Q2 2020 ON Semiconductor Corp Earnings Call
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Thank you.
Good morning, Thank you for joining on semiconductor Corporation second quarter under 290.
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President and CEO.
Bernard Goodman, our steel.
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During the course of this conference call.
Projections.
Forward looking statements regarding future events or future financial performance.
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Forward looking statements are describing our form 10-Q.
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Thank you Bob and thank you everyone for joining us today.
During the second quarter, we saw a moderate improvement in business conditions as microeconomic SDDP across the world.
We are seeing improvement order activity across most end markets and geographies as the global community adjust the G isn't that the children.
Brought about by depend Debbie.
They always 19th and Debbie continues to be a significant headwinds will result.
However, due to strong execution and unwavering commitment from our employees.
Of course in supply chain partners, we believe we are.
We are successfully navigating the current environment.
Despite near term challenges long term drivers of our business remain intact.
We're seeing strong momentum you know key end markets driven by accelerating design win for our power analog incentive <unk>.
At this time, improving our gross margin is the primary strategic priority for the company.
Have you didn't from our most recent press releases, we that we have accelerated our plans to optimize the bashing network.
In addition, we're making strong progress the land Boulevard at 300 million manufacturing walking system at east the skill.
That said.
He will either provides additional details regarding our progress on the manufacturing in his remarks.
Now let me provide you with details on our second quarter 2020 result.
Who whether you for the second quarter of Twentytwenty was 1.213 billion a decrease of 10% as compared to revenues of 1.8 billion in the second quarter of 2009.
The year over year declining whether you, what's given primarily by slowing down in my something well likely going to.
Oh, It was 19 pandemic.
GAAP net loss for the quarter once people sense, which U.S. confused when net income was 24 cents, which here in the second quarter of 2019.
Non-GAAP net income for the second quarter of 2020 was 12 cents per diluted share as compared to 42 cents booking.
Second quarter, a few though.
GAAP gross margin for the second quarter of 2000, what's stony, 0.8% as compared to 77% in the second quarter 2009.
Non-GAAP gross margin for the second quarter of 2020 was 30.8% as compared to these duty seven when in the second we're going to 2019.
Year over year declining gross margin was given primarily by lower revenue.
And we'll get really difficult.
Second quarter 2020 gross margin included approximately 24 million 19, you need it.
These costs include approximately 50 million related to the under utilization of our factory network into first half second important.
At this time, we not expecting commodities underutilization charges in the third quarter of 2000, when the alone and consequently, we expect to see a substantially.
Gross margin for the third quarter.
Other koby Nike, we needed cost in the second quarter included higher logistics costs and costs related to the implementation of enhanced health and safety protocols.
Our GAAP operating margin for the second quarter of 2020.
With that as compared to 11.7% in the second quarter of 2019.
Our non-GAAP operating margin for the second quarter of 2001 was 7.4% I've compute <unk>, 0.7% in the second quarter of 2019.
Year over year declining operating margin was driven largely by over revenue and lower gross margin.
All these 19 been Debbie.
GAAP operating expenses were.
Were 321 million as compared to 341 million second quarter 2009.
Second quarter GAAP operating expenses include approximately 11.8 I.
Associated with our previously announced restructuring programs.
Non-GAAP expenses would have been water with 284.6 million, that's compared to do you want to 88.2 million second quarter of 2000 <unk>.
The year over year decrease in non-GAAP operating expenses was driven primarily by strong execution cost one and by restructuring and cost saving measures the replay the company.
Second quarter free cash flow was 81 point.
And operating cash flow was 154.5 million.
Well expenditures during the second quarter worse than we had 3.3 million, which equates to a capital intensity or was that.
Given the current macroeconomic environment, where directing most of the capital expenditures.
Okay.
Even though these in the east fish at the ski school fab.
We expect pool capital expenditures for 2012 to be approximately 400 million.
We ended the second quarter of 2020, <unk> cash and cash equivalent of 2.06 billion as compared to one point 92 billion at the end of the first quarter of 2020.
This time with cash balances of approximately 2 billion, we're very comfortable with only what do you position.
At the end of the second quarter. These appealing to you only had 140 days up by name nine days as compared to 231 days.
Well.
The increase in days of inventory was driven primarily by our expectations.
The second half.
[music].
In addition, we want to ensure that we have significant.
And the support of customers each piece of any supply disruption.
In the second quarter distribution, even do we decreased marginally in terms of wheat.
Now let me provide you with an update on performance.
Starting with the power solutions.
Or PSG.
Revenue for PSG into second quarter was 618 million.
Revenue for advanced solutions moved well the second quarter was 427 million in revenue for intelligent sensing <unk> was 168 million.
Now I would like to turn the call call overseas Jackson, one additional comments on the business environment.
Yes.
Thanks Bernard.
Let's start with structural changes, we're making to drive margin expansion and then I will provide an update on current business environment.
To drive gross margin expansion, we've accelerated the pace of our manufacturing footprint optimization.
Announced plans to explore potential sale of our six inch fab and you Gotta Japan.
Action from Mcdonald's, Japan Fab is expected to be transition to other fabs in our network.
This announcement comes on the heels were announcement February regarding our plan to transition production from or six inch automotive centric fab in Belgium.
But manufacturing optimization plans, we have announced thus far we expect to see significant improvement in our manufacturing cost structure in gross margin.
Our 300 millimeter manufacturing capability in the east Fishkill fab as important as significant flexibility, which has enabled us to optimize our network.
During the second quarter, we started our first 300 millimeter wave from production at the killed fab.
We are currently sampling our 300 millimeter products to customers and we expect to recognize our first 300 millimeter revenue.
Sure.
As we've noted in our earlier calls, we're very pleased with our celebrated progress and ramping or 300 millimeter manufacturing processes.
The yields have been spectacular and we expect to see a meaningful positive impact from a gross margins as or 300 millimeter manufacturing ramps up.
Yes.
We made substantial progress in key initiatives for driving gross margin expansion <unk>.
We have launched new products and built a robust design win pipeline in automotive industrial and cloud power in the markets to Dr. Richard months.
We continue to optimize our portfolio to ensure healthy margins for the company.
We've accelerated the optimization of our manufacturing network. In addition, we will continue to work on expanding or gross margin through operational improvements within our network.
As a revenue recovers driven by global macroeconomic recovery and the ramp up of design wins, we expect to see strong operating leverage and robust gross margin expansion.
Let me know comment on the current business environment.
We are beginning to see moderate recovery in the business environment improvement is broad based with improving order activity across most end markets.
Unlike in the second quarter, we've not seen meaningful push out or cancellation of orders.
Based on current outlook, we expect to see improving business trends through the rest of year.
Improvement in our business is driven not only by improving global macroeconomic environment, but also by our celebrating design wins and automotive industrial and cloud power end markets.
Customers are restarting in factories in are engaging with our teams on ongoing projects.
Our factories are resuming normal operation at this time, we don't expect to see meaningful supply constrains and the current.
Beyond.
From a geographic perspective, we were seeing recovery in demand from Americas in Europe.
Activities.
In these regions, we're very encouraged by improving PMI numbers from both Europe and the U.S.
We are beginning to seeing signs of recovery in automotive demand from Europe, and the U.S., while demand from China and Asia remains healthy [noise].
Despite the disruption caused by the covert 19, anaemic, we continue to make progress towards strategic and financial goals.
Key secular mega trends and long term drivers of our business remain intact.
We are seeing accelerating momentum and key strategic initiatives for electric vehicles, Robotics factory and warehouse automation cloud power and eat ass.
Customers are increasingly relying on us to provide enabling technologies and our analog in sensors and the value the differentiation in technology and quality our products offer.
I will provide details of the progress in our varies in markets for the second quarter 2020.
Revenue for the automotive market in the second quarter was $327 million and represented 27% of our revenue in the second quarter.
Second quarter automotive revenue declined 26% year over year.
Year over year decline and automotive market was driven primarily by the closure of automotive production factories in various parts of the world do over 19 anaemic.
Although the covert 19 pandemic caused a temporary slowdown in our automotive revenue he secular drivers power business have remained intact.
Our content in the fastest growing automotive applications continues to grow at a healthy pace based on our design win pipeline indications from customers and revenue trends, we believe that we're gaining significant share in the most attractive segments of the automotive semiconductor market.
We are beginning to see recovery in the automotive market in the U.S. in Europe.
Conversations with customers indicate that we should see ongoing recovery in the third and in the fourth quarter.
Sure.
We're seeing strong momentum for our silicon carbide in silicon products for electric vehicles. We recently won a very significant design with one of the leading global automotive Oems for our Silicon carbide power module for traction in burgers.
For electric vehicles, and we expect to start seeing revenue with some this win a year from no.
Based on our current engagement with various automotive Oems, we expect when multiple designs in the near to midterm.
The broad portfolio silicon and silicon carbide products and industry, leading module capabilities. We believe that we're uniquely positioned to be a strong leader in power semiconductor market for electric vehicles.
We expect to see strong revenue growth in our IGBT modules for you traction burgers.
Wins ramp in China this year.
And eight asked we continue to win designs for Cmos image sensors with leading global Oems.
Our competitive position in automotive Cmos image sensors remain solid and our customers value, our technology leadership and breadth of product offerings in this market.
We're seeing strong customer interest in our recently introduced backside illuminated image sensors for automotive applications.
We are making strong progress in light are and we expect to commence commercial shipments of our lighter products and mid to late 21 21.
During the second quarter, we also secured major design wins for us around views and applications. We expect to begin seeing revenue from these wins in mid Twentys when do you want.
Our ability to integrate our automotive sensor products with our analog and power products, coupled with our deep automotive systems expertise has provided us with a very formidable competitive advantage.
[noise] customers continue to place very high value on our ability to provide complete solutions for various automotive sensor applications.
Revenue in the third quarter of 2020 for the automotive end market is expected to be up strong linked quarter over quarter as we expect to see worldwide recovery in automotive production.
The industrial end market, which includes military aerospace and medical contributed revenue of $348 million and this quarter.
The industrial end market represented 29% of our revenue in the second quarter.
Year over year or second quarter industrial revenue declined 3%.
The decline was driven by reduction in global industry activity and supply constraints student over 19, Devon.
We are seeing strong traction for our silicon carbide products and industrial power applications with an expanding base of customers.
Recently, we announced a win with Delta for our Silicon carbide power modules for solar inverter patients.
Demand for industrial automation continues to grow at a rapid pace, we've secured major design wins for our image sensors for industrial applications and we expect revenue from these wins to be recognized in late 1020.
We continue to scares design wins for large format sensors and diverse industrial applications. We are engaged in leading global players on many warehouse automation and robotic delivery products.
We expect an E commerce customers will be key driver of our growth.
Of industrial revenue any years' time frame.
As is the case in automotive market, we leverage abroad company wide portfolio customer relationship just your design wins for our sensor products in the industrial market.
We continue to make strong progress in industrial out he station or in fact, a long term first industrial Io Te connectivity product incorporating Wi Fi technology from our Quantenna acquisition within a year.
Revenue in the third quarter 2020 for the industrial end market is expected to be down quarter over quarter.
Geopolitical issues related to a specific customer have adversely impacted our third quarter industrial revenue.
We don't expect any further meaningful decline in revenue from this customer beyond or.
Communications end market, which includes both networking and wireless contributed revenue of $255 million in this quarter and represented 21% of our revenue during this quarter.
Second quarter communications revenue increased by 3% year over year.
We saw strong year over year growth in our Fiveg business in this quarter.
On the smartphone front, we continue to increase our content and most popular platforms.
Revenue in the third quarter of 2020 for the communications end market is expected to be down quarter over quarter.
Our third quarter communications revenue has been impacted by delayed launches certain platforms and geopolitical issues related to a specific customer.
We don't expect any further meaningful decline revenue from this customer beyond the third quarter.
Computing end market contributed revenue of $158 million and the second quarter.
Computing end market represented 13% of our revenue in the second quarter.
Second quarter computing revenue increased by 14% year over year due to strength in both server and businesses.
Revenue in the third quarter in 2020 for the computing end market is expected to be up quarter over quarter, we expect growth in both server and client parts of the computing business.
The consumer end market contributed revenue of $126 million in the second quarter.
Consumer end market represented 10% of our revenue in this quarter.
Second quarter consumer revenue declined by 20% year over year.
A year over year decline was due to broad based weakness in consumer electronics market due to open 19 pandemic and our selective participation in this market.
Revenue for the third quarter 2020 for the consumer end market is expected to be up accordingly.
Alan.
In summary, gross margin expansion is a key strategic priority for the company, we've accelerated the pace of our manufacturing footprint optimization with the goal to drive significant gross margin expansion.
Ramp of our 300 millimeter manufacturing processes and he said feel fab should further help in gross margin expansion in the near term the expected decline in Kobin 19 related expenses and impact of cost realignment measure should help expand margins.
We've seen moderate improvement in business condition to date, we expect this improvement should continue in the near term.
We are seeing broad base recovery across most end markets and geographies.
He secular mega trends and long term drivers of our business remain intact, and we are excited about or medium to long term prospects.
We're seeing accelerating momentum in our key strategic initiatives for electric vehicles Robotics factory in warehouse automation, Bob power and Ada Es.
Let's go over 19 related impact subsides, we expect to see meaningful improvement in revenue growth and margin expansion.
I'd like to turn it back order Bernard for forward looking guidance Arden.
Thank you Keith.
Based on product bookings and backlog levels and estimated earnings levels, we anticipate that pool on semiconductor revenue will be the range of one point.
1.3 billion either through a quarter of 2020 outdo quarter revenue has been impacted word we buy geopolitical leases it looked like.
At this time near to midterm expectations related to these lessons have been de risk to a large extent and we don't expect to see any food <unk> lending revenue from these customers beyond the two important.
For the third quarter of 2020, <unk>, GAAP and non-GAAP gross margin between duty, 2% to 44%.
Our third quarter gross margin outlook includes Cobiz 19 related costs of approximately 11 million.
We expect total GAAP operating expenses.
Seven.
He said.
Our GAAP operating expenses include yet where position of intangibles restructuring and impairment and other charges, which are expected to be.
We do see any 4 million.
We expect total non-GAAP operating expenses of 277 to 293 million in this quarter.
Yeah, DCP third quarter of 2020 gap net other income and expense, including interest expense will be an expense of 40 to 45 million, which includes a noncash interest expense of nine to 10 million.
We anticipate our non-GAAP net other income and expense, including interest expense will be an expense will still need to be 35 million.
Net cash paid for income taxes either.
One is expected to be 17 to 22 million.
For 2020, we expect cash paid for taxes will be in the range of 54 to six.
We expect total capital expenditures of E 90 million in the third quarter of 2020.
We're currently targeting an overwhelming proportion on capex ideally.
<unk> capability at an accelerated piece.
Well 2020, we expect total capital expenditures approximately 100 million.
We also expect to share based compensation of 17 to 19 billion is it wouldn't have 2020, which approximately 2 million is expected to be the cost of goods sold and the remaining amount is expected to be expensed.
This expense is included non-GAAP financial measures.
Our GAAP diluted.
Third quarter of 2020 is expected to be 400 million shares based on our current spot price.
Our non-GAAP diluted share count was good.
2020, it's expected to be 111 unions years based on our go to stock price.
It would be deals on share count and earnings per share count lesions are provided regularly quarterly and annual reports on form Tenk you Werent in Haiti, respectively.
With that I would like to started its you any session. Thank you and Jade. Please open the lines for questions.
Thank you Sir at this time she would like you asked the question. Please press Star then the number one on your telephone keypad and if you would like to return to question. Please press the pound key thank you.
First question comes from the line up for our CMO.
She bank your line is open.
Hi, guys. Thanks for me ask a question first question I had is on the gross margin line good to see no negative surprises on that for the first time in a couple of quarters. So I just wanted to to look at a in the near term how do you expect those tobin related charges to trend you still have a bit in the third quarter do they go away in the fourth quarter and then much more importantly longer term.
With the Belgium, Fab and then they got a fab, but essentially being sold or shut down how do we think about the long term gross margin potential when did those benefits come in what's your new targets et cetera.
Thank you was when you first address the issue or the Colby related expenses.
It's a hope it's difficult to predict exactly when those are going to go away as we said that lot of those that are related to a threed expenses, we charted a premium rate, though as well as a safety safety protocols that we have put in place obviously it will be a functional power. The colby's pandemic progresses over time, and we expect those gradually become down but we also.
Shifting that those will continue into <unk>.
We have a typically a assessed the savings associated with 60 inch fab to be the 2500 $30 billion.
Fixed costs it will wait for three year, the timing of the of the savings is really a function.
Well for off of business dynamics, and ER and we don't we don't have a perfect timeline and from the time, we we conclude a sale it will still be because while we oh the year to year to happen until we get full savings.
But at the bed, so really when we get the when you get the.
That concludes.
Long term, we still are expiring and steel targeting to achieve our long term goal.
He said that we inaugurated in our 2019 analysts they.
We probably a little bit delays with the fact that the 19th when do you were obviously, that's very good years going to topline point of view.
Got it thanks for the color on that doesn't like my follow up I just wanted to hit on the revenue side.
In the last couple of quarters, you talked about supply disruptions and I think everybody understands that but they were in the first quarter a bit over 100 million I think it was about the same in the second quarter is what's your originally said so did you have those supply disruptions impacting revenue in the second quarter and then potentially more importantly, if you don't have any in the third quarter are those revenues just gone.
For like so many of your peers or you're actually expecting to catch up on some of these formerly delinquent shipping.
So a we did continue to have a supply constraints or pandemic induced supply constraints in the second quarter.
That was reflected in the total numbers.
They are much less in the third quarter.
And we're hopeful that there will be done before the end the year.
But at this stage again everything is is still unknown, if there's flare ups or changes around the world there's still risk.
Thank you.
I.
Thank you next question comes from the line of Peace family of Cds were your line is open.
Thanks, guys. First question is Ah you managed to really get job keeping the opex down in Q2, and you're giving us guidance for Q3, how about longer term trends and opex with some of these restructuring plans what can we expect for the next I guess several quarters.
So we need we did that we did a.
I think some significant actions that helped us.
Over achieve our our second quarter and.
Guidance.
In the in the long run we're still targeting twitchy, the 21% of Opex as we have.
And at least they however, we have to be aware that that at some point of diabetes.
I think when business conditions.
Reactions that will.
The variable comp that we'll we'll come back.
And will cause a temporary blip that will be gradually.
Average through as we increase revenues.
Got it and then for my follow up on any.
Commentary or color on the Koch industries investment.
Why did you got the shareholder rights program and do you expect them to be a passive or active shareholder.
They have indicated publicly that they're a passive a intent.
Your older and had no further communications.
Okay. Thanks.
Thank you next question comes from the line of Peace Castle Freeman James Your line is open.
Yes. Thank you good morning, I wanted to comment on the linear already of bookings through the quarter and you know it sounds like Youre.
Expecting some improvements as it goes there's the ended the year if you could elaborate on that a little bit more thank you.
Oh, Yeah, we had a good linear picked up through the entire a second quarter and.
We continue to see good activity here in the third I'm. So at this stage, we don't we don't know when they stop ramping but so far we've seen quite strong since the middle of the second quarter.
And what about with regard to a Q4 seasonality.
And I guess, given all the ups and downs, we've had this year I'm not sure that that normal seasonality.
Generally applying spike you know any thoughts.
On how we should be thinking about number quarter in light of all that's going on right now.
Yeah, and our comments, we've mentioned we expected a condition to continue to improve we really only give guidance one quarter at a time, but we see no reason to believe.
There should be any retraction of the current trends.
Okay. Thank you.
Okay.
Thank you next question comes from the line a friend she Gill from Needham and company. Your line is open.
Yes, Thank you for taking my questions.
Threats the accelerated the transition to 300 millimeter as he gets a very good progress I'm. If you could remind us the cost savings the potential cost savings as you transition to 300 millimeter I believe that 12 inch facility had revenue capacity of about $2.2 billion or or.
About 40% of your revenue.
So just wondering if you could maybe outline what are the cost savings what would the cost savings be once you ultimately transition.
Q3 hundred millimeter and given kind of the accelerated timeline, you pad and you're starting to see revenue from 300 millimeter customer in third quarter.
Should we expect the transition to happen a little bit sooner than later thank you.
So.
So that's the first question is on the under long term benefits.
He skilled that's going to be a or millimeter fab gives us.
Sizable good.
Gross margin.
Somewhere in that.
In that the 20% to 25%.
This is gone.
Yeah, now obviously that that is one of the fully loaded fab.
In the in the Indian doing period, we are putting a foundry cost so the a the savings that we get dosing functional device that we're getting a we do a in a very excited about loadings Abbott said mentioned in his prepared remarks was wonderful the yields a.
As we are running it through.
So and we expect first first revenues in the quarter, however, meaningful revenues with somebody usage.
[music].
Now, having said that even the poultry costs that were getting from them.
Quite attractive.
Okay. Thank you and as for my follow up the we're starting to see a recovery and automotive, particularly in U.S. and in Europe.
I'm wondering if you could discuss kind of what's your view on global auto production ending this year and are there any thoughts in terms of what the rebound could look like in 2021.
[noise], Yeah, I guess, we don't have any from opinions on 2021 yet.
But I would expect to that a if you don't have the shutdowns that we had and 44, new theirs is very significant improvement.
Year on year for next year.
We're looking at something in the minus 20% for into automotive sales decline year on year in 2020.
Time will tell but all of our customers are telling us they are pretty much back to full capacity or sometime during the third quarter of this year.
Very good thank you.
Thank you next question comes from the line of teaching about cash from Mizuho. Your line is open.
Yeah, Hi, guys just couple of questions. One on the automotive side I think you mentioned laid out would be shipping in 2021, I'm just wondering what your expectations that sick impacts and also on the east Silicon carbide I'm not that it's ramping or are you still <unk> ER.
I know in terms of Silicon carbide first of all that would this be more skilled external and how do you see that drive a into next give given no let's take multiple.
Catalyst.
Subsidies on the east side I'm going forward. Thanks.
Okay, Yes, automotive light our would be in the launches a for a vehicle Oems in the second half of next year with the new launches they've got a after the summer.
And we do expect to see a significant contribution.
On the E V side with Silicon carbide, our intent is to have both internal and external supply on ongoing basis.
Next year, a this year next year it should be mostly external supplies, a and then as you transition to 2020 to a larger percentage of internal.
Got it and I think you mentioned one customer delays.
Geopolitical tensions is that the same customer that's impacting you want the industry and the Comsat's that's it thanks.
Yeah, it's a very large customer a in China and that is a broad based.
Customer and it impacted several of the segments.
Great. Thank you.
Thank you next question comes from blindness, Christopher Nolan from Susquehanna. Your line is open.
Hi, guys or some of the question questions about the God I guess, what does the revenue contribution there and then how are you guys looking out the odds of successfully selling dot facility.
Thank you.
So we actually are a expecting to have success. There we've seen good progress with interest in our Belgium factory.
And so these assets are still have interest in the marketplace.
We're expecting to have good results.
First percentage of revenue I'm not sure I have that number.
We don't have a precise number it is the I think leasable facilities compared to fuel.
Yeah.
Yes.
The.
The told footprint.
I'd say mentioned earlier the ER the ER.
The savings that will get from debt facilities around 30 billion.
<unk> per year.
Understood for for the remainder of your capacity you know you still have quite a bit of extra there have you considered serving new products, some sort of fab pillar product or something like that.
In fact growing out of your footprint organically or have you even considered the foundry model I know you're doing that on attempt that basis that fishkill.
I Wonder if you could also give us an update on those temporary foundry customers that you have or have they.
Actually decided to continue with you as well, but yeah. How you can tell that extra capacity would be great.
Yeah, So I'll try and get that when I think your question is we do foundry services for many a customers that generally specialty processes that use our analog.
Sensor capabilities.
They're not temporary their permanent relationships that we have with those customers and we continue to.
To be excited by servicing them.
As far as looking at you know low margin products to fill up factories were not looking at that we don't think we need to look at that.
We think the demands that we've talked about.
Coming up for their power products.
Sensor products will more than a.
Meet the needed amount of ramp over the next few years, so the trends in electric vehicles.
In factory in automation et cetera that we've been talking about we think that more than sufficient and then with the closure of two of our wafer Fabs. We believe the balance a in the medium term will be quite good.
Thanks, guys.
Thank you next question comes from the line Frank Alice B. Riley SDR here line he soup and.
Yeah. Thanks for taking the question and guys. Thanks for all the color on Cox initiatives I just wanted to follow up on a few of the fab sell questions. Keith. So from your last question can we deduce that there are no weather fabs that the company.
I would sale would sell if we don't have a strong recovery or are there are some things that but you could execute on if we had a lackluster rather than a strong recovery.
Yeah. The we have no current plans the outlook that we've gotten right now we think the remaining network is appropriate but as always we will see with future holes.
Got it and then perhaps touching on to end market issues with one question one it looks like compute and the third quarter will be well be back too.
Record highs can you give us a sense for how the mix of PC versus or surpass our.
Evolving that ran and then with how do I know.
You don't want to give us specific outlook for calendar 21, but do you feel with all the decide when to hop in your secular growth areas that the next thing 21 that business could be back towards prior record levels. Thanks for the help gosh.
So yes, we're seeing good results there.
I wouldn't give a kind of two pieces of the color one the infrastructure piece for the cloud continues to grow and we see very sharp growth there.
We think there was certainly some overhead related acceleration on the client side.
We don't see that diminishing here. This year, we think that continues.
With a lot of the remote learning in remote a interactions that are going on.
People continue to upgrade the various parts of their plans systems. So I would say as we enter into the first quarter of next year, we still see a strong the compute a environment and should expect next year to be as good if not better from a growth perspective.
And then not automotive.
Automotive certainly what we've seen a major interruptions as you know the first part of the year with manufacturing as I mentioned or customers are telling us that are they are full steam ahead.
Here as they've gone into Q3.
In each of those are.
Major customers around the world their efforts electric vehicles are celebrating.
Is there efforts from an eight ass perspective or decelerating so.
We are expecting to see a return to the above.
Market growth for our products and automotive industry.
That's helpful. Thank you.
Thank you next question comes from the line effect Francine of Cowen Your line is stupid.
Yes. Thank you very much good morning, everybody.
<unk>.
I wanted to follow up on on some of the DCN server power stuff.
There's been some fairly big disruptions with one of the big microprocessors suppliers there in the future roadmap and I was wondering maybe you could step back and tell US. How you guys are aligned on the sort of or power side, it regardless of chip vendor or or of OEM or or odium, Mick and if that might change any of your forward out.
Look there thank you.
No we are well aligned with.
The various processor options for Pcs and servers.
In very well aligned with a rep.
Model changes that they have in their portfolio. So.
We frankly think that.
It does change things for them, but from our perspective or all of them still leave power and.
Alright, great. Thanks for the hope there and just as a follow up I guess your one year on from from closing Quantenna now and if you just kind of step back and I look where the design win traction has been a and maybe the revenue trends. Since you closed the deal just kind of level set where you were versus.
Jason I think that'd be helpful. Thank you very much guys.
Okay or on the Quantenna, we are not achieving the revenue growth. We had hoped certainly they work it oh events have had an impact on that.
We are quite excited about the progress, we're making with our new combination products for the client market.
And the teams there on the engineering side trying to drive a low power.
Combination product for that market or making great progress. So what we're seeing out there is good excitement for the future designs, but less revenue than we had.
Thank you next question comes from the line up Harlan sewer JP Morgan Sir Your line is Susan.
Good morning, Thanks for taking my question.
I wouldn't be intelligent Centene group, you know we tend to focus on the automotive piece, which is the largest segment growing at a double digit cagar, but the fact, the industrial and edge applications are seeing strong adoption robotics machine vision.
Smart retail so excluding some of the legacy businesses do you guys still see a double digits growth CAGR in industrial and edge over the next few years and what's the current mix of industrial and edge within iced tea.
So we do see a lot of strong growth coming its been offset by our pulling back from so the very low margin consumer like security business security cameras.
For homes et cetera. So that's match some of the great growth, but we are seeing the adoption there in the industrial area in the automation area and in the robotics area actually pretty exciting. So we are expecting double digit growth for all of those portions of the market and of course in automotive to continue so.
After after seeing the coal would impact this year plus some retraction from some of the security business I would expect to see that double digits returning in 2021.
Yeah. Thanks insights there and then on the cloud power, obviously benefiting from the strong cloud server spending trends, but.
Especially in servers are you guys are seen as strong tickup in dollar content I think it's been about like a 15% cagar on dollar content over the past four years under server platforms, you've got Sapphire Rapids from Intel ramping next year I think you guys are anticipating bought 25.
<unk> dollar content step up on the upgrade or is that still how you kind of see.
Dollar content improvements on a go forward basis.
Yeah, Yeah, we're seeing it go from about $60 $75 next year.
It is our expectation.
Great progress remember <unk>. Thank you.
Thank you next question comes from the line of John Pitzer of Credit Suisse. Your line is open.
Yeah. Good morning, guys. Thanks, Let me ask the question Q, but just kind of curious you talked about the impact of the geopolitical in Q3 can you quantify it and in your prepared comments you said that that you think it's now been fully de risk because that customer effectively now zero and are you concerned that to date. The U.S. has just been targeting a single entity in.
China, what are the risk that you though.
Yeah.
We are a very concerned about some of the increasing tensions on a global trade a very much I believe that global trade is essential for technology and the growth semiconductors Ah. So clearly clearly would not like to see further there.
Sure.
We don't get comment on specific customers, but the answer is no. It's not zero revenue expectations from a from China or those customers, but the pieces that looks likely to be impacted we think have all been impacted at this stage.
That's helpful. And then keep as you guys ramp from the 300 millimeter fiscal facility I'd be curious as to what end markets. We think that we should think about that fab supporting and you've been a longstanding.
Member of the <unk> I'd be curious.
Get your view of the chip sacked post the sale of the fab in Japan and in Belgium, what percent of your capacity is gonna be U.S. base and how much that help you in the future chip tax past, especially around tax rate.
Okay. Two separate questions. There are on the 300 millimeter the mortgage there we're ramping up initially power products. So all the server in automotive and industrial applications that we talk about growing are gonna be filling that up with power products.
And then that will be followed a afterwards.
More sensor in analog products.
Oh the chips Act, we think is an important part of a balancing out the supply chain for on semiconductor we actually have a several facilities already here in the U.S. and with the addition of East Fishkill.
The vast majority of our wafers will be coming out of the United States.
Well.
Thank you Pinkie.
Thank you. Your next question comes from the line of Steve It O'connor of fixing BNP Paribas. Your line is open.
Great. Good morning, Anna Thanks for taking my question, maybe one or two follow ups for months in previous on answers keeps you spoke of Bossa improved order activity will send markets and geography, which are the end markets that are still impact is or I'm still seeing pockets of weakness and also in orders the.
The long lead time orders has visibility there improved two or is it more just to shorts needs from orders and they have a follow up thanks.
Yeah, I'll start a in reverse order from the from the lead time orders and impact we're seeing there clearly customers are using those lead times to place their orders. So we don't see any a increase in long term orders from a normal pattern I in fact.
Anyway, if anything a little bit less of that and more of the.
Order as or lead times dictate.
Oh relative to.
Where ah wherever you still see some softness.
In general a as I mentioned, the handset business looks like it's gonna be ramping later this year.
Rather than earlier a in some of the business I mentioned earlier was security and industrial in China is a little bit softer than it was in Q.
Thanks. That's helpful. Then and then maybe as my follow up but it sounds like you accelerate some traction on the silicon carbide.
With some of the inverts or wins that you mentioned when you look at your overall design wins on Silicon carbide, what's the phasing of of those wins when we look over the next maybe three years starting in 20 to 21 is the bulk of those wins romping twentytwenty too or is it more spread over the next three years. Thank you.
So yeah, we have ramps up every year a in the accelerate to I would say a.
Significant acceleration in would be 22.
But we are actually starting to ramp here at the end of this year through all next year, but but I'd say the biggest impact is 2022.
Thank you next question comes from the line of Kristen guarantee of Baird. Your line is open.
Hi, good morning.
Hi, Good terms trick short question on gross margin I understand a little utilization rates and the covet related charges, but gross margin.
Earlier this year came down in 2012.
Which I think was around 52% at the time and and yet you're watching your base was about one third lower than it is now so is that most key attribute it to planting capacity in 2018 or are there makes a pricing effects as well and also what was the pricing decline year over year <unk> co.
During the quarter. This interest we pulled at quarter.
So we actually view that the a the ER.
They impact mostly due to a two to cope with end to end due to the younger realization that is driven by.
With that.
Long term, we still are or eating and we auto coffee to that.
The long term goal of 43%, we don't see any immediate pricing.
Issues as we go through pricing.
You know, we the Oh the.
Yeah, I think that's that's it.
Okay, and then any update that we should get telling you acquisition strategy is that something that is basically going to be made on change with what we've seen in the past decade or is there any changes as a result of.
The environment tend to manufacturing shift that's ongoing why can't it the company.
Oh, so no change in the basic philosophy.
When the time is right and the opportunities right, we certainly will being interested party, but at this stage there was a no activity.
Great. Thank you.
Thank you next question comes from the lineups, Kevin Cassidy of Rosenblatt Securities. Your line is open.
Thanks for taking my question.
When you announced the acquisition of East Fishkill Fab you had said it was about.
$300 million and investments you're going to make into the fab out of the 400 million in your Capex for this year, how much of that is going towards the 30 300 million for fish East Fishkill.
It is a significant portion of it.
That does that we are devoting and.
The that that should really give us the ability to win lumpy the vascular.
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Okay, great and.
And me make out a fab what process nodes were being run there.
Those are mostly analog notes for various a.
Mixed signal products and a the markets for that were everything from automotive to.
To consumer.
Okay, great. Thank you Greg <unk> congratulations on the progress.
Thank you.
Thank you next question comes from the line of Gary Mobile.
Gary Mobley Wohlfarth Wells Fargo Securities. Your line is open.
Yeah. Thanks, Good morning, Thanks for fitting me in everybody.
Let me just kind of a post close my question. So I'm curious to know how the potential divestiture sale of they've got a fab might impact any relationship that you have some Japan based automotive Oems and up an art you mentioned that a distributor inventory was down a little quarter over quarter remind us of Ah.
Oh, how by how how far you need to go before your Bakken to the your long term.
Range goal and in what you expect that distributor inventory decrease again in the third quarter.
Yes, I'll take that question before the so it was so we got the we are we are at the high end devolved isobutanol.
Not really in a outside of those loans, we also feel demon doing that.
The the a in anticipation of a recovery so that that should help us.
Fourth quarter.
Yeah and on the relationships, a clearly value our customers make sure that the.
Transitions, there do not impact them.
We have a much larger eight inch facility in I, usually Japan, a in so what we tend to do is a use that for those customers in Japan that need that continuity of local supply.
Thank you.
Next question comes from the line a snake tell their off off Longbow Research. Your line is open.
Hi, Thanks, guys.
I Wonder I think last quarter, you're now closed $50 million cost saving problem I, just wonder how much of that has gone through or how much left to go.
Well, we did accelerate didnt did or did that so oh guidance for the quarter shows that we all can do you got the at the low point to that does that we that we achieved the second quarters before most bodies done.
Okay, great and a follow up quickly a I think the gross margin about the free cash flow generation was much stronger than expected, though I wonder if you have any any thoughts on how should we think about 2020 outlook for free cash flow and then any thoughts on resuming the buyback.
So at this stage.
We we are we still.
He feels like that.
No.
Isn't that Brian no before later on.
The free cash flow Oh.
Talked about on our Capex being eaten then you would have doing what I really either and the west will should come directly from the piano don't expect any any other significant.
Disruptions in the free cash flows we should be <unk>, mainly a result of the of the piano might not be capex will be 19 to do a quarter.
<unk>.
Got it thanks.
Thank you next question comes from the line of fees at Carga effect of Americas Securities Your line Soufun.
Hi, Thanks for taking my question I think keep you mentioned that dumb automotive customers are gonna be at full production rates and cutesy I just wanted to make sure if I heard that property or the real question behind that is how far below do you think your auto customers are below their prior peaks of production and how does.
That compare to your automotive a sense of versus the prior peak.
Yeah. So my comment there is that during the third quarter, they should old reach full production.
They they weren't all full production from day, one so that's going to vary a bit.
By end customer, but like I said, they're all bullish of getting back to what they consider.
During the third.
But if they're not at full production then why your automotive revenues stood at 15, 20% below your prior peaks.
You know try again, so they aren't full production for the entire quarter, they're achieving full production rates during the quarter.
So there's still ramping I guess is the simple.
Wait to interpret that.
Got it thanks, and as a quick follow up if we see conceptually your Q4 sales a flattish should be assumed on gross margins also said flattish or are there other trends that that could take them higher or lower.
So I'm not postulating on revenues in Q4, but are you should see continued improvement Oh, the gross margin front as the a expenses around Cobrand go down.
And we continue to get traction.
From Q2 levels.
Thank you.
Thank you next question comes from the line up Sean pardon substitute capital. Your line is open.
Hi, Good morning, Thanks for taking my question, Keith I won't go back to auto as well, but more of it looks like in the first quarter odd outperformed production by about 15.6 about 20 points in the second quarter. It looks like you picked up five to $7 content per vehicle on average. This year, just maybe you could highlight where you've seen the content increase year over year.
Here and do you expect I mean, I know, it's typically a high single digit outperformance production, but it looks like you'll be well ahead of.
You know that down 20% for 18 years this content trend continues.
Yeah, a as I mentioned, the a the two trends on electrification.
In the eight asked the safety side continue to drive more dollar content for us and a as you pointed out I think it's showing up.
In a in the less declines than the marketplace overall as opposed to big games. So hopefully is as the market turns around you'll see those trends.
But it really is electric power a in the E V side in all of the S applications starting to grow.
There continues to drive those trends.
Okay. Thank you have the Bernard do you see you would expect internal inventory dollars to decline sequentially third quarter do you or was that just.
Distribution.
We expect distribution.
I don't we expect Sheila.
You mean, probably flattish into him so.
Hello.
But the down.
Okay. Thank you very much.
Thank you next question comes from the line of Craig Hettenbach <unk> from Morgan Stanley Caroline you soup.
Yes. Thanks, Keith just question on easy since you do both <unk> swell silicon carbide, just want to get a sense of how you've seen that market does not a lot and as particularly myself and our by adoption now what are some of the signals you're getting from customers that they're moving forward versus that that trade off.
<unk>.
We're still seeing the predominance of the a lower cost vehicles go IGBT a in the high end vehicles going Silicon carbide is the trend, we're seeing very definite bifurcation going on there.
And that is a geography independent.
So you know we think there there will be good growth in both sectors.
Got it and then just to follow it sounds a question that I've been asked when the geopolitical issues do you have a rough sense. They can quantify roughly for Q3, what the impact is to the guidance and then do you think feel any pull forwards ahead of that before those issues arose.
So were I'll start with the into that we're not expecting any additional a issues there.
I think we think that the new rule, giving is kind of at a pause for a bit.
So I'm not expecting any further impacts were surprises on the number a I don't know that we've got a number we're prepared to handle because it is specific customer and we don't show that type of information.
Okay.
There are no further question at this time for centers you May proceed.
Thank you everyone for joining the call today.
I look forward to saying you at various conferences during the quarter Goodbye.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a great day.
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