Q1 2020 Earnings Call
Ladies and gentlemen, thank people standing died and welcome to the semiconductor first quarter 2020, <unk> earnings Conference call.
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I would now like to hand, the conference over to you speaker today.
I'll talk a wheel you may begin.
[music].
Thank you to wonder.
Good morning, and thank you for joining all semiconductor proposition sports car companies going deep pocketed is I'm supposed to school.
I'm joined today Mike.
Our president and CEO.
Marc Goodman, our CFO.
This call is being background on the Investor Relations section a horrible.
Do W. W ensemble.
If a deal did broker along with our time to go into first quarter honestly.
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Input cost would be or whatever.
Good morning, This conference call.
That's good British for today's conference call, but it's called an or different form or something <unk> end markets. This segment's geographic journals shared called doctors don't do for some kind of also bolstered our roughly.
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And this presentation includes certain non-GAAP financial measures.
Confirmation of this non-GAAP punish him I guess.
Dr come by every measure undergo <unk> I wanted studies, which is posters separately Arnold website under Investor Relations.
And then of course this conference call, we didn't make predictions on a go forward looking statements regarding future events or the future financial performance.
The worst believe estimate project.
And then May expect wind down.
Sure Synthetics.
Intended to identify forward looking statements.
We wish to caution that such statements are subject to risk.
That's good color trendy misogynous or different mentally from protection.
Important factors, which could affect our business sector.
Oh I thought it goes to depart from our forward looking statements.
Our describing our form 10 gig.
Juice and other filings with Securities Exchange Commission.
Additions for different this government on incentives for the fourth quarter.
I would estimate.
Forward looking statements made today.
The company has no obligation to update forward looking statements.
Reflect back towards though genius actions or other factors.
Required by law.
You want to go the strip center problems and gardening, you do code Nike endemic the previously announced today.
This is scheduled for August <unk>, New York has disposable.
We will provide you would do and location for the win as we've got four they've tried it no.
Turning to what we're not Goodman went for white and Waterview out of our sports pardon the pun Dupont users Bernard.
Thank you Bob Thank you everyone for joining us today.
I used the case with most of our peers or we don't.
For 2000.
And outlook for the second would it have been meeting we had just bike will be thing.
Although our near term results have been impacted by different.
We believe that long term drivers our business maybe Pat.
We expect to show progress towards our target financial model as global macroeconomic environment, we talk.
We continue to be limited structural changes like margin expansion and how your free cash flow.
In the face of challenging business conditions, we have taken measures.
Our balance sheet in Nashville.
These steps include the drawdown of approximately 1.17 billion from our revolving line of credit.
So that's what's taken out of abundance of caution when so that we have adequate levels.
The global macroeconomic conditions unexpectedly it's hard for me to read nickel with 19 pandemic.
Further we have taken certain tactical and temporary actions, we shouldn't be solved in cost savings of approximately 50 million throughout the rest of the year.
These measures think nor do we deduction in executive salaries and compensation Board members.
As mentioned on our portal one key company match.
In the U.S.
Oh married salary wage increases and staggered formal approval of certain employees for three weeks during the year.
The cost savings a 50 million throughout the rest of 2020 or in addition to dosed <unk> hundred seats.
Okay, and I know earlier.
We anticipate that our capital expenditures for 2020 wouldn't be largely focused on anything out of 300 millimeter fab in east Fishkill at this time, we expect capital expenditures approximately 425 million.
Yeah.
We're going to more reserves, our balance sheet, Maine, we do not intend to do buybacks hours years until business conditions.
Now let me provide you additional details on our first quarter 2020.
Total revenue for the first quarter of 2020 was 1.278 billion a decreased 8% that's compute fuel revenue of 1.387 billion into first quarter of 2019.
The year over year declining revenue was primarily driven by slow down the microeconomic of TV and supply is going to supply constrains, resulting from.
I haven't been we lead mandated love don't make it was around the world.
We do actually good deal operations, a few hard fight.
They were employed and to comply with mobile recompletions.
GAAP net loss for the first.
Any sense would be much here, that's compared with net income between seven cents.
In the first quarter of 2019.
Non-GAAP net income for the first quarter of 2020 was 10 cents move the needle each year as compared to 43 cents, which year, whereas 2019.
GAAP non-GAAP gross margin when the first quarter of 2020, Onest duty 1.7, 0.5%.
37%.
Thank you.
The year over year declining gross margin was primarily driven by lower revenue and significantly lower level of using factory utilization as Mitch mentioned earlier.
As required by GAAP, we recorded a period charge of approximately 19.
The significant under utilization of our factory networking.
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Discharge also mean lose the pack the bush weren't strike I don't Belgian fan.
The strike was related to our announced plans to divest.
As utilization of our factory in it.
Expected he brings many business conditions will eventually in the second half a year.
I will not be required to de under easily patient related and we need it gives you charge.
So we did see a step function ink gross margin.
First quarter of 2020 gross margin was further impacted by approximately 3 million of charges I said, we saw them higher logistics in Britain costs.
Our GAAP operating margin.
2000, <unk> was 1.5% as compared to 12.9% in the first quarter of 2090.
Our non-GAAP operating margin for the first quarter of 2000 <unk>.
As compared to 15.5% into first quarter of 2019.
The year over year declining operating margin was largely driven by lower revenue and gross margin.
GAAP operating expenses for the first.
What is 384 million as compared to 334 million <unk> first quarter of 2019.
First quarter GAAP operating expenses include approximately 31 million I suppose you rushing dance animals.
Non-GAAP operating expenses were 319 million as compared to 219 million in the first quarter of 2019.
The year over year increase non-GAAP operating expenses was primarily due to the acquisition of went Ghana.
First quarter free cash flow was 34 million and operating cash flow was 160 million during the first quarter. We used approximately 65 million <unk> 3.6 million shares or common stock.
Capital expenditures during the first quarter 132 million, which equates to a capital intensive [laughter] Stan.
Given the current microeconomic environment, where do you reckon most of our capital expenditures with an evening.
Fabric.
I indicated earlier, we expect capital expenditures would 2020 approximate before.
Right.
We exited the first quarter of 2020.
Cash and cash equivalents.
Good point 92 billion as compared to 894 million at the end of the fourth quarter of 2000 <unk>.
At this time with cash balance of approximately 2 billion, we're very comfortable with our liquidity position.
At the end of the first quarter east of even to be on hand, 131 days like E D as compared to 223 in the fourth quarter.
Fourth quarter of 2019.
They do you shouldn't be too even three was driven primarily by moving expected revenue.
Distribution inventory increased slightly in terms of weeks.
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You do some dollars distribution, even three decline accordingly.
Now let me provide you an update on the performance of our business you starting with power solutions needs appears G revenue for P.S.G. for the first quarter of 2000, when he was 624 million.
Thank you for the advanced solution.
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Well the first quarter was 467 million in revenue for intelligent sensing boom moved what's hot and 87 million.
No I wouldn't like you turn to call would eat Jackson for additional comments on the business environment either.
Thanks Bernard.
At the outset, I think all of our employees for their dedication supporting our first responders and customers in the face a very challenging conditions.
Our employees was well beyond what is required to them to ensure supply of critical components from ventilators and other medical equipment.
In countries, where governments instituted lock down measures to control the spread of the virus many of our manufacturing and support teams stayed at the factories to ensure supply critical components to our customers.
Safety of our employees is of Paramount importance to us.
Consistent with that commitment we have suspended all non essential travel.
Really the teams are working remotely in compliance with local rules and are following strict social distancing guidelines in case, they required to visit a work facility.
Our IP organization has done an outstanding job of enabling thousands of our employees to remotely.
We are actively supporting local communities by donating medical supplies and personal protective equipment and matching employee donations, we continue to step up on short notice.
Well the state of California requested one of our customers for a quick turnaround and then the layers or supply chain and manufacturing teams responded with streamers. She provide critical components immediately.
These teams like many others in on semiconductor exemplify the spirit of collaboration and being a good corporate citizen.
Despite the current challenges he secular mega trends and long term drivers of our business remain intact.
In automotive, we expect the key secular trends such as Ada Es vehicle electrification and fuel efficiency will continue along a steep upward trajectory.
And industrial we expect to see acceleration in factory and warehouse automation robotics energy efficiency and personal medical devices.
In cloud power along with growth in data centric applications, we expect to see an increased spending on servers and communications infrastructure. That's companies put in place a robust infrastructure to enable a remote and distributed workforce.
We believe that the global community should be able to overcome the current health crisis in a timely manner, and we expect business activity to improves and thereafter.
Oh, you're taking measures to mitigate the impact himself business conditions, our long term girls and strategy remain unchanged.
We are aggressively working to enable our 300 millimeter manufacturing capability.
Our product development programs and customer engagement on the key strategic projects are continuing as planned.
We continue to strengthen our leadership in by investing in the fastest growing segments of automotive industrial and cloud power in markets like.
We expect that our contact and niche applications will continue to grow at a healthy pages displays at current prices.
Along with continued execution on our key strategic initiatives, we're making structural and technical changes to align our business or conditions and to drive long term growth and profitability and free cash flow.
Our business realignment programs remain on track, we have taken actions a complete the previously announced restructuring programs. These programs should result in the cost savings of approximately $115 million a year.
As announced earlier, we should be able to achieve these savings by the fourth quarter of Twentytwenty on a run rate basis.
We believe that with these actions the company is well positioned for accelerated progress towards our target model as a global macroeconomic environment recovers from the overnight and <unk>.
As mentioned during the previous results conference call, we're making strong progress towards ramping production at our 300 millimeter bad Daddys Fishkill.
At this point, we're tracking significantly ahead of schedule and we now expect began initial production in the middle of 2020.
The results in yields of initial wafer runs had been spectacular based on our experience thus far with the special fab, we're even more confident that transition of production to this fab will be a major inflection point for manufacturing cost structure as we consolidate our front end network.
Let me know comment on the current business environment on the demand front it isn't makes picture.
Demand from automotive end market has been impacted severely knew what was your manufacturing plant and extremely challenging global macro economic conditions.
We expect the automotive weakness to continue to automotive manufacturing plants reopened and global production restart at least at a moderate pace.
We're seeing good strength in a few end markets in the second quarter, most notably activity in the industrial end market appears to be strong across most geographies.
Server and Fiveg infrastructure related demand continues to grow at a healthy pace.
The man from smartphone and consumer end markets continues to be soft due to massive slowdown in global macro economic activity.
From a geographic perspective after a slow down early in the first quarter demand from China has improved meaningfully.
Japan is another area of modern strength.
And from the U.S. and Europe has significantly softened due the pause and most economic activities because of government mandated quarantines and other regulatory actions aimed at reducing the spread of Cowen 19.
Within the U.S. and Europe automotive is an area of conspicuous weakness.
It appears that customers are praying for recovery in the second half and are placing orders to ensure supply.
This time, we are seeing significantly higher order activity for the second half the year as compared to that in the first half of the year.
The orders are broad based in terms of in mortgage geographies and channels.
During the first quarter Cobot, 19, pandemic significantly affected our operations and impacted our ability to supply products to many or customers.
East disruptions have continued into the current quarter and we expect to resolve them by the end of this week.
Early in the first quarter, our manufacturing facilities in China were closed for longer than planned for lunar new year holidays in compliance with government mandates.
Following the extended shutdown, our China factories resumed production and are now running it close to full utilization.
Subsequently in March our facilities in Malaysia in Philippines, where a sizable part of our backend operations or.
Were severely impacted due to lock down mandates governments.
Our Malaysian Philippines manufacturing plants ran significantly below capacity for most of Mark.
Under utilization and these facilities continues in April and then domain.
Most of our facilities worldwide are expected to be running required level of utilization by the end of this.
Now I'll provide details of the progress in or berries in mortgage so the first quarter.
20.
Revenue for the automotive market in the first quarter was $439 million and represented 34% of our revenue into first quarter.
First quarter automotive revenue declined 6% year over year.
Year over year decline in automotive market was primarily driven by the closure of automotive production facilities in various parts of the world and supply constraints driven by reduced level of operations at our partners manufacturing facilities.
We saw weakness in China, automotive and industrial markets earlier in the first quarter business activity has since picked up as factory to reopen in China.
Currently we are seeing significant weakness in the U.S. and European automotive margins to closure of automotive factories.
Based on comments by major automakers. It appears that many European factories are now gradually returning in the U.S. automakers are planning to reopen factory starting in later for me.
Based on third party reports, we expect global light vehicle production units declined by approximately 20% to 25% year over year.
20.
Despite a massive decline in light vehicle production units, we expect semiconductor content.
Automotive applications to continue to increase and a healthy pace.
Key secular mega trends driving increased semiconductor content automotive applications, such as vehicle electrification Ada es fuel efficiency and led lighting remain intact, and we are well positioned through our technology leadership and customer relationships to capitalize on these trends.
During the first quarter, we secured a major design win for U.S. image sensors, where the Japanese OEM.
So I am as one of the largest automakers in the world.
This win underscores our global leadership, and Ada Es image sensors and highlights customer confidence in our technology in a high safety critical application.
Our momentum for Silicon carbide himself in power products for electric vehicles continues to increase in pace.
Well, they solid pork product portfolio silicon carbide devices in modules, we are seeing strong growth in revenue from electric vehicles.
The same time, the breadth and depth of our engagement with leading participants in the electric vehicle ecosystem is expanding very significantly.
We expect to see strong revenue growth in are you mean, he modules for traction inverters as our design wins ramp in China. This year.
Extension or subsidies for electric vehicles in China until 2022 is likely to be a significant boost for silicon carbide.
In China.
Our power products continue to grow in many automotive applications.
Truncation of various vehicle systems, and conserve energy and to improve performance is a key driver of increasing content our devices in vehicles.
During the first quarter, we also secured a major design win for our mid voltage Mosfets reporting systems.
Revenue in the second quarter of 2020 for the automotive end market is expected to be down deeply quarter over quarter due to closure of most use and European automotive factories for a significant part of the quarter.
The industrial end market, which includes military aerospace and medical contributed revenue of $315 million in the first quarter.
Industrial end market represented 25% of our revenue in the first quarter.
Year over year, our first quarter industrial revenue declined 12%.
This decline was driven by Swift and sharp decline in global industrial activity and supply constrained due to the covert 19 endemic.
Despite challenging macroeconomic conditions, we continue to make progress towards a key strategic initiatives.
In industrial power segment momentum for our salt carbide in silicon devices remain robust.
We're seeing strong customer interest for silicon carbide devices for fast charging stations for electric vehicles.
During the first quarter, we secured an important design win for high voltage Super Junction MOSFET for electric vehicle charging station.
Well the medical front, our teams are working very hard to support the medical community in the fight against Goldman.
Entire organization is focused on supporting increased demand for components for critical medical equipment, such as ventilator infusion pumps patient monitoring systems cardiac assist system and medical imaging equipment.
Our gaming engagement with E commerce consumers is growing at a rapid pace and we expect E commerce related applications will be a strong driver of our industrial image sensor business.
We believe that growth in our E commerce related business will be driven by increasing E commerce volumes.
Increasing warehouse automation and adoption of delivery were robots.
Through our early engagement with industry leaders in E. Commerce, we built strong design win population pipeline for our Cmos image sensors for warehouse automation and delivery robots.
Revenue in the second quarter of 2020 for the industrial and is expected to be up quarter over quarter, driven by strong recovery in the demand from all regions.
The communications end market, which includes both networking and wireless contributed revenue of $204 million than first quarter and represented 20% of our revenues during the first quarter.
First quarter communications revenue declined 1% year over year. The decline is primarily due to weakness in their smartphone related business, we saw solid year over year growth in or infrastructure business driven largely by Fiveg.
We further solidified our position in Fiveg infrastructure market by winning new design for media most most that.
Revenue in the second quarter of 2020 for the communications end market is expected to be down quarter over quarter, primarily due to softness in the smartphone market.
We expect our fiveg infrastructure to grow at a robust pace quarter over quarter in the second quarter.
The computing end markets contributed revenue of $136 million in the first quarter.
Feuding in market represented 11% of our revenue in the first quarter.
First quarter computing revenue declined 7% year over year, primarily due to our selective participation in land related business.
Our server business grew at a very impressive rate year over year.
We experienced better than expected results and are server business as corporation rush to augment.
Structure to support a remote workforce, our power management products for server processors.
And interoperable power supplies were key drivers Barrington research business.
Revenue in the second quarter of 2020 for the computing end market is expected to be up quarter over quarter, we expect growth in both server and client parts of our business.
The consumer end market contributed revenue of $134 million in the first quarter.
Consumer end market represented 10% of our revenue in the first quarter.
First quarter consumer revenue declined by 17% year over year than the year over year decline was due to broad based weakness in consumer electronics market due to the Kobin 19, pandemic and or selective participation in this market.
Revenue in the second quarter 2020 for the consumer end market is expected to be down quarter over quarter.
In summary over 19 has had a sizable impact on both demand for our products and our ability to supply we expected during the second quarter by the end of this week, our supply capabilities will improve significantly.
Based on order patterns. It appears that are customers are planning for recovery in the second year and we're encouraged by the gradual resumption of global Tivity globally.
Despite current challenges due to covert 19 pandemic, our long term goals and strategy remains unchanged. We have taken previously announced restructuring actions to optimize our investments and cost structure and we are well positioned to make a celebrated progress towards our target model as a global macroeconomic environment recovers.
We continue to work aggressively to enable our 300 millimeter fab in east physical and we remain on track to start or 300 millimeter production by the middle of this year.
Despite the current macro economic disruptions he secular mega trends 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 of the semiconductor industry and with our design wins, we expected our content and automotive industrial and cloud power applications will grow.
Now I'd like to turn it back over to Bernard for forward looking guidance Bernard.
Thank you Keith.
What I'm getting to the details let me highlight the keep buying loose guidance.
Our guidance for the second quarter is based on the assumption that the move backwards anomaly environment for them you read.
Movies 19 pandemic.
We will likely continue to face operational and logistical challenges Documentum, Andy will also be superior of extreme uncertainty and volatility and future results of our business. We look only dependent recently, Andy but also on government actions in the diesel recovery in global macro economic activity.
For our ability to forecast over business performance.
And the range upon guidance for various financial.
The second one is wider than when we have provided historically.
Based on one of booking trends backlog levels and estimated dunes Nichols DCP. The toll on semiconductor revenue is expected to be reach 1.1 $1.26 billion in the second quarter.
As noted earlier, we will likely going to these operational in logistics in June.
Well.
Second quarter of 2020 weeks that gap and non-GAAP gross margin between 29% and 31%.
Lower revenue in the second quarter as compared to that.
I know you dream.
Whatever quarter declining Monday, when the second quarter.
Fixed and record marginally lower period under utilization charging the second quarter as compared to that over that.
We expect total GAAP operating expenses.
What do you do.
GAAP operating expenses include amortization.
Restructuring and asset impairments and other charges, which are expected to be fully between 40 to 47 million.
Total non-GAAP operating expenses, a few hundred 97.
<unk> million in this quarter.
The DCB second quarter of 2020 gap net other income and expenses, including interest expense will be the 40 to 45 million, which includes non cash interest expense nine to 10 million.
We anticipate our non-GAAP net other income and expenses, including interest expense will be duty three to 35 million.
Net cash before income taxes in the second quarter of 2000 twin is expected to be 10 to 13 million.
For 2020, we expect cash before taxes to be the major.
We expect pool capital expenditures.
100 million in the second quarter.
20, we're currently targeting an overwhelming proportion for capex when an even go to 300 millimeter fab and on accelerated fees. When 2020, we expect total capital expenditures approximately 425 million.
We also expect share based compensation opened 19 to 21 billion second quarter.
Which approximately 2 million is expected to be cost of goods to the remaining amount is expected to be operating expense.
These expenses included in our non-GAAP financial.
Our GAAP diluted share count for the second quarter of 2000.
As expected to be Waterman unions units based on our current stock price.
What do you feel some share count and earnings puts your calculations I provided regularly in our quarterly and annual reports on form 10-Q, one team key respectively.
With that I would like to start the Q any session. Thank you and to one got please open up the line for questions.
Ladies and gentlemen, as a reminder to ask the question you. When they are then want on your telephone.
To withdraw your question press the pound key.
Again that start once asked the question.
Please standby, while we compile the Q and a roster.
First question comes from the line up Ross Seymore with Deutsche Bank. Your line is open.
Hi, guys. Thanks for let me ask a question I guess, that's first on the revenue side of things could I get a little more color on what you're seeing in the near term bookings and how you're guiding versus that because I guess the impression I have from your script is.
More of that a you're not seeing as much strength as some of your peers and the very near term, but you're more confident in the back half of the year and it seems like a bit of a dichotomy, where they're guiding well below currently strong bookings for fear that the macro economy is actually going to weaken further where your guidance seems to take the opposite tact.
Yeah interesting.
Interesting comparison I think the two.
Two things that impact that one Oh, we were talking about the revenue stream the impact that we have in the Philippines, Malaysia is perhaps more significant than much of our competition. So.
You are hearing us talk about supply constraints in the near term.
On the demand side, the automotive piece.
Significant force.
But it is picking back up for Q3.
And so again I don't I don't have any specific comparatives other than to say that we've seen as is more demand than we can service in the second quarter and the rate of that pace is going up significantly in the third quarter, but we think we'll be able to have all of the supply constraints.
Thanks for that and then I guess my second question to be on the gross margin side of things.
It continues to be a source of headwinds I think directionally, everybody understands why but the magnitude is bigger than I, even thought so I guess kind of two points on that weren't there a number of onetime issues that hit you in the fourth quarter in first quarter that should have been a bit of a tailwind in the second quarter.
Then as we think about that second half trajectory and gross margin are there. Some structural changes that are going to kick in or what's the stairstep you're talking about is it just utilization popping up.
Thank you Ross so you're correct, we didnt have some onetime items that affect.
We're in the those have been resolved.
We'll see those anymore that same with the OSA that will go away.
You definitely as Keith mentioned earlier, we were substantially affected by the abnormally low utilization.
For the period seen which we had locked down and you know factories and that caused us to beat the to book.
Abnormal onetime and 19 million dollar hit.
Gross margin, which we expect will continue maybe a little bit marginally lower but will continue as well.
One that once that goes away.
Back to us.
The meeting that had been most margins should step up nicely.
So obviously the markets when do you.
Yeah.
And our fault and we should be pretty nicely as we go back.
So I <unk> and it is premature primarily the fact that that we have had the significant hit to our into our.
Operations the supply constraints.
Thank you.
Thank you.
Next question comes from the line of course dangling with Citigroup. Your line is open.
Hey, Thanks, guys just follow up on Ross's question. So if the revenue levels don't get back to 2019 levels for quite some time, what's the plan to drive to the gross margin target, especially considering the manufacturing capacity you have right now.
Well, we have only the unknown to announced a.
The intended see labore, Belgium, the fab that will can easily that path anything's continue getting getting worse, there will be other actions so along the same.
Uh huh.
That doesn't seem like we compete focused on on cash and we also that much on the gross margin, but across the spectrum. We took some temporary actions to shore up or numbers that we had an almost $150 million previously.
Okay.
As permanent restructuring actions and then we announced at this time another $50 million will be of use tactical actions that will show up at the cash.
Conditions continue worsening, we'll be ready to take what action.
Thanks, Bernard and then as my follow up just to go along with the restructuring actions can you give us a sense of how these things are supposed to trend in terms of opex versus cost to goods for the rest of this year. Then we'll we'll they're still be some savings next surely you realize all the savings by the end of this year.
For the $115 million than we announced earlier.
We expect to achieve the a the exiting the velocity.
It is primarily optics, driven so little bit the small piece will be than Houston calls, but mostly.
It's a it's all based driven.
The 50 million of temporary actions is by nature will be temporary just the between now and the end of the yields about close to $50 million.
Have you are focused on opex, but at least a really good what do you see vision of Cogs that will help.
Okay, great. Thanks, guys.
[noise]. Our next question comes from Milan of Chris CAISO with Raymond James Your line is open.
Yes. Thanks. Good morning, just a question on on the supply disruptions and talked about that was pretty severe in the second quarter.
What's of one what's the status of that that I'm, sorry, as you go into the second quarter, what's the status of those supply disruptions or what's the percentage of capacity. That's that's back online and then naturally when you have those supply disruptions there some incentive on the part of customers to layer in some orders they might not necessary.
We need a what's your visibility on that I know, it's always something difficult to judge, but you know how are you I guess judging down the orders that you have to avoid the potential lift up double ordering.
Yeah, so the supply disruptions.
Have improved as we got into me they were still quite severe in April.
And we don't expect to be full.
Capacity until the end of this week, so as a very sizable part of the second quarter has.
In fact it.
Relative to the demand things I will just say that the the orders we have makes sense based on the in market data that we're getting.
We don't see anything that's abnormal.
Relative to what's going on and so the areas that are weaker weaken our backlog in the areas that have picked up.
Primarily due to China coming back online.
Are the ones that have picked up.
Okay. Thank you.
As a follow up with regard to Capex and I understand there's some elevated capex right now because of what you're doing with Fishkill facility could talk about how long that continues at what point is the spending on fish kill over and then once that's the case, what's a more normalized level of capex spending it.
Back when Fiscals over and then you know presumably as we go into 2021.
So basically we have that we have said the wasn't easy acquisition.
The skills that are under our long term a.
Our goal is 6% to 7% on.
Capex.
We will we will be a week was that targets as time goes by.
I'm not sure it will be exactly at the beginning of 21, but it will be.
With that this as we go.
Thank you.
Our next question comes on the line up.
Gill with Needham and company your line is open.
Yes. Thank you question on the the comment about the gross margin stepping up.
Significantly in the third quarter, Oh, or you're stepping up.
One of the can discuss that old in more detail, obviously, the underutilization charges will go away, but what what else will drive that step up function.
Are you expecting a better mix shift and the third quarter auto comes back online.
Or any other details in terms of what what do you think will be the drivers for the step up in margins.
On the back half of the year.
So a skied mentioned earlier, we are seeing better demands for the bank absolutely expect to help from a incremental whether you tend to fall can you should be should be nice. We also should be seeing mixed asked our [laughter] a seller markets that like better gross margin should be should be coming back up particularly.
[laughter] and in terms of of the end markets you had mentioned that Europe and the U.S. are starting to bring back manufacturing online. This is based on the commentary from those companies that you cited.
In terms of tangible evidence from from your perspective on the automotive side, how would you characterize the order Shaw and automotive as we go into kind of if you look at the third quarter and then also has there been any delays of more advance Ada Es program because of the the drop in.
Demand any any thoughts there in terms of the current eight ask program for the easy programs that.
That are on track.
Yeah, we saw a very steep decline a in demand from automotive as we got through the first quarter.
First part of the second quarter.
That a free fall a if you will has.
Leveled off in a little longer a declining.
So that's certainly a good sign.
And then we have specific requests oh from or large Oems.
Letting us know that they are expecting to have more live in the second half and we need to be ready.
From a demand on things like Ada Es and electrification those continue quite on track a in what we're seeing is that some companies are using this dislocation in the market.
The kinda reposition themselves upscale with both their electric vehicles and he das content. So we're actually seeing.
Seeing potentially a seller reader.
In those two parts of automotive.
As it recovers.
And just last question on the on the smartphone side you you <unk> you mentioned a drop in smartphones can offset partially by five year infrastructure [laughter], there's been indication of the smartphone to recovering in China I just wanted to get your thoughts on your you know you're maybe your dollar content opportunity in smartphones.
In any any view there in terms of how we think about the second huh.
So a dollar content around $9 for smartphone you have indeed seeing.
A pickup in China.
But only with the China brands at this stage, but we are expecting to see a global blends launching new models in the second half.
So our expectation.
Is that the second half will be much better for smartphones.
Thank you.
[noise]. Thank you.
Our next question comes from the line of the change or cash with Mizuho. Your line is open.
Checked to see if you don't need Sir.
Hi, sorry about that I know you guys mentioned some long lead orders that came in.
The second half just wondering if it's.
Slanted disproportionately to automotive and industrial or how you're seeing that.
Yeah, it's very broad in the second hand them in their is looking good. We just mentioned smartphones, so look like they're going to be up.
Automotive is up from a very low number so it's a going she had too excited but the industrial a piece continues to build and our server and cloud business continues to show great straight.
Got it and on the five decide I think you mentioned a it's growing.
Sequentially into the second quarter is that infrastructure business and book coming from China that or do.
Do you see.
Quick enough pick up in the U.S. Europe et cetera. Thanks, So China, certainly the strongest to pick up there, but we really never so much of a decline outside of China.
So it continues to be healthy.
Thanks.
Thank you.
Our next question comes from Milan of Christopher Roland.
<unk> International Linafelter.
Hi, guys I know, we might be a ways away from from M&A, but it's been a focus of eurs in the past.
And you guys have previously talked about doing something more strategic or higher gross margin.
But given the hunger utilizations and growing footprint that you guys have have you shifted at all towards.
A belief that you need more volume across her infrastructure.
And maybe if you can talk about any other levers you can pull there in terms of under utilization.
You know you've talked about reducing your older footprint, but how about bringing more external and internal for example is that.
Is that a salt here thanks.
So I guess, a two questions on that from from an M&A perspective, I'm not sure. This is a proven time and so a really nothing new to report there and as far as utilizing the.
The network, we clearly are looking at bringing more manufacturing inside a those are actions that are underway and should help us in the second half of this year.
Got it and then not on a fishkill.
That with some nice commentary you guys had around around ramping yields there.
I guess since things are ramping a little bit better than expected you know how does this compare to your original expectation or are there any changes to.
The model positively and then secondly, what's gonna be your strategy since yields are so good in terms of bringing bulk volume from other fabs are you going to bring them immediately and leave those other fabs.
And the or is it couldn't be more of a controlled process in which.
You are doing at one time at a time thank you.
Yeah. So a couple of commentary bluntly the products were putting into U.S.K. first or the power products supporting most of our automotive and cloud power type applications and so the good news is those volumes continue to grow.
And so we feel pretty good about that we had intended to ah to ramp that in not.
Empty other factories.
And we continue to think that we'll be able to keep our factories full while ramping.
Yeah.
And Ah from a promote on and on track or ahead of schedule perspective, It's a roughly looking like grew about six months in advance of where we thought we would be a in we worked with customers that are specifically growing power content with us.
To qualify those factories insert running here a in a matter weeks.
Thanks.
Thank you.
Our next question comes from a lot of Craig Ellis with B. Riley Your line is okay.
Yeah, Thanks for that and I'll just follow up to the last question. So if you're getting good engagement with customers on fish meal, Keith what would you expect the percent of bonds production to be out about facility.
Getting this year.
And as you have another six quarters under the belt exiting calendar 21.
The person to total sales so could come out of use fishkill, but that's lower cost footprints and whatnot elsewhere.
So I don't I don't actually have prepared a quarter by quarter a break down for you Craig we talked about having the ability do about $2 billion of revenue from the factory a that won't happen in a 20 or even 21, but.
Let me get to 23, we should be able to do that.
Okay.
That's helpful and then auto obviously, it's been a big focus on this call that sometimes maybe others given the impact.
Two units this year as we look at how do I think you know we're probably in the in the second quarter gonna be tracking.
120 ish million below prior highs how much of that volume can be made up with increased content over the next year or two Keith and and how much.
What had been automotive volumes in the factory network will need to be absorbed by things like cloud power.
Or other growth initiatives or areas, where you've got secular constant Kim thank you.
Yeah. So the mentioned before the things were watching carefully or are the electric vehicle ramps in China, They put a back a incentives.
Because they're the content as you know as several hundred dollars higher electric vehicle.
And so the simple answer is if they really ramp mostly electric as we go forward in China, there's a substantial opportunity to overcome any losses.
And then Ada es similar kinds of situation there they're becoming.
Consumers are more safety conscious and so we're seeing the content there go up.
20, $30, a card and time and so I think a the question will be as we come out of this downturn. What's the strategy is gonna be and right now at least for looking at more electric vehicles and a more focus on safety. So.
We think most of that if not all of that will be offset as we exit.
Thank you.
Thank you.
Our next question comes for the long enough Ambrish.
Severance festival.
B M. All your line is open.
Very much. Thanks for taking my question I, just wanted to come back to the gross margin side, but now that I'm sorry, you were cutting out when you answered the question it looks to me I'm.
One of them send the bridge between two one in Q2.
So how much of the cost would go away.
How much if it is onetime in nature, and then kind of related to the recovery part is you talked about Twog true and you're also talking about a step function increase and then there's the protect your coming in which is you are 200 millimeter fab. So what's the right way to think about fall true.
As margin recover as result of revenues coming back.
That would be helpful. So I'm just kind of helps bridge the gap and B, how should we think but thank you.
So.
The fault the bridge for Q1 did you speak fluent it's mostly the decremental fall through a 50% on the on the revenue going from at 12 78 to 11 80.
The the one off period charges that we saw in Q1, you mentioned the fact that we than we had during the month of April you. The sheltering place the mandates government benzene.
Our locations and then we expect to be.
Getting close to being out of that by the end of this week. So he has had a significant.
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Which is going to be similar in nature, maybe a tad bit less but similar in nature. I think you one that's the one that when we go into Q.
Assuming that these are that the all these supply yeah.
Issues I easy mandates from the governments have.
Have.
Eliminated that that that approximately 20 million goes away completely as we go with you on the and then you have the normal fall through on one whatever whatever revenue.
Comes through.
Next the high level.
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And how this folks who changed a bit see under should be hoping you and this is not a question for this year. Obviously, you just started with assets, but steady state how should we ended the image or have a.
Positive impact poor since.
We definitely see that the the unit cost of.
Dramatically over we have a will be better.
You know, obviously will be depending on the speed of deal qualification for more customers.
As we go into that that needs morry longer term 21, 22 timeframe and we expect any significant thing that direct impact in 2020 as it relates to you.
The two.
Gross margin and we also relying a lot on what we're seeing others have done.
Yeah.
Expect that we'll have something similar in nature.
Okay. Thank you my quick follow up the acute site.
On your comment about you over to increase for second quarter, a little bit surprised about industrial.
Specially given the macro backdrop is that.
Primarily related to.
China recovery or sell in just can you. Please.
And then that please thank you.
Yes, China is certainly the biggest driver of the increase there as you remember in the end of last year. It had been severely curtailed in China.
It was very very weak and so that the that has been recovering. We also have the medical business in that industrial category and they've certainly season.
Uptick globally.
And Ah so those are kind of kind of the big ones there.
Thank you very much.
Thank you.
Our next question comes from the line of Matt Ramsay with Cowen Your line itself.
Yes. Thank you very much good morning, I just wanted to follow up Keith on on a couple of other questions if folks asking about assumptions.
For for manufacturing it fishkill.
Just assuming given what's going on in the macro that that revenue levels for the industry and the whole company will be maybe lower exiting when you taking coming into the point, where you take over full ownership of the facility are you guys basically kind of saying that through different optimizations over the rest of your factory network.
And a little bit more insert sourcing that.
The overall volume and dollar content of what you might put through for skill at the point that you take over ownership. We should just assume is roughly what it was when you signed the agreement are there any sort of big picture changes to those assumptions that we should think about given all that's going on thank you.
Well the way we look at a things can twofold, one the amount of power a that we've got a percentage of the company. We expect to continue to expand for all the reasons, we've been explaining a in so when we take over in 2023, we would certainly.
Aspect that power piece of the business to have grown substantially a we don't think cobot is with us forever.
And then secondly from a factory perspective, I mean, we didn't do that expansion of frankly because of our outlook for the growth in electric vehicles, and the growth and the Fiveg infrastructure in the cloud power was going to be such that that specific set of.
Technology nodes would need that expansion. So really nothing has changed on that perspective or from the 2023 look but certainly as had a major interruption here.
Got it that that's clear and and helpful. I'll just wanted to follow up I, obviously on Bernard on the on the Opex side. There's some some actions you guys have laid out.
Anything in particular to call out in R&D that might be changes to different programs that we should pay attention to or is it <unk> no real change to what you guys announced last quarter and just some obviously additional belt tightening given what's going on globally. Thank you. So no no additional from what we announced that what do we did we outlined so much.
Investments.
Okay.
Mark and Cindy.
Think about but most of these additional actions so far more tactically needs and <unk>.
Don't change our view.
Oh.
R&D.
Thank you.
Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is open.
Hey, guys. Thanks for squeezing me in need just a time opposed supposed to my questions now I know in the past you were planning on.
Becoming more vertically integrated and in power devices with some silicon carbide materials Wonder if that's still in the quarter you guys.
And had Bernard could you.
Give us some I guess benchmark on what's the Opex run rate can be as we exit the year is $290 million in that fourth quarter that like number to think about.
Okay on the continued a vertical integration we continue to be on track there.
Have a network as I mentioned before of internal supply and external supply.
Wafering.
As we do a silicon today.
And Ah So we continue to invest in that and.
We're making good progress.
And on the on the Opex question. The we Oh, we do intend to continue you are obviously, an absolute dollars multi year.
Current levels and promote.
Bye.
So a the navy a with the actions city temporary to permanent actions, you're talking about talking about.
On a 90 seems to be an appropriate.
Thanks.
Thank you.
Our next question comes from Milan upon Sir JP Morgan Your line is open.
Good morning, Thanks for taking my questions.
Operation on logistic challenges in southeast Asia are shifting the impacting your lead times it seemed to have called the normalized lead times for the team.
Is around eight to 12 weeks, but you guys seem to have very good oil in order to Visibilities for Q3 second house. So it does look like lead times are higher can you guys just give us a sense on where the average lead times are today, just wanted to see how much order and backlog visibility you guys actually have for the second half.
Yes, so it's around 14 weeks, but once you see from an order pattern perspective is our industrial and automotive customers and even the cell phone customers are handset customers will give us a much longer look and actually much longer orders.
Particularly as they see there they're planning on ramping in the second half. So a piece of it is lead times in a piece of it is just the nature of the customers.
Great. Thanks to the insights there keys and then on the lower on the utilization under utilization charges. This quarter, just given the better second half order book manufacturing lead times are you guys actually starting to pick up wafer starts in your fab now or do you have enough bare die supply and just hope to supply the better does.
Man's initially from an improvement in the Bakken operations.
Yeah, most of the a increase so all of the increase is really been in the dice applying for inventories have been the day supply here the first quarter.
And as we go into second quarter, because we were back in constraint.
So we really haven't had to ramp the front ends yet.
Because we're still playing in that kind of spring back in environment.
As we get to Q3 with higher revenues.
<unk>.
Great. Thank you.
Thank you.
Our next question comes from lung John Pitzer with quite a Swift your line is open.
Yeah. Good morning, guys. Thanks for me ask the call keep them, sometimes you could quantify what you think the supply impact was.
From co bid in the March quarter, and what's embedded in the June God I'm, just trying to get a sense and if you weren't having these issues and Malaysia and the Philippines, how much hard you think revenue could have been in March and how much higher do you think it could be in June.
Yeah, I I guess I will try and get this quantifies viable as they can we would have made our original guidance in the first quarter had we not had the supply disruptions.
And you can figure out that's a pretty significant number.
And actually in the second quarter.
The the supply constraints have at least as big of impact if not slightly more.
Because it is for much longer period of time in the second quarter than we had in the first.
That's really helpful. Thanks, Keith and I want to go back to your comments about content growth in autos.
Helping kind of take some of the staying out of units being down 20% to 25%. This year I guess when you look back in calendar year 19, your business contracted about as much as Sars, Ted and I understand the 19 within the auto space was also an inventory digestion period, but I got to believe with units being down this much that it's more.
Unlikely that the supply chain continues to take inventory down in calendar year Twentys. So why more optimistic about content growth. This year, then last or are there company specific drivers that you can touch too. Thanks.
A twofold, one we really do think that inventory situation a isn't better control this year.
The orders came down on those quite dramatically.
Motive during the first quarter and into the second quarter. So we believe there being very prudent.
But they are now getting to levels of inventory that.
I think that that actually concern or customers that they don't want to go lower than that from a supply perspective.
And there are still certainly some memories out there of 2010 from a lot of it. So I guess the first order would be a we don't expect more inventory contractions. This year.
Second the piece is looking at the electric vehicle content and particularly in China.
We do think that that mix will go up a much nicer.
And then it wasn't 19 very significant increase there and so that piece of it as we mentioned earlier opens up you know a couple of hundred dollars or more of content per car.
And a if you have either would increase the Navy's engine I know a couple of percent it would certainly offset.
Weakness of of the Saar that's been.
Helpful. Thank you.
<unk>.
Thank you.
Our next question comes from a lot of trust endeavor with Baird. Your line is open.
Hi, guys. Good morning, and just a quick sort of that question to John's question. So what that does that point of sale is built into your Q2 guidance given.
The supply disruptions that you've mentioned then is it.
Should we assume that a inventory level at this teas are going to come down in Q2 than potentially rebound in Q3 as a result, if your supply coming back in the second half.
So we are assuming a.
You know are Pos on a sequential basis, we expect that the on a week spaces will be trending back down to the that when do you.
I mean.
No normal.
So both.
Okay, and then any a quick update telling the quantenna in terms of.
New product development and and any type that's.
Potential savings that you would it you're doing there.
You know we continue to make good progress on our client devices that we.
Talked about at the time of acquisition, obviously no revenue here in 2020 were not expecting.
Here.
But the the balance of the business has held up quite well.
In these environments.
Folks are still doing the infrastructure investment similar to 29 team.
Great. Thank you.
Thank you.
Next question comes from a lot of Shawn Harrison.
No capital your line is open.
Hi, good morning, everybody.
Keith.
They put in a few minutes finer point on the automotive content I think you outperform production by maybe 17 points in the first quarter past couple of years, you've seen I don't know anywhere from five points about performance to the 10 points of outperformance do you think second quarter, maybe you more mere production and then you start to see that type of potentially high single digit double digit.
Outperformance versus production for 2020.
Yeah again is a it we're expecting in the in the third quarter as things begin to ramp again, you'll see more of the leverage and then as I mentioned several times, a particularly as the.
Mix shifts more electric you should see an acceleration of that delta.
Okay.
Second quarter with more maybe mirror global production instead of outperforming yeah. We're I'm not look for any of the quarter. A again, everybody is is shut down and and.
Yeah, I would not expect outperform the sport.
And then put artist to the incremental $90 million cost out I know the first 25 was more focused in on R&D I think youre, implying that the majority of this 90 million is as DNA related.
Versus incremental R&D I just wanted a clarification on that please know that the only meaning 90 spread across the whole up expanding they'll geographies, including R&D, but also all the other sales and marketing DNA and a little bit of Cox.
Okay, maybe relatively equal.
Probably that's a percent yeah.
Okay, great. Thank you very much.
Thank you.
Our next question comes from them on the perfect <unk> with Bank of America. Your line is open.
Hi, Thanks for taking my question I just wanted to do for the first one is down gross margin. So it Bernard let's say Q3 sales are flat.
Versus Q doing what's the gross margin and if let's say sales grow 10%, what's the gross margin assuming some seasonal mix.
So so definitely on on the.
Revenues are flat I would still expect the approximately $20 million.
Period expenses going to lead that should the via the primary improved gross margin and a assuming no change in revenue all mix and if we have a 10% you'd be much have to speak about a 50% involve people that incremental.
Got it and then I was wondering did you talk about or just the resale activity in June what are your expectation then just kind of what we should think.
Think off your balance sheet inventory and distribution inventory exiting Joan Thank you.
So let me start with internal even do we expect those two love to be flattish to slightly higher.
To a keats commented about the depending on how strong we see that to a quarter might have to we started some of the faster at a higher level.
Hi.
On the under Disti inventory as I mentioned earlier, we expect to trend back down to that.
We get stronger received which lead that need to boost.
Thanks very much.
Thank you.
Our next question comes from a lot of Craig Hettenbach.
Your line is open.
Yes. Thank you I'm just question on automotive in understanding the quarterly trends to be noisy, but it's in the full year in the context of auto production is down 20% to 25%, but what would you expect to be kind of a rough gross <unk> on and in 2020.
So expect that deal that they use the content growth will be just like we've talked for a long time, you that 7% to 8%.
He got to whatever the and the unit is offset by a 17% Oh.
Off it.
Got it thanks, and then just a follow up on a 300 millimeter really in the context of consolidating other fad can you just talk about maybe a rough timeline of of how that plays out over the next couple of years.
[laughter] so.
We've announced a the divestiture of a one of our factories now closure of a second ones there in Rochester, New York, and both and announced a those will be actions as sometime in the next year a in and we have no further ones to announce today, but clearly that.
Demand picture in 20 ones will give us some more direction on timing.
Got it thanks.
Thank you.
Our next question comes from Milan.
Today.
Long Beach research.
Well on its own.
Thanks, Good morning, guys I just want to go back to the industrial comments, specifically the strength in China. I was wondering if you can give us some more color I think you mentioned.
Occasions, such increase automation robotics do you see the current paying Dan Makena.
Essentially putting the seeds due to a secular change in that industry and to your point, saying that increase in automation. If he can comment to what level demand in China and industrial is his coming back to compare it's a pretty cold but.
Levels.
Ah yes, so first of all talk about trends, we do see this pandemic as decelerating People's thoughts and investment in automation.
And so we are seeing a that industrial automation a piece pick up.
Quite nicely.
And Ah, we think that that would be.
And you trend.
Because again, just just from a rational business perspective, its impact we've had is on the people so the more automation.
Go to less expectation or further disruption.
But broadly in beyond just the that that secular trend, we do see a pick back up.
The factory is closed in the first quarter in China.
The order is completely stopped a in what we're seeing now just to return to a more normal environment, a that we had a pre Chinese new year. So.
Not a not excessively greater than we had.
Pre Chinese new year, but very similar to that.
[noise] [noise] [noise]. Thank you.
Ladies and gentlemen, this concludes todays conference. Thank you for your participation.
Now disconnect everyone have a wonderful.
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