Q2 2019 Earnings Call
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Quarter of 2018.
The year over year decline in revenue was primarily driven by well publicized macroeconomic and geopolitical factors, which have impacted the overall semiconductor industry.
GAAP net income for the second quarter was 24 cents per diluted share as compared to 30 735 cents in the second quarter of 2018.
non-GAAP net income for the second quarter was 42 cents per diluted share as compared to 46 cents in the second quarter of 2018.
GAAP gross margin for the second quarter was 37%.
non-GAAP gross margin for the second quarter was 37.1% year over year, our second quarter 2019, non-GAAP gross margin declined by 106 basis points, primarily due to lower revenue.
Despite a meaningful quarter over quarter decline in revenue in the second quarter, we delivered solid gross margin performance with gross margin flat as compared to that of the first quarter.
Our GAAP operating margin for the second quarter of 2019 was 11.7% as compared to 13.5 in the second quarter of 2018.
Our non-GAAP operating margin for the second quarter of 2019 was 15.7% as compared to 16.3% in the second quarter of 2018.
The year over year decline in operating margin was driven largely by lower gross margin.
GAAP operating expenses for the second quarter were $341 million as compared to $358 million for the second quarter of 2018.
non-GAAP operating expenses for the second quarter were $288 million as compared to $318 million in the second quarter of 2018.
The year over year decline the second quarter operating expenses was driven by aggressive expense control zero bonus accrual and the reversal of bonus accruals during the first quarter of 2080 90 19.
Second quarter free cash flow was $69 million in operating cash flow was 222 million capital expenditures during the second quarter were 154 million, which equates to a capital intensity of 11%.
We exited the second quarter of 2019 with cash and cash equivalents of $885 million as compared to $940 million in the first quarter of 2019.
We used 50 million of cash to repurchase 2.6 million shares of our stock during the second quarter.
At the end of the second quarter days of inventory on hand were 137 days up by nine days as compared to 128 days in the first quarter of 2019.
This increase in inventory was driven primarily by the inclusion of content as a result.
For a few days during the second quarter and by the fair market value step up of containers inventory had we included containers results without fair market value step up for the entire second quarter. Our days of inventory at the end of the second quarter would have been on 32 days up four days as compared to 128 days in the first quarter.
We intend to lower the days of inventory on our balance sheet in the third quarter.
Distribution resales increased meaningfully in the second quarter over the first quarter.
Distribution inventory in terms of weeks declined quarter over quarter in the second quarter and is now within our target range of 11 to 13 weeks.
We expect to see further reduction in our distribution inventories in terms of days in the third quarter.
As we noted in our previous earnings conference calls, we are aggressively managing our distribution inventory to ensure a healthy level of inventory in the distribution channel.
We believe that in addition to secular growth drivers in automotive industrial and cloud power markets are proactive management of distribution inventory has been a key reason behind relatively lower level of volatility in our revenue over the last several quarters as compared to volatility in revenue of our peers.
Now let me provide you an update on performance of our business units, starting with power solutions group or PSG.
Revenue for PSG for the second quarter was $701 million.
Revenue for the analog solutions group for the second quarter of 2019 was $462 million in revenue for the intelligent sensing group was $185 million.
Now I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith Thanks, Bernard our execution remains strong despite demand weakness in the overall semiconductor market.
In the second quarter, we delivered strong margin and earnings performance, despite strong headwinds from geopolitical and macroeconomic factors.
While the near term business conditions are tepid, the foundation of our business with exposure to secular megatrends in automotive industrial and cloud power end markets remain solid.
The strong execution discipline, we are well positioned to navigate through the current soft patch in demand.
Much anticipated recovery in demand conditions has not materialized, yet current booking trends point towards stabilization of demand trends.
Based on commentary from our distribution partners. It appears that ongoing inventory correction in the distribution channel should be nearly complete by the end of the third quarter or early fourth quarter.
While we have strong visibility into the distribution channel geopolitical and macroeconomic factors are difficult forecast.
No matter what direction business conditions take we are well prepared to respond in an expeditious manner.
Despite the current slowdown in demand, we continue to make prudent investments to strengthen our competitive position and to further improve our industry leading cost structure.
During the second quarter, we announced the completion of our acquisition of Quantenna communications provider of market, leading connectivity semiconductor solutions for Wi Fi.
We believe that connectivity capability as a primary requirement for success in the industrial Aiotv market.
As we have announced earlier, we intend to leverage content has market, leading connectivity capabilities to gain technological leadership in the connectivity market for industrial Aiotv.
At the same time, we will continue to invest in content and to grow its carrier business.
Current customer feedback has been very positive and customers are excited about the benefits of the combined technical financial and market resources of Quantenna and on semiconductor will bring to them.
Integration of content is on track and the teams are working on product roadmaps and achieving synergy targets.
Due to ongoing stress softness in the semiconductor industry Quantenna has experienced a slowdown in this business as well and is expected to be mildly dilutive in the third quarter.
However, as we realize synergies and reduce costs, we expect the content and will deliver targeted accretion.
We're also making strong process.
Towards ramping our production at 300 millimeter East Fishkill fab in upstate New York.
Process development reporting our power products has started and is progressing at a rapid pace.
We are solidly on track to start shipping our first 300 millimeter power products from East Fishkill Fab in 2020.
As we've indicated earlier, our 300 millimeter is fishkill fab accelerates our progress towards our 2022 target model enables efficiencies in our manufacturing network.
And further strengthens our industry leading cost structure.
We believe that the ramp of our 300 millimeter production will be a major inflection point in our manufacturing strategy and in our manufacturing cost structure.
Key secular trends driving our business remain intact.
Our momentum in our key strategic markets continues to accelerate.
We continue to see meaningful increases in our content in automotive industrial and cloud power applications.
We believe that automotive industrial and cloud power end markets will be among the fastest growing semiconductor end markets for a long time.
In the automotive market accelerating adoption of electric vehicles, and active safety should drive strong growth in our power semiconductor and sensor businesses.
In the industrial market, we are seeing strong traction for our power semiconductors, driven by higher power efficiency requirements for our industrial systems.
In the cloud power market, we are seeing robust growth for our analog power management products for servers and power semiconductors for Fiveg infrastructure markets.
The current slowdown in demand driven by macroeconomic and geopolitical factors does not change our view on our long term growth potential.
Now I'll provide details of the progress in our various end markets for the second quarter of 2019.
Revenue for the automotive market in the second quarter was $434 million and represented 32% of our revenue in the second quarter.
Second quarter automotive revenue declined by 5% year over year.
Asia, including Greater China was the primary contributor to this year over year decline.
Weakness in the us and European automotive markets also contributed to this year over year decline.
On a quarter over quarter basis, we saw some stabilization in automotive revenue from greater China region in the second quarter.
We expect that year over year decline in China light vehicle production units to moderate in the second half of the current year.
On a global basis, we expect the global light vehicle production in terms of units will decline by 3% to 4% year over year in 2019.
US and European automotive units will likely decline by 2% to 3% range year over year in 2019.
We continue to see a strong adoption of our products in a vehicle electrification active safety and in various analog power management applications and our content in automotive applications continues to grow.
Content and applications, such as Avi HCV led lighting and in vehicle network is growing in a meaningful manner.
We are seeing strong customer interest for our silicon carbide products and our customer engagement is growing worldwide.
Customer interest in our silicon carbide modules for traction Inverters and onboard Chargers has been very strong and we are engaged with many customers further up coming platforms.
Demand for our Silicon based power products for vehicle electrification continues to accelerate and we are seeing strong growth in our power MOSFET business.
In the current quarter, we are starting pre production of high voltage IGBT modules.
To support customer ramps in the fourth quarter and into 2020.
In Adas applications momentum for our sensor products continues to grow.
We continue to gain traction with our portfolio of automotive image sensor products and our customers are increasingly relying on us to provide them with complete product suite for automotive applications.
As I have indicated before we are the only provider of automotive image sensors with a complete portfolio of one mega pixel two megapixel and eight mega pixel image sensor.
Adoption of rear and surround view cameras as well as increased volumes from level, two and three Adas and autonomous vehicle systems continued to be a catalyst for growth.
We continue to grow strategic engagements for automotive radar products and we have delivered first evaluation samples to our customers.
Our analog power management and power management products for Adas instrument clusters as well as in vehicle networking solutions continue to grow at a healthy rate.
Growth within our advanced lighting power management and Levy driver solutions continues to be strong globally.
Revenue in the third quarter for the automotive end market is expected to be slightly up quarter over quarter as opposed to seasonality a sequential decline in revenue.
The industrial end market, which includes military aerospace and medical contributed revenue of $363 million in the second quarter.
Industrial end market represented 27% of our revenue in the second quarter.
Year over year, our second quarter industrial revenue declined by 12%.
Greater China region has been the primary source of weakness in the industrial market, where we have recently seen stabilization in business trends.
We believe that our product offerings for increased power efficiency requirements for the industrial systems will allow us to take advantage of the secular Megatrends ahead.
We continue to see increased momentum with our mid and high voltage power semiconductor products, such as at Pts and IGBT and modules in the industrial end market.
We continue to see strength in the China solar market with our power modules 90, Bts and our breadth of customer engagements in China continues to expand.
Within industrial we are gaining traction in medical with our Bluetooth low energy products.
Our technology and design expertise is well recognized by our customer base and we expect strong growth in the future.
We continue to see strong demand for our products and implantable devices personal diagnostic and in hearing health market.
Revenue in the third quarter for the industrial end market is expected to be down quarter over quarter due to normal seasonality and ongoing softness in the industrial end market.
The communications end market, which includes both networking and wireless contributed revenue of $248 million in the second quarter.
The communications end market represented 18% of our revenue in the second quarter.
Second quarter communications revenue increased by 7% year over year.
Much of the year over year increase was driven by strength in the Fiveg ramp.
Smartphone related revenue in the second quarter was also up year over year.
We did not have meaningful revenue from content in the second quarter as the acquisition closed on June 19th.
As noted earlier, our fiveg related revenue in the second quarter was disrupted as we halted shipments to a major customer in accordance with us Federal law.
We have now resumed partial shipments to this customer in accordance with us law.
Despite near term uncertainty current engagement with our customers points to meaningful deployment rates for Fiveg systems in the near to mid term.
On the smartphone front, our revenue grew year over year, we expect to see increase in our content in new platforms slated for launch later this year.
Revenue in the third quarter for the communications end market is expected to be up quarter over quarter due to launch of new smartphone platforms and inclusion of content as results for a full quarter.
The computing end market contributed revenue of $139 million in the second quarter.
The computing end market represented 10% of our revenue in the second quarter.
Second quarter computing revenue declined by 7% year over year. However, our server business posted very solid growth on a year over year basis during the second quarter.
We are seeing a temporary pause in our service business in the current quarter as customers adjust their inventory levels future generations of server platforms, we expect meaningful increase in our content.
Revenue in the third quarter for computing end market is expected to be down quarter over quarter due to the decline in our client and server businesses.
The consumer end market contributed revenue of $164 million in the second quarter.
The consumer end market represented 12% of our revenue in the second quarter.
Second quarter consumer revenue declined by 21% year over year.
Year over year decline was due to continuing broad based weakness in consumer electronics, and white goods markets and our selective participation in these markets.
Revenue in the third quarter for the consumer end market is expected to be down quarter over quarter.
In summary.
Thus far in the current downturn cyclicality in our revenue and margins has been lower than that of our peer group.
Our performance speaks to the transform nature of our business and our focus on highly differentiated power analog sensors and connectivity products for the automotive industrial and cloud power end markets.
We are seeing stabilization in business trends in our key markets. However, demand continues to be sub seasonal as macroeconomic and geopolitical factors continue to weigh on end demand.
We believe that ongoing distribution inventory correction should be nearly complete by the end of the third quarter or early fourth quarter 2019.
Despite current weakness in the business trends across the industry secular megatrends driving our business remain intact and we are upbeat about our medium to long term prospects.
We are focused on the fastest growing end markets of the semiconductor industry.
And with our design wins, we expect that our content in automotive industrial and cloud power applications will continue to grow.
To adjust to slowing macroeconomic environment, we are prudently managing our business with sharp focus on controlling experience.
Expenses.
Our operational execution remains solid.
Now I'd like to turn it back over to Bernard for forward looking guidance Bernard.
Thank you Keith.
Based on product booking trends backlog levels and estimated turns levels, we anticipate that pull on semiconductor revenue is expected to be in the range of $1.355 billion to $1.45 billion in the third quarter of 2019.
For the third quarter of 2019, we expect GAAP gross margin to be in the range of 35.2% to 36.2% and non-GAAP gross margin to be in the range of 36.7 to 37.
37.7.
We expect total GAAP operating expenses of $349 million to $369 million.
Our GAAP operating expenses include the amortization of the intangibles restructuring asset impairments and other charges, which are expected to be 34 to 38 million.
We expect total non-GAAP operating expenses of $315 million to $331 million in the third quarter.
The quarter over quarter increase in operating expenses for the third quarter over those in this of the second quarter is driven primarily by the inclusion of Quantenna results for the full quarter processed transport costs related to that to be hundred millimeter fab. These fishkill annual merit increase and the absence of bonus reversal, which significantly lowered second quarter operating expenses.
We expect to see meaningful a meaningful decreasing quantenna related operating expenses as we realize targeted synergies and reduce costs.
Offsetting increase in the third quarter operating expenses, our savings, resulting from tight operating expense controls.
We anticipate third quarter of 2019, GAAP net other income and expense, including interest expense will be $38 million to $41 million, which includes noncash interest of $9 million to $10 million.
We anticipate our non-GAAP net other income and expense and including interest expense will be 20 931 million.
Net cash.
Paid for income taxes in the third quarter of 2019 is expected to be 11 to 15 million.
We expect total capital expenditure of $125 million to $135 million in the third quarter of 2019.
We also expect share based compensation of $21 million to $23 million in the third quarter of 2019 of which approximately 2 million is expected to be in cost of goods sold and the remaining amount is expected to be in operating expenses.
This expense is included in our non-GAAP financial measures.
Our diluted share count for the third quarter of 2019 is expected to be 414 million shares based on the current stock price.
Further details on share count and earnings per share calculations are provided regularly in our quarterly.
And annual reports on Form 10-Q and Form 10-K .
With that I would like to start the Q and a session. Thank you and Chris Please open up the lines for questions.
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And our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for me ask the question I was my first one one for Keith I know you guys are guiding to the basically the same sort of sub seasonality by about five points as everybody else, but last quarter, you talked about an improvement in bookings that gave you confidence in the back half now you're talking more about a stabilization and do you think the inventory corrections can be done at the end of this quarter or next.
I guess what changed quarter over quarter is it just the obvious trade war tensions rising and what gives you the confidence that the projection. This time is something that you are willing to make after last time proving too optimistic.
Yes, I think.
Without question two things happen during the second quarter the geopolitical piece was.
Much more pronounced than anticipated and as the quarter one on as you are aware.
Those impacts Scott more significant.
Now the second piece is we did see more inventory correction going on.
Than we had anticipated based on backlog trends going into the quarter.
At some of the OEM sides as well so the combination weaken during the quarter.
And I think thats, what what led to the results we had.
As we look forward in dialogue with the customers.
And looking at what's going on geopolitically.
Things have been stabilizing more.
Certainly the biggest impact.
From U.S. sanctions.
We believe we comprehend at this stage, which we did not have going into the second quarter.
And so we have got more confidence in what I will call stabilization at this point.
That's great and then my follow up question one for Bernard on gross margin and inventory I know you talked about bringing inventory down in the third quarter can you talk a little bit about what that's doing to your gross margin in the near term and now that we have the global foundries acquisition of 300 millimeter fab as well as the content acquisition.
Talk about the path to the low Fortys gross margin target does that get expedited any sort of updates on the steps we should follow over the next.
Year or so towards that 43% target you laid out at your analyst meeting.
Sure Ross Thank you so.
Inventory corrections.
In the in the third quarter.
In the internal inventory correction is expected to occur by going a mile basis. We don't expect that I will have a significant impact on our gross margin and as you can see our guidance for overall gross margin is slightly better sequentially than that thank you.
Q.
Yes, definitely the both the acquisitions that we announced this quarter of one Panna and also the phased approach for east Fishkill.
It should be.
Tailwinds that will help us.
Achieve our gross margin targets for 2023.
So we feel pretty good about those.
Anda.
We will continue with our normal.
50% fall through on incremental revenue and in the short term this been.
Little bit of a headwind, but the we expect that that does the inventory correction in the secular drivers.
The course that we expect that that will continue also being a significant.
Thank you.
Thank you and our next question comes from the line of Chris Danley with Citigroup. Your line is now.
Hey, Thanks, guys.
I guess one.
One more question on macro.
At least according to Twitter, we've got another $300 million in tariffs coming down the Pike here in the next month.
How do you think that impacts you guys and did your guidance change.
After the update Kmart or do you think that that could be a little bit of downside out there.
We saw the the tweets as well and the reactions to it.
I think.
Our belief is that the this is comprehended in the guidance that we've given.
They are.
Tariffs in the tariffs themselves have not been the issue for our revenues so far.
What we expect to see is potentially some.
Market share changes from our customers.
As a result of this.
But the overall in markets I would not expect significantly stabilization.
Okay great.
And then for my follow up just to drill down on a couple of Ross's questions.
So on inventory, what's the I guess the goal for your internal inventories and when do you think you would get there and then on Opex can we expect opex to drift down on the dollars basis for the next couple of quarters as you guys start to squeeze some synergies.
Let me ask them in reverse the.
The.
The Opex, we expect those two to stabilize and then in 2020 come down as we as we get the benefits of the synergies that we talked about for Ocwen data, which we've talked about being $26 million about.
16 of those the in Opex in about 10 in Cogs.
The.
Inventory goal.
In India in the.
Near mid term I expect those to come down to about 120 days.
And right now we are at 132, when you pro forma out for content assets with the full quarter.
Great. Thanks, guys.
Thank you and our next question comes from the line of VJ Rockies with Mizuho. Your line is now open.
Yes, Hi, guys just a couple of questions on the Utica The China side, just wondering what your content is on the on August in General in China, now and how do you see that TV.
How do you see the market going into next year. Thanks.
On the JV, we expect continued growth.
Despite the macro economic conditions and number of cars sold globally.
We expect that percentage should continue to rise and it will be led in China.
So we would be expecting some recovery there.
In in China for Automotives on that basis.
Globally, though we're not looking for a large pickup.
In total units of cars sold.
And in terms of content.
From a content perspective for the electric vehicles is up to about $400 per battery car and then if you move to a level two eight assets.
Systems, you get another $150 per car.
From a year on year basis, so pretty significant content changes.
Got it and I don't know if you talked about continents gone diminished in the September quarter.
I assume thats again, well about corporate today. Thanks.
Thanks.
So the one thing that we aren't we're not disclosing the details we normally don't disclose customers or individual sub end markets. It will be integrated within our AE is GE group.
And we believe we are on track with the synergy.
And the integration plans and as we mentioned in the call in the market for wildfire has also support the sema weaknesses on the macroeconomic and inventory corrections and therefore, we talked about being a mildly dilutive in the third quarter, but on plan with the with the long term.
Not to implants.
Great. Thanks, a lot.
Thank you and our next question comes from the line of Vivian ARIA with Bank of America Merrill Lynch. Your line is now open.
Hi, Thanks for taking my question.
I'm I'm curious, how you're managing utilization.
In Q3, and what will help the gross margins recover from here or will it be an improvement in mix are there any other operational things that you are.
Putting in place it was good to see gross margins kind of holding that and in Q2, but I'm just.
I'm wondering what are the drivers from here on your longer term goals.
The same ones that we have elaborated in the analyst day for the long term.
The the mix effect the fall through on the incremental revenue.
Manufacturing cost savings and some some divestitures.
In small scale.
We also talked about that you deferred the two acquisitions, we just closed in this quarter when Dan I should be accretive to gross margin and so should.
The dish deal.
Acquisition.
In the short term, we also take the normal practical cost the cost reductions more in sourcing and.
Tighten the belt, just on discretionary spend even that the Cogs level.
And that should also help us shore up the numbers in the short term.
Okay and then.
On the computing business for Q3, I I believe Keith you mentioned that it could be down I'm trying to reconcile that with the stabilization in the PC market and just the growth because a new CP use coming out and.
Q3 could you give us a sense for where youre seeing the headwinds are more on the unit side is it more on the.
Content side and your computing business. Thank you.
Yeah. It is definitely related to units.
And definitely has some of the macroeconomic.
Impacts one of the things we do believe is that the Q2 numbers.
Had some significant amounts of ship a hedge overly concerned with tariffs being imposed in increased.
Thank you.
Thank you and our next question comes from the line of Anthony Stoss with Craig Hallum. Your line is now open.
Hey, guys. Most of my questions were asked but maybe you can provide more color on the size or expect to size of the silicon carbide business. A 19 is where do you see a goal for 2020 and also just to be clear your comments related away that you have more visibility does that include your ability to ship to the comp side. Thanks.
Taking the last one first I think we do have more visibility.
And our ability to ship into the columns piece.
Of that.
Clearly there are still impact on the five G portion, but the handset business seems to be.
An area that can be shipped so.
More clarity on wall way at this stage and of course, we're applying for further exemptions as you would expect.
From.
For the Silicon carbide perspective, we do see that they are continuing to grow at an extremely rapid pace.
We're not expecting a 19 to be in the hundreds of millions of dollars, but certainly towards the triple digit millions.
Thank you.
Thank you and our next question comes from the line of Matt Ramsey with Cowen. Your line is now open.
Yes. Thank you.
Yourselves and other companies, obviously with the automotive challenges in the industry have given a little bit more color specifically on the market in China.
I Wonder if you guys might sort of remind us what percentage of your automotive business is China consumed today, roughly and just how that business might be trending differently than some of the business in automotive outside of China. Thank you.
Well trend wise actually I mentioned that we've seen stabilization a that that market took a pretty steep double digit drop on a year on year basis globally, and so that's a very significant and most significant action on a worldwide automotive basis.
We think that China overall, when you look at the the numbers.
Contributes around 25%.
Or so total automotive.
That is an estimate because clearly we ship things to other parts of the world that are still being imported in China, but roughly a quarter.
Got it thank you and as a follow up from from US you had mentioned in your commentary that the customer feedback around the continent deal was it was quite strong that Mike.
Wonder if you might elaborate on that and what particular verticals or what type of customer engagements. There have been in discussions or since you closed the deal that might shed a light on on where you're going with that technology stack. Thank you.
Yeah, so their existing customer base, a as you are aware.
Basically a is the ones that we would have been referencing there they're looking at I guess more assured supply, having a stronger financial backing a there.
From the span out piece, we've been talking to industrial I O T customers.
About our plans to expand offerings into that portion of the business and they have also been quite excited.
By taking some high performance solutions and combining it with the rest of our I O T solutions.
Oh, Thank you and our next question comes from the line of Ambrish Srivastava with BMO. Your line is now open.
Hi, guys. This is jamison, calling in for Ambrish. Thanks for the question. So first I was wondering if you guys could comment on your lead times and power where are they now versus the peak and also what our where they're doing compared to normal levels.
Oh lead times still continue to be kind of mid teens. A this is down a definitely from a year ago levels or by a four or five weeks and a slightly longer than what we would call normal for the industry.
As there are still some constraints in our power business.
Okay, Great. Thanks, and then my follow up is regarding your or your East East just kill Fab I was wondering would the lower demand that you guys are saying does this affect any ramp of any sort there do plan on like is pulling things in or are pushing things out given the increased supply that you'll have from there. Thank you.
Oh no it doesn't change any of our expectations. There were still moving full steam ahead as I mentioned earlier on the trends the automotive trends and the Fiveg trends were expecting a.
Significant and continued growth in those power businesses next year.
So there is no no changes.
Anticipated there.
Thank you.
Thank you and our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is now.
Yes, hi, good morning, Thanks, very much for taking the questions. First question is related to pricing in prior calls that I think the comment of any commentary.
Thanks.
Oh.
Pricing in general terms, we still are seeing a pretty benign environment as compared to what we have seen previous previous years.
So not no no.
No change from that.
Yeah, I think we lost it.
Chris can we move onto the next caller please.
Thank you and our next question comes from the line of Tristan Gerra with Baird. Your line is open.
Hi, good morning.
In terms of.
Quantenna being impacted by the macro trend or was there also any company specific events such as any.
Share loss that would have impacted a whopping you for quantenna versus your prior expectation and also if you could.
Quantified, perhaps the EPS dilution that you expect some quantenna in the quarter.
So as I mentioned, we did visit all of content as customers.
Since the acquisition in without a without exception they have all cited softness in their business and no share loss of any kind.
Ongoing.
Yes.
Yeah, I've got to say on the on the earnings per share, but like you said, it's not meaningful contribution.
In the in quarter three.
Okay great.
And then could you comment on your utilization rates.
That's embedded in your Q3 guidance.
Yeah, they're low seventys.
It should be very similar to Q2.
Thank you very much.
Thank you and our next question comes online of Christopher Roland Aside your line is now open.
Hey, guys. Thanks for the question.
In your opinion.
And in comparison to others why do you think it took so much longer for for your Disties to start making these adjustments to inventory adjustments here was it do you think it was the long lead times that you guys had or are there some more market specific issues or.
Product specific issues that you guys have that others don't.
I do believe mix is a contributor to a to the behaviors there.
Companies with more power content have seen less of the.
Of the corrections and seen it later.
Understood.
And maybe maybe you guys can talk about cycle times.
And if you expect the lead times to approach cycle times.
Is that something you're contemplating in this down cycle or not.
On a product basis, you certainly have seen a narrowing of the gap between manufacturing cycle times and lead times they're.
Not.
Don't normally collapse inside or manufacturing lead times in good markets or bad.
Great. Thanks, guys.
Thank you and our next question comes from the line of Craig Ellis with B. Riley FBR. Your line is now open.
Yes, thanks for taking the questions I wanted to pose a couple of intermediate term questions on a few of the end markets. Keith as you look at automotive nice to see it growing in that third quarter.
Do you sense that the underlying dynamics in that business content gains.
Not rising as the quotient et cetera, I mean that this is an inflection quarter, where we could be back to sustain growth or are there some headwinds coming in the fourth quarter that would mean, it's more bouncing along the bottom.
In terms of the units sold we don't see a.
A significant improvement in the fourth quarter.
Globally, we are not looking for that we do think that the number of models are adopting E. B in the number of models adopting level to aid das will be increasing.
For the 2020 car model years, and so we should see.
That offset.
Even a flat or slightly down Q4 total unit number. So we are expecting a return to growth.
As you exit this year.
That's helpful. And then the follow up is on cloud power. So it sounds like the base station business is getting some strong traction server isn't helping just because of shipping heads are the first part of the question is when do you think those will both be working in your favor and on base stations, specifically as you interact with your customers what are the unit numbers for base station builds if they're talking about for this year and next year. Thank you.
Yes, when we talk to growth we are over 60% growth year on year.
In those.
Cloud power and.
Applications and so yes, very very significant growth.
We don't.
Actually have any units I can give you a specifically in the forecast however.
And timing on when server can help cloud power.
I'm I'm.
Expecting that to be a certainly as we entered 2020.
Thanks Keith.
Thank you and our next question comes from on the Rossy Gill with Needham and company. Your line is now open.
Yes, Thank you for taking my questions.
Question on automotive if we sell auto continues to grow in Q4.
It looks like it the the second would be down about less than 2%.
I think you had indicated that overall light vehicle production.
It's going to decline, 3% to 4%. So just wanted to get a sense.
Is that kind of roughly what you're expecting and how does that I guess reconciled with dollar content gains and then.
Power and a dash.
If it is the case will be a slight improvement over the unit decline.
I am not as great.
So just I would like to get some color on that.
Yes, so again I think it really is.
The on content story, there not the units.
The other piece of what you've seen so far this year is inventory correction.
At the suppliers to the automobile industry. So.
If the units themselves.
Can be down to 3% or whatever but the inventory piece.
And then for Brechtian piece contributes the rest.
And as I mentioned before I do expect as we get into Q4, the additional content story, we'll take over and you'll see continued growth.
For us.
Okay. That's helpful for my follow up question.
You talked about booking trends are pointing towards stabilization.
Is this.
Is this mainly.
Based on your <unk>.
Distributor customers in China, who are basically said.
We finished inventory correction and.
We're going to do.
At least kind of rebuild slowly.
Or I'm, just kind of characterize what's driving the stabilization.
And and bookings is just purely that were done with the inventory correction and we're kind of going to go about we're going to be bouncing off the bottom from here on out.
Yes, any insight on that.
Yes, a couple of comments one we did mention that we expected continued distribution.
Inventory declines in the third quarter.
And we think that will be about the end of it.
So it's really not a.
Big Disti stocking a change in attitude.
We have seen stabilization actually increases.
From backlog in China.
Whereas they were declining pretty rapidly beginning of the year those now look to.
Be done with the inventory correction and starting to increase.
Thank you.
Thank you and our next question comes from the line of Harlan sur with JP Morgan Your line is now.
Good morning. Thank you for taking my question, maybe just a follow up on that previous question. So on the weaker industrial trends, especially in greater China, you guys think see signs of stabilization any specific sub segments, where you're starting to see just stabilization factory automation building automation any any color here would be great.
No it's across the board in China.
That.
That kind of starting to see the increases there so no one market stands out.
Okay, and then on the distribution inventory came down nicely in Q2 will be down again in Q3 resales were up sequentially in June so relative to let's say your flattish guide for Q3 X Quantenna.
How much are you anticipating we still is up sequentially in Q3 looks like autos will be up do you expect industrial we sales to be up sequentially as well.
We are expecting to see sequential increases in the resales.
They will.
Match pretty much that.
The commentary I gave by market.
We see normal ramps.
In communications in the in the third quarter, we'll see some ramps on the automotive side.
Excuse me, but those will be reflecting Q3 extra re sales, reflecting the market commentary.
Yes, thank you very much.
Thank you and our next question comes from the line of harsh Kumar with Piper Jaffray. Your line is now open.
Yes, Hey, guys I wanted to revisit the question on Opex as you look to integrate quantenna.
I'm, assuming you're September guidance, Quanta, opex bold and into it how should we think about the sort of synergies kicking in and to what extent do you is there a goal that you would give us on a percentage basis, how we should think about on an opex basis longer term.
So our long term goal for Opex is that this theme that 21% as we have elaborate in our analyst day.
We we are on track to do that plans for synergies one Dan when we announced Quint I know, we've talked about synergies being about $26 million.
About 16 of those in Opex and.
Pending Cogs.
Yeah, and they will be coming in.
And become meaningful in 2020.
Okay, and then for my follow up I was curious if you could size.
You know how much business you are not able to do it but Bobby as you look to get these licenses. If if there is any color you could give us on that front that'd be helpful.
We normally don't give any cost.
Details on specific customers.
But as we said in our prepared remarks, we have partially resumed shipments on on that do you.
So the customers that were affected.
Fair enough thanks, guys.
Thank you and our next question comes from the line of Shawn Harrison with Longbow Research. Your line is now open.
Good morning, Andy.
Commentary about distribution and in getting the inventory corrections.
I guess the commentary seem to be a little bit ahead of the more negative tone Arrowhead last week and I was wondering if your inventory correction is maybe ending earlier function, obviously of the power products you sell being in higher demand are managing inventories a little bit more aggressively than others.
Yes, as I mentioned, certainly mix has an impact on what goes on there, but weve also talked over the quarters about how we have a little better control system and much better visibility.
So reacting.
Appropriately and never getting to overstock.
It's also a piece of that equation.
Then as a follow up if I may Bernard.
Free cash generation. This year is probably a little bit light versus typical curve, maybe you could talk about how you would expect to see free cash flow generation in the second half of the year.
Yeah, typically if you look at the seasonality of our free cash flow. It is back end loaded typically in the third and even more meaningfully in the fourth quarter is that we expect to see some some catch up playing a throughout the rest of the of the year.
Thank you and our next question comes from the line of Chris Caso with Raymond James Your line is now open.
Yes. Thank you good morning.
Just a question following up on distributor resale and obviously, you and everyone else are reporting on on on a sell in basis. Now can you help us to quantify how much the distribution inventory reduction has been a headwind in the second quarter and what's contemplated in your third quarter guidance, how significant is that.
So in both quarters, there is a significant reduction.
Contemplated and I don't know that.
We're giving specific numbers there.
Chris but.
Certainly there are meaningful.
And we expect the leaving the third quarter to be towards the lower end of our.
Normal operating guidance.
For Disti inventory.
Right.
As a follow up then.
Any comments about how we should look about look at look at December and obviously, there's a lot of moving pieces on the macro but.
With what you said on on distribution inventory I suppose that would be a tailwind as sell in and sell out converge.
How any of the things we should be thinking about with respect to December .
Yes, we only give guidance one quarter at a time, but but I would reiterate that we expect the distribution inventory correction to be largely over in Q3.
Of this year.
Got it thank you.
Thank you and our last question comes the line of Craig Hettenbach with Morgan Stanley . Your line is now open.
Yes. Thank you question for Keith on autos and understanding it's a very challenging backdrop, particularly in China.
But it's also unusual in the quarter that is reported to see a big Delta.
And so if you could just give some color in terms of this cycle, what you're seeing from you know kind of tier one suppliers and Oems and how there there may be managing inventory that.
Led to a much bigger drag in Q2.
Yes, they are.
A lot of dialogue occurred there as you might have expected and I do believe that many of the auto suppliers.
Remained more optimistic longer.
Than I've seen in the past and then decided to take some fairly decisive inventory corrections.
As they got through the second quarter so.
From my perspective, that's that's what's different this Q2 versus.
Any of the others we've experienced.
Got it and then just a quick follow up Youve commented about distribution inventory and expectations into Q3 any thoughts from an OEM perspective, I know that's been a little bit of a track as well, but just how you see OEM inventory into Q3.
Again, just a this is more qualitative and quantitative as we talk to our customer base and particularly in the auto sector.
We think they are largely going to be corrected at around the same time.
Into Q3, two beginning of Q4.
Got it thank you.
Thank you and that does conclude todays question and answer session I will now turn the call back to Parag Agarwal for any further remarks.
Thank you everyone for joining the call today.
We look forward to seeing you at various conferences during the quarter good bye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may all disconnect everyone have a great day.