Good morning, everyone. Welcome to our 2017 Analyst Day in Phoenix. I also welcome those who are joining us on webcast. As many of you know, my name is Palak Agrawal, and I'm Head of Corporate Development and Investor Relations at ON Semiconductor. We have a very impressive agenda today.
We will start the presentation with Keith Jackson, our President and CEO, who will provide a strategic overview of the company. His presentation will be followed by presentations 3 business unit heads who will talk about their product lines. And finally, Pana Gutman, our CFO will close out the presentations with financial overview. We have allocated sufficient time for Q and A, so feel free to ask a question. Now let me turn your attention to the obligatory safe harbor statement.
I'm not going to read it, but feel free to read it at your leisure. And with that, it is my pleasure to welcome Keith Jackson, our President and CEO.
Good morning, everyone. I can tell you we've got a day, which as we are putting together these materials, excited us. We think the company is in a great position for sustained growth and profitability and cash generation. And we're going to tell you a bit of that story today. And as Parag said, we're glad to take questions as we go along.
So key focus for us as we look at our strategic directions is making sure we continue to be an execution machine, doing the things we know how to do well and taking advantage of all the investments we've been making to generate additional cash flow and bring that to our shareholders through increased value and rapidly paying back our debt right now. What's happened with the company? We have really been transforming ourselves. We're along a journey. It's not through yet, but we're well into it.
To go from being a supplier of many multi source products to one that is really a key enabler in analog and power. And we believe we've made a great distance and journey on that already. Most of the strategic markets we're focused on today are really reliant upon ON Semiconductor and our specific technology to drive their markets. Secondly, we have built a large company. It's definitely diversified both from a market customer technology and product perspective.
But we have a lot of opportunities and we're able to optimize our investments to the highest growth and highest margin areas, which gives us the opportunity to, again without growth in the markets and improve our margin profiles. The Fairchild acquisition is one that we are extremely excited about that is going very well for us. We've had nothing but positive surprises and we'll give you an update on that as we go through the day. And then lastly, just making sure we reinforce that really the opportunity this year and next year and the year after is for margin expansion and accelerated free cash generation. I talked about the evolution.
This just gives you a quick snapshot. If you go back to 2,006, the company was less than half analog power and sensors. If you come fast forward to Q4 of this year, over 2 thirds of the company was in that category. So we've been definitely focusing both our organic and inorganic efforts in those areas where we think have the highest growth rate for the industry and also making sure we have the technologies that are most relevant for those industries, so we can drive margins. From a market mix perspective, you can see we were just over half of our focused markets of auto, industrial and communications in 2006.
And now again, 3 quarters of our business are in these marketplaces. So it's not just something that's on our wish list. It's not just a strategy on paper. It's things we've been executing to. And so now we think we have most of our assets in the sweet part of the market that will get the fastest growth in semiconductors over the next few years.
I mentioned diversified from a customer perspective. This is also pretty key. There are cycles in the business. And what we've observed even beyond cycles is that there are winners and losers and they change places from a customer perspective from time to time. What we've shown you here is the size of our top customers.
You'll see that none of them are bigger than 5%. You'll see a mixture from communications, automotive and industrial on this chart. So we have exposure and good content at everyone in the markets that matter. And certainly, even those that matter the most to us do not have substantial or overarching impact if they fail or stutter in their marketplace. I talked about innovation.
This is something that is really key. If you're going to be driving margins, the end of the presentation today, Bernard will be talking about how we're driving the margins up. But we are in competitive markets. We'll always be in competitive markets. What differentiates you?
There are several levels. I'll talk about those today. But one of them clearly is our ability to enable innovation. We've been investing in advanced technologies that are really enabling our customers to reach new heights. All of you are very aware of ADAS in automotive.
You're also very aware of the image sensing portions of that. We're going to talk to you about how we provide the content enablement for all of those systems. Vehicle electrification, yes, it's something that is growing quite rapidly. You may not know just how significant that is from a semiconductor perspective. An electric vehicle, all electric vehicle can have $200 plus more content for us than a straight hybrid or combustion engine.
From other disruptive technologies, there's other things in cars. Of course, there's the push for increased gas mileage at all times. We've got some new parts now that will enable our customers to remove tens of meters of cable from their car, removing 100 of pounds. And this is something again that we find disruptive, something that we're uniquely positioned for and gives us confidence in our growth there. Industrial market.
This is going to be changing rapidly. If you look at the big motors that are involved in the industrial market, that's where most of the energy losses occur in industry. We've got not only all the technologies they need for today, we're also leaders in the new wideband GaT technologies in GaN and silicon carbide, enabling for them solutions for the future. We're also automating our industrial constantly. One of the big things that has been happening is reaching some standards on wireless connectivity in the industrial space.
We've got all the presence we need there to enable our customers to do monitoring with the sensors, communicate with their CPUs and then actually manage power in all forms. And so we've got kind of end to end connectivity in industrial. Lastly, in communications, certainly there is a slowing of the handset growth. We understand that, but we still have some significant opportunities to increase our dollar content in each of those phones. We'll be talking about several of those today.
They're not limited to things like wireless charging or fast charging, but we think there's some ways we can continue to drive content there. And then the USB Type C, which is not just a phone phenomenon, it's going to be on all mobile devices. There's some great content for us that we think also drives that much above the market rates. So we think we have opportunities with our focused markets to outgrow semiconductors. What are the priorities?
Growing profitably. We get a tremendous amount of leverage with our model with growth. And by investing and growing in the profitable areas, you can accelerate the cash generation portion of that. We will continue to invest in those areas from a market perspective and in the leading technologies from
a product perspective.
We've now got some great size and scale and that really helps us from a sales reach and distribution partnerships. Our network of global field applications engineers has been growing at double digit paces for many, many years now. We can not only take our great products to our customers, but we can help them design their systems, getting the market faster and ensuring that we get a good share. From a cost structure perspective, we'll talk a little bit more about that later, but we've got a tremendous amount of leverage there. We are one of the largest producers of products in the marketplace, if not the largest.
And so an operation there that focuses on just getting points of improvement on the margin side has a great deal to do with the drop through we get to the bottom line. Fairchild has given us new opportunities to accelerate those reductions and we'll talk about those. And so the manufacturing operation is focused on net margin improvements and all of this should be accelerating our free cash flow. Lots of questions on Fairchild. One of the ones I always get is, well, what's been different than you expected?
And my answer is pretty consistent. There's really only 2 things that were different than we expected. One of them is they had some great technologies that we're going to be able to leverage with ON sales force and manufacturing base. We're pretty excited about that. And the second was the sales opportunities that we see out there.
That was a bit of a surprise. We knew they had been losing share. One of our key concerns was how do we turn that around. As we went out and talked to their customers and the distributors, we found very willing partners in that. In our very first full quarter of Fairchild, the bookings we did for their products were up 49% year on year.
So this has been a very pleasant surprise for us. We're very excited about that. And that is helping us raise our estimates, which Bernard will share with you later on the synergies and cash flow we can drive from that. And then from a gross margin perspective, really no surprises. We knew there were big opportunities with On's manufacturing network to start squeezing costs.
We've already been doing that. We got a very rapid start on it because of the delay in closing the deal. But we're well ahead of plan and we're quite excited about the Fairchild integration. What did it really bring to us? Really on the power side, you're going to hear today the difference the portfolio made on the technology side.
ON was largely a low voltage and some mid voltage types of power solutions. Fairchild have been focusing on the high voltage side of that equation. What it makes for us now is a provider of power products that can do everything our customers need them to do. Scale and cost structure, we were already quite large, shipping over 1,000,000,000 units a week last year. We're now going to be upping that up, upping that as we go through this year to more than 1,500,000,000 as we exit the year.
And again, these are rates not seen in the rest of the industry. It gives us the economies of scale and the leverage with suppliers that we need to continue to drive margins. Key technologies. You'll hear us talk a lot about power of course, but also when you look at the silicon carbide, which it adds to our portfolio and the USB Type C products they have that complete the full portfolio in USB Type C making ON one of the few folks that can do end to end solutions. And then lastly, with all of this goodness, the free cash flow, we should be seeing an extra $260,000,000 a year in just by 2019.
I also get a lot of questions on industry consolidation. We certainly believe the industry will continue to consolidate. There are way too many inefficient players out there. The industry certainly has much opportunity to return more to shareholders with consolidation. Scale is relative.
I think right now there's a lot of digestion going on by big players. But these big players at some point in time are wanting to get bigger. The market dynamics have not really changed in the last year. So at some point in time that will reengage. We're feeling very comfortable at this stage that we have the size and scale we need to grow faster than our competitors.
But nonetheless, we'll always be looking at when we should participate and how we should participate. What I can tell you is, we certainly will be only looking at opportunities that give us significant returns for our shareholders and the investment yielding way more than our cost of capital. From a collateral benefit perspective, integrations and consolidation in the industry have lots of good benefits, mostly focused around cost reductions. Customers don't necessarily embrace those as well. Unless you happen to be taking out a weak player they need, generally, it's disruptive.
We're taking advantage of that with many of the other ones that are going on around the world and specifically those where there has been foreign entities involved creating nervousness around supply, we think there's some near term opportunities for us to out gain market share on those competitors. What is the advantage that we have? Well, I certainly talk about that size and scale. If we do more than 70,000,000,000 units this year, I don't believe no one else in the industry will touch that. And just that scale and magnitude gives us cost advantage.
From a power perspective, I've already mentioned the breadth of the portfolio. I've already mentioned we're leaders in the front end of the technology. Our products stack up against the best in the world and we believe that they're differentiated to help our customers get a differentiation for their products. Enabling new technologies. You will find ON Semiconductor at the forefront of all of the new technologies.
You want to talk about the virtual reality, augmented reality, drones, I mean, you name it, there is no portion that you will find in the world that does not have an ON Semiconductor part helping enable their new technologies. Broad market portfolio, 84,000 products. That's a lot, more than any one person can keep track of. But what I can tell you, we've got teams of FAEs and applications people around the world who are helping our customers design their systems faster using an ON solution with our superior technologies. And we think this is a competitive advantage that most of our competition cannot match.
And then lastly, on that cost structure front, just to hit that one more time, the leverage that we get with a $0.01 a unit in savings is just tremendous. And we have the opportunity to do that. It's a part of our DNA. Each year we set out and the operations team is tasked with getting at least 6% improvement like on like. And each year, they have exceeded that expectation.
Not dwelling on a specific application, but just giving you an example of what all this means. We talked about ADAS, one of the fastest growing applications in the marketplace. Again, everybody is focused on the image sensors and that's great. I think we've got the leading position there with the leading market share and the leading technologies. But literally, if you look at power and analog, there's a lot of components there required to make those sensor systems work.
ON Semiconductor, again, has the leading product in each of those categories, which basically leverages our strength from a dollar content perspective when we win these systems. So how do we provide that value? How would your customer our customers describe us? Certainly, they see us as critical to their solutions in power, analog and sensors. They come to us for that.
They work with us to see how we can make their products better and at lower costs and faster time to market. All those things I've been talking about help us do that. Providing the full solutions does matter. A lot of these customers have very complex build materials. They're trying to bring things together.
If they can operate with fewer people, it lowers their cost of ownership also and gives them much more comfort if they can rely on those semiconductor suppliers to meet all of their needs. And so generally speaking, they would prefer to have fewer larger suppliers. And then lastly, we talked about operational efficiency. It's something that we've been driving for many, many years. That enables us to remain cost competitive and still drive margins upward.
What are the markets? We touched on them earlier. In automotive, we believe there's high single digit sustainable growth. This is not driven by any growth in the number of cars being built each year. This is all about the content drive that consumers have around advanced safety, new convenience features and more entertainment features.
We've talked about some of the specifics. I won't go through all of those, but we have engagement at the OEM level as well as the Tier 1 level in all of the major customers around the world and all of their major new systems. This gives us the confidence that we will be growing there. And it's not just ADAS. We'll talk some more.
You'll hear more about the lighting change, the motor control changes and electrical vehicle changeovers. Industrial, kind of low to mid single digit growth. This is certainly a GDP driven industry, but they are making investments now to solve energy efficiency problems that they've had. Our new expanded portfolio allows us to address all of those needs from both the power regulation and control, but also in the connectivity that they need and the sensing that they need, so that they can have the best solutions for their customers. And lastly, communications.
We talked earlier, cell phones are slowing. We do see a slower growth ahead for this market, kind of low single digits. But nonetheless, the content changes, we believe will help us overdrive the opportunity there. And now with our portfolio, we're entering into the infrastructure place portion of this communications business much more than we have in the past. So again, let's talk about some of the proof in the strategies.
This is automotive I'd talk about. We've more than doubled since 2012 in revenues. And organically, those numbers have been sustainably close to double digits. We've been the fastest growing semiconductor supplier to automotive in the last 5 years. We're not just present in ADAS that we talk about a lot time.
We are present in every single part of the car. I'll talk about that. And in every part of the car, there's an opportunity for us to increase our dollar content. If you look at a car we talk about right here, some of the bigger trends, lighting moving to the LED lights everywhere. There's much more semiconductor content when they make that happen.
In the body and interior, there's 100 or more motors in every car. By making them more efficient brushless DC, you get more semiconductor content and again more content from on there. We've got some opportunities to remove fuse boxes and tremendous amount of cabling in the car with our new eFuse that we're talking about. And of course, they're all putting different charging solutions into the new vehicles for the mobile devices. Active safety, of course, the largest dollar content growth that we're going to see and we'll outline that in all of our presentations today.
But as I showed you before, the entire bill of materials is 1 On is going after and it presents us an opportunity in the 100 of dollars over the next few years. Powertrain, we've traditionally been in the combustion engines. And of course, there's always a push for some new products there to get better fuel efficiency. But the real game changer is in electrification. That can add another $200 of on semiconductor car quantity in every car.
That vehicle electrification, what does that really mean? You have to manage the battery. We've got the products for that. You have to charge the battery. We've got the products for that.
If you drive the motors, we've got the products for that. And then you have to split off and handle all the various loads in the car for all those other motors and those other entertainment things. We got the power for that. And so we've got the complete solutions there, giving us 100 of dollars more opportunity. And again, we'll describe that in more detail later.
The industrial market, we have also grown to more than 2 times the size in the last 4 years, giving us again, I think a presence there that's one of the fastest growing in that marketplace. You'll hear a lot about high performance power conversion. This is really where you're looking at the higher watt loads that ON has been developing and Fairchild helped bring us. And that is a key area for growth, very high ASPs, high margins for us. And again, we'll talk more about that later.
Industrial automation, the Internet of Things, really the wireless connectivity standards are enabling our customers to completely automate things that were very difficult before. And we see this as an opportunity to outsize the overall product growth in industrial. Talk about this power conversion. One of the things most people don't know is that ON can give you the complete solution that you need for power from the sun to the palm of your hand. We provide the high power modules that are in the kilowatts to solar inversion, to distribution systems, etcetera.
And then we convert those power loads, very high power loads down to the micro loads that you need to operate in your actual electronic systems. This gives us a great deal of influence in working with our customers to optimize not just our product content, but their efficiencies. And we see this as our differentiation capability in the market. Talk a lot about motors. And now we can say that we actually can solve the largest motor loads.
We're talking kilowatt type applications with the full product portfolio as well as the milliwatt solutions that you see going out there. So we are the motor control experts and we think this is another area that's going to be growing faster than overall industrial and you'll hear more about that in our presentations today. Communications, we've also more than doubled our revenue in the last 4 years. This is an area where Fairchild did bring us quite a few solutions, particularly in fast charging, but also completing our portfolio in USB Type C. So with the combination of more and more phones going with fast charging, wireless charging and USB, again, we think we can outpace the overall mobile phone growth pretty dramatically.
And then as I mentioned earlier, we're now getting into the infrastructure business with more of our server power type products and we'll talk more about those. But all of this we think gives us an opportunity to outsize that market. This is just another example. This is what a phone looks like from our perspective about $9 of content for on semi. The green parts are what we had traditionally and the red is what Fairchild brought to us.
So you can see that portfolio is certainly augmented. It did not overlap with what we had and it gives us again bigger opportunities per phone. So what would I leave you with? We have really been a transformative company. It's not just about multi source components and lots of components.
We have technologies our customers need and are finding critical in their marketplace. And we have focused those technologies and our investments on the fastest growing areas. Cash flow is our primary focus for the company. You're going to hear a lot about that from Bernard later. We think we do that with expanding margins and operational improvements.
Certainly, growth will be something that can supercharge that, but it's not something that's required for us to make accelerated free cash flow happen. And then lastly, Fairchild, there's always risk with any kind of acquisition. This is one that we think is an absolute home run. We're well ahead of plan there. We found nothing but positive surprises and we're expecting that we will continue to increase the expectations we have on that and we'll share more of that with you later in the presentation.
With that, I'm going to pause and take some questions now. And then just remember, you've got the product groups and Bernard and Cuming. There's always been cycles in ASPs. They generally though have been very well mapped to what happens in the macro semiconductor industry. I think one of the changes that is coming is there has not been a lot of investment in the analog and power capacity around the world.
There have been fewer and fewer players. And every time there's fewer players, we close off manufacturing facilities to get more efficient. The net of that is you should start reaching a point where the supply and the demand are much more in balance. And when that happens, you should see a more systemic environment and where ASP will not reduce as much each year. The question I always get is when does that happen?
And the answer is I don't know yet. But certainly, we should be getting closer. Sure. Strategy, big thing. I will tell you that in some cases, we started very early.
Automotive, for example, became a major focus for us back in 2004. We've been outsizing our internal investments on that area for some time. And again, the opportunity we saw there is the one we're talking about today, which is consumers basically wanting more electronics to make their drive experience better and that has been playing out quite well. In other areas, we have had changes in the strategy. Back in 2004, again, we had a very strong emphasis on computing.
Computing was still a growth market and we looked at owning that entire power path, etcetera. Well, the good news is we are indeed the largest market share guy in computing. Unfortunately, the market's not growing as fast. What we did about 3 years ago, as we recognized that was coming, is we started reusing those power resources to look at power in automobiles. As you're looking at the more complex brains and using our multi phase capabilities there, looking at other markets in communications and in industrial, the same way from a power resource perspective.
So we started shifting those several years ago away from computing. Consumer was never a strategy for us. So I don't want to look like geniuses there. That market is not growing. The margins are quite bad.
And so really the 3 markets we've chosen early on was automotive. We changed from the computing side to industrial over time. And of course, communications has always been a strong market
for the last 2 decades.
Kind of answer those reverse order. Debt level wise, we've been pretty open saying we're very comfortable with the 2 times leverage, net leverage. And it seems to be a place that gives us an efficient return on our investment. And borrowing costs are not that great and we can do much better with that money than paying it off when you get into kind of that 2 times leverage range. 2 times leverage also gives you some flexibility to amp that up or down depending on what's happening with the financial markets.
And so we like that area. And that is an area we want to get to as quickly as we can. And certainly, at this stage, we're looking at what that's going to be toward the end of next year. From a what kind of things do we look at? In each of the acquisitions we made and in any acquisition we would make in the future, we look at what technologies will complement what we have, make us more valuable to our customers.
And then more specifically now more than ever, we're looking at the return piece of that equation. We've got the opportunity to increase our own earnings with some internal work on operations and new product technologies giving us pretty high hurdle looking outside for acquisitions. So certainly, something we've said greater than the cost of capital, I would say quite a bit greater than the cost of capital right now. Again, I'll answer reverse order. There is the opportunity for us to grow much faster in phones than 2% to 4%.
I believe that. We're just again being very cautious on the overall phone growth rates in the numbers we give you. We want you to leave here today feeling confident that the plan is solid and not based on wishful thinking. Relative to the Nexperia sale, there really wasn't a lot of analog content there. It was mostly small signal discrete.
They certainly were trying to be quite aggressive on pricing as they were making that transition. We've actually found more opportunity, much more opportunity than we could ever have lost, basically because their customers in automotive and industrial are quite sensitive to quality and security of supply. And so we've been given opportunities for share gains and I believe that's been showing up in that business here the last couple of quarters. The integration is going quite well. I mentioned this to some folks last night.
We every time we've done an acquisition, we have a team that is the integration team that gets augmented with new players with everyone, but we have a playbook. And so the guys have been honing that playbook now for over a decade. And so we know the right processes. We put those in place. One of the things that helped us with Fairchild is ironically one of the things I disliked the most, which is how long it took to close.
So we were working, preparing for integration for 3 or 4 months longer than we had hoped would be true. As a result of that, people hit the ground running. I can tell you we've been very, very pleased from a morale perspective. They were looking for an opportunity to grow and be meaningful in their marketplace. I think the ON acquisition helped with that and also have just frankly a sense of security after having many, many months of uncertainty in the process of getting the deal done.
And so the net of all that is the folks that we sought and pursued to stay with us are doing a great job. It's hard to differentiate them from a different non employee. Thank you. I will turn it over to Mr. Kloster Bauer to talk analog.
Good morning, everyone. We're going to talk for a little bit about the Analog Solutions Group. Quite a bit different than a couple of years ago when we got together. But the theme is really the same, energy efficient analog solutions, and you'll see that as a thread throughout the presentation this morning. Where are we right now in the analog group?
You can see the mix of our product is very similar to the company overall, but it's a little bit different. We are heavily leveraged where we were in the 4th quarter in automotive. Communications is strong and industrial is strong. So over 75% of our revenue is in those 3 key markets. We believe we're a leader in automotive power management right now and certainly in front lighting and sensor interface.
But we see a lot of opportunity for growth coming in ADAS. On the communication side, we're also a leader in power. We've got a really good wall to battery charging solution that a lot of people are using today. But as there's more and more intelligence in the charging path, we see some opportunity for growth there. And then in industrial, we've been number 1 in ASICs and ASSPs for industrial for quite a while.
Our motor control portfolio brought out along communications in the IoT edge node. Brought out along communications in the IoT edge nodes, we think are going to give us some great traction. So the key takeaways, again, we're going to continue to grow in these 3 strategic markets. As Keith mentioned, we're very well aligned with the company there. Sharp focus on margin expansion.
We've combined a number of businesses within the company and from Fairchild here. And we've identified a number of opportunities we'll talk about later that are going to give us some better than normal, I would say, gross margin and operating margin expansion. We do have some disruptive products, particularly in IoT Edge and a lot of those products are getting traction. Our design in funnels are double digits, our revenue and we see that type of growth going for the foreseeable future. And then one of the other transitions that's become a natural part of our business is beyond just ICs.
As we became a solutions group, software and modules are becoming an increasing part of the solution for our customers. And so we are offering module solutions to our customers, particularly in connectivity, but also putting different software stacks, allowing products faster. Strategic intent, again, market leadership and analog power management. I think that just about everything that we do in the group regardless of what division is around power efficiency, either it's the lowest power product in the market it's got the highest conversion efficiencies. And that's really a differentiator that we won in our analog group.
We're going to continue to grow it at least twice the market organically. We've been doing that for the last several years. We think we've got the products and the customers and we're targeting the right application to do that. I mentioned earlier, differentiate through integration and power efficiency, smarter solutions and how we put these products together and better efficiency so that we've got something that we can sell against the competition on other than price so that we can reach some value. Expand the margin, talk about that in a slide here in a little bit.
And then have a target model to get us back to sort of that 45 percent margin base that we were at before you saw earlier we were around 39% in the 4th quarter. We think that we've got a very solid plan to get within the next couple of years back into that 45% range. Fairchild, added to the strength of the team that we had. And the first thing and Keith mentioned it, I got about $300,000,000 of analog from Fairchild in the communication space. Really solid team.
They had some very good products in power conversion, extremely good PMICs, very good fluxes and switches, USB Type C portfolio really filled out the things that we didn't have at on at that time. And so, a really good leadership team, the leader from Fairchild is actually on my staff and he's running mobile for all of the analog group right now, a very senior leader. And we think that was a real prize in the acquisition as far as the analog team is concerned. I mentioned it completed our USB Type C. We got a number of customers in the industrial space too, offline power.
Power conversion and offline power point of load was an area where Fairchild had a lot of strength in the industrial side and we're seeing some traction in that. And then they had a cloud computing initiative that was really in its infancy. But by pairing that with our computing strength that we already had in B Corp Power in my group, I think we've got a really good power solution going forward, not just for computing, but as Keith mentioned for some of the other areas of the market where multiphase power is becoming important, particularly in some of the content share we think we're going to be able to get in the cloud and server computing platforms. Again, growth in these strategic areas, very significant percentages of our revenue. And we'll talk a little bit more about each of these key applications as we go through it.
But we do feel like we've got a very solid and identified opportunities and applications in each of these markets, not just to sustain, but to improve our share and to improve our margin position in these markets. So, in automotive, as Keith mentioned, we're everywhere. We get about $90 per vehicle right now and you'll see some of the growth opportunities that we see going forward. This is an area where we, in analog, didn't get a lot from the Fairchild acquisition. Most of that growth that you see last year was all organic.
You may remember we had to sell our ignition IGBT business so we could pick up Fairchild and get their ignition IGBT business. So that was sort of a wash. But we've had really good traction and organic growth in the automotive space. Going forward, we see some real growth drivers here for us. And you can see that the growth areas in the TAM are really expanding.
Some of that is around power management. We'll talk about some real opportunities. All of these electronics that are going everywhere in the vehicle need power rails. And the power management of it in some cases is significantly more content than the application or the processor that they're putting in the function. Sensor interfaces for all the driver assistance and all the sensors that are out there being able to interface, clean up those signals and make them usable.
Higher speed FlexRay, LVDS buffers, things like that for in vehicle communication. And then, SmartFET. SmartFET is an area of the market that's really been dominated by a couple of people for a long, long time. We've got some traction there and some really good products coming out. And we think we're going to see some better than market growth in that area.
And you can see from this chart again that similar to Keith's, all of the areas that we have analog content in the vehicle today, the colors, we've got strong product offerings in everything there that's in blue. In green is where we're really doubling down on our investment and that's power supplies and it's connectivity and it's smart pets. Those are the areas that we think we're going to see the above average above market growth in the next few years. And then a couple of areas that we did get from the Fairchild acquisition, just the SmartFets and Igniters, we think there is some opportunity for growth there. Certainly, we know those customers in that market base very well and we'll be going after that going forward.
LED lighting, Keith mentioned a couple of times. This is an area where we've made a lot of hay in the last couple of years. We're literally involved with all of the major lighting suppliers today. There's 3 real components of these LED lighting modules or 4 if you count communication. There's communication products, there's the power supplies, there's the pixel controller and there's motion control through motor drivers.
And then there's all the FETs, which come from our Power Solutions Group. Because of the integration that we have it on, we can sit down and we can put a complete solution together for the customers in this area. And we've been very effective in that. I've seen some of the new freight lighting solutions for some of the European OEMs where the entire bomb of the headlight is on content. It's either from the power solutions group in discrete.
It's got our pixel controller. It's got our power supply and it's using our motor controller. So, it's really an opportunity. Our SECs and the way we go to market, we put together reference designs like that with ON product and we take those out to the customers. In many cases, our customers will pick up that ON reference design and put the entire thing in the vehicle.
Great opportunity for us to cross sell across the business groups. We're also winning in rear control now. More and more rear lighting is going to LED and as well as interior lighting, mood lighting, emergency alert lighting. We're seeing just a lot of opportunities in that space. I mentioned ADAS Power.
This is an opportunity that's probably the one of the fastest, if not the fastest growing part of the power market in the vehicle right now. And as you can see, there's a vision control module and that's what Intel calls the brain. They had a big announcement at CES. They actually announced us as their partner for the PMIC and the Vcore that goes around that brain. That's an opportunity for us for about $8 worth of content per vision control module.
But then as you get down into radar, lidar, cameras, ultrasonic, all of these products need power. And as you can see, there's somewhere between $30 $45 of content per vehicle once we start getting into autonomous driving or highly assisted driving just in power management in the car. If you remember the earlier slide, I had $90 worth of content available. This almost gives me 50% more opportunity as we get more and more ADAS in the car. And this scenario where we've got an extremely large team of people focused right now and we're winning a lot of opportunities.
Move to industrial real quickly. I mentioned for a while we've been number 1 in ASICs and ASSPs. We work with a lot of big industrial companies on their motor controls, on their HVAC systems. We've got a real strong position in medical imaging. Next generations of those types of products are driving deeper submicron technology nodes and add a lot more sophisticated products, a lot of standards based IoT out there.
One of the things that we've mentioned maybe before, but our trusted design and manufacturing capability has really taken traction with some of the defense and aerospace programs in the last couple of years. And while these have been a long time to money, we're going to start to see some margin contribution from some really significant programs in that because of the work that we've done to get our Regression and Idaho fabs certified as trusted foundry. So, we think that that's going to be a real opportunity, not as much for top line growth, but a great opportunity for margin enhancement in some of our industrial products. Some of the growth drivers in this area for us, certainly Mobile Medical. We're seeing more and more opportunities in the Mobile Medical space.
Last week or a week before last at Mobile World Congress, we announced our Bluetooth low energy 5.0 compliant part. We have the first part that's 5.0 compliant and we also have the lowest power Bluetooth SoC in the market today. This was developed initially for medical and mobile medical products, but we're seeing applications in automotive. We're seeing applications in a lot of different consumable and consumer and handheld types of applications, particularly with 5.0 where you're getting the longer ranges out of your Bluetooth low energy part and still getting the kind of power products. This product is going to be a home run for us.
Connected sensing, we have the 2.4 gigahertz lowest power parts out there for ZigBee, Thread. We've got a Sigfox compliant part in every area that Sigfox has released. We've been certified and we're seeing a lot of edge node opportunities there too. So that's some growth for us. And of course, precision motor control and robotics and smart energy and smart breakers are getting increasingly we've got multicore processors to look at waves for arc fault detect, to look for anomalies in power and big circuit breaking systems.
So we've got a lot of IP around that space and we've got a lot of technology in the combined company now between Fairchild and ON that gives us traction in that area. Talk a little bit about intelligent charging now. As we move sort of out of industrial and automotive into more of the commuting or communication space. We are number 1 in travel adapters. We are the 1st to market with a full A 4WP solution with our cooperation with Qualcomm.
We're seeing a lot of growth in intelligent charging. And intelligent charging is not just wireless charging, but it's also fast charging. And some of the new standards that are coming out USB PD interface into those types of products. But we think there's content gain there. And here's an area where you can see that we had growth in traditional ON, but we also got a significant shot in the arm from the Fairchild acquisition.
The communication space well, I guess this is a chart where you can see the shot in the arm, sorry. But again, power management, it's a common theme. Even though we're an analog group, we're in a lot of different markets. Power is really our middle name in all of these spaces, faster charging. And then RF tuning, we've talked about for a little while, but we are starting to see more and more traction in the RF tuning space, particularly as we're getting ready to go to 5 gs and some of the carrier aggregation specs are going to get a little bit tighter.
We're seeing some of the big handset makers pay more attention to closed looped RF tuning. Our mobile solution in wall to battery, again, very much like the front lighting solution, we bring a complete solution to the customers, particularly plays well in China and some of the smaller mobile customers where we can bring in and say, here's from the adapter all the way through to the battery, the entire charging path. You can see we have those products complete reference design that we go to the market with. The other thing that we're seeing is with the fast charging more and more drive to getting some game changers on the adapter side. If you look at the standard cube that we all know and love, it's a 5 watt adapter, but you need more power if you're going to charge faster.
It's just physics. So, we've just released and announced at Mobile World Congress, again, switched adapter that will actually put out about 45 watts in the same space as that 25 watt adapter that is out there today. But you can see with each generation, the power per cubic inch or space on that adapter is going up. And that's what's allowing the evolution on the other side to go from really a 3 amp charger at about 92% efficiency to something we think can be over 10 amps of charging at a very high 98% efficiency. And again, we had a contact charging demonstration that we displayed at Mobile World Congress where we were charging at 8 amps over normal cable and got a lot of attention from some of the handset manufacturers.
USB Type C, it's a very it's going to become a very popular standard. There's a lot of noise around it right now. We believe that we've got the most complete product set in the market for that space. We were the first one with a fully certified super speed 10 gigahertz redriver. That redriver, while that looks like it's an expensive part per node, takes about $4.5 worth of cable out of that smartphone if you really have to deliver data at that speed.
And we've got some handset manufacturers that believe they do. So, it's a great part. We were right on like I said, we were right on time with the market for it. We think that there's about a $1.5 of content in USB Type C per phone for us. Active cabling allows some additional growth.
And as you can see, there's a list of a lot of handset guys that are out there that we've got design wins for already in this space. But it's not just the handset. We have automotive customers that are designing in our USB Type C. We've got computing customers that are designing in our USB Type C. And we think that there's going to be a number of other consumer types of applications where USB Type C is going to be the product of choice going forward.
Talk a little bit now about computing, because Keith mentioned, we have in the past we had a major focus in computing. And as we've seen the computing, we got a nice shot in the arm from Skylake with the increasing content. We're up to about $2.65 a notebook, dollars0 to $0.70 per desktop on that platform. But how are we leveraging that into some growth and some better margin opportunities going forward? Well, really the concept there of multiphase power and coming up with a Vcore solution is goes across a number of markets today.
As the computing power gets more and more intensive in things like mobile and automotive, they want multi phase charging instead of a simple PMIC. Certainly, the cloud space is an opportunity for us with the acquisition of Fairchild and having the point of loads and some of the power in solutions that we have some design ins with and then developing our own digital controller to go with that so we can bring a complete solution to the market. This is what we're using some of those resources Keith mentioned about in the computing side today. We're not going to ignore computing. We've got some really good computing customers.
We still generate a lot of revenue there. Competitive landscape in that space continues to get smaller. So, we think that there's still room there, but not a lot of growth. And it's never going to be a real high margin business. But by taking that multiphase and expanding it into the cloud, you can see from $265 opportunity in our desktop, we've got about $50 worth of opportunity on FURLY.
It's a lot larger content. In automotive, as I mentioned earlier, it's about $8 And that's the PMIC and about 5 Doctor. MOS that go with each one. Looks like a very similar architecture to a PC, but it's got ASO level D functional safety. There is a much higher barrier to entry in that space and we think the margin profile will hold up there a lot longer.
And then in mobile, we're seeing some really high end mobile devices that want 30 watts, 40 amps of charge to light up some of these really bright displays, to do some of the other projector modes, some of the functions in handsets that some of the companies are looking at for differentiation. We believe that we can generate that type of power with some of our multi phase PMICs that we're developing for handsets. So, again, we've had an opportunity to leverage this capability and this skill set, I think into some higher margin and certainly higher dollar content applications. When we were here 2 years ago, we talked about how we were going from discrete parts to ASSPs, some full customs and multi module solutions. As I mentioned today, now we're going into higher level modules and we're developing software application and firmware for some of these things.
We've got product lines now where we have multiple devices. The only differentiation is the software stack or the application layer that we put on for different part numbers. Certainly allows us to leverage our hardware R and D dollars better. And as we go forward, it's changed the mix of our engineering capabilities to more and more software in some of these applications. So, we'll talk about gross margin improvement plans.
Certainly, the top side there is product margin. There are some opportunities. There are a number of products that came over to my shop from the Fairchild space where they were doing 100% of the back end externally. And certainly, our back ends that ON are world class and we've identified some opportunities through some margin expansion there. We're also looking at our internal product as well and looking at some new innovations around test and validating product to make sure we can get quality product to our customer, but not spend as much money in test.
Test is a very non value added function to our customers. They want good product, but whether I spend one second testing it or 10 seconds testing it doesn't matter to them. And so we've actually got some even some innovations and some patents around how we think we're going to be able to reduce the test time significantly and help our margins. Certainly, portfolio management is part of it. As we've gotten larger and larger, we've got more opportunity to maybe do some portfolio pruning, some price increases.
And then, of course, in the new products that we're releasing, we are seeing the opportunity to hold margins longer and keep them through keep them at above corporate average margins for longer of their lifecycle. And there's some factory rationalization. I'm sure Bernard will talk about some of that. But as we move some of these products from 6 inches to 8 inches into some of our larger back end facilities, we're going to see some more opportunities there. On the operating expense, we certainly don't want to give that all back away.
So we actually think that we can do better on the lower side of the chart than we do on the top as far as expansion. There's some synergies that we got with the Fairchild acquisition. There are some opportunities to reassign and reassess where we had some of our R and D teams and how we could go forward and get more value, more return on investment for our design time. There is some direct headcount growth to some of our low cost design centers. We've got design centers in just about every geography of the world now.
And we are allocating the growth or the need for additional headcount in some of our Eastern European and Asian design centers. And then closer collaboration with our customers, more home runs, fewer strikeouts on products that we develop improves our return on investment as well. So, we think all of those things together will not only allow us to keep that 600 basis points, but actually add to that on the operating margin line. So, in summary, we're seeing a ton of growth in automotive and industrial. You've seen some of the exciting products we think we have there and as well as in communications.
Reusing technology and IMP across the fast moving markets. The capabilities that we develop in power management really do scale across the different areas that we have. The RF communication links we can use in multiple types of products. And so, we're seeing a lot of cross selling across even within my group as well as within Bill and Tanner's groups across the company with some of our products. Some disruptive technologies, as I mentioned, we're going to differentiate on power.
We're going to differentiate on power and then integrate it and the integration solution, what we put in our SoCs. And we're going to do that by staying close to these world class customers that we have and making sure that our solution is the right solution for their next product. And we'll execute the margin expansion and we'll synergize the portfolio with the other groups. As I mentioned, having a complete solution for our customers really does add value. And when I can go in with Bill's products in ESD protection, when I'm selling USB Type C, that makes it a better solution.
When I can interface my power rails to Tanner's imagers for the cameras, that makes it a better solution for our customer. Anything that's easier for them to get their products to market faster and they're sure that it's going to work makes us a better supplier for them. That's all. Thank you.
All right. Good morning. My name is Tan Aslikh, I head up the Image Sensor Group. I'm going to talk about some exciting stuff this morning. Our purpose at ISG is to create sensors that can see better than the human eye.
That particular statement that I just said has implications on to a lot of the core characteristics of the sensor design including low light performance, speed, dynamic range, zoom, field of view. So what do I mean by that? Our eyes for instance cannot see in 1,000 frames a second, but our machine vision sensors can actually do that and analyze that turbine for wobble which is basically sometimes the difference between a greatly functioning turbine engine for a long time versus a crash that's unpredicted. The second one is we can't see in low light, in pitch dark conditions, in extreme low light conditions like moonless, starless, nights with overcast. But the sensors that we have in our cars right now are able to do exactly that and save lives.
We don't have wide field of view. But the sensors that we're designing and the lenses that we're putting around the sensors actually can see things like a fisheye can. So it all boils down to 2 things. 1 is human safety and the other one is productivity. So I'm going to focus the rest of the presentation where those 2 hyper growth markets that I'm going to identify matter the most for those 2 components that I just mentioned and where our vision matters the most.
So number 1, ADAS and autonomous driving. Number 2, machine vision itself for industrial applications. So those are 2 things that I'm going to talk about. And they happen to be double digit growth markets for us and have been like that for a while. So for the rest of the presentation, there are 4 things that I want you to take away.
Number 1, we are a leader in automotive image sensor market, which is a market to expect expected to grow about to 24% annually in the next 5 years. 2nd, we have optimized our portfolio with 80% exposure approximately to automotive and industrial. 3rd, we have expanded our margins as you know from 2014 by about 4 points to now and we expand to we plan to expand another 9 points to until 2020. By basically utilizing mix shift like Bob mentioned in his business as well as cost reductions coming through yield improvement and supplier diversification. And the 4th is we decided to get into radar.
So I'll talk to you about how we're going to expand our leadership in ADAS and autonomous driving with sensor fusion. We've always wanted to be and had a goal to be number 1 in mission critical applications. Why? Because it provides us the best gross margins and the best price and power. So we are number 1 in automotive.
We have about 50% market share. Our cameras, our sensors are implemented across the car inside and outside including in cabin driver monitoring systems, mirror placement for improving the aesthetics as well as fuel economy of the car as well as surround view and of course ADAS. In industrial, we're number 1 in many segments, many sub segments of industrial, so including mainstream machine vision, IP security cameras, scanning and specialty industry which includes military and scientific applications. Give an example, our sensors are used in all of the flat panel inspection devices that are utilized in the latest smartphones from Apples and Samsungs of the world. Also they're using IPS systems or intelligent transport systems where you're able to now of course detect the license plates of any vehicles that are going through toll booths, but also look at the number of axles and count them and so you can charge the right toll as the car goes through the tollbooth.
In space, we're number 1. Our sensors are in Mars Rover in Juno Orbiter which is on its mission to Jupiter as you know. And we also have put our satellite sensors into a company called Planet Labs, what I call a constellation of 88 satellites, each of which are a backpack size, weighs about 4.5 kilograms and they just launched in February and added to their fleet which is now 149 satellites. These satellites can survey the entire Earth every day and they're in a mission as a company to what I call democratization of data science and satellite data gathering. So they sell their data for instance to economists and companies for things like tracking the activity on shipping docks in certain regions of the world so they can predict economic activity in that region better.
In medical, we're number 1. We have 41% share. We're in X rays, portable diagnostics as well as digital radiography. But another interesting market that's important for us is the pill cams, which we have a leadership position with our customer Medtronic who has the leadership position in this market, including their competitors nowadays as well. And that market itself is expected to grow to about tens of millions of units for doing endoscopy and colonoscopy in the next 5 years.
So it's going to be a nice growth market for us as well. So in ISG, as I said 82% comes from industrial and automotive, 45% automotive, 37% industrial, specialty is about 18%. Our annualized revenues on a Q4 run rate was $685,000,000 with gross margin of 33%. We closed the year at total of $17,000,000 of revenue. And in automotive, as I said, we have the market and the technology leadership.
And we have as you like to attest to this I finished the presentation the broadest product portfolio as well as the customer base in the world. In industrial, we're number 1, but not only we're number 1 in certain segments, we're actually growing the market by twice even though it's growing in mid to high single digits in certain segments. We have the technology leadership with high speed CMOS, electron multiplying CCD as well as what's called TEC packaging or thermoelectric cooling which is becoming quite important. That's a great example of, for instance, us innovating at the system level where we're taking what they used to do at the module level, cooling thermally and electrically and bring it all the way down to package level, so we can gain more pricing power through that. In specialty, which is basically a segment for us now where we have narrowed the focus down to in consumer, we've decided to focus on areas where we think we're absolutely good at and have an established market position.
For instance, global shutter sensors. We've been selling global shutter sensors into a lot of markets and they happen to be quite important for 2 areas that we think are hypergrowth. Number 1, augmented reality and virtual reality where we have garnered a lot of marquee customers including Facebook, Oculus VR headset which has now 2 of our global shutter sensors in it as well as drones or for instance part of DJI which is a Chinese company you might know has about 50% of the entire drone market. And there's some nascent application that I'll show in IoT there as well. So our strategic intent is fourfold.
Number 1, we'll continue to do what we're good at and that happens to be mission critical applications I mentioned in automotive and industrial. Number 2, we're adding radar capabilities so we can lead the next frontier in autonomous driving with sensor fusion. We plan to expand our margins through OpEx rationalization and operational improvements and our 2020 target model is $850,000,000 42% gross margin. We do believe we can get there confidently. So if you look at the growth opportunities, of course, automotive still presents its largest growth opportunity.
It's growing north of 20% year over year, expect to grow another 20% for the next 5 years. We have outgrown the market for the last 7 years. That's how we increased our share systematically. But major growth drivers are basically in ADAS and NCAP and autonomous driving. NCAP stands for New Car Assessment Program for those who don't know.
It's basically a rating system for the active safety for cars and all three drive huge growth. Industrial, we're number 1 in certain segments as I mentioned before including scanning specialty segments as well as mainstream machine vision and IP security. We have the broadest product portfolio in industrial. So we sell sensors that are anywhere from $1 to tens of 1,000 of dollars and anything in between. So that's one stop shop for our customers.
And in specialty, we are focusing on what we're good at and what we believe are going to be the growth markets that I outlined earlier. So let's look at the automotive market. The car sales are growing at basically the global economy level which is shown in the orange line as you see there. The light blue I guess at the top is showing the attach rates. They're exploding.
We have about 1.2 cameras right now per car going to about 3.5 cameras per car by 2020. The market is tripling itself from $600,000,000 to $800,000,000 A lot of the growth as you see here also in this chart is coming from ADAS. Viewing is also growing because the viewing cameras whether it's rearview and surround view are getting installed into the smaller vehicles as part of the mandate and also of course to drive for people to be able to just have that nice convenience feature that the surround view cameras provide. There's also some nascent but fast growth in 2 areas. 1 is in cabin for driver monitoring which is part of ADAS, but it could also be part of convenience in the car and also mirror placement.
We can actually view now the surroundings of the car whether it's the rearview mirror or side view mirrors better than the human eye can and enable this through a lot of technologies that we have for instance with LED Flicker Mitigation. So it's a nice market for us. Our market share in ADAS is 70% and in total in automotive is about 50%. To be exact it's 50.3%. We've grown our market share since last year by about 2%.
We closed the year at $295,000,000 of revenue, so approximately $300,000,000 We think we're going to get another 20 plus percent growth this year and exit the year at about $400,000,000 of run rate in Q4. So, so far so good. A leading electrical vehicle manufacturer has some hardware out as you might know. And they're also going for a mainstream deployment later this year, which will use the same system. But we now have 9 of our cameras basically the entire camera architecture that they have in their cars.
So 2 for front view, 2 for forward looking side cameras, 2 for rear looking side cameras, 1 for rear view, 2 in cabin, so they look at the driver and 1 mirror placement. Our customers are essentially who's who in the automotive industry. So we have a marquee customer list. There is not a single I think major automotive OEM or Tier 1 that is not our customer. And some of these customers are buying in the tens of 1,000,000 of dollars a year from us.
So of course there's been a lot of attention since the camera deployment is growing and growing, the market is growing in automotive, a lot of companies are trying to get in. But TSR, which is techno systems research, which is basically the most reputable image sensor market research company that particularly tracks automotive image sensors, they just issued their report 2017 in February and they predict based on 2015 to 2017 and based on all the designs that we have in the pipeline that every one of our competitors including Sony, Toshiba, Pixel Plus and others have lost share except for Omnivision which basically is gaining 0.4%. In the same time period, we have gained 3%. Now Bob has talked about this. Keith mentioned it.
I'm sure Bill is going to talk about it also. One of the major reasons that we are successful in this business is that we now offer the entire electronics MOM in the module in cameras. So in addition to image sensors, we have ISPs of course, the in vehicle networking devices that come from Bob's team, power solutions also from Bob's team, signal and protection devices as well as storage devices from Bill's team. So we now can go to market as a unified solution. Why is it important?
Because it can enable us to build the best system solutions and optimize them in power, in size, in cost and customers love that. And second of course is that we can go to market faster and enable them to go to market faster which is also what they like. Now 50% share in a market brings you a lot of power with the ecosystem. So we have a vast network of customers and partners that we work with. So we work with anybody in the lens manufacturing that is a major provider in discrete ISP, SoC providers, security manufacturers as well as independent software houses.
So for instance, the SoC providers like Mobileye and NVIDIA have selected our sensors for their platforms as sensor of choice in the 1 meg space and in the 2 meg space and we continue to work with them quite closely to do that. Tier 1s, before even Tier 1s to see the RFQs sometimes OEMs come to us and show their sensor architecture to verify what they're planning is implementable, Especially with Nowradar we have a better position. And therefore we get their RFQs before even the Tier 1 sees those. So we continue to innovate and we continue to innovate with our ecosystem. One example I'm going to give you about that is where the viewing and the sensing now is emerging and the lines between the 2 are blurring.
So you want to be able to use the cameras that are around the car to be able to do sensing as well. You don't want to have 2 cameras doing separate things. Why do you normally have 2 cameras? Because each of those cameras are typically done for 2 different reasons. 1 is a human vision, so you want to display the results and the other one is a machine vision, you want to just detect an object.
And they happen to use different color filters. 1 is a clear pixel, the other one is a color pixel. So how do you merge them to? We have a technology called ClarityPlus now we're deploying in all of the SoC major SoC manufacturers that pre IP to insert in their processors so they can process that and have one single camera to do ADAS and viewing. So what is the road ahead of us?
What's next? So as foggy as this picture might be, the answer actually lies in this picture. We decided as you probably saw on Monday and announced on Monday, we decided to get into radar. We acquired the millimeter wave assets from IBM with a lot of nice patent portfolio to come with it and people that have had 2 decades of experience in 77 Gigahertz radar deployment. So we're delighted to have them on board and looking forward to expanding our portfolio.
So with that, we're able to go from 9 sensors that I showed you to 19 transceivers, 19 sensors in total with 10 radar transceivers. So it's a huge portfolio expansion operation. Let me show you the numbers. So if you look at level 2 level 1 and level 2 which is on the left all the way up to level 4 which is basically the first instance of being able to drive the cars together. Our SAM now goes from $25 to $200 per car.
That's through radar expansion as well as the camera attach rate expansion and all the components that are around the module in addition to sensors that I do from the with the components that Bob and Bill does. So there are three reasons why we think we're in a better position to lead this market. Number 1, we can reduce energy by basically going to a single pre processing step through a single pre processor versus to what these typically what these systems use. We can eliminate the cabling to have one cable to go from the sensor complex to the central processor which actually has huge implications in size and weight which is obviously a big deal as I think Keith mentioned earlier. And we're able to do better sensing because imaging can give the path of interest to radar and radar can get the path and give the region of interest to imaging.
And as a result of course radar as I showed you in the image is able to see in poor visibility conditions and can detect the range and it can have a better accuracy in doing so. So I think this is going to be a really substantial growth area for us and we plan to lead it. Now how do you become a market leader? You can't do that if you don't have the best in class technology. We have world's best automotive pixel technology, which is the reason that we have had a chance to lead the industry and garner 70% share in ADAS as I mentioned before.
We have processing technologies in LED and image processing like I mentioned before. We own our own CFA and micro lens factory which also is important because then you can innovate at the system level within the sensor stack. We have a package technology called IBGA, stands for Imaging Boll Grid Array, which we had invented about 7 years ago and we have patented that quite thoroughly. And that's now the de facto standard in automotive imaging. We have the widest dynamic range going all the way up to 140 dB.
Stacking enables some new frontiers for us because we can now miniaturize the cameras and we have this already in house and deploy it in different places in the car. We have the global shutter technology. And one last thing is I think we kind of surprised the industry with this also that we have put ASIL compliance circuitry, complex ASIL compliance circuitry on the sensor itself. So all of our new products in ADAS has that technology. We also are putting cyber security because as the cars are getting connected and are able to drive themselves, it's important to secure it properly.
So we're investing big time there. I think we have at least 2 maybe 3 years of leadership there in the industry. So we have 5 sustainable competitive advantages. We have a very strong design win pipeline in the order of $1,000,000,000 north of $1,000,000,000 and we have 3 year visible teams that of course as the design cycles in automotive are longest. We have a robust technology lead as I mentioned.
We have the complete solution as I showed you. And what's more, we're able to produce twice the products per year and have the largest automotive team in imaging in the world. We just you might have seen also the announcement a couple of days ago injected another 50 people in the U. K. Who has decades of experience in designing image sensors.
So we're proud to have them on board as well. And finally, we think we're going to lead the sensor fusion with radar in infusion as I mentioned before and that's a major focus for us going forward. Industrial. Industrial Vision segment is pretty interesting. It has about $600,000,000 of market size going up to about $800,000,000 It's growing in mid to high single digits.
The growth in that market was about 6.5%, But we were able to outpace the growth in that segment and achieved 12% instead of 6.5%. We have both CCD and CMOS which none of our competitors do. And they happen to be important to have both because they have very different characteristics. CCD is still the best in uniformity as well as performance in extreme low light conditions. Python CMOS is very good industry leader in high speed CMOS design and they cover the whole gamut in terms of pricing strategies.
These cameras are using a lot of things, but there are 2 fundamental growth drivers in this market. Number 1, the Industry 4.0 initiative, which a lot of companies are shifting to. And that has to do with robotic factory automation, which is powered by a lot of cameras, plus the artificial intelligence now that's enabled through the cloud. And they're all coming together and changing the way that we manufacture. And second is an initiative which is tied to the first one in China called Made in China by 2025.
And that's basically an initiative in a nutshell to change or convert the Chinese economy from mostly a manufacturing economy today to a service economy. So for instance, Terry Gao who is the CEO of Foxtun has stated publicly that they will automate their factories by about 70% by 2025. So the huge growth, we are the leader in machine vision as I said in mainstream segment and we have a huge force in China. So we're capitalizing on that. The other thing I want to point out as part of the mission critical application portfolio we have is we've been working with a company called ARRI.
You may or may not know this, but if you go to movies and if you watch the credits you'll probably see a lot more of it these days. ARRI, which is a camera company with our sensors called ALLEV has won the Emmy Award in 2013. In 2016, they have won the Academy Award for Scientific and Technology category. So these cameras, Alexa cameras are so popular. They're in of course major producers and directors like Oliver Stone and George Lucas, but also getting into some new producers like Netflix and Amazon's of the world.
And they're used to shoot a lot of the Academy Award winning movies themselves like The Life of Pie, Rebrand and Birdman. So I encourage you to watch the credits and you'll see how prevalent these cameras have become. So we're proud of the fact that now the industry thinks digital is better than film. That's one reason that we're excited about it. Now specialty, again, we've narrowed it down to 2 things.
One is global shutter and the other one is depth sensing. Global shutter is a way to essentially capture the image at the same time, not do it by roll by roll, which is rolling shutters do and it has artifacts. And that sensing is important because then you're able to see with a single sensor and you don't have to deploy 2 sensors to do stereo vision and we can now enable that with a single sensor. So we're in a lot of the fast growth areas that utilize the technology. We have a leadership position in that.
In Global Shutter for instance our efficiencies in these sensors about 4 to 5 times our competitors. So Facebook as I mentioned, Leap Motion, all of these companies that are doing VR headsets like Valve are utilizing our sensors and in drones with DJIs. We're also seeing some new uptick in wearable computing, eyeglasses, you might know Snap Spectacles, as well as some IoT devices like vacuum cleaners that are connected to the Internet as well as refrigerators that wants to put 4 cameras inside, so you can see what's in there when you are in the grocery shop as you're coming home and you stop there. So there's some growth there. Now margin, as I said, we've improved our margin by about 4 points since 2014.
We have another huge opportunity in front of us to improve by about 900 basis points. There are 3 areas that's going to come from. Number 1, we have managed I think mostly dual source almost all components of our supply chain, so front end, back end, probe, final test, etcetera. So that's I think a good progress and we're going to benefit from that. 2nd, we're transitioning to lower cost fabs as well as to lower process lower geometries and smaller process nodes.
So for instance going from 150 nanometers and 200 millimeter or 8 inches wafers to 110 and also to 65 nanometer and 300 millimeter wafers. There's a significant opportunity for us in front of us for yield improvement. So we are doing a lot of things there including fab process improvement as well as binning, which of course a lot of the industry in the processor side has adopted already successfully. And reducing our test times, which is also a pretty big low hanging fruit for us to improve the manufacturing side. On product development, we have a lot of dye shrinks in the plan as well as BOM cost reductions and these things including include for instance reducing the cost of the protective film or of course the package or substrate that goes into the entire image sensor product itself.
And then finally in OpEx, leverage is a big deal in imaging. So you can design a really good image sensor and utilize it everywhere. That has been one of our reasons for success in the past. So we will be doubling down there and we'll of course be tightening our controls on OpEx and rationalize it across the whole group. So with that, I think we'll be able to hit 900 basis points and go up to 42% as I said earlier.
So in summary, we have a leadership position in both automotive and industrial. We have 50% share in automotive. We have the best technology in the portfolio itself. We have a very robust design win pipeline north of $1,000,000,000 as I said. We have the broadest range of customers and partner relationships and we're investing in radar for sensor fusion.
In industrial, we have number 1 position in several sub segments. We're growing above the market. We have the top to bottom portfolios that I mentioned earlier $1 to $10,000 And we have also a very, very robust design pipeline in that segment. So with that, I think we'll be able to get to 42% by 2020. That will come through of course cost reductions and strong OpEx control for the operating margins.
And what's better I think with us as opposed to my competitors say Sony or OmniVision, we're part of a manufacturing company. So we're going to be tapping into the vast manufacturing scale and the logistics networks that Shram and his team have set up for us. So that's all I have. Thank you.
Thanks, Darren. We will take a 15 minute break and reconvene at 9:45 Mountain Time. Thanks. All right, folks. Let's get started.
Let me welcome Bill Hall to the podium.
All right.
Good morning.
I will start out with a warning to the people in the first row. This is my Analyst Day suit and it's 8 years old and the buttons are a little tight on it. So, I know Keith has the opposite problem. But anyway, I got to flip. Here we go.
Okay. So here's you've seen every one of my compatriots have a slogan and ours is new powerhouse and power semiconductors. It sounds a little bit fluffy marketing kind of stuff. But if I was to pick 5 words that best described how my business changed in 1 year, and I was speaking to an adult not using curse words, I would pick new powerhouse and power semiconductors. So, if you look at the landscape a year ago, you had one power discretes and power modules and then a whole lot of mid level guys.
Now 2 mid level guys, one bought another one. Now all of a sudden, you've got 2 guys at the upper echelon of power discretes. And to try to put this in a politically correct way, is giving our customers great comfort to have another big supplier of power discretes and
modules.
Okay. So key takeaways. I kind of just talked about the first one. We are now a powerhouse in power. Number 2, we take margin improvement very seriously and we put as much intellectual innovation into margin solutions as we do into new product solutions.
Number 3, just like Bob and Tanner before me, we're all expanding products into the same three markets. And number 4, in the past, if you look 10 years ago, we were kind of a me too company. And if you look 5 years ago, we were what I would call a fast follower. Now, we're in a much different mode where we are innovating and actually developing disruptive technologies. So in power, it's gallium nitride and silicon carbide, which by the way you may hear me refer to the term wide bandgap, which includes both of those technologies just as a shortcut.
And then eFuse and smart passive sensors, and I'll talk about them in a little more detail. Okay. So what is our strategic intent? So quite simply, we want to narrow the gap as quickly as we can between us and Infineon as the number one supplier. And we want to continue to create more separation between us and the power suppliers that are behind us.
So right now we have good level of separation. We're clearly the strong number 2 supplier. We want to drive more towards that number one position. We'll continue innovating products and technologies. We'll continue fanatical cost reductions, which drive margin improvements.
And so we have a model. Today, we run $2,500,000,000 of revenue at 33% margin. Our model is to get to $2,700,000,000 in 2020 at 38% margin. Quite frankly, the 2 0.7% I think is a very easy number for us to hit. And the 38%, we've proven that we have done that in the past with the past versions of this group.
Okay. So now we're going to look at what does our market now look like? What does our revenue look like by market segment? And you'll notice the 3 key markets, at least they're to my right, yes, they're to your right also. Automotive, communications, industrial is almost 70% of all of our revenue.
That is where we're doing all of our product investment. Consumer and computing, we treat a little more opportunistically. They drive a lot of volume and they help in some of the cycles. But we're focused on new product growth in the pie chart slices on the right. Automotive is our biggest at 25% of revenue.
We have over 7,000 products that are qualified for automotive. Now, I had one of my guys go through the Internet the other day to try to compare that to ST and Infineon and NXP. And the next best guy he could find through using the Internet was at 2,700 parts that were available for the automotive market. And beyond that, it dropped pretty quickly. So again, we have a great portfolio there, probably the biggest portfolio in the world in this space of discrete power and modules.
In communications, we're number 1 in power discretes, so smartphone market. And then the last one on there, and I like to save the best for last, is industrial. A year ago or even months ago, industrial for us was 15% of our total revenue. The big benefit we got by bringing in Fairchild was we moved that number up to 20%. You'll see it more graphically, I want to show you some revenue numbers.
But what was good about it is, it's all new customers for us and it's new products for us. So it is very accretive kind of thing. There's no overlap with our previous industrial business.
All
right. So now, we call ourselves the Power Solutions Group. Simple reason for that is 75% of our revenue comes from Power Products. We spend about 90 percent of our R and D spend on power products. If you look to the left side, you see a pretty complete sampling of the major categories.
The areas that are driving the most revenue and we're investing in the strongest would be different voltage flavors of MOSFETs, rectifiers, various kinds of power modules, IGBTs, wide band gap, again, which is a shortcut for Saint Silicon Carbide and Gallium Nitride and Gate Drivers. So we're now Power Solutions Group and a strong player in that group. Now I'm going to show you the benefits of Fairchild. And it's pretty stunning actually. So if you look at this chart, I think Tanner had a similar one.
In this case, we show every power technology that falls into the power discrete bucket on the left side of this chart across the top, 5 major players. If you see a star, that means that you have top of the market share. So generally, we look at the top 3 or 4 players. If you have a check mark, that means you have portfolio there, but are not in the top 4 players. And then a plus sign means you're investing heavily in that area.
So this is what it looked like last year. Now when we combine ON and Fairchild through the magic of animation, you can see looking down the list, there's a ton of stars now on the on-site versus Infineon who's the 1st column to the right. So what I would contend to you is that on a macro portfolio basis, we have a much bigger portfolio or at least a bigger portfolio than Infineon. So we can go win business from them. Now, I said macro view.
Let's take it down more to a micro view. So this chart focuses on IGBTs and you describe the portfolio between voltage levels and types of packages you put parts in. Here's where Infineon fits. They're widely acknowledged as a strong player in IGBTs. On before we purchased Fairchild, had started investing about 6 years ago on IGBTs.
We have introduced 5 generations of IGBTs in that timeframe. So you see we've made a lot of progress catching up with Infineon. You throw in the Fairchild acquisition and now we have better IGBT coverage than Infineon does. Now, I'll go to something that may be more representative of the power market because it's a much bigger chunk of the revenue and look at MOSFETs. Again, voltage levels are down the left side, packages across the top.
You also see some TAM data. High voltage is about 20% of the market and low and medium voltage reach around 40% of the market. So here's Infineon, widely acknowledged as a leader in MOSFETs, pretty good portfolio. This was on before we purchased Fairchild. We had focused in the low and medium voltage area and done pretty good job.
This is where you add in Fairchild. All of a sudden, we're covering the whole spectrum. And again, I would contend that even at a detailed level, we have a wider portfolio than Infineon. A chart I don't have in here just due to time constraints is I could show you many power efficiency curves and curves that come from our customers who tell us that our latest trench MOSFET technologies and IGBT technologies across various figures of merit for efficiency is better than Finian. So I'm telling you is we have the portfolio that matches Infineon, we have performance that matches them and we're climbing on them in market share.
So, hopefully, you get my point on Infineon. All right. So again, like Bob and Tanner and I think Keith had this, we're focused on 3 segments. In automotive, for me my group, it's definitely the HEVEV category where we're focused. Traditionally, we've been really strong in body and I'll talk about that in a sec.
In Industrial, the 3 big trends that we're developing products around, 1 is alternative energy. You see this driven largely in China due to pollution in China and the money the government keeps pumping more and more dollars into solar energy, opening up big opportunities for us. And we actively sell products to that market today in the form of modules. Next one is industrial motors. Interesting statistic I came across a year or so ago was that 35% of the electricity that supplies the world's needs for electricity goes into industrial motors.
Now in contrast to that, lighting is only 18%. So it's the single biggest category, electrical motors. So it's critical that as a civilization that we improve the energy efficiency of these motors. 3rd on the list is Cloud Power. I think, it was Bob talked about it a little bit in his presentation.
Again, a lot of us think of the cloud as if I look up, there's all these ones and zeros up there somewhere. In reality, it's big rooms filled with servers and disk farms and telecom and datacom equipment. They all require high power and very precise clean power and power that is uninterruptible and so forth. So a lot of our energy goes into parts for that market. And the interesting thing is all three of those industrial markets and EV and body, you're generally using the same technologies, just slightly different topologies and circuit implementations.
Last one is communications. Big one for us is smartphones, wearables and adapters. We play pretty big in power adapters. So, let's go in a little deeper with some of these. So, in automotive, if you look at the chart on the left hand side, and I think Keith actually stole my thunder a little bit.
If you went back to revenue in 2012, we've actually doubled organically in 2012 to 2015 our revenue. And we did that because we decided in 2012 to focus on automotive. Last year, we grew organically 11%. If you throw Fairchild into the mix, it's like another 30% growth. So we're now it's our biggest segment.
It's over $600,000,000 a year in revenue. The key systems we're interested in are powertrain. And as I mentioned earlier, EV and HEV is where we're focused. Interestingly, a lot of people think that is the extent of the electronics that drive a hybrid car or EV car. No, there's also onboard chargers.
There's auxiliary pumps. You used to run air conditioner off a fan belt, you now run it directly from the battery. And there's also things like charging stations in your home. All of these require very high power conversion systems. So things I'll talk about the technologies on the next page.
Body and lighting, traditionally body motors is where we've derived most of our revenue. As Keith said, there's over 100 different motors, little motors in your car that do a variety of things, open doors, let windows roll up and down and so forth. We also are getting into some disruptive areas such as occupancy detection with our SmartPass sensors and a new cabling architecture we call ring architecture with our eFuse technology. And I'll talk about that later. In safety and ADAS, we've long been strong in power steering.
A lot of that strength comes from the Fairchild side. But then big place for us is cameras. And as Tanner pointed out, we have a lot of products that attach to his image sensors to form a camera module. So I'll move to the next page. So the future of automotive, we see the TAM growth in the areas we're investing being around 9% CAGR from 2017 to 2020.
You'd have to do the math yourself there. I don't show it to you. Again, we intend to play big in HEV and EV. The key technologies there today are IGBTs that are in power integrated modules. We also see coming down the line superjunction and wide band gap in silicon carbide and gallium nitride.
So other than the modules, the other things are the switching elements that switch the power. Autonomous driving, big buzzword. The real benefit is driving ADAS adoption very quickly and development of new technologies for ADAS. Again, our major play there is supporting Tanner's products. Each of his cameras or image sensors needs an EPROM to store calibration data.
They also need very clean power rails and we provide that with our advanced LDOs. I'll talk a little bit about the ring cabling system, the kind of unique idea. We've been working with several major automotive OEMs, companies in Michigan, if that helps. And down their value chain or supply chain, so with some of the module makers and guys like that. And so the problem today is most everything in a car is point to point wiring.
So if you want to protect a motor that opens up your rear tailgate, you've got to run wire from the battery to a fuse box, all the way the length of the car to the motor and then all the way back to the battery again. And that causes that puts in a ton of wiring. We have something called eFuse, which is a self resettable fuse. You can put it right at the point of load. So the point, if you want to protect that motor in the back, you put it right next to that device.
Now what that allows you to do is instead of point to point wiring, you run kind of a bus around the car in a ring fashion and you have little stubs off of that bus that will protect have eFuse that will protect the various things that are at the end of those stubs. It'll pull, as Keith said, tens of meters and hundreds of pounds of copper out of the car. And pulling weight out of a car is very critical as it has a direct implication to miles per gallon. And particularly in hybrid cars goes a long way. So that's a disruptive technology that we're trying to drive in the industry.
All right.
Industrial market, we were not a strong player before the purchase of Fairchild. We did have about $200,000,000 of revenue. Annualized in 2016, we're now up to about $500,000,000 of revenue per year. And that's 20% of our total business. The key areas that we are engaging in is solar power, mainly working with Chinese energy Companies and we're in production today and shipping products today.
Cloud Power is another one, which we've talked about already. The key there is how do you get a lot of power in a small space, so power density. And in industrial motors, we've got to improve the efficiency to cut down the amount of electricity that we're using for industrial motors. So the TAM there is growing at about 2%. So that market, the wireless market, which we're including smartphones, iPads, wearables and adapters.
It's about 2% growth. The areas that I talked about earlier were solar, and you can see all the key high power technologies there, power integrated modules, IGBTs, silicon carbide, gallium nitride and so forth. Get into cloud power, it's a lot of the same kind of things, again, just different topologies. Cloud power, in some cases, is lesser levels of power, so you can go to low and medium voltage technologies. Industrial motors, again, similar, very similar kind of products to the first two.
So, I guess the good news there is if you take that stuff and you take EV, we're building portfolios of parts where the knowledge can be reused and tweaked to go into a variety of these kind of applications. In IoT, of course, it's always a great buzz phrase. We do have one area we're kind of excited about and that's our smart passive sensors. So these things are basically think of an RFID device that has 4 sensors built into it. The 4 sensors are pressure, temperature, proximity and moisture.
And so that device requires no battery because like RFID, it actually harvests energy from the device trying to read the data of the sensor. It has a lot of use in automotive. I kind of skipped past it, but like you can weave them into the fabric of a seat, a car seat and it will detect the weight in that seat and whether that weight is a human being or a bag of groceries. So, some pretty neat stuff. We think ultimately it's going to be the Internet of Things that are going to take advantage of this wireless technology that provides a lot of sensory data.
Okay. Communications market, we've had good steady organic growth over the years. We're engaged with all the major suppliers of smartphones. 2016, you see a big drop or a big increase due to Fairchild. Again, we're up to about $600,000,000 of yearly business.
Main areas for us are smartphones. And within smartphones, cameras and biometrics all use image sensors. So we get the attached products, High speed serial interfaces like USB, HDMI, MIPI interfaces, they all require protection, ESD protection, we have devices there. And of course, battery life is a key thing. And you want to be able to charge your batteries and not have them explode on you.
So we have battery FETs that actually assist in that area. Wearables, key there is size, really, and I'll talk about size on the next chart. And then in charging, you have basically there's multiple categories, fast charging, wireless charging, small form factors are the key there. Again, it uses a lot of MOSFETs and typical type power conversion type circuitry. So, the growth of wireless is smaller than the 2 other areas I showed you.
We're looking at about 2% growth between now 2020 and I'm talking about CAGR. Key area is a camera module, again attach rate with Tanner charging and you see FETs, more of the low to medium voltage FETs. You'll see some wide band gap because in the future wide band gap is good because of it provides power conversion because it switches really fast that allows you to use smaller transformers and capacitors and things like that around it. So you can put in the size of a 10 watt adapter, 45 watts of power. It's a game changing technology and adapters.
And then smaller form factors, which I mentioned, it's a key competency of On Semi. It's been that way for 10 years that I've worked here. Couple of key ones would be we have the world's smallest MOSFET, we have the world's smallest EEPROM, we have the world's smallest LDO and we have the world's smallest package for small signal diodes and transistors. And that's the X4 DFN. That one is interesting.
It's actually encapsulated on the wafer. And the size of it, if you look at the cross section area of an X4 DFN part, it's roughly the same area of the cross section of 2 human hairs. So that's how small it is. It's almost undetectable with the human eye. So, I'll get into I think I 2 more slides here and let you get to the fun with Bernard.
So, I'll talk about GaN and silicon carbide. So first off, we have both technologies. One of the great synergies was Fairchild. We were working with GaN. They were working with silicon carbide.
We have a GaN Cascode transistor in the market today. We have a silicon carbide diode in the market today. Next quarter, we'll have a silicon carbide FET in the market. So we're in all those areas. 2 years ago, we were more bullish on GaN.
I think there's a lot of hype about GaN being the better of the technologies. Quite frankly, because silicon carbide has been around longer, is actually beginning to be adopted and we see faster growth there than we do in Gallium Nitride. Still investing in both, but we're going to see most of our growth in the next 3 years come out of silicon carbide. Benefits, I talked about smaller form factors. Another neat one is in automotive, wide band gap materials can tolerate very high temperatures.
So you can actually build a car that doesn't have a liquid cooling system in it. So that's kind of and that would remove quite a bit of weight. All right. 2nd to last slide here. So I want to talk about margin improvement.
I think I just showed you about 7 slides on new product strategy. We spend about 75% of our engineering spend on new products and about 25% on margin improvement. There's 2 categories of margin improvement. The lower one you see is what we call evolutionary. That's the stuff that pretty much the whole industry knows how to do.
The typical go to larger wafers or do die shrinks, go from gold to copper. And that helps us with the every year offsetting the degradation in ASP. But if you want to grow margin, you have to go to revolutionary type margin improvement plans. And we do some things that are fairly unique. A simple one to understand is our high density lead frames.
We have a factory in China that can build 1,000,000,000 units a week of surface mount devices. We happen to use 24 row lead frames, whereas most of our competitors use 10 row, which basically means for every 10 products they make in the same period of time we can make 24, a huge benefit in throughput and cost reduction. Rapid test metallization, this is a new concept where you actually have a metallization layer that connects all the dye on the wafer, so you can test them in parallel, Greatly shortening the test time. Then when you're done, you just etch out that metal layer because it's no longer of use to you. The last one I'll talk about is the bottom one says plasma dicingulation.
This is a technology that only on semiconductor has. And we've had it for a while and it's in fact been in full production for 2 years. Now typically when you want to singulated dye, you see the picture of the wafer there always left. You use mechanical saw and you cut it vertically and then you cut it horizontally and you pull a rectangular die out. With plasma etch, I should say this, with a saw, you have to have a lot of space between dye for that saw to be able to cut down through that gap.
That gap is called the scribe street. When you etch it, you can go to a much smaller scribe street because you're doing it chemically. The other benefit is, if you etch it, you don't have to do rectangles. With a saw, you have to do rectangles. So we can now do hexagonal shaped die or any shaped die.
But benefit to hexagonal is you don't a lot of times we don't use the space in the corner of a rectangular dye. So you're saving all that dye space. And these kind of savings can give us over 20% more dye on a wafer, which is significant. So it's really the evolutionary stuff keeps pace with the ASP reductions, lot of it driven by our operations group. The revolutionary stuff is what enables us to raise our margins.
And our plan is to go from 33% to 38% over the next 3 years. So, summary, we're a leader in power semiconductor market. It's really us and Infineon at the top with a pretty big gap between the next guys. Our portfolio is as strong as Infineon. Our performance parameters are better than Infineon.
We're gaining market share on Infineon. Margin, as I just showed you, is critical to us. We're investing heavily in power technologies, but also in disruptive technologies. And finally, as Bob and Tanner said, we all work really well together in terms of our products. I have products built around Bob's ASICs and I have products built around Tanner's image sensors.
So I think I am done. I think now
Q and A period for the business units. So Bob will antenna.
Okay. How about you?
Thanks for the presentation. It's Mark Lipacis from Jefferies. One question for Bob, one for Tanner. Bob, I think investors group the analog companies into groups by gross margins and there's kind of like a group in the 30% to 40% range and a group in the maybe the 50% to 60% range. I was wondering if you could give us like a view of the competitive landscape.
Percent range? Do you have aspirations to get your margins into that bucket? That's for you. And then for Tanner, you start off your presentation talking about making sensors that can see better than the human eye. And I think you covered that, but just to help me internalize it, if you're just displaying that to the human eye, then maybe you don't get to realize the benefits.
Maybe you could give us a concrete example of how and a sensor that can see better than the human eye, how that manifests in an application in a car that makes it safer? Thank you.
Sure. So I'll this is on. So I'll answer the first question first. On the analog side, we certainly see ourselves competing against the guys that are in that higher echelon margin profile. We don't believe that 45% is the endgame.
That's sort of what we think is a realistic expectation between now 2020. But we have a lot of very high volume products that we're continuing to sell that are sort of a headwind against getting higher than that in the near term. But a lot of the products that we are introducing into the market, we're introducing head to head against that group that you would say is more in that 48% to 55%, 60% kind of market range. And we have a lot of products in that category. But realistically, again, we think that 45 by 2020 is achievable and but I don't think that's our end game.
All right. So let's dissect the question to what I had also mentioned earlier. So if you look at what I mean by better than human eye, there are 4 5 things that I mentioned. So one is speed, the other one is low light, 3rd is dynamic range and 4th is zoom and 5th is field of view. So take low light for instance.
We have sensors right now that can see in extremely dark conditions around the car where you don't have a lot of lighting and extremely bright conditions. I'm talking about conditions, for instance, what happened in the Tesla crash and beyond. I mean, you personally probably realize this when you drive every day. There are certain times that one second or a fraction of a second that you can't see anything. The sun is in your eyes.
Or even if you just put the shade down, it's still too bright for you to see below the shade on the road. So that's dynamic range, very low light to very high light. And we have sensors now that can see better than the human eye. 140 dB is way better than human eye. Take speed.
Human eye can discern about 30 frames a second approximately. We now have sensors basically go up at 90 frames a second. And these are getting deployed today. And we have machine vision sensors that go to 1,000 frames a second. And I think some of that, like hundreds of frames a second, will find its way in automotive, too.
And the reason for that is obvious, but I'll say it. So you can go faster and break sooner if you have a faster sensor, right? That also means saving lives. Field of view, human eye can only see basically 140, 150 degree in a wide angle. We have sensors with, in particular, the technology around the sensor itself, but also lens that can see much wider angle.
So you can see around the car better. So you don't have to deploy as many of them to stitch together and so forth. So those are the examples I would give in that car application that you were asking about.
Thanks for the presentation this morning. Harlan Sur with JPMorgan. In addition to I think it's you've conveyed to us the breadth of the product portfolio, but you've also stressed integration potential as a kind of a key differentiator. And I think one of the things that Keith and Bernard have talked about over the last few quarters is the success with the power integrated modules, especially in solar and some of the heavy industrial motor segments of the market. So maybe for those of us who don't understand quite understand what these power modules are, give us a quick overview of that.
But more importantly, what is the dollar content capture relative to just selling discrete components and the potential margin profile? And is this new product segment one of the faster growing segments within your product portfolio?
Okay. So I'll try to remember all those questions. And maybe like Keith, I'll go in reverse order. So, the profile is definitely growing very, very fast for us because largely because of the pollution issues in China. So the first market that we've really gotten into quickly is into solar applications.
The ASP of those devices, they're somewhat simplistic power integrated modules and they're in the $30, $40 range. A power integrated module basically is either IGBTs or MOSFETs, some switching technology that's in a half bridge or full bridge topology, has some diodes sprinkled in there. And but generally what differentiates them from other modules is that they take very high levels of current and voltage. So you can go up to 1700 volts, they can handle up to 300 amps of current, you're talking about a lot of power. We happen to I would say, hate to use the word luck, but there was a neat intersection of we had the right IGBT technology and the right pins at exactly and a customer who has been a traditionally strong customer for us in China that all at the same time that customer needed to rapidly get a lot of PIMs out of us to meet Chinese government orders.
So that's been a great opportunity for us. We intend to expand more into motor control and then more into automotive, but that's kind of the landscape of the PIM. The highest price PIMs I've seen, you get into HEV and EV and you're looking at $200 PIMs. Great.
Thank you. Just one follow-up question. In trying to tie some of the themes that you've been talking here at the product level to kind of the trends in the end markets, One of the things in the cloud and data center segment of the market that is going to happen either this year or next year is the move to 48 volt power in the data center. I'm just wondering how is the team do you think it's going to be a trend that starts to fire this year and how does the ON team benefit from this?
Well, I think that both Bill and my groups benefit from that because of some of the higher voltage MOSFET and higher voltage, higher current carrying capability products that we have. Again, one of the areas that our teams work very closely together is whether it's a point of load that I developed for the cloud guys with all of the intelligence or whether it's discrete or a FIM type of product, we work together in the same MOSFET technologies and we work with our customers very carefully. I don't think it's going to be this year, at least not in a sort of major scale, But I think we're well positioned for that ramp and that transition when
it does come.
I think another additional answer to that question is that we have everything from discrete pins, I mean discrete MOSFETs all the way up to Bob's high end smart FETs and Doctor. MOS and all that kind of stuff. So we give our customers a variety of ways to create the same kind of circuit basically.
Guys. It's Pierre Ross Seymore from Deutsche Bank. Tanner, a question for you. Actually, two questions, but they're both on competition. First, in your lead in the automotive space, 50% market share, etcetera.
For a long time, your competition was focusing on the consumer side and handsets. And you guys, for one reason or another, start focusing on auto much, much earlier. So you have a dominant position now. Have you seen the design win share change as they started to focus away from the handsets as that market slows, I would assume they're looking at autos as well. You wouldn't see it in the market share revenue today, but you might see it in the design activity.
That's the first question. The second one is on the RF or excuse me, on the radar side of things. Just talk about the competitive advantage you might have because there's some pretty strong incumbents already in that space. So how does adding that capability, how can you differentiate versus the Infineon, the NXPs, FTs, ADIs, etcetera?
That's right. So start with the first one. Yes, and we track this very, very closely. That's why I mentioned that our design pipeline has increased. In fact, it has increased dramatically.
There are several reasons for that. I think our stickiness is getting is mattering more and more. We measure this as I said in the company quite closely. So it's over $1,000,000,000 We have 3 year visibility. Automotive is a huge long design cycle as you know.
So yes, competitors are coming in, but this stickiness and long design cycles are actually working to our favor because and that's why I showed the partner ecosystem because we have a huge footprint in the whole partner ecosystem and are in these reference designs from Mobileye's and NVIDIA's of the world as well as lens manufacturers ISP providers, SerDes providers. I mean TI is building cameras with our stuff in them. Imagine that, right, as a competitor of our company. So that's working to our favor. The other thing is that even though the competitors are coming in from a different space and they're focusing on it, they're still number one priority is mobile.
I mean if anything happened capacity shortage whatever or design resources, Sony is still focused on Apple and the rest of the mobile industry. OmniVision the same way because they earn their money there. And so I hope you got this through the presentation, but imaging is one of these markets that is incredibly open to innovation. It is not a commodity and it's nowhere near being a commodity at all. So that's why I mentioned and opened the speech with the stuff that we work on and why being better than the human eye matters a lot.
So as long as you can keep the pace and innovate better and focus on it like crazy maniacally, think we'll continue to pull away. And one strategy there we did was with radar. Now second question, why are we getting into radar? We believe, again, as I said, to be able to drive the cars autonomously, you need multiple sensors. Imaging is not going to be enough.
In fact, LiDAR will be there as well. And even including far infrared imaging, which I also showed on one of the slides, to detect human beings as well as like pedestrians as well as animals on their own, right? In radar, there are incumbents like you said. But if you believe in the story of sensor fusion, which I think almost everybody believes in, it's going to matter how you fuse them, right? None of these competitors that we have NXPs of the world, other players have imaging.
And if you believe in sensor fusion and a lot of processing or pre processing has to be done near the sensor, so you can cut down on other things like I showed weight of the cable, size of the module, the number of processors you need to do you need to have, which means lower cost and lower power, as I explained. And also fuse them so that you can use data from 1 to benefit the other one and vice versa, you're going to do a better job, right? So our 50% market share gives us a footprint with all the ecosystem partners right now. And believe me, they're all looking into radar or developing radar. You're an example, publicly informed, Delphi, huge on radar, huge on imaging.
They're huge on Mobileye too. And they're basically fusing. And it's just one of the examples of the customer that we'll be working with together. So we believe there's huge potential room for strategy and getting ourselves in into radar with definitive architectural changes where we can combine the chips differently and have cost reduction, weight reduction and power reduction.
This is Steve Smiggy with Ramey James. Two questions. One for Bill. In your comparison relative to Infineon, do you sense customers will start to view you 2 guys as the main players and others will have a harder time competing? Or is it still relatively competitive there?
And then for Bob, I was hoping you could comment a little bit on the lighting market for automotive. A number of your competitors talk about opportunities in that market. Do you feel with your suite you'll be the dominant player even with the competition or is the market just expanding so quickly there's expanding pie for everybody? Thanks.
So, my answer to your question about would our customers be consolidating around us and Infineon as their 2 major suppliers. When we first looked at this thing Infineon has market share here, us plus Fairchild are here and everybody else is down here. My thoughts were that it was going to be a clear Infineon and On would be the 2 top guys and all these little guys are going to lose share to us. What we found, which surprised me, even before we the purchase went through and then after the purchase went through was that customers are actually looking for another competitor that they could leverage against Infineon. So, they've become too, I guess, too dominant and wanted to have an alternative to Infineon in the marketplace.
Vijay from Mizuho.
Sorry.
I'm sorry.
Can you repeat your question again? I
was just
on LED lighting.
Okay. Yes, yes, yes. So on LED lighting, we do think we're going to continue to be 1 of the, if not the top guy, 1 of the top 2 guys. Again, a little bit like in Tanner's space, we're currently working with so many of the front lighting guys today, geographically all over the world. We know, for example, that our next generation products are already designed in to the top automotive lighting guys for their next generation products.
And as I mentioned, it's not just my power buck boosts and pixel controllers, but it's the FETs from Bill's group and it's really a complete lighting solution. So we know we're going to maintain share certainly in the next or gain share in the next generation. But there are a lot of players that have certainly turned their eye to that space. And I think that while it will continue to grow, I think we'll have to stay on top of it. We're already introducing our 5th generation products to some of our early adopter customers and we're working with them on their next platforms beyond the one that's not even in cars yet.
So I think we've got a good roadmap and a good technology path. We've got good teaching customers that are helping us stay ahead of some of our competitors. But certainly, the pie is too big there the competition not to be putting a lot of energy there.
Great. Thanks. Vijay from Mizuho. Just a question for Tanner. You mentioned you bought a millimeter wave you had a millimeter wave radar acquisition.
When you see the first camera plus radar products hit the market? And you talked about processor players. Are you working with who are the big processors you're working with? Are there Intels, NVIDIA's mobilized? And do you see those products come out?
And one last question for the group. You guys talked about gross margin expansion in all the segments. How much of that is dependent on revenue versus product refinements? If you have revenues flattish, can you still drive margin improvements across all the segments? Thanks.
All right. So I'll answer my questions first. The what was the first question? I forgot. RADAR.
RADAR. Yes. So 2019 is the time frame for that. 2019 is the first time frame that you'll see a radar product from us in the market. That will be fused with image sensors.
So of course we're selling image sensors that we're going to be preparing the processors especially the co processors that we design which is sitting right next to the ISP sorry sensor in the form of an ISP to be able to enable the radar fusion. So 2019 and are we working with all the SoC providers? Yes, with all of the ones that you mentioned, so Mobileye, NVIDIA, Intel. Mobileye, of course, were in production already, had been forever since the beginning. We are in their next generation designs with the 2 meg, which is the next big frontier with NCAP driving that in a big way with a wide field of view.
NVIDIA, we're in their platform. They have chosen us as a sensor of choice also for 2 meg. And I think the first production with NVIDIA systems will be this year later this year. Intel, we're also partnering with them. And there's some developments that we're doing with them in Europe.
So we're engaged everywhere.
Thanks.
So I'll take a shot at your second question, which I think was, do we rely heavily on market cycles to improve margins. So, of course, there's no doubt that in an upmarket factories get more utilized and our margins get better. Our strategy going into every year is not looking at what's the market going to do and planning around that in terms of cost
control.
Our operations group with Mr. Schram over here, they have a goal to take out 6% per year no matter what the market is doing and that compensates an average of 6% per year of ASP reduction. My guys tend to be working more of these the revolutionary projects. They're trying to get another 4% per year regardless of what the market is doing in order for us to grow margin. So, yes, it becomes a harder in the down market and it becomes a lot easier in an up market, but we don't plan or strategize or depend on the market to hit these kind of plants.
Yes. And I'd say from my space, it's very similar. We've got very specific margin enhancement programs that are targeted around. If you looked at the revenue growth numbers that we put up on our slides, they're significantly below some of the TAM and SAM growth in some of the markets that we targeted. So we're really not counting on wild optimism in the space of revenue growth to get to these gross margin improvements.
We think that specific programs with specific I mean, some of them are down to 10 basis points from this. I mean, and these are programs that we measure our teams against every month and make sure that we're on track for. So those things will happen. If we get a little tailwind from the market, then that just makes things easier.
Yes. And kind of a follow on answer. I know you asked follow on questions. I guess I can do a follow on answer. We have a group within my organization that's just chartered with cost reduction.
And they run right now we're running about 7 major programs, okay, aimed at specific technologies. Within each program, there's anywhere from 10 to 20 projects of things they're doing to try to improve that. So, it's a big deal. It's not just 5 product engineers in a quarter trying to in a corner trying to get rid of dogs or something like that.
Thanks for the presentation, guys. This is David Aberle on for Chris Rolland of Susquehanna.
Can we talk a little bit
more about the wireless charging opportunity? There's increasing expectations in the market of the biggest handset player kind of adopting a solution maybe in the near term. If this happens, how do you believe that would influence the ecosystem in wireless charging? And would your expectations be for other smartphone makers to follow suit in the near term? And then secondly on that opportunity, I believe you guys have historically focused on magnetic resonance rather than magnetic induction.
What's your current view of which way the market
is heading between those two technologies?
Okay. Yes, certainly, if the world's largest handset maker does have wireless charging in their next product, it will accelerate adoption I think across the board. I think that people have been kind of waiting for a stimulus like that in wireless charging. There are still a number of standards out there and there it may be induction. We still believe that there are some there's some room in induction charging, but we believe that resonant charging is a better solution long term and that the ecosystem will migrate to that.
In response to that, what we're doing though is we're introducing some Tri Mode products right now that are will work both with induction as well as magnetic resonance because we think that the there will be infrastructure put in place if our friends in Cupertino do put in wireless charging and its induction. There will be a lot of infrastructure put in place to support that. And we will see we'll want to be able to take advantage of that as well. That said, we are starting to see some pickup from some other people on resonance charging. We've gotten some new board members recently or some new members recently in the AirFuel Alliance that I think are an indication that there are some people that are starting to get on board with Resonant as well.
But to your point, our roadmap has gone from being sort of singularly focused around Resonant to acknowledging that we need to have a Tri Mode product in the market, particularly for automotive because they're going to want to they want a solution that works for everybody. So we're working with some of the automotive guys on Tri Mode transmit solutions as well.
Any more questions for the team? Thank you, guys. Now it's time for the most anticipated presentation of the day.
Hello.
Thank you, Praj. You're putting the pressure on. Appreciate that. I'll keep this short and sweet. Key message very simply: free cash flow, free cash flow, free cash flow.
We are really intensely focusing on free cash flow. We are going to drive that through operating leverage, and I'll show you now a lot more details on how we intend to do that. I'm going to start with the 4 key takeaways, so you have the answer before you look at the details. We are providing a target model with a 40% gross margin and a 19% operating margin. As was mentioned throughout the presentations and in the question and answer session, the assumptions that we put in there for revenue, we believe, are pretty modest.
We think in our internal plans are to do better than that, but we wanted to be grounded on something that was credible and that we could achieve. And I'll go into more detail into the model. Number 2, free cash flow growth. That's the key message. All of this model at the end translates into how much cash we can generate, and we are very excited.
At the bottom, you can see in green, we expect to generate $900,000,000 or in excess of $900,000,000 of cash by 2020. I mentioned it already. A lot of it is without revenue growth. We'll show you the details. We can achieve a lot of margin and operating leverage expansion without revenue growth, but obviously, we will pursue the revenue growth actively to make it even better.
I'm going to show some increased synergy targets for Fairchild. As was mentioned by Keith in his presentation, we are extremely happy with how Fairchild is going and we're to a point where we can show some raising of our synergy targets that are reflected in the target model. And 4th, after we generate all of this cash, the question is what do we do with all of this cash? So I'll show you some more details on that. Fundamentally, initially, our goal is to use the cash and the incremental cash flow that we generate to delever to about 2 times net and then we should be able to get back to a shareholder return policy.
Again, these are the different topics I'll cover. 1st, Fairchild synergies. We have talked about those in relation to 2015 base. Our numbers were originally 150, then we increased it to 160 when we announced the deal. That's an exiting velocity for 2017, going to 200 for 'eighteen and going to 225 for 'nineteen.
We have upped that now to an exiting velocity of 180 at the end of 'seventeen, 220 at the end of 'eighteen, and 245 at the end of 'nineteen. Most of the improvement is coming on the COGS side, not that much on the OpEx side. On the OpEx side, we're very happy that we have been able to accelerate those and do them earlier than we thought that the number is about the same. The incremental amounts come from more synergies that we can get on the COGS side. The target model is based on a $5,600,000,000 of revenue, which is approximately a 3% CAGR.
And I'll show some detail on that in the next chart, drives to 40% gross margin, gets some operating leverage on operating expenses down to 21% and it translates into 19% operating margin. By the year 2020, that represents a non GAAP EPS of $2 and a free cash flow in excess of $900,000,000 Now I'm going to go into some of the assumptions and the transitions as to where we go from where we are right now to this target model. As Wes discussed earlier, here are our assumptions that went into the model for the end market growth, automotive being the strongest in the high single digits, 7% to 9% industrial, a little bit more GDP like at 3% to 5% communications at 2% to 4% and the QN markets we are focused the least on, we are expecting those to decline over the next 3 to 4 years. Bottom line, when we look at this, it gives us about a 3% CAGR, and that assumes kind of an industry CAGR in that 1.5% to 2%. So it's again fairly modest industry assumptions.
We think we'll outgrow that. Obviously, our internal plans are to do much stronger than that. Gross margin, and by the way, one of the things I failed to mention on the previous chart, all of our comparisons are against Q4 'sixteen annualized, which is the first time we have Fairchild as a full quarter so that we can make apples to apples comparisons. Gross margin, we are in the 35% range. So we're actually 35.2% in our last printed quarter.
We intend to grow it to 40%. And here you can see which ones are the main contributing factors. Manufacturing efficiencies, and you heard some of those mentioned by BU peers today. Includes in sourcing, but it also includes test time reductions and some of the revolutionary changes that Bill talked about or some of the yield improvements that Tanner talked about. So, in general, we should expect about 80 bps coming from manufacturing efficiencies.
Mix, we should get about 90 bps, and I'll show some chart in a second. Fall through, indeed, with a 3% fall through, we still get 150 basis points on the incremental revenue. So basically, what it says, it says, if there is no revenue at all, we should still be able to get to 38.5% gross margin with 0 absolutely 0 growth. And obviously, the flip side is the same. If the revenues grow higher than 3%, we should be able to outgrow the 40% or achieve the 40% earlier.
Manufacturing consolidation, since we acquired Fairchild, we have been talking about the fact that we are going to be doing some consolidations and that should give us about 120 basis points of the transition to get to the 40%. And last but not least, we have included a modest amount of divestitures. It's less than $100,000,000 but that should give us also an incremental 40 bps of help. We're obviously looking at more, if we can do more, but right now, that's what we have played into our model. On the manufacturing consolidation front, currently, we have 9 major fabs.
4 are 8 inches and 5 are 6 inches We are going to continue moving over time to more 8 inches and consolidating our 6 inches network. We think that just putting numbers on the path consolidation, it's about a $60,000,000 opportunity that we should be starting to get by 2019. On the back end, manufacturing, it is extremely efficient operation. We produce 70,000,000,000 units a year. The Fairchild had been outsourcing some of their materials.
And as a result, we have nice opportunities in bringing that in. And the savings on that should be about $20,000,000 just on the pure in sourcing. Plus as we talked about there is other operational savings that we are actively working on. On the mix front, we are already a pretty sizable amount of our revenues are in the 3 end markets we like, which typically have above corporate average gross margins, but we still expect to continue growing that. So, we are at 70% today in terms of Automotive, Industrial Communications, and that should be growing to about 82% by 2020 with consumer and computing shrinking down to about 18%.
And we did the granular calculation at the detail level, and that yielded about 90 bps of contribution to the improvement in gross margin and operating margin. On the operating margin front, we exited Q4 'sixteen at 12.9%. Our target is 19%. So we need about a little bit in excess of 6% to achieve our target. And I already talked about the details, about 480 bps come from the gross margin front, but we still expect to obtain some leverage on our operating expenses or operating leverage.
About 60 bps come from the revenue growth, the 3% that we put in there. And about 70 bps are the conclusion of the different synergy projects we have in place for the Fairchild acquisition. Operating expenses. Our model there is, obviously, we do have synergies, but also our model is that we expect them to grow at about half of the pace of revenue growth. So, it's modulated based on what happens with revenue, and we should still obtain a fall through or a leverage as a result of growing at about half the pace of the revenue growth.
And as you can see on the historical, we do have a good track record of having reduced that from about 24% to already 22% and we'll keep going down to 21% over the next several years. Now if you translate that into what is the free cash flow model, the operating cash flow, we expect that to be in the 21% to 23% range. By 2020, interest expense is expected to be in the $100,000,000 to $110,000,000 Obviously, there is a external factor there. It depends what happened with interest rates. That could swing the numbers up or down, but we think that that's a pretty reasonable assumption.
Our cash tax rate, we expect by that time to be around 12%. I have another chart on that one. We keep we'll keep our capital expenditures in the same 6% to 7% model that we have had. We believe that's a very good and sound model. It allows us to source equipment in many cases for the front end on the used market and get another 10 or 15 years of mileage on that equipment.
And therefore, it's a pretty efficient way to do it. We also have our Fujitsu joint venture in which we can get the increased capacity at a pretty cost effective way. So, we expect capital expenditures to remain in that 6% to 7%. And right now, P and L and CapEx are pretty much the same. So the depreciation is expected to follow through and be the same case.
That translates when you get all of that, that translates into a free cash flow yield of 15% to 17% of revenue. So we are really on track. We had a we have always talked about the fact that we expect to do about $500,000,000 of free cash flow in 2017, substantially up from where we were in past years. But with the Fairchild synergies, with the operating leverage, with all the operating improvements and the disciplined capital spending, we believe we are on track to go much higher and to achieve the target of €900,000,000 by 2020. Addressing the question about really what's the revenue going to do and what it's not going to do, we decided to add a chart that shows really sensitivity to a 2020 model for different levels of revenue all the way from 0% to 6%.
Obviously, the middle one is the one that we chose as the model, but here you can pick your flavor and see the different metrics and what it does at different revenue levels. You can see that with no revenue growth, you still achieve in excess of $1.50 and 38.5 percent gross margin with $734,000,000 of free cash flow in 2020. And on the flip side, you can go to much more verified levels if you go to 6%. So when we look at that, we feel pretty good about them all. We feel pretty good that we have a plan that's grounded on a very good set of actions and plans, and that is not that does not only depend on what happens with the external market.
We have talked about aggressively delevering the balance sheet. These are the towers of the maturities we have right now. We did already redeem a convert instrument in the month of January that reduced our gross debt. Obviously, we didn't do too much on our net debt since we had to use cash. We intend, as we have said multiple times, to get down to 2 times net leverage.
We also have, just to be on the safe side, the $600,000,000 untapped, undrawn revolver to be used in whenever we need it. And we also we like to operate around $500,000,000 of cash to be really in a safe place. Capital deployment, we expect to achieve that 2 times leverage within the by the middle or half or second half of twenty eighteen, after which we expect to go back to returning cash to shareholders, the flavor of which we have still to decide whether it's share buybacks or a dividend, but it's in the plans. As Keith mentioned, we are not averse to acquisitions, but if we do acquisitions, they do have to have a very compelling financial and strategic intent. And last but not least, we do have a sufficient amount of cash in the U.
S. Or excess thereof. We have on point number 2 about $1,800,000,000 of offshore cash can be repatriated because of all the NOLs that we have and the capital structure the tax structure that we have. Talking about that on the tax front, we are running about 10% in 2017 on a cash tax basis. Will be going to about 12% for the years subsequent.
We get a lot of questions about what is our position with impending or possible changes in tax and tax code. In general, we support it. In general, we think it's something that will be good for the industry and good for us. We are a net exporter out of the U. S.
So, we think that we are in a position to really be in a good take good advantage of any reform that can happen. If I summarize what I've presented, really the key point is a steep acceleration in free cash flow going to that $900,000,000 target for 2020, getting a lot of margin expansions through synergies and operational improvements, not depending that much on revenue growth to achieve the targets, but obviously we'll pursue it and it should help. And we have raised the Fairchild synergy targets. We believe that we're now in a position to recognize a little bit more towards the achievement of that target. And we will be aggressively delevering and then follow that with shareholder returns.
Short and sweet, that's what I have. Now I'll open it up for questions and answers, not only for me, but for any others that you might have. Yes, Ross?
Hi, Bernard. Thanks for the presentation. Two quick ones. First one is the same one I asked Keith. ASPs, how does that play into the gross margin targets you have, especially with the mix change and consolidation you're seeing?
So, the basic assumption is still the same 6%. We didn't play on anything different and we have the same operational normal day to day cost reductions that Bill's team put in place to offset that. And all of the other are complementary additional programs that will yield margin improvements. So it's we didn't assume that consolidation or anything would give us more pricing power. Obviously, if it comes, great, it will be better.
Then the second one, which hopefully is just as quick. On the CapEx to revenue side, the 6% to 7%, if you're consolidating fabs the future and I know that's a few years out does that change the 6% to 7%?
We don't believe so. We do have still needs to fuel capacity. To your point about the 6% or the ASP decline even though the top line doesn't go up the units go up in the same 6% to 10% proportion even without growth in revenue.
Hi, Yes. This is Craig. Craig Enback with Morgan Stanley. Just a question on the computing consumer outlook. How much is that a reflection of just you have a much bigger opportunity set with Fairchild now and you're looking to be more selective versus just how you're viewing those end markets?
So in general, we view those end markets are being mature. The margin profile is not great. So, in that sense, yes, we'll be focusing less on those and that might mean that we may be a little bit more selective. We are going to pursue areas like server. That's an area that is something that we think is worthwhile.
But in general terms, our R and D dollars are going to the other three areas and therefore we don't expect to have a significant push in consumer and computing. Yes Steve? Yes.
Bernard on the upside case for revenue is the 6% is that 3.5% GDP? Is that what gets you there? And is it the right way to think about revenue opportunity, maybe 2 times GDP or something like that? I mean, you've got a lot of drivers, but still seems like it takes a big macro.
That's a tough one to answer. It's we have the right to do correlations between GDP and end markets. And indeed, around 3 or so is where things don't are not that good. Probably something in that neighborhood could drive the market to be in that 3.5% should probably drive top line to be much faster. It's difficult.
Yes?
Hey, Bernard. Mike McConnell, Pacific Crest. On Fairchild with the higher synergies, one thing we haven't heard today was kind of the plan for their distribution network. My understanding was you guys were looking at maybe consolidating that. And how should we think about that?
Would that drive more upside to the synergies? And would that be more top line or margins? Thank you.
I think it will be more on the top line. We our sales force and our sales team are actively working on doing a consolidation of distribution. Fairchild had greater than 60% of their revenues going through this. We had more like 50 something. We think partnering with distributors now is a very good thing.
With $3,000,000,000 of our revenue flowing through our disty channel, we have become a partner with distribution and we're getting a bigger share of Mynd and hopefully it translates into a bigger share of wallet. So, we think it's more increased top line than really cost savings from the there might be some minor by having less distributors to deal with. But in general terms, it's more the opportunity to partner up to get more design win activity and more top line. Yes, Chris?
It doesn't look like it's on.
It's on. Just two questions. One is, within the 3% growth rate that you talked about, how much is portfolio pruning contributing to that? In other words, with the bigger scale from Fairchild, you could be a little more selective. Maybe talk a little bit about that and how that affects the overall growth rate?
Also in your presentation,
can give some background about where your head is right now, If you
could give some background about where your head is right now and where you might prioritize between buyback, dividend and then debt reduction below 2 times? Yes.
So, first question, that was on the
On portfolio pruning. On portfolio pruning, yes.
So by virtue of assuming a decline in some of the end market revenue, we are de facto including some pruning. We also played in a small set of divestitures in the numbers, so that's also played in. But it's and it's more a function of that, of really focusing intensely on growing those end markets that we believe in and that have better gross margins and refocusing the others. In relation to the dividend versus share buyback that's more a discussion with our board understanding. We do have a share buyback program that we got approval for, for $1,000,000,000 and we have used about 300 and something of that.
So we have an avenue to immediately go back to that. Going below 2 times net leverage, we will look at that. But in general terms, I think it's probably better use of our money to return it to shareholders than to go below 2. We think that 2 is a level that we will feel that we feel comfortable at and gives us the flexibility to do up or down if we need to.
Hi, Sean Harrison Longbow. Two questions.
If my math is right, you had about $2,500,000,000 debt exiting the year and about $1,000,000,000 of run rate EBITDA. So I'd expect probably at least $500,000,000 of free cash flow or more this year is what you've offered up. So why wouldn't you be at 2 times net leverage entering 2018 and you could start next year with a return to cash to shareholders? And then the second being just the upside synergy target.
Where are
we at right now? Or where should we be exiting the March quarter in terms of Fairchild synergies just on a run rate?
So the first question, our total gross debt at the end of the year was $3,600,000,000 not $2,500,000,000 So 2.5 net my
bad or 2.5 net debt.
Yes. Well and so we should be able to get earlier. And obviously as soon as we get there is when we'll reinstitute our buyback programs. Right now, we'd say it's somewhere in 2018. The second question was?
Where should where will you
be at in terms of Fairchild Synergies exiting the March quarter on an annualized run rate basis?
It's we are probably a little bit still ahead of the Remember we said that we were going to get about $160,000,000 Now we said $180,000,000 by the end of 2018 of which 130 $1,000,000 is OpEx. So we're probably already something in that $140,000,000 or so at the end of Q1 approximately. Any further questions?
Great. Sorry if I missed this. But just in terms of bringing Fairchild stuff in house, I think one of the reasons they had outsourced some stuff or left it outside was they were trying to smooth out margin over the course of economic cycles. And so I'm just curious, is the opportunity better to bring that in house and that's the decision? Or how should I be thinking about the cycle versus actual margin?
Yes. We think our model which right now is our model has been eighty-twenty allows still allows for that to buffer yourself in cycles up and down. But SEARCHAR actually had moved 50% of their back end outside. And the main reason is that they didn't have the size and scale. They closed down their Panam factory where they had a lot of that back end and outsourced that because they didn't have enough volume.
We have $70,000,000,000 that we flow through our factories. In that sense, we have typically much better cost than what the subcons have. We don't have to pay them the profit. We can pocket it ourselves. So using a 20eighty, it still allows for that management of the cycle and moving capacity in and out depending on where you are in the cycle, but not fifty-fifty.
In the past year, we talked about returning cash back through dividends as well. And in that 80% of free cash flow, is there a possibility of getting post 2018, is there a possibility of getting a chunk of that through dividend?
Yes, it is a very real possibility. It still has to be decided with the Board, but it is a possibility, a very real one.