Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the <unk>.
Dr Fourth quarter 2019 earnings conference call.
At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone if your for any further assistance. Please press star zero.
Please be advised so today's conference maybe recorded.
I'd now like to him a conference over to your speaker today, Parag Agarwal, Vice President of corporate development and Investor Relations. Please go ahead Sir.
Thank you certainly good morning, Thank you for Johnny on Semiconductor Corporation fourth quarter, but do not being.
Quarterly conference call I'm going great, but each of our president and CEO and Bernard Goodman, our CFO.
It's gone is being worked off on the Investor Relations section or public website Www Dot onsite me Dot com.
And it just got cost along with our bumping 94 quarter on incident.
But they were on our website approximately one hour well then this conference call.
Another quarter brought cost would be up.
It's hard to do well in this conference call.
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Honestly and this preconditioning towards certain non-GAAP financial measures.
For additional just non corporation myself with the most directly comparable measure and again I didn't know on these studies, which is supposed to separately on our website in the Investor Relations section.
During the course of this conference call, we admit birds or other forward looking statements regarding future you weren't or future financial performance overcome.
We believe estimated Roger anticipated in turn me expert real none.
Your next question.
Turn to go out into <unk> forward looking statements.
We wish across industry segments.
Doris good I'm, starting to do it could call at pretty much results to differ materially from corridor.
Important factors, which can affect our business excluding backed up a good call. Good results to differ from our forward looking statements are describing our form 10-Q.
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Additional factors start describing all honestly, what fourth popped up on connecting our customers are they'll probably looking statements MACI and the governor assumes no obligation to update forward looking statements to reflect cortisone.
These are themselves or other factor, except as required by law.
On August 80 2020.
We host an even more investment community in New York City, the for White cartridge. It appeared on our business.
I just see win.
A big divestment come knocking on our business strategy and markers.
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We want information on our manufacturing consolidation now and none of it's not worth 300 mm manufacturing started.
With that in predictions for the in even sharper [noise].
Now lets me Tony I want to Bernard Gutmann, <unk>, who report and wherever you off our fourth quarter, arguing 19 Bernard.
Thank you Bob and thank you everyone for joining us today.
Following stabilization in the third quarter, we have seen improving business trend in the fourth quarter order trends continued to improve throughout the quarter.
We believe that in addition to the normalization of the supply chain improving demand across most end markets. These three driving improved order rates.
Based on our order rates in conversations with customers, we believe that the piece of recoveries moderate.
Rather than a sharp sharp upturn in the man.
Macroeconomic data.
From most major economies is increasingly favorable and industrial activity is showing signs of modest improvement.
At the same time, we're cognizant of the potential risks arising from the emerging grown up I was crisis, and where diligent any monitoring these rapidly evolving situation.
Our traction in our key strategic markets continues to accelerate in our design win pipeline continues to grow at a rapid pace.
Our content content these fastest growing segments automotive industrial and cloud part of markets continues to increase.
Our customers are adopting our solutions for industrial automotive and cloud part of market than an accelerated me.
We believe it a highly diversified customer base growing content in fastest growing applications in the semiconductor market and long lifecycle of many of our products should enable us to continue to outperform most of our peers.
To accelerate our progress towards our gross margin target, we have begun to make structural changes to our manufacturing footprint.
This morning, we announced that we are exploring the sale of our six inch fab in Belgium.
We will provide updates and financial impact of these actions as we for him up our production transition plans do you eat will further expand on our plans for the Belgium Fab later during this call.
Along with making structural changes to improve our gross margin, we're streamlining our investments in various markets.
Awards this and we took limited restructuring actions in the first quarter do we do so operating expenses by approximately 25 million per year.
We should begin to see nominal impact of this action in the second quarter of 2000, when deep and full impact should be apparent by the fourth quarter of 2020.
Now let me provide you additional details on our fourth quarter 2019 resolved.
Total revenue for the fourth quarter of 2019 was one point World you million.
[noise] a degree of 7% as compared to 1.5 point 3 million.
In the fourth quarter 2018.
The year over year declining whether you was primarily driven by well publicized micro economic and geopolitical factors, which have affected the overall semiconductor industry.
GAAP net income for the fourth quarter was 14 cents per diluted share as compared to a net income of 39 cents in the fourth quarter of 2018.
Non-GAAP net income for the fourth quarter of 2019 was 30 cents per diluted share as compared to 53 cents in the fourth quarter of 2018.
Yeah, and non-GAAP gross margin for fourth quarter of 2019 was 34.6% that's compared to 37.9% in the fourth quarter of 2018.
Fourth quarter gross margin was lower than our expectation due to a combination of certain tragically mix in operational issues.
We had an unexpectedly high demand for low margin product line in our consumer segment during the fourth quarter.
We expect the strong demand to come to you in the first quarter as well.
We intend to either discontinue this block language significantly raise prices after the first quarter.
On the operations, one with certain facilities with even a slap issues. We expect this issues will be resolved by the end of that first quarter of 2020.
In the medium term, we expect to see headwinds from fixed cost your gross margins.
As you're aware, we expanded our manufacturing capacity in 2018 and 19.
However, revenue has lagged our expectation to do well understood macroeconomic and geopolitical factors.
Therefore, we the addition of manufacturing capacity and lack of revenue growth, we're now facing underutilization charges in higher depreciation expenses.
We expect revenue growth in 2020.
[noise], we'd expected revenue growth in 2020, we should be able to offset the impact from under utilization and depreciation.
We expect higher than 50% incremental gross margin for 2020, starting in the second quarter over a year.
Our GAAP operating margin for the fourth quarter of 2019 was 9.9%.
Compared to 14.8% in the fourth quarter of 2018.
Our non-GAAP operating margin for the fourth quarter of 2019 was 12.3%.
That's compared to 16.8% in the fourth quarter of 2018.
The year over year declining operating margin was largely driven by lower gross margin.
GAAP operating expenses in the fourth quarter were 347 million flat as compared to those for the fourth quarter of 2018.
Non-GAAP operating expenses for the fourth quarter with 314 million as compared to 317 million for the fourth quarter of 2018.
Recall that our 2019 operating expenses included more than two quarter of expenses from our acquisition of one Panna communications.
The year over year decline fourth quarter operating expenses was driven by aggressive expense control in zero bonus accrual.
Fourth quarter free cash flow was negative 21 million and operating free cash flow was 92 million.
The fourth quarter free cash flow and operating cash flow were negatively impacted by the onetime payment of approximately 175 million to power integrations for previously disclosed settlement of intellectual property litigation.
Capital expenditures during the fourth quarter were 112 million, which equates to a capital intensity of 8%.
Going forward, we anticipate that a sizable part of our Capex will be spent on enabling our 300 millimeter east Fishkill fab.
We exited the fourth quarter of 2019 with cash and cash equivalents of 894 million as compared to 929 million at the end.
Order 2019.
At the end of the fourth quarter diesel inventory on hand, 123 days down by five basis, compared 228 days in the third quarter of 2019.
Distribution inventory increased slightly but is within our comfort zone.
The increase was driven by specific customer programs.
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 for the fourth quarter, what 696 million.
Revenue for the advanced solutions group previously known as analog solutions group for them for the fourth quarter was 507 million and revenue for the intelligence sensing group was 199 million.
Now I would like to turn the call over to keep Jackson for additional comments on the business environment Keith.
Thanks, Bernard I'll start by reviewing our progress in 2019, and then touch other objectives for Twentytwenty.
Despite the macroeconomic and geopolitical challenges faced by the semiconductor industry in 2019, our execution was solid and we expect outperformed most of our peers in the analog and power semiconductor drew.
Our performance in 2019, clearly demonstrates the transforming nature of our business and the strength of our business model and execution discipline.
Our exposure to secular mega trends and automotive industrial and cloud car in markets has enabled us to outgrow most of our peers.
Despite macroeconomic and geopolitical headwinds he secular mega trends driving our business remains on track.
Our content in the fastest growing applications in automotive industrial and cloud power applications continue to grow and we continue to strengthen our leadership in key markets such as eight asked power management for servers, and Fiveg infrastructure and high power solutions for electric vehicles.
We announced our plan to acquire or first 300 millimeter fab and we expect to start production of our power products at this facility soon.
Also in 2019, we closed our acquisition of one telecommunications and we're making solid progress toward luncheon connectivity solutions for the industrial Aiotv applications.
Well, we're pleased with our performance for 2019, we understand the need to take aggressive substantial intermediate to accelerate our progress towards our margin targets.
As Bernard indicated earlier, we announced this morning that we are exploring the sale of our six inch fab in Belgium.
We're looking for partners that are willing to enter into an arrangement on mutually beneficial terms that enable smoothed an orderly transition for both parties.
Our fab in Belgium is very attractive manufacturing is that with robust to said and highly skilled workforce.
It is automotive qualified and its proximity to the world's leading automotive innovation and manufacturing hub is very compelling attribute.
We believe that our 300 millimeter east Fishkill fab affords us significant flexibility and optimizing our front end footprint and we'll continue to work to improve the efficiency of our manufacturing network.
Recall that in our third quarter 2009 teens earnings conference call, We announced that we had initiated a process of closing down our six inch fab in Rochester, New York.
We're making strong progress towards ramping production at EUR 300 millimeter fab in East Fishkill.
At this point, we're tracking significantly ahead of schedule and now we expect to begin initial production in the middle of 2020 as compared to our previous expectation to begin in the latter half of 2020.
The results for Neil's of initial wafer runs have been spectacular based on her experience, thus far with east Fishkill fab, where even more confident that's transition of production to this fab will be a major inflection point for manufacturing cost structure as we consolidate our front end network.
We will provide further details on the financial impact of our 300 millimeter fab transition at our strategic business update on August 18th in New York.
In addition to making structural changes to our operational cost structure, we have taken measures to optimize our operating expenses. As previously discussed we took limited restructuring actions to streamline our investments in certain markets and these actions are expected to result in annual savings of approximately $45 million a reduction of approximately 25 million.
Dollars per year should accelerate our progress towards our target operating expense intensity of 21%.
Let me now comment on the current business environment.
So moderate improvement in our order rates in the fourth quarter and improvement has continued thus far the current quarter.
We believe that this improvement is driven by improving macroeconomic and geopolitical conditions and normalization of the supply chain inventory.
Macroeconomic data files, geography suggest improving GDP outlook and modest improvement in manufacturing activity.
Data from China, pointing towards relatively resilient manufacturing activity has been especially encouraging.
Based on publicly available data in inputs from our partners. We believe that the current inventory levels are inline with our near term demand outlook.
Well, we are encouraged by near term trends, we are fully aware of risk emerging from the ongoing Corona buyers crisis, and where does diligently monitoring this rapidly evolving situation.
Despite the gyrations and macroeconomic and geopolitical environment, we remain focused on our key strategic markets.
At the same time, we're making substantial measures to make structural changes to our manufacturing footprint with the goal of expanding our margins and further improving our industry leading cost structure.
We believe that automotive industrial and cloud power will be the fastest growing semiconductor end markets for the next five years.
With highly differentiated portfolio of power analog sensor and connectivity progress products, we're well positioned to outgrow the semiconductor industry as we grow our content in the fastest growing applications in our strategic markets.
Furthermore, with improving operational efficiency, we expect to meaningfully expand our margins and grow our free cash flow.
Now I will provide details of the progress in our various end markets for the fourth quarter of 2019.
Revenue for the automotive market in the fourth quarter was $462 million and represented 33% of our revenue in the fourth quarter.
Fourth quarter automotive revenue declined 3% year over year, although our automotive revenue decline year over year, we continue to see improving trends in the market with ongoing recovery in China.
Our momentum and Ada Es and vehicle electrification continues to accelerate.
During the fourth quarter 2019, we secured design wins for key platforms for eight as an incoming viewing just applications are designed funnel for Adas continues to expand at a robust pace.
As we noted in our previous earnings call. We have 116 of the 72 Mega pixel and eight Mega pixel platforms awarded in 2019 for level too and level three vehicles.
Our light Arne radar products are gaining strong traction our design funnel for these products continues to expand at a rapid pace.
We believe that we are enabling democratization of light our with a solid state solution, which is a fraction of the costs of other existing solutions, our low cost advantages enabled by a Cmos based architecture as opposed to that based on exotic materials.
Southern design win pipeline, we expect to have leading share with the top five low global light our module makers.
In addition customer feedback on our radar solutions has been very positive and we have emerged as a key contender for upcoming round of design wins based on our engagement with leading radar tier one integrators, we expect again, a very meaningful share in this market as the next round their designs are announce.
On vehicle electrification front, our engagement for silicon carbide modules with major global automakers continues to grow we're seeing a strong ramp of our IGBT modules for drive train of electric vehicles in Asia and in Europe, and based on our design wins and backlog. We expect it's 10 Ewing acceleration in this ramp during Twentytwenty and beat.
Sean.
We are beginning to see a ramp in analog power management for Adas processors, we are engaged with all the leading processor providers for the automotive ecosystem and expect strong revenue contribution from this product line.
We expect to see strong growth in our analog power management solutions for instrument clusters in vehicle networking and advanced lighting.
Revenue in the first quarter of 2020 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 $344 million or fourth quarter.
Industrial end market represented 25% of our revenue in the fourth quarter.
Year over year, our fourth quarter in industrial revenue declined 12%.
While macroeconomic data points to moderately improving manufacturing activity, we havent seen significant improvement in order activity from our industrial customers. It appears that industrial customers are still in the process degree aligning their inventories.
Despite soft end market condition key secular trends driving our business remain intact, we're seeing strong traction for our silicon carbide modules and we have commenced shipments of these modules to leading global industrial Oems.
In emerging area of growth for industrial businesses E. Commerce, we've built a strong design win pipeline for our Cmos image sensors for warehouse automation and delivery robots, we are engaged with leading ecommerce retailers on many programs and we expect strong contribution from this segment of the industrial market.
Revenue in the first quarter up 2024, industrial end market is expected to be flat to down slightly quarter over quarter.
The communications end market, which includes both networking and wireless contributed revenue of $289 million in the fourth quarter.
The communications end market represented 21% of our revenue in the fourth quarter.
Third quarter communications revenue declined 3% year over year.
The decline was primarily due to weakness in or smartphone related business on a quarter over quarter basis, we saw strong growth in our smartphone business in the fourth quarter, but fiveg related business was weak as customers continue to realign their inventories.
Revenue in the first quarter of 2020 for the communications end market is expected to be down quarter over quarter.
The computing end markets contributed revenue of $153 million in the fourth quarter.
Computing end market represented 11% of our revenue in the fourth quarter.
Fourth quarter computing revenue declined 8% year over year.
We continue to see strong momentum in our server related computing business on sequential basis, we saw growth in our client computing business driven by improved supply of Intel processors.
Revenue in the first quarter of 2020 for the computing end market is expected to be down slightly quarter over quarter.
We expect that strengthen our service server business should help mitigate the impact of normal seasonality.
The consumer end market contributed revenue of $153 million, the fourth quarter that consumer end market represented 11% of our revenue in the fourth quarter.
Fourth quarter consumer revenue declined by 10% year over year.
Year over year decline was due to continuing broad base weakness in consumer electronics.
On a quarter over quarter basis revenue for consumer end market was flat as compared to our expectation of a decline due to previously discussed unexpected demand for a low point margin product line.
Revenue in the first quarter of 2020 for the consumer end market is expected to be down quarter over quarter.
In summary, we are taking up substantial actions to make structural changes to our cost model with the goal of accelerating our progress towards our target financial model.
At the same time, we've accelerated the timeline for production ramp at our 300 millimeter fab as we now anticipate that initial production will start in the middle of 2020 as opposed to our prior expectation of the second half of the year.
Secular megatrends driving our business remain intact, and we are upbeat about our medium to long term prospects.
We are focused on the fastest growing end markets. So the semiconductor industry and with our design wins, we expect that our content in automotive industrial and cloud power applications will continue to grow our performance in 2019, clearly demonstrates the transforming nature of our business strength of our business model and execution discipline.
I would like to turn it back over to Bernard for forward looking guidance Bernard.
Thank you Keith.
Our guidance for the first quarter of 2020 does not include the impact from potential supply chain disruptions, resulting from revealing grown of items crisis. As we indicated earlier, we are diligently monitoring the situation, but at this time, we don't have enough information on potential impact on our business from this rapidly.
Evolving crisis.
Based on product booking trends backlog levels and estimated turns levels, we anticipate that pool on semiconductor revenue is expected to be in the range of 1.35 billion to 1.45 at 4.5.
Billion in the first quarter of 2020.
For the first quarter of 2020, we expect GAAP and non-GAAP gross margin between 33.7 in 34.7%.
At quarter to quarter decline in first quarter gross margin is driven primarily by the annual contract pricing reset.
We expect total GAAP operating expenses of 357 377 million.
Our GAAP operating expenses include the amortization of intangibles restructuring asset impairments and other charges, which are expected to be in the 30 to 34 million.
We expect full non-GAAP operating expenses of 327 to 343 million in the first quarter.
The anticipated quarter over quarter, increasing GAAP and non-GAAP operating expenses is primarily driven by the acceleration the acceleration of processing plants connectivity at those 300 millimeter fab the resumption of variable compensation accrual for 2020, and the end of tactical expense control measures in the.
Fourth quarter of 2019.
We anticipate the first quarter 2020, GAAP net other income and expenses, including interest expense will be 38 to 41 million, which includes noncash interest expense of 9 million to 10 million.
We anticipate our non-GAAP net other income and expenses, including interest expense will be into 20 931 million.
Net cash paid for income taxes in the first quarter of 2020 is expected to be 14 to 18 million.
We expect total capital expenditures of 125 245 million in the first quarter of 2020.
We currently are targeting an overwhelming proportion of our capex for enabling our 300 millimeter fab at an accelerated pace.
We expect our capex intensity to subside in the latter half of the current year.
We also expect share based compensation of 19 to 21 million in the first quarter of 2020 of which approximately 2 million is expected to being cost of goods sold and the remaining among these expected to be in operating expenses.
Yes expenses included in our non-GAAP financial measures.
Our GAAP diluted share count for the first quarter of 2020 east expected to be 118 million shares in our non-GAAP diluted share count is expected to be 413 million shares based on our current stock price.
Further details on share count in earnings per share count lesions are provided regularly.
Quarterly and annual reports on forms 10-Q, and form 10-K, respectively.
With that I would like started the Q and a session. Thank you and Sydney. Please open the line for questions.
As a reminder to ask a question.
On your telephone.
Your question press the pound.
And the interest of time, we ask that you. Please limit yourself to one question and one follow up please standby well, we compile the Q and a roster.
And our first question comes from Ross Seymore with Deutsche Bank. Please proceed with your question.
Hi, guys. Thanks for it May ask your question, it's good to see the revenue side, turning the corner and and I think that's that's an important stuff, but the gross margin side as a big concern for lot of investors, So Bernard or Keith.
Talk a little bit about the greater than 50% incremental fall through going forward.
Any sort of scale on that revenues looked like they should be up second quarter year over year, we'll gross margins take a big step up.
And when will some of these fixes really start to be shown on the gross margin side as you work your way towards that fore handle target that you have.
So a couple of comments thank you last.
We do expect greater than 50% fall through as.
Revenue will resume normal seasonality patterns in the in the second quarter.
As we mentioned in the call.
We also have certain one off a transitionary items that.
Affected us mix wise and in fact.
Thank the ways that we expect to subside by the end of the first quarter and that will also allow us to grow the better than 50% fall through in the into India in the second quarter.
Also let me remind you that we have about the probably 30 to 40 basis points.
Improvement starting in the second quarter due to the elimination of the low margin OSA contract.
So and as we mentioned we are we are exploring the sale of our six in shift facility in in.
Belgium, which which eventually will also result in some very nice tailwinds for our gross margin.
We are quite confident about our secular drivers for grows on the on the on the topline in automotive industrial and Fiveg. So we expect to see some pretty good resumption of our of our gross and Furthermore, we do feel very good about how.
The the qualification is going at the 300 millimeter fab, which will also be at tailwind as we move further into 2020 and 21.
Thanks for all those details and I guess as my follow up moving on to the Opex side and sticking with the margin target side I get that you will squeeze and things tied at the end of two of them in and some of the variable cost come back into the equation, but it still seems like a pretty big step up how should we think about the $25 million of cuts.
Coming out even with that it's still seems like youre going to be a bit above where most of us had expected to be so any trajectory and kind of color on when you can get to that 21% opex intensity target will be helpful.
Well, we have that laid out for 2020 Tulia, we are still the absorbing the quantenna opex, which is higher than what we had been running so that that has been the reason for being a higher definitely taking out 25 million should the as she will help us.
Get closer by the end of 2020, but we should be looking at 2021 before we can we can.
Get to that 21% level.
Thank you.
Thank you and our next question comes from Chris Danley with Citi. Please proceed with your question.
Thanks, guys just a couple more questions on gross margins. So how big was the impact of the low margin product.
Ballooned up and then how big was the.
The facilities in scrap issues impact and then what exactly where the facilities and scrap issues.
So we're not getting into a lot of those details, but I can see that via that the the mix between I like the under utilization slash depreciation versus the one off items, it's about half and half.
Okay great.
And then on the on the sale of the.
Belgium.
Generally as a lot alike.
Stuff like that associated with doing anything over in in Belgium.
Is there like a way to work around that or what's what's sort of the plan on on getting through the costs associated with doing something with a fab.
Yes so.
The what we're looking at a similar arrangement that we've made both in Gresham in these fishkill, where we find an interest in party.
Who will be ramping the facility is we.
Exited in so and Thats a sales situation you don't encounter.
Any kind of exit costs that you're referring to.
Got it okay. Thanks, guys.
Thank you Sir your next question comes from Novak Oreo with Bank of America. Please proceed with your question.
Thanks for taking my question I had a few on margins is that first.
What revenue level do you expect to get back to you on historical 30, 637% growth.
Gross margins on new tank getting to those kind of gross margins as possible and Q2 guilty of this year.
We will with if you again, if you take the 50% falling through of or better than 50% balk through we should be able to get back to those levels in the in the in the rest of the year for 2020.
Got it and Paul My follow up I think you mentioned some contract price reset in Q1 I'm curious how.
So as those negotiations on this year relative to prior years.
Because there does appear to be somewhat of a gross margin had done I think.
One of the challenges facing is to try and based on how much of the gross margin Q1 gross margin is because of that contract pricing are worse is now under utilization.
Trend. So if you could quantify how much of this Q1 gross margin right roughly 200 basis points are still below trend how much of that is because of pricing.
Skewed to the under utilization trends. Thank you. So as you know we have a good amount the for annual contracts for Oems that are reset once per year. So we see as a result of that one per year.
Bigger impact.
Our characterization is that the the contract pricing has been pretty normal as compared to historical trends.
And any impact from money utilization is anyway to quantify that Ben bienvenu that disappear.
We definitely need revenue increases to to help us to absorb that under utilization is so if we have normal seasonal patterns, we should see some good recovery in the second second quarter and beyond.
Thank you.
Thank you next question comes from Chris Caso with Raymond James. Please proceed with your question.
Hi, Thank you good morning.
Just to clarify.
One other comments that you made regarding the the underutilization charges.
It is what you're saying is that that was one of the contributors to the gross margins being.
Below what you expected I think you said it was about half and half I, just I guess I don't fully understand why underutilization charges to be more than expected if revenue.
Came in with with slight upside where they are changed in production during the quarter.
Just some clarification please.
Yes, so so a couple of comments there one of them as we did also.
The reduced inventories in the quarter and the second thing our mix of external versus internal was not the what's more of it more towards external which hasn't helped us has caused the under utilization to be bigger and that was based on the mix of products, we have the demand for.
Okay, I guess a lot of struggling with with.
Go forward is kind of understanding.
Gross margin.
Issue that you saw was was kind of short term and transient gets better as your growth.
Assistance.
As as you said, the 50% plus incremental gross margins I think typically you said in the past 50% is what you get just on increasing revenue and better fixed cost absorption. So is at some point during the year. Some of these transition issues go away and we sort of see a step up and gross margins and then you get back to that 50% rate.
Just just some clarification around that.
Yes, we said the this transition we items should last Q4 and Q1 in after Q1.
The where most for disappear.
So we should see some degree of step up as you go into Q2, therefore a script.
Okay. Thank you.
Thank you and our next question comes from Rajvindra Gill with Needham and company. Please proceed with your question.
Yes. Thank you.
If we kind of look past the temporary impacts the gross margins in kind of look too.
Some of the margin tail.
Could occur in in your business can can you discuss in terms of the impact of qualifying the 300 millimeter fab.
How much kind of cost benefit increasing utilization rate do you think you'll get as you start to transition will cost us flows to that 300 millimeter fab.
And any color in terms of the sale of the six inch facility in Belgium, what that will do in terms of Cogs what percentage of that.
Manufacturing is of your internal manufacturing just any color there in terms of trying to.
The way the imports.
Yes.
I'll give you a kind of directionally a the impacts that you're referring to will give the specific models in August.
When we're.
Ready to do that the 300 millimeter factory as we mentioned is going to allow us.
To get some very cost effective.
Earn products to the market.
We expect to see some nice in quick ramp there.
So back to Bernard's comment on more than 50% fall through we think that's a strong contributor to that in the second half of the year.
It also enables us to do a more in sourcing.
In the factory rationalizations.
Selling of the Belgium factory.
Also will contribute to that.
We are not going to give specific numbers at this time, but all of those risk factors that this confidence in a much better than 50% fall through.
As you go through the year.
And just a follow up on the margins again and you might have touched on this but how low in the gross margin percentage for those consumer products.
And.
Any color what those products work.
And while we're not going to get into details by product line, but the definitely were substantially below the corporate average.
Okay. Thank you.
Thank you and your next question comes from VJ rough patch with Mizuho. Please proceed with your question.
Hi, guys just following up.
Spots and again I know you talked about the loading inventories.
Through the quarter, but also looks like year on year also does headwind in terms of utilization, but just wondering in the basket you and utilization numbers yet some thoughts on legislations that in Q4 did you expect in Q1 on how we expect that to progress.
So in general terms, we explicit expect flattish utilization.
In Q1.
And on the industrial side you mentioned.
Still some realignment of inventory going on.
But how do you expect.
That amendment to be must be done I should go to Q1 do you expect industrial to kind of tend to some sort of go through the back half. Thanks. We we think so we don't know for sure, but our expectation is by the by the second quarter and definitely by the back half the year it should be done.
Thanks.
Thank you.
As a reminder to ask a question. Please press star one and our next question comes from Christopher Rolland with Susquehanna. Please proceed with your question.
Hey, guys. Thanks for the question.
About the consumer products again.
What were the dynamics for the product was this a last time buy.
Or are you kind of expecting more after Q1, and then and the reason I ask is it ties into the bigger picture story for on for for the last decade, you guys have been talking about moving up the value stock with your products.
Gross margins would would fall.
This seems like it's a a product that was probably not price optimized considering volume.
You know it does have the margin profile that you want.
So I guess are there opportunities to review your entire product line.
Optimized pricing and eventually.
So the margin structure or even even shot or some of these really low margin business. Thanks.
Yes. Thank you. So I'm really this story there are you seeing the weakness in industrial which is our highest margin.
Businesses in the company at the same time, we had unexpected strength in consumer segment. It is a segment that we were.
Controlling pretty tightly, but we had some very strong demand for both Q4 in Q1.
2020 deliveries.
We have now taken the steps we need to a dramatically change.
The profile there in expected to not continue past Q1.
From a margin inhibitor.
So.
We do expect if you get Q2 onward, you'll see continued reduction in the consumer profile and increase in the industrial.
Okay, great and Oh on the distributor side of things I think you said distributor inventories increased I think the last day or update we had was maybe 11 to 13 weeks there.
Maybe you can give us an update there and then also you talked about increases from specific customer programs.
Maybe you could describe those programs are and whether thoroughly that to some other changes it tie for example.
So in in general terms. So when we said is deemed to increase the but we're still within our comfort zone.
We like to operate at.
I can't comment definitely on the on the customer programs, but they weren't differently linked to some of these were linked to do those to those programs.
Thanks.
Thank you and our next question comes from Craig Ellis with F.B. Riley. Please proceed with your question.
Yes, thanks for taking the questions B. Riley FBR Bernard I wanted to go back and take longer term look at gross margin. So off from the level that we're guided to in the March quarter, We've got a 900 basis point gap too.
Target level, what I'm, hoping you can do it's just help characterize.
Yes.
Trajectory of getting there how linear as it towards target how much.
That gap is closed.
As we go through 20, and 21 and what are the big levers that you have to well it to move the needle.
Are they are the same that we have a enumerated in our analyst day.
The via the fall through on incremental revenue definitely plays a significant role in that it was definitely a headwind in 2019 in and expect that that will resolve itself with better macros in the wesco via planning period. So we expect to get back into line to a nice.
The world ways, which will help us.
Get some was completely good gold grades.
The the.
Structural changes, we're making in manufacturing as well as the.
The ramping of the 300 millimeter fab should help us achieve the hundred 30 or more.
Basis points that will come from manufacturing cost savings.
The secular growth drivers, where where we are expecting to grow faster in high margin.
End markets is also a contributing factor that should be fairly gradual over time again as we mentioned in the short term we took some step back with these one off consumer thing, but in the long term, we expect them the mix to continue being.
Continue being a significant into the factors.
And we will continue doing the portfolio, managing which has allowed us to do divest consumers and businesses.
Yes that that will there will continue helping awesome that fund. So is the same this theme ones that we have talked about it will.
Definitely.
Because the a good amount of revenue growth it will take us.
Thank you that our manufacturing cost savings, including the 300 millimeter fab and end the mix.
But just to clarify that the drivers of the sand, but the gap is much more significant than it was one that target was first established so.
Which of those which of those variables do you think you you can get.
Incremental leverage on so that we can close that gap and make it 43%.
I think there is a good chance that that we can be in that we can do more on the manufacturing front. We have a we have a good amount of tools that we can do and flexibility with the with the new capacity, we have four millimeter.
Definitely we need the revenue and ended the put the the I'll give more was predicated on the 5% CAGR.
And we started that 2019 with a negative.
So that definitely put so a little bit of pressure on in terms of getting it done in the timing that we need.
That's helpful and then the follow ups for Keith Keith we're seeing good automotive growth since the second quarter of last year is your sense that we're on a sustainable growth trajectory and then switching gears on then on industrial it seems like that businesses continued to east down no surprise, maybe given global is sound.
But is your sense that industrials set a bottom here and in the March quarter or or do you think there's some further risk just given the different dynamics that you see an end to the extent than just the bottom kind of recovery check to see project industry.
Yeah, I'll cover both automotive industry the on automotive piece I think there is.
Feeling that.
We may see I'm, a return to more positive there I.
I think a lot of the dynamics.
Is going to be accelerating more of the vehicle electrification.
Ed faster rates than we've seen in the past, which has a very large.
Increase in our content, which gets us pretty excited.
About seeing a lot of good growth in automotive as we go through 2020.
The industrial side has been weak and it is generally the portion of the business that.
Reflects.
Kind of the GDP is side of the equation.
We do see that bottoming out we're starting to see order patterns pick up.
In.
Like all of the sectors. The inventory piece appears to be getting back and control. So I would expect to see the industrial aside started picking up again in the second quarter.
Great. Thanks kit.
Thank you and your next question comes from Mark well pockets with Jefferies. Please proceed with your question.
Hi, Thanks for taking my questions.
The just going back to the strong demand for the lower gross margin.
Products.
So the the options sound like it either just continue or increase the ASP.
I just wanted to explore that so in the process.
If the decision is made to discontinue is that because the lower gross margin products also our lower operating margin products also as a total lower profitability you just want to get out of that business would that be the.
The rationale and if you decided to discontinue would that hit your utilization rates and then causing continue challenge for fixed cost absorption or are these outsourced products. That's that's the first question I don't think so I would say the a of the the answer is yes. This is both gross margin and operating margin.
In terms of phone.
Definitely raising prices.
Helps a significantly any these outsource.
Okay got you that's that makes sense, Okay, and then on the Keith you mentioned, a resilient manufacturing activity in China.
This where their particular end markets there and do you have a sense of the extent this is due to.
A restocking further downstream or.
Hey, Thank you know if you any any read it this is real end market consumption that's happening.
That's all I had [noise].
Yes, no. Yeah. This is broad based in China, and I think is reflecting.
The inventories being back in line.
Still seeing an economic growth in Trinidad So I think it's just basically you're moving some of the headwinds there.
It's a pretty broad based.
Okay very helpful. Thank you.
Thank you next question comes from Harlan sur with JP Morgan [laughter] question.
Good morning, Thanks for taking my question on the improving business trends could you. Since then by geography last quarter. I think you guys saw some improvements and although in China continued weakness in any stabilization in U.S. did you guys see the demand profile by Geo start to flatten out in Q4 in here in Q1.
So not a lot of change or some incremental weakness in Europe incrementals strength in China.
In the U.S. to the rest of the world.
Pretty much on par with with what we saw in a few through early Q3 and before.
Great. Thanks for that and Bernard on the higher Opex insight into your combined with the restructuring actions announced today, how should we think about the progression of opex as the year unfolds.
Yeah. So I would expect golf speaks to a to be a definitely not higher than Q1 in the flat trending towards slightly down.
Thank you.
Thank you.
One comes from Ambrish.
To start with BMO. Please proceed with your question.
[noise] Ambrish if your line is on mute. Please on me.
And our next question comes from David O'connor with Exane BNP Paribas. Please proceed with your question.
Great. Good morning, Thanks for taking my question, maybe if you could go back to the 200 millimeter. The skill. The initial production there seems though mid 2020, we pulled us in a bit how aggressively Keith will you run the skill and what type of products are driving the initial ramp there maybe then related to that so Bernard.
Can you remind us how much of the businesses outsource today and how much of that could be in source as you ramp these fish meal.
Yeah. The EUR 300 millimeter, a ramp will be dog, driven largely by medium voltage mosfets, where we see a great deal of Ah demand pick up in a in our automotive designs.
For vehicles a of all sorts actually.
And in the industrial sector.
Across all the segments. So it is one of the high growth areas and we're seeing good demand pick up.
In the order patterns in so that'll be the first part to ramp in 300 millimeter. So India you the external utilization our mall, we like to do 80 inside 20 outside.
Right now, particularly for the front end were more in the middle sixties, outsource insourced into and middle that Thirtys outdoors.
Oh.
Very helpful. Thank you.
Thank you next question comes from Mark Delaney with Goldman Sachs. Please proceed with your question.
Yes. Good morning, Thanks for taking the question I was hoping to understand of the 26 million of synergies there were supposed to be taken out of Quantenna Cogs and opex how much of that has been realized so far and if you touch on the Opex synergies in particular from Montana have those been realized.
And then related to that a in May was asked my second question now that the new 25 million Opex reduction plan that was announced that entirely separate from that one kind of synergies or some of that capture and what kind of synergies that that were previously anticipated. Thank you.
So they are completely separate programs one has nothing to do with the other.
I would say ondeck once in a good portion a good a good sizable portion of the Opex has only been realized.
And we should see a little did that we observe drafts still coming into the 2020, but but for the most part it's all done and the other one will be all incremental.
Thank you.
Thank you and your next question comes from Tristan Gerra with Baird. Please proceed with your question.
Hi, good morning.
Your guidance does not include any impact on the call Tonight virus, but could you provide some color on what you've seen so far in terms of factory shut down the seems like some of the OTI Anderson and whether there's a risk that there could be some inventory holidaying.
And that is submitted this potentially benefiting your Q1 two of your outlook if you.
Couple of any color on what you're seeing understanding it's still very early in the process.
Yeah, it's developed rapidly and the changes have been quite quick we don't think there was opportunities for any inventory quoting.
Prior to any action is going on in China.
What we have seen is.
A request a in China for factories to remain shut down after Chinese new year longer.
Then they normally would be it looks like it's approximately a week.
End of course, there is some capacity slack.
In the system as we've been talking about Utilizations are not full.
So we anticipate the most people will be looking to recover.
That expert shutdown.
During the first quarter. So at this stage really don't have much more visibility than that.
But it doesn't look like it will be significant impact.
At least based on today's data.
Okay, Great and then somebody if I missed it did you mention what.
The Senate just capacity will be removed from the describing bed Jim.
We Didnt know we didn't know we have a number yet.
Okay.
Okay. Thank you.
Thank you and our next question comes from Gary Mobley with Wells Fargo Securities. Please proceed with your question.
Hey, guys. Thanks for taking my question and then let's go back to the automotive side, the business and I am not mistaken in years past you've talked about.
Having roughly 7% automotive sales growth against a flat Saar environment.
That appears to be the consensus view as it relates to auto sales in 2020. So against that backdrop are you confident you can see that mid to high single digit percent growth in your specific auto sales.
We are a and we think if we looked at the numbers.
In 2019 AD supported that type of a rate comments I made earlier today, though I think a there's more celleration toward the.
Hybrid and electric vehicles, so that might actually get better for us.
As we go through 2020, so we are expecting that high single digit or better.
This year.
Okay, Alright, just a follow up question I just wanted to verify for distribution, what's the sell in greater than the sell out during the quarter.
Very slightly.
Thank you.
Thank you and our next question comes from Ambrish.
With BMO. Please proceed with your question.
Hi can you hear me guys.
Yes.
Yeah, sorry about that I, just wanted to get back to gross margin and I'm not sure I caught the club response from earlier question on the quantification of the three different factors how much of under utilization.
I'm also contributed and then.
I'm not sure I understood. This [laughter] I'll be under you charge is going to go away as we go into Q3 or there is gonna be lagging under utilization charges in Q3 as well.
So what do we characterized it as we said about half of the issues were under utilization slash depreciation and have where transitionary one off items.
At least a small lag in terms of the impact of a under utilization the impacts the quarter, but for the and obviously it will depend on how strong seasonally the second quarter EPS in terms of the rebound revenue, which will dictate how much utilizations will be.
Okay. Thanks for the clarification.
Thanks, [laughter] comes from John Pitzer with Credit Suisse. Please proceed with your question Yeah. Good morning, guys. If somebody asked the question just wanted to follow up to the extent that you end up getting out of some businesses in the consumer sector going into the second quarter for modeling purposes is there any way to try to call.
On a five what the impact might be to revenue going into the June quarter, maybe relative to seasonal.
We're still expecting seasonal or better behavior as we go through this year as I mentioned, we're through a we think we're through the inventory correction phase a in so you should be seeing in a relatively stable.
Economic environment, you should be seeing.
Better performance this year without those headwinds and so we're really not attributing.
A significant lessening of that with the the consumer business.
That's helpful. And then guys probably shouldn't be that important because it doesn't impact free cash flow Bernard I'm, just kind of curious.
As you March towards that 40 plus percent target for gross margins, how do we think about depreciation from the December quarter levels. When does capex look like especially as you start to really facilitate and build out.
Yes fishkill.
So basically what we said from the Capex point of view, we guided for a 125 to 145 would it go short term for the first quarter and said that a good portion of that Capex is devoted towards that 300 millimeter fab and then we expect that to the people off throughout the year and go to a lower level in 2000.
21 at this stage I would expect capex and the and depreciation to converge in between the pre the pretty much a aligned so I don't expect any.
Significant amount of increased depreciation.
On on RPL as we as we normalized to this capex.
Thank you.
Thank you and our next question comes from Shawn Harrison with Longbow Research. Please proceed with your question.
Good morning, Thanks, a lot of me ask a few questions as well like Keith the commentary on a return to normal seasonality does that also apply to kind of the fiveg infrastructure related portion.
Yes.
Yeah. So I think a again the comments are similar I think the inventory absorption pieces on track to be behind US here in Q1, So I would expect that to also look much more seasonal however.
Secularly, it's gonna grow and so you should see.
Basically no headwinds to that growth as you get through this year well through this year.
And then as a follow up Bernard I I know on a dollar basis, the cash taxes not much change from the fourth quarter, but it's up on a percentage basis I just maybe.
Any dynamics here in the March quarter associated with that or how it tracks you know maybe on a percentage basis or dollar basis post the March quarter.
Yeah, So a capex cash capex maintenance budgets nature recently is lumpy. So I would say that Q1 is open on attacks is already taxis lumpy, yeah and Andy It is it is a.
In a in the 14 to 18 million range with Q1, we expect for the year to be 10% or less.
As a percent of of the profit.
Yeah, but again it is a little bit lumpy.
Thank you.
Thank you and our next question comes from Christina Lee with Citi. Please proceed with your question.
Hey, Thanks, guys just a quick follow up on the consumer gross margin issue to the Chinese competition has anything to do with with the gross margin should either from next barrier or somebody else out there no not not at all a this was just a a business that we.
It was going to decline and then there was a surprise.
Upside.
So it had nothing to do with the.
Any new comparative Tonight dynamics.
Okay. Thanks for taking the follow up.
Yes.
Thank you operator next question comes from Craig Hettenbach quick Morgan Stanley. Please proceed with your question.
Yes, Thanks, Keith just thoughts on the end markets for 2020. It sounds like you said kind of autos high single digit growth kind of lead industrial near term is lagging a bit but just as you see over the course, the or kind of the puts and takes up by end market.
So on the industrial side.
Yeah, we think it's still lagging right now primarily a the portions of that go into new factory buildings in new residential buildings that that has been a kind of the drag piece.
Medical pieces in there has been strong and growing quite nicely, we expect that trend will continue.
It or Mil Aero piece has been holding up quite well so the change that we're looking a in the industrial side are twofold. One we think the energy infrastructure will be a secular positive.
We're seeing more solar installations wind installations.
We see growth in that as we go through this year.
And then on the building side the near hopefully we will have cleared through all the inventory here in Q1.
And you will see a return to normal audience from a seasonality perspective after that.
Thanks.
Thank you.
Not showing any further questions at this time I'll now turn call back to Parag Agarwal for any further remarks.
Thank you everyone for joining the confidence.
We hope to see you at various conferences during the quarter Goodbye.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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