Good day, ladies and gentlemen, and welcome to the ON Semiconductor Business Update Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will host a question and answer session and instructions will be given at that time. As a reminder, this conference call may be recorded. I would like to turn the conference now over to Parag Agwala, Vice President, Corporate Development and Investor Relations.
Sir, you may begin.
Thank you, Brad. Good afternoon and thank you for joining today's conference call. I'm joined today by Keith Jackson, President and CEO of ON Semiconductor Sam Ferdari, President and CEO of Quantenna Communications and Bernard Gutmann, EVP and CFO of ONS Semiconductor. This call is being webcast on the Investor Relations section of our website atwww.awnsemi.com. A replay of this broadcast will be available on our website approximately 1 hour following this conference call, and recorded webcast will be available for approximately 30 days following this conference call.
The presentation accompanying this conference call is posted on our website. During the course of this conference call, we will make projections or other forward looking statements regarding future events or future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, launch, should or similar expressions intended to identify forward looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors which can affect our business, including factors that could cause actual results to differ from our forward looking statements are described in our Form 10ks, Form 10 Qs and other filings with the Securities and Exchange Commission.
Our estimates may change and the company assumes no obligation to update forward looking statements to reflect actual events, changed assumptions or other factors except as required by law. The discussion in this conference call will be limited only to proposed acquisition of Quantenna Communications by ON Semiconductor. As we are in quiet period, we will not make any comments on current business environment or on near term outlook for our business. Now let me turn it over to Keith Jackson, who will provide a strategic overview of proposed acquisition of Quantenna Communications. Keith?
Thank you, Parag, and thank you, everyone, for joining us today. At the outset, I extend a warm welcome to the employees of Quantenna Communications. I'm excited about having you as part of On Semiconductor team and I look forward to building great products together to better serve our combined customer base. As we indicated during our recent Analyst Day, we intend to build capabilities to accelerate our growth in industrial, automotive and cloud power end markets. The proposed acquisition of Quantenna is a step towards building our capabilities in ubiquitous wireless connectivity technologies to effectively address industrial, automotive and related IoT markets.
The combination of Quantenna's leadership in high performance Wi Fi technologies and software and ON's expertise in power management, low energy Bluetooth and multi protocol radios build a formidable technology platform to create wireless connectivity solutions for the industrial, automotive and related IoT end markets. Both DAWN Semiconductor and Quantenna Communications are leaders in their respective markets and combination of these two leaders will enable strong wireless connectivity platforms for addressing a wide range of applications in industrial and automotive markets. We intend to use our sales and distribution range in industrial and automotive markets to aggressively penetrate these markets. We estimate that with the combination of Quantenna's and ON's technologies and capabilities, the combined company will be able to address a new market opportunity of approximately $1,200,000,000 in 2022. This incremental opportunity is primarily related to the IoT connectivity market and does not include opportunities in the automotive market.
The incremental market opportunity of $1,200,000,000 is in addition to Quantenna's expected market opportunity of 1 $900,000,000 in 2022 from its existing business. While industrial and automotive markets offer tremendous growth opportunities for future connectivity solutions based on combinations of Quantenna's and ON technology portfolio, Quantenna's current market provides strong growth opportunity for the near to mid term. Bandwidth of the last mile connection has increased up to 10 gigabits per second and wireless providers will need to aggressively upgrade customers to high bandwidth Wi Fi solutions to maximize user experience and upsell their broadband services. Drivers are in place for high bandwidth Wi Fi access points. Proliferation of over the top video content by providers such as Netflix, Amazon, ESPN, YouTube and many others has driven the need for higher bandwidth for Wi Fi connections.
Furthermore, as video content transitions from full high definition or 1080p to 4 ks ultra high definition, the need for bandwidth is expected to grow exponentially. Quantenna, with its leadership in 4x4 and 8x8 MIMO WiFi chipsets with beamforming technology, is well positioned to benefit from increased demand for WiFi bandwidth. Though 4x4 and 8x8 MIMO devices comprise a small part of the overall WiFi chipset market today, according to data from ABI Research and our estimates, revenue from these devices is expected to increase from $715,000,000 in 2018 to $1,900,000,000 in 20.22. We intend to continue to invest and strengthen Quantenna's R and automotive markets. Teams from the combined company will work together to create power efficient connectivity solutions for automotive and industrial markets.
Along with investment in R and D, we plan to invest to strengthen Quantenna sales and marketing capabilities to drive our expansion into new markets. With that, I would like to invite Sam to make comments on the transaction.
Sam? Thanks, Kate. We are very excited to announce today that we are joining forces with ON Semiconductor. Since its founding in 2006, Contena has been a leading innovator in Wi Fi technology, introducing market to Trump's situation that raised the bar on high performance connectivity. Today's announcement highlights our technology leadership in Wi Fi and our outstanding achievement of Quantenna's team of skilled employees, representing almost 2,009 years of R and D and IP development.
Now Quantenna is ready for the next phase of its evolution. Together with ARM, we look forward to broadening our market reach, expanding our technology development and delivering industry leading products for the benefit of our customers. The combined of on the scale, market leadership and world class quality and customer support organizations, together with Quantenna's deep Wi Fi expertise and capabilities, will allow the combined company to take innovation to the next level and address new and existing customer opportunities. Now let me turn the call to Bernard.
Bernard? Thank you, Sam, and good afternoon, everyone. Let me start by going over the details of this transaction. As you are aware, ON Semiconductor has agreed to acquire Quantenna Communications for $24.50 per share in an all cash transaction valued at approximately 1.0 $7,000,000,000 Including net cash of approximately $136,000,000 on Quantenna's balance sheet at the end of the Q4 of 2018, the net consideration for the transaction on an enterprise value basis is expected to be approximately 936,000,000 dollars Olin Semiconductor will use cash on hand and its revolving line of credit to fund the transaction. The transaction is expected to be immediately accretive to non GAAP earnings per share.
We expect the transaction to close within the next 6 months. As the primary purpose of this acquisition is to gain access to Quantenna's industry leading Wi Fi technologies and software capabilities, we are not expecting significant synergies as a result of this acquisition. At this time, we forecast annual synergies of approximately $26,000,000 The synergies are expected to come from cost of goods sold and general and administrative functions. We believe that given our scale, we can achieve cost savings related to external manufacturing services and logistics. On the general and administrative front, elimination of redundant corporate functions will be the key driver of cost savings.
We expect to achieve our annual synergy targets on a run rate basis within a year of closing. As Keith mentioned in his prepared remarks, we intend to continue to invest in R and D and sales and marketing functions to address new markets and strengthen our presence in existing markets. Increased investments in R and D and sales and marketing for Quantenna should not have any impact on our recently announced 2022 target model as we plan to redirect investments from other areas to drive growth in industrial and automotive connectivity markets. As there is minimal overlap between the markets and customers of the 2 companies, we do not expect any significant risk related to the closure from a regulatory perspective. As I indicated earlier, we expect the transaction to close in the next 6 months.
As of now, we have determined that we need regulatory approval in the United States and in China. With that, let me turn the call over to Keith.
Keith? Thanks, Bernard. We are very excited about the anticipated benefits that the acquisition of Quantenna Communications will bring to customers, shareholders and employees of both the companies. I'd like to take this opportunity to thank the people at Quantenna Communications for their efforts and cooperation in this process, and I look forward to working with them in the future. This concludes our prepared remarks, and we will now take your questions.
Brian, please open up the line for questions.
Our pleasure, sir. Thank you. And our first question will come from the line of Shawn Harrison with Longbow Research. Your line is now open.
Hey, good afternoon. This is Gokhita Choudhary calling on behalf of Shawn. First off, I just wanted to ask about the transaction funding with cash and interest. Can you give us any details on the split? And then to just confirm the interest that you're using on the revolver, that's about 3.8%.
Is that correct?
Yes. It is LIBOR plus 125 is the interest that we currently have on the revolver and we'll fund it from the revolver plus cash on hand.
Okay, perfect. And then in terms of manufacturing, are you able to bring Quantenna's in internally? And then I wanted to kind of know about the $26,000,000 in savings. If you can give us any kind of idea about the split between COGS and G and A, that would be helpful too, please.
So no, there's no intent to bring manufacturing internally on the wafers. We will continue to use foundries going forward. It really is about scale and the supply chain from materials perspective, logistics costs that are different than ours and other related things. And that is the bulk of it. And then the G and A would be the 2nd largest portion.
Thank you. And our next question will come from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Congrats on the deal. A couple of quick questions. The first one is on kind
of a blending of the end
market targets as well as the technology. Quantenna, a long time, has had great product in the service provider market. But simplistically, it's more high performance than it is low power. The markets you're attacking with this over time, industrial and IoT seem to require the opposite technology. So can you just talk a little bit about how you're going to evolve that technology and kind of the time to revenue for attacking the markets that you're highlighting is the primary goal of this deal?
Yes. Clearly, it's an expansion of markets with a different product set. There's no misunderstanding there. The teams, however, on the on side have been working in that direction for some time. And we think by getting together with Quantenna's teams, we can accelerate that process pretty significantly and would be looking for revenues in that 18 to 20 4 month range.
Got it. And then Bernard, your comments about, I think, reinvesting to broaden the business and somewhat similar to what Keith just said, broaden the business and accelerate some things. Is the $26,000,000 savings, is that a gross number or a net number that we should think of relative to the current spending rates that Quantenna has on OpEx and COGS?
It is basically the gross number. It's much we're going to take out. But as I mentioned in the prepared remarks, if we invest more, it will be redirecting investments that we're planning on doing in other parts of the business. So the net for the company means we are not negating from what we said in terms of our operating expense target for our 2022 model.
Got it. Thanks guys.
Thank you.
Thank you. And our next question will come from the line of Chris Danely with Citigroup. Your line is now open.
Hey, thanks guys. Maybe just
to follow-up on Ross' question about getting into these, I guess, lower end markets. So from the Quantenna perspective, would you guys plan on introducing some like scale down chips for industrial and auto? And then can you guys maybe go through what the product synergies are? Is there any sort of measure of typical on content for every Quantenna chip that ships?
Well, in their current markets, we wouldn't have those measures. On the other side, we do think there are opportunities for more SoC type things. And then content wise, you would see significant pickup on the on content as you go into those other areas. I don't know if you would call it a dumbed down or subset, but certainly retargeted from a performance perspective, because you still want to be the high performance guy just with lower power. And again, that's where the teams are going to work together.
Thanks.
Thank you. And our next question will come from the line of Mark Delaney with Goldman Sachs. Your line is now open.
Yes, good afternoon. Thanks for taking the question. We're wondering if you have any more details on the degree of accretion that you're expecting. I know you said immediately accretive, but any more color on the magnitude that you're expecting? And if you can give us any more sense on some of the puts and takes around that, for example, what would happen to the combined company tax rate?
And I know ON had announced 1,500,000,000 dollars buyback authorization. Does that the cadence of that buyback come down at all? And again, how
does it all factor into the potential accretion? Thanks.
So in terms of accretion levels, as I said, it's going to be immediately accretive. We think that in a year or so, it can be about 0 point 0 $5 We are potentially looking at whether we need to adjust our share buyback. We're still committing to do the full our full plan over the full year horizon, but there might be some timing differences at the beginning.
And then just on combined company tax rate?
We don't have yet a full blown analysis. We don't think that in the long run, it will affect what we talked about in the Analyst Day, which is a 17.5% longer term target goal.
Got it. Thank you.
Thank you. And our next question will come from the line of Kevin Cassidy with Stifel. Your line is now open.
Thank you and congratulations on the acquisition. And Keith, you had mentioned $1,200,000,000 of new market addressability. Is that the low end that you're describing? Or is there something more than that on the 1,200,000,000 dollars
The 1,200,000,000 is really the IoT market as we see it on the industrial side. We did not include the automotive applications in that number.
Okay. And just one other, is there any change in management expected? Is SAM going to continue to run this as a
division within AN? We are not through with those discussions, but we are expecting the Quantenna management team to join the company to the extent possible.
Okay. Thank you. Congratulations again.
Thank you. And our next question will come from the line of Craig Ellis with B. Riley FBR. Your line is now open.
Yes. Thanks for taking the question and congratulations on the deal guys. Keith, I was hoping you could start just providing some broader context. Had you been looking to add Wi Fi connectivity capability to automotive and industrial and as part of that had come across Quintana or was the intersection with Quintana something that was more recent and opportunistic? Just context on how we got to our part today would be helpful.
Yes. Context wise, we've known for some time we've been operating at the edge connectivity node with our low energy Bluetooth, looking at the industrial applications and tying back all kinds of management functions through that. And we knew we needed a way to get into the Internet, which the Wi Fi connection helped. And we were looking for high performance solutions and came across Quantenna from that perspective.
That's helpful. And then I think in the prepared comments, there was mention of minimal portfolio overlap. Can you just specify where exactly that overlap is? And to the extent that, that would lead to any kind of carve out, can you quantify how substantial that would be?
Insubstantial. Immaterial. Yes, immaterial.
Okay. And then last question for me, and then I'll hop back in the queue. As you look at the opportunity to incorporate Wi Fi into the different automotive and industrial solutions, Keith, what are some of the few applications either on the auto Well, I think the industrial applications will be the
Well, I
think the industrial applications will be the first ones to deploy automotive taking a little bit longer to get into play there. And on the industrial side, all of the, I'll call it, factory automation and building automation areas would be top of the list for 1st revenue.
Great. Thanks, guys.
Thank you. Our next question will come from the line of Tristan Gerra with Baird. Your line is now open.
Hi, good afternoon. Strategically,
should we look
at this acquisition a little bit similar to what you did with Actena a few years ago? And also does that mean that we could see you as a potential require of other IoT connectivity technologies going forward?
Good question. It is a little different than Aptina and Aptina from a technology and market perspective did touch some of our other markets, but the technology was unique. In this case, the base technologies we're talking about here across most of our markets in many of our groups. So it's going to be, I believe, a lot more synergistic and not just more of a bundling approach to the market.
Okay. So it sounds like you would be able to leverage those products via your existing distributor base? Yes. And with cross selling. Okay.
And any commentary on impact on expected impact on relative to your free cash flow target?
No, not anything meaningful. It should in the long run should help us as we are generating more cash.
Yes. Our approach there Tristan is this certainly will be moving us toward the model we gave you for 2022, but not changing that model.
Great. Thank you.
Thank you. And our next question will come from the line of Vivek Arya with Bank of America. Your line is now open.
Hi. This is Adam Gonzalez on behalf of Vivek. Sorry, I joined the call a little bit late, so apologies if any of these questions have already been asked. But I'm just wondering if you can maintain gross margin at current levels as you go into these new IoT markets that you outlined in the prepared remarks?
We actually think we will increase gross margins from their current levels basically with the scale and opportunity from our network.
Got it. And do you have an estimate for Quantenna's exposure to China from revenue perspective? And maybe you can outline what some of the regulatory hurdles you might have to overcome to get this deal done?
I would have to refer to Sam for their percentages in China, if he knows that. And on the regulatory side, again, just our perspective and Sam can give his as well is that there's lower risk here on most things because there is no market overlap, which would typically flag concerns.
So
we all sales in China itself is nominal, but we do sell to Chinese company there are 2 companies who manufacture in China and they sell into U. S. So due to that embargo, there is a transition period that we talked about in the last call with the investors, and we do expect that to go away very soon. The transition period is the moving of the factories out of the China into new China. But the exposure is very nominal and is very temporary.
Got it. Thanks.
Thank you. And our next question will come from the line of Craig Hettenbach with Morgan Stanley. Your line is now open.
Yes, thanks. A question for Bernard. Just in the context of the 2022 model and investment being redirected, does this really just serve to kind of accelerate some of the other markets you're going to deemphasize from an end market perspective?
I don't think it's going to decrease any of the ones that we have our targets of growing industrial at 6%, automotive at 9 percent and cloud power at 13% should not be affected by this. We do think, as Keith mentioned earlier, that this will dovetail nicely into allowing us to achieve the target model. It does have some help in terms of enhancing our gross margin as this is better than our corporate average.
Okay. And then just as
a follow-up on the automotive and industrial angle, anything on Quantenna's kind of roadmap or things that you can kind of see it penetrating these markets? Or will as you buy them, is that really the catalyst to kind of redirect some investments to start to penetrate markets they haven't played in?
Yes. Due to NDAs in place, I would have to revert to Sam if he wanted to share their internal data.
Yes. Regarding the automotive or industrial IoT, we have always talked about potential of being on the access point side or in the automotive being the connectivity to the outside. We do think we have a good technology for that kind of application. Historically, we have been hold back because of our sales channel and the investment we have done in that area. But I think the technology could be easily applicable.
Regarding the edge type of devices, I believe that being able to reduce the capability of the not the capability, but order of the MIMO, but it still has a very good performance type of a MIMO for the given application combined with the ON low powered expertise. We are positioned to develop products, which are going to be well differentiated and capable to gain to those markets in the time line that Keith mentioned.
Thanks for sharing that.
Thank you. And our next question will come from the line of Harsh Kumar with Piper Jaffray. Your line is now open.
Yes. Hey, guys. Congratulations on the deal first. And then two questions for me. With a significant focus now on IoT and an entry into the IoT area through antenna, can we expect the growth rate for combined ON to change to the upward?
And then secondly, is there a possibility of cross sales here?
This business certainly will be growing at the high end of the ranges we gave you, and so it should contribute to faster growth overall. And then as we're successful in pairing up these products, as we mentioned earlier, into solutions in those other markets, we should be able to get an acceleration factor there. So growth rates should increase from the from
the result of
this.
Thank you. And I'm showing no further questions in queue at this time. So now I will hand the conference back over to Parag Agarwal, Vice President, Corporate Development and Investor Relations for any closing comments or remarks.
Thank you everyone for joining the call today. We look forward to talking to you at the release of our Q1 2019 results. Goodbye.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.