income taxes in the fourth quarter of 2019 is expected to be 14 million.
We expect total capital expenditures of 105 215 million in the fourth quarter of 2019.
We also expect share based compensation of 17 to 19 million in the fourth quarter 2019 of which approximately 2 million is expected to be in cost of goods sold and then we meeting about is expected to be operating expenses.
This expense is included in our non-GAAP financial measures.
Our GAAP diluted share count for the fourth quarter of 2019 is expected to be 440 million shares.
non-GAAP diluted share count is expected to be bought on 12 million shares based on a go and stuff right.
Further details on share count in earnings per share calculations are provided regularly.
Quarterly and annual reports on form thank you and Form 10-K , respectively.
With that I would like to start with you any session. Thank you and Sydney. Please open up the lines for questions.
As a reminder.
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Sorry.
[laughter] your question press the pound.
And the interest of time.
It yourself to one question and one follow up please standby well we've compiled acuity roster.
And our first question comes from Ross Seymore with Deutsche Bank. Please proceed with your question.
Good morning, guys.
My question is on the revenue side of the equation. It's good to see you guys were in line and then our guiding seasonal but I wonder about the seasonal guide to given what we've heard from other broad based players were largely sub seasonal and for some of the players significantly so still persists.
So what are you seeing that gives you the comfort to be seasonal in the fourth quarter.
Ross I think is mostly a the content gains we continue to have in as we mentioned the automotive piece of our business should be up we're seeing some recovery in Asia there.
And with our exposure in a content, we think that may give us a little better left.
And then quite frankly, we've done on a very good job in getting inventories in the supply chain in place.
To enable a more normal environment.
Great. Thanks for the color on that then switching one for you Bernard over on the gross margin side of things that was a little bit less than what you guided to I know you gave three reasons for that could you give us a little bit of color on those three reasons, the onetime or the asps in the utilization and as we go into the fourth quarter. It looks like it's up a little bit I assume that's just the one time a reverse.
Thing itself, but any color on what's happening there. If you view all these moving parts to be temporary and do any of these things change your longer term <unk> trend towards a four handle.
Thank you Ross so I'll start from the latter part that we don't believe this stuff exhausting the long pure via the the ER the secular drivers and the reason for growth.
Or the same there was no structural changes that prevent us from doing that.
I think the specifics we did that we did and Numerate three at the first one is the really a vendor cost product specification issue that impact the that affected one.
One customer can give you more deal than that it is a it is one of the reasons why the fourth quarter is showing some lift.
The second piece is we did see more pressure on SBS. It on on on primarily on multi source products.
In the last the in the last quarter and that's obviously a reflection of the of the weaker end demand.
The market.
And the third.
The third reason is we did.
We did a purposely control or at least the and internal inventories and resolved our utilization was in the middle fix this.
It was one of them. It was we have had a long time and obviously that had been has also ramifications on gross margin.
We expect a few you not to have a lot more even do a reduction in the Disty channel, but that's still a little bit more internally. So oh go Oh, a gross margin will still have what our utilization will still be indeed in the lower.
In the were a portion of our normal range.
Yeah, and but if I look in a long run our 300 millimeter fab.
Fish meal acquisition, we believe is really something that will be a transformative and will allow us to stool significant improvements in gross margin in we're very happy with where we're seeing so far in terms of.
Well, so colossus banks were seeing qualification.
Thank you.
Thank you and our next question comes from Chris.
Citigroup. Please proceed with your question.
Hey, Thanks, guys I'm, just a couple of.
Questions to dig into the gross margins a little bit so on the onetime customer adjustment if like business conditions stay in this sort of sluggish overall environment is it possible that other customers could come back and ask for something like that and then on the is piece.
Being lower for multi sourced products.
How much of your product portfolio I guess is at risk from that and then when can we expect us to reverse or could this get worse if business conditions remain sluggish like this.
So so the me escreen reversed the the the products that are mostly affected by that are those that are in our computing and consumer which is about 20% of our business, that's kinda give or take a obviously.
Weekend demands or or a making this the fact that.
It will get back a function of how long via the the weakening demand to be used in terms of Viking Viking regimen.
The second one we believe that via the adjustments related to one single customer and we don't a reasonable with that it will.
Will that affect other customers.
Okay, Great and for my follow up Keith can you just kind of run us through your major end markets. It sounds like autos getting a little bit or how would you sort of rank them from a I guess leased to most impacted.
Yes, so automotive Oh, we're seeing a recovery in Asia.
We're seeing a recovery in the server portion of computing.
Relatively continued benign conditions in industrial or and then you have a seasonal weakening in consumer as you would expect.
So I'm I'm not sure.
That is abnormal from a seasonal perspective.
And then the handset market same story.
Okay, great. Thanks, guys.
Thank you.
Comes from.
Bank of America Merrill Lynch. Please proceed with your question.
Thanks for taking my question I wanted to also talk about gross margins five style. Since you completed the acquisition a fair China gross margins have off you know that kind of peaked at around 39% right now that 36%.
And I think Bernard you mentioned that utilization is that as in the low sixtys or so range.
So as you move forward is 50% incremental gross margin steadily useful construct.
You go forward or you think that as you've got more production on to 300 millimeter it could be better than that that at some point.
Yes in the in the short doing that 50% should still be evaluating obviously, a as he said though.
This deals being somewhat transformative changes in that.
That that the fall through.
And also as we continue with our secular drivers in the areas that are.
There are going.
Vascular those command also be better gross margins. So that should also help themselves the default.
Hi, and for my follow up keep there is some discussion amongst investors that perhaps some Chinese hardware makers might be deliberately are under some pressure being asked to move away from U.S.
Chip maker, so not not on specific applies to all off your diversified fears have you seen any evidence of this from your customer discussion then.
Off any share shift right being in place, but at the European.
Japanese.
Competitors have you seen any evidence of that so far.
So far there's been some share shift where we are unable to ship products to the a european or or Japan based competitors that are small amounts for us, but otherwise nothing detected in a in their current business patterns.
There have been discussions with many of the customers in China about having alternate sources for assured supply, but no no dialogue at this stage about losing specific share.
Okay. Thank you.
Thank you.
A question comes from.
Yeah.
Anthony. Please proceed with your question.
Yes.
Thank you a question on on the inventory digestion, because I think thats important that's something that at least you could control. The end demand is harder to to figure out but in terms of inventory digestion. I was wondering if you could kind of characterize where we are.
In the inventory correction cycle, just started about a year ago.
Oh, we interpreting this could be it we're at the bottom of that correction.
And then along those lines, if demand or to snap back.
From a trade resolution or for whatever factor.
How quickly do you think you'll be able to respond to meet that demand.
In your supply chain as well then you do your own internal levels. Thank you Gary.
So a inventory wise a as I mentioned last quarter. We felt we were nearing the end of the correction process, we still believe that.
We think were in a in a stable and reasonable place with the supply chain area.
One of the key things a if you look at a recovery on those recoveries do generally happen quickly and can change things, but with our inventory levels, where they are in distribution.
And internally, we think we're in good shape for response.
Okay, Great and for my follow up question.
Related to Fiveg.
You would basically said in the past you had you had zero fourg revenue.
But because of the increase power requirements for these base stations at the radio access head as well that Hillary supplies that there's going to be a significant increase in Moscow content.
When do you can kind of characterize the to fiveg.
Hey station infrastructure cycle.
There's been some reports are there might have been a little bit of a pause.
How do we think about fiveg relative to your position as we go into next year.
Okay. So we are a I think well positioned with all of the players in Fiveg.
And that deployment will continue to expand a I think we had some pretty a rapid.
Early test trials that went on a little bit of a pause, but we expect next year to be a very significant ramp in China.
Thank you.
Thank you.
Question comes from Christopher.
<unk>.
Your question.
Great. Thanks, guys. So given the slower macro and this is probably maybe for Keith I'm not sure, but given the slower macro.
And your new plans to to lower existing utilization.
You know given that macro does this change the speed at which you're going to quit new projects like for example, the fishkill fab.
Maybe you could talk about.
How you would quit a quick that what utilizations might look like for the next or you three years or so and then and then also.
I think you have some wafer capacity coming on as well does just that slower macro soccer equipment, there as well.
A simple answer there's a slower macro is not going to deter us a enabling our 300 millimeter expansion.
That is a key part of getting our margin profile, where we'd like it in being able to survive satisfy the growth in demand for automotive and industrial power.
So that will continue or other types of things have been curtailed a significantly to balance that a total capital needs, but those will continue to move forward.
We don't we don't see any a situation in which are in which that would make sense to slow and as we mentioned earlier that ramp will enable us to balance our network out better to accelerate gross margin.
Great and then a you know the Durbin some moves this last quarter.
One company competitor and in particular as they move more towards a direct sales force versus distribution [noise].
Perhaps controlling that process capturing more margin.
Just wanted to know your thoughts on distribution versus perhaps you know a move moving more internal for you guys or do you view do you view kind of these competitive changes here has an opportunity for you guys even.
Yeah. We we are strongly believers in the distribution network a they can reach a range of customers around the world for the design.
When commitments that we need a and they are also quite efficient add reaching although small customers. So we continue to support them strongly.
See share gains in that distribution network on an annual basis, and we'll be looking for opportunities to <unk> to grow even faster and distribution.
Thanks Keith.
Thank you I know next question comes from Craig Ellis with B. Riley.
Please proceed with your question.
Yeah. Thanks for taking my question and congratulations guys on navigating the trough well.
No what I wanted to follow up first just with a clarification on operating expense clearly, there's a lot going onto a tissue old operating income from some of the pressures that we're on gross margin, but can you clarify for the things that were done in a in the third quarter.
How much of those moves or tactical versus more structural changes that would flow through to next year.
In general terms most of the actions would Patrick.
There is something that we sold during the year.
There were more structural but what we did in the third quarter was more.
Got it and then on the Cogs side, there was mention made to pay a six cents pet fab shutdown in Rochester, New York I can you just summarize for us a what some of the cost reduction laboratory should look out into.
2020, and with utilization at 65% is there anything else that might be contemplated if the demand environment that we have now persists into next year. Thank you.
Yes, so as though we are that the the levers that we have come to you being the same.
Definitely a the east the skill.
As well as the I used to that give us more degrees of freedom in terms of managing or or or network and the more opportunities for optimization.
At the same time, we'll continue working on the on the regular fall through as we.
Please our utilization back up to the more normal levels.
As well it's mix.
Thank you.
A question comes from Ambrish.
<unk>.
Please proceed with your question.
Hi, Thank you good morning, guys, Chris on China Auto as the first time and the long why we've heard anybody say, China and growth in the same Brett is this due to some design wins that you have done a ramping or is that reflective.
Well, maybe production bottoming out and seeing a pickup from from very low level. So it's specific to you or is it more macro and then my follow up club or not you talked about you mentioned a share buyback and the like that often done in the quarter that just ended what does that mean for buyback.
Going forward I'm, assuming you brought it up because it means you're going to be back buying stock this quarter onward. Thank you.
Okay on the China Auto business those are a new wins, we've got primarily in electric vehicles and a new models are starting to ramp so there's a a content piece there.
But our sense also is that a generally there's going to be more units made now than there has been in the earlier part of the year. So a combination of both content.
In the few more units.
And on the share buyback question Ambrish.
In long run we are committed to de lever to our share buyback program, we have a one and a half billion dog program.
Intend to Uh huh.
From T. you are working on that one in the short one we do have the a as we mentioned several times during the call. We do have the settlement of the of the litigation issue. We had we are we in that implies the significant cash outlay in the short term and that will have to be taken into account that we as we go through that.
So that goes through this quarter's burner.
It is good.
Thanks.
The next question comes from Matt Ramsay with Cowen. Please proceed with your question.
Yes, thank you very much.
I guess two questions on the automotive business and I'll, just I guess go ahead and asking about at the same dawn.
Expediency I'm. The first one is on the image sensor business I think you mentioned in the.
Matt We've lost few Matt.
Sydney can you go into the next well.
Our next question comes from Mark Delaney with Goldman Sachs. Please proceed with your question.
Yes. Good morning, Thanks for taking the questions first as a follow up on the gross margin topic in under utilization I was hoping you could clarify if on took up period charge in the quarter related to the under utilization could I think there's only so much I fixed costs, you can capitalized into inventory and so did you take a charge and if so can you quantify that.
So in terms of utilization we mentioned we were in the in the 65% to reduce our normal capitalization rules the whereby a portion of the unit caused the it's below our spend that gets a gets written off if it's at levels that are gets capitalized.
So there was no unusual at TD nuclear charge.
That's helpful. And then a follow up question around the booking trends I was hoping you could comment a little bit more on the linearity of bookings that the company started the quarter start off we can then bookings more recently have been.
Largely seasonal or was it pretty consistent throughout the quarter. Thanks.
We will believe it has been pretty consistent and based a seasonal.
Thank you.
Question comes from Chris.
Raymond James. Please proceed with your question.
Yes. Thank you first question is on a on a Ah Hey, Sps and you talked about.
Some.
Pricing pressure that well that was starting if you help to quantify all that little bit of that and I know that this the time of year. When you start to negotiate some of the annual pricing could you can give some indication of how that's looking for it for next year I know past several years.
Fees have been performing better than they normally have this is it kind of getting back to where we're a couple of years ago now.
Yes, so Chris.
We don't quantify is fees in the though with the <unk> like we did in the past, but I can see that in general terms. It is less than historical less than any previous cycles. It is still more than what we saw in the in the first a couple of quarters of the year, but but less than historical.
Alright, thank you.
As a follow up on on automotive maybe.
Maybe give some some indication of where do you think.
Auto growth falls relative to units and I say.
Looks like you're you're up.
You run it was going to come in you know somewhere down 4% or so this year on not a similar reduction in a in units. This year, how do you look going forward.
What would be the spread between on semi is auto revenue and units. Obviously are content is growing by how much more do you expect to grow versus the market going forward.
Yeah. We're a if you look at kind of the performance. This year you think we believe there was a contraction in the supply chain. So.
In essence, it wasn't just a reflection of the in units, but actual.
Inventory coming down throughout the whole change so we still believe you get a significant.
Benefit from the content gain even in a down market.
Going forward, we're looking for 7% to 9% kind of growth in the auto market for us.
On a unit basis, which I think is forecasted roughly flat up 1%.
That's helpful. Thank you.
Thank you.
Question comes from VJ cash with Mizuho. Please proceed with your question.
Hi, good just going back on the comprehensive side, they say September quarter do a 11% sequentially. Just wondering if you had it look at Fiveg and hence its what trends you saw a which is that growth and assuming that the December quarter. I know you guided down I'm, just wondering which segment was because I'm going into this.
Thanks.
So we don't think Fiveg handsets were a big play in the third quarter. There were certainly content, there and does some phones out but it was not a substantial portion of the total.
And then as we look into the fourth quarter for handsets, it's a normal seasonal downturn.
So nothing.
Nothing significant there other than normality.
Got it and last question going down a any thoughts there how that's progressing where do you guys you're seeing there. Thanks.
So that business continues to be soft like a the rest of the markets, but we're not seeing continued.
Decline there so it looks like and stabilized a in we are expecting a more normality as we get into 2020.
And we have also a we also in the to completing the integration work this quarter and the and that should result in some of the senior people either.
Thanks.
Thank you next question comes from David Williams with <unk> Capital. Please proceed with your question.
Thank you.
Wanted to ask on the industrial side are you see anything in terms of the sub segments that stands out or maybe gives you a bit of optimism for returned to growth there.
Right now a pretty much all segments a are showing the same type of weakness nothing or nothing looks like it's breaking out yet.
I am expecting a the medical piece of that business to break out pretty quickly.
As a a lot of our design wins in the personal medical electronics arena start ramping in 2020.
And then can you talk a little bit about the content growth you say between.
The standard Fourg handset and maybe go into a thought you can't said what is the opportunity there for us for content growth. Thank you.
It a it's gonna be somewhere around a dollar difference in content.
Thank you next question comes from Harlan.
JP Morgan. Please proceed with your question.
Good morning, Thanks for taking my question I'll, then consumer specifically white goods.
The segment to continue to show appreciable year over year deceleration into Q3, but it looks like year over year compares are starting to actually get better in Q4, and showing signs of normal seasonality on a sequential basis I know, it's off of a low base and that's one of the more trade in macro sensitive segments, but looking beyond Q4, do you guys expect that.
End demand trends are now looking to be more seasonal going forward for this segment.
Yeah, I would expect more normal seasonality as you enter the first quarter next year.
There was.
Buying that was anticipation of tariffs that had some significant skewing of purchase patterns there.
We think thats behind us and there was also some inventory corrections, which we think are largely behind us. So it should be looking more more like a normal seasonal business going into next year.
Great good to hear that and then on the new products can you give us some metrics on your design win traction on auto image sensors for 28, Mega pixel sensors, but on the high performance eight Mega pixel front for eight us I think Sony might have a seven and a half mega pixel solution, but do you guys have any competition at eight mega pixel level.
No.
We have a superior performance, there and nothing I would consider competition.
We have been winning the platforms at eight megapixel.
And not losing any ground or traction.
Thank you.
Thank you next question comes from David O'connor with Exane BNP Paribas. Please proceed with your question.
Great. Good morning, Thanks for taking my questions I'm a question my son design wins on the Silicon Carbide you mentioned on D. These you mentioned seven inverter wins in the in the trends with can you give some more detail and then when exactly these are run thing what kind of geographies and our de silicon.
Are these actually Susan carpets are the most silicon based on opening.
Okay. There are a mixture of IGBT and silicon carbide and a those wins ramp anywhere from a late next year to the following year. So Oh I don't have the specific schedules in front of me, but it'll be over the next two years.
Great and then maybe one follow up for birds. So.
So just to clarify so Q4 would be the peak under utilization charges.
The we believe the Q4, we probably going to be the are the lowest utilization that just like you three.
We believe we're at the bottom in terms of Ulysses right now.
Very helpful. Thank you.
Thank you and your next question comes from trusting.
Please.
Hi, good morning.
As it sort of up to the quite a question what percentage of manufacturing how you kind of T. outsourcing and is there any leverage staff to bring capacity bats internally to help your utilization rates.
We have been doing that as the regular ongoing block this a the coal or.
All the outsource amount is about 30%, including everything at about 20% when you exclude our most recent acquisition.
Okay and is that a process that can continue on you know how low can you go in terms of outsourcing as a percentage.
We continue to balance where we can we've got obligations to to some of our suppliers there but in general we think we can get that down a few percentage points over the next year.
Great. Thank you.
Thank you next question comes from harsh Kumar with.
Hi Jaffray. Please proceed with your question, Yes, Hey, guys solid execution I had a I had a couple of questions.
Based on the auto I think Q2 mentioned that second half you you're expecting to see more units in China. I was curious if this is normal or your thing. This is just shut already contracted so much so were kind of whipping around and trying to make up a little but and then how do you see when you talk to your kind of customers over in China, How do you see the dumb.
Then trends for next year.
Okay. So I'm on the first part kind of current conditions. There was some changing regulations and changes in government policies Oh on how they are.
The subsidize that marketplace.
Created some bad situations in the middle part of the year.
We see some recovery from that.
I'm not a significant in demand jump a is the way I would describe the.
Current conditions.
And then next year, though we do think there will be continued expansion.
Their economy is going to continue to grow we think they will have digested a the efficiency a requirement changes that theyre going through right now.
And we should see some continued growth there.
In 2020.
Understood and my follow up I know sami's have been like all over the place on business have been all over the past trade war, but could you maybe remind us how we might even try to think about seasonality here for your business and maybe even the industry as such or particularly for your business.
Sure. So a normal seasonality there was such a thing is as you look at 2% negative for the fourth quarter with small negative.
The first quarter is also a negative.
The in that in the two that 3% range.
To be a Q2 in Q3 on the positive.
Things like for.
Four or 5% for.
We're both acute into Q2 in Q3.
Understood. Thanks, guys.
Thank you.
Listen comes from Shawn Harrison with Longbow Research. Please proceed with your question Hi morning first question just on product lead times is there any product right now where you are still seeing extended lead times or is everything pretty much normalize poignant.
No we have a few specific more custom based products that still have a extended lead times.
But those are where there is unique flows are unique requirements, most or general products are in the normal range.
In the end markets those products or is it more auto centric or.
Tends to be a industrial and automotive more than any other segment.
Okay. There's a brief follow up Bernard I think there's a convert coming due next year.
Do you have any thoughts on refinance that pay that off et cetera.
We we are at these at this stage, we intend to be it down.
We do have a but what do we could also explore possibilities of refinancing.
We did we finance our debt a recently and.
Have a above the $1.2 billion on drawn revolver and keys we.
Having said that.
Thank you.
One comes from Craig Hettenbach with Morgan Stanley . Please proceed with your question.
Yes. Thank you I'll just call back Quantenna any update on just product development and the areas of autos industrial and how you're thinking about that.
Yeah, we continue to invest we took some on teams and added them to the Quantenna team to continue to drive a derivations of the high performance a Wi Fi that they've got into those marketplaces.
That development looks like it's going to be in good shape to deliver what we said.
Expectations for the 18 months to two years from now.
Got it thanks, and then just a follow up for Bernard I imagine the inventory in the channel came down sequentially can you talk about just kind of framing that versus the typical target of 11 to 13 weeks and then where you guys are today.
Sure we're comfortably within that the 11 to 13 week range.
Okay. Thanks.
Thank you.
This concludes our training session I would now like to turn it back to Parag Agarwal with any further remarks.
Thank you everyone for joining departure date.
Look forward to seeing you at various conferences during the quarter Goodbye.
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