Good day, ladies and gentlemen, and welcome to the ON Semiconductor Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. I would now like to introduce your host for today's conference, Mr. Parag Igerwal, Vice President, Investor Relations and Corporate Development.
Please go ahead, sir.
Thank you, Christy. Good morning and thank you for joining ON Semiconductor Corporation's Q2 2016 quarterly results conference call. I'm joined today by Keith Jackson, our President and CEO and Bernard Gutmann, our CFO. This call is being webcast on the Investors section of our website atwww.www.allgeme.com. A replay will be available on our website approximately 1 hour following the dry broadcast and will continue to be available for approximately 30 days following this conference call, along with our earnings release for the Q2 of 20 50.
The script for today's call is posted on our website. Additional information related to our end markets, business segments, geographies, channels and shared thought is also posted on our website. Our earnings release and this presentation include certain non GAAP financial measures. Reconciliation of these non GAAP financial measures to most directly comparable measures under GAAP are in our earnings release, which is posted separately on our website in the Investors section. During the course of this conference call, we will make projections or other forward looking statements regarding future events or the future financial performance of the company.
The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should or similar expressions are intended to identify forward looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from the projections. Important factors which can affect our business, including factors that could cause actual results to differ from our forward looking statements are described in our Form 10ks, Form 10 Qs and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the Q2 of 2016. Our estimates may change, and the company assumes no obligation to update forward looking statements to reflect actual results, change assumptions or other factors, except as required by the law.
During the Q3, we will be attending the Citi Technology Conference in New York on September 7 and Deutsche Bank Technology Conference in Las Vegas on September 14. Now, let me turn it over to Bernard Gutmann, who will provide an overview of the Q2 20 16 results. Bernard? Thank you, Parag, and thank you everyone for joining us today. Let me start by providing an update on overall business results.
We posted yet another quarter of strong business results, driven by continued focus on expanding margin and maintaining strong cost discipline. We delivered strong gross margin and operating margin performance and our revenue exceeded the high end of our guidance for the Q2. As I indicated in our earnings call for the Q1, we continue to work on optimization of our business, manufacturing footprint and cost structure with an objective of achieving our target model. We believe that our margins have significant headroom to improve from current levels and we have levers that we can pull to improve our profitability, even if revenue growth lags our expectations due to macroeconomic factors. We will provide additional details as specific business improvement measures are implemented.
Now let me provide you additional details on our second quarter 2016 results. ON Semiconductor today announced that total revenues for the Q2 of 2016 was approximately $878,000,000 an increase of approximately 7% as compared to the Q1 of 2016. GAAP net income for the 2nd quarter was $0.06 per diluted share. Excluding the impact of amortization of intangibles and restructuring, prefunding interest related to our acquisition of Fairchild and other special items, non GAAP net income for the Q2 was $0.21 per diluted share. GAAP and non GAAP gross margin for the 2nd quarter was 35.1%, meaningfully above the midpoint of our guidance range, which was 34.3%.
GAAP and non GAAP gross margin in the Q1 of 2016 was 33.7. Percent. The significantly better than expected gross margin performance in the 2nd quarter was largely driven by higher utilization, richer product mix and improved operational efficiency. Average selling prices for the 2nd quarter decreased by approximately 2% as compared to the Q1. GAAP operating margin for the Q2 of 2016 was approximately 8.6% as compared to approximately 7.1% in the prior quarter.
Our non GAAP operating margin for the Q2 of for the Q2 was 12.3%, up approximately 170 basis points as compared to the Q1 of 2016, primarily due to higher revenue and gross margin. GAAP operating expenses for the 2nd quarter were approximately $233,000,000 as compared to approximately $217,000,000 for the Q1 of 2016. Non GAAP operating expenses for the Q2 were approximately $200,000,000 as compared to $189,000,000 in the Q1. The increase in operating expenses as compared to the Q1 was driven by higher revenue and relaxation of certain cost control measures that we were put in place in the prior quarters in face of challenging business conditions. Operating cash flow for the Q2 was approximately $104,000,000 as compared to approximately $115,000,000 in the Q1.
Operating cash flow for the Q2 was impacted by approximately $24,000,000 due to interest expense related to pre funding of Fairchild transaction. Excluding the $24,000,000 interest expense related to pre funding of Fairchild transaction, our operating cash flow would have been approximately $13,000,000 over the Q1. We also placed approximately $68,000,000 in escrow to cover a few items related to prefunding of the Fairchild transaction. This amount will be returned to us at the time of close of the transaction. During the second quarter, we spent approximately $52,000,000 of cash for the purchase of capital equipment and used approximately $28,000,000 for the repayment of long term debt and capital leases.
We exited the Q2 of 2016 with cash, cash equivalents and short term investments of approximately $588,000,000 a decrease of approximately $31,000,000 from the Q1. Excluding the impact of the amount placed in escrow and interest expense related to a pre funding of the acquisition, our cash balance at the end of the second quarter would have increased by approximately $61,000,000 At the end of the Q2 of 2016, ON Semiconductor days of inventory on hand were 120 days, down approximately 8 days from the prior quarter. In dollar terms, inventory on balance sheet declined by approximately $10,000,000 as compared to the Q1. We expect to further decline in balance sheet inventory days in the Q3. In the Q2 of 2016, distribution inventory days declined by approximately half a week as compared to the Q1, and distributor resales increased by approximately 7% quarter over quarter.
Accounts receivable went up by approximately $59,000,000 or by 3 days in the Q2 as compared to the Q1. The sequential increase in accounts receivable was primarily due to the timing of shipments. Following the end of the second quarter, receivables have returned to their normal level. For the Q2 of 2016, our lead times were up slightly as compared to the Q1. Our global factory utilization for the Q2 was up as compared to the Q1.
Now let me provide you an update on the performance of our business units, starting with Image Sensor Group or ISG. Revenue for ISG was approximately $173,000,000 up approximately 3% as compared to the Q1. Revenue for standard products group for the Q2 of 2016 was approximately 310,000,000 dollars up approximately 9% quarter over quarter. Revenue for the Applications Products Group was approximately $273,000,000 up approximately 9% over the Q1. Revenue for the Q2 of 2016 for the System Solution Group was approximately $123,000,000 up approximately 8% quarter over quarter.
Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?
Thanks, Bernard. I will start with an update on our acquisition of Fairchild Semiconductor and then I will provide commentary on current business trends and on various end markets. Based on the feedback from various regulatory agencies, we expect to close the Fairchild transaction around the end of the current month. We are working to obtain the last of necessary approvals in the U. S.
And China, and we will provide updates as further events unfold. I must also caution that despite our confidence in closing the Fairchild transaction this month, events outside of our control could result in unanticipated delay. The ongoing consolidation in the semiconductor industry has further validated strategic and financial rationale driving our acquisition of Fairchild. The acquisition of Fairchild adds highly complementary products and capabilities to our portfolio and enables us to deliver compelling value to our customers, shareholders and employees. Teams from the 2 companies have been busy planning for integration.
Our preparations are further confirming the financial and strategic rationale for the acquisition. As a result, we believe that we will be able to meet or exceed the financial targets we provided to the investment community at the time of the announcement of the acquisition. We plan to provide further updates on the financial and strategic impact of the acquisition immediately after the close of the transaction this month. Let me now comment on the business trends in the Q2. During the Q2, the pace of bookings improved meaningfully over the Q1 and commentary from customers was generally positive.
The strength in bookings has continued into the current quarter. Though we are experiencing improved bookings, the macroeconomic data continues to be a mix of good and bad news, and the business conditions remain subdued. We continue to manage our business prudently and we are directing our investments towards areas in automotive, industrial and mobile device markets that will enable us to drive both top line and bottom growth. Examples of such areas include ADAS, LED lighting in automobiles, machine vision, medical, image stabilization and autofocus and power management in a broad range of applications. Our design win pipeline remains strong and continues to grow.
Now I'll provide some details of the progress in our various end markets. The automotive end market represented approximately 36% of our revenue in the 2nd quarter and was approximately flat quarter over quarter. On year over year basis, our automotive revenue grew by approximately 15%. We continue to outgrow the market driven by our leadership in fast growing segments of the automotive markets such as ADAS and active safety, LED lighting, power devices and networking solutions. We have clearly established ourselves as a technology and market leader in ADAS.
We continue to reinforce our leadership position, and we are now enabling future autonomous driving vehicles through our expertise in automotive CMOS image sensors. We are working with all major auto OEMs and Tier 1 integrators to define next generation platforms. In Korea, we are benefiting from adoption of surround view cameras in vehicles with strong wins for our CMOS image sensors in multiple upcoming models. We are seeing acceleration in revenue for our recently launched 1 megapixel and 2 megapixel CMOS image sensors for in cabin driver monitoring applications. During the 2nd quarter, we secured a win for our LED rear lighting solutions with a leading European OEM for future models.
We also secured wins for new ASICs from European Tier 1 Integrators for start stop alternators and ultrasonic park assist applications. During the Q2, we saw strength in specialized products for infotainment, safety and powertrain applications. Demand for products from our standard products group was strong as well. The T6 MOSFET family from our standard products group continues to receive strong acceptance from customers for steering, braking, engine and transmission control applications. Although there have been a few data points suggesting a slowdown in automotive unit sales, we believe that we can continue to grow our automotive revenue in the high single digit percentage range annually, driven by primarily by content gains.
Revenue in the 3rd quarter for automotive end market is to be flat to down slightly quarter over quarter due to normal seasonality. The industrial end market, which includes military, aerospace and medical, represented approximately 23% of our revenues in the 2nd quarter and was up approximately 15% quarter over quarter. The growth in the industrial market was driven by strength in the security cameras, machine vision, medical and general lighting related applications. In the medical market, we continued our momentum in the hearing aid market with our Azario platform. We are leveraging our strength in the hearing aid market to expand into other related areas.
We are seeing strong growth in the glucose monitoring applications, and we are targeting this market with new products. We also experienced growth in medical imaging applications in the Q2. In the machine vision market, our Python series of CMOS image sensors continue to grow at a rapid pace. Our CCD image sensors for industrial applications also grew at an impressive pace in the 2nd quarter, driven by demand for machine vision applications such as flat panel inspection. We can expect continued growth in our machine vision revenue driven by increased automation and manufacturing and investments by industrial companies in upgrading their manufacturing capabilities.
Revenue for the Q3 for industrial end market is expected to be flat quarter over quarter. The communications end market, which includes both networking and wireless, represented approximately 18% of our revenue in the 2nd quarter and was up approximately 11% quarter over quarter due to seasonality and the ramp of new design wins in various platforms. Our design win pipeline for mobile devices continues to grow, and we remain well positioned with global smartphone makers as well as with China based smartphone OEMs. Our strategy of broadly focusing on all players in the smartphone market and driving revenue through wins on major reference design platforms is yielding strong results. During the Q2, we experienced strong growth in our filters, protection and low dropout regulators for multiple platforms.
Our content on various platforms continues to grow. Our optical image stabilization and autofocus products continue their strong traction with China based smartphone OEMs. We are well positioned to benefit from our wins for protection, e squared PROMs, LDOs and op amps on multiple platforms, which we expect to ramp in the second half of the year. Revenues in the 3rd quarter for communications end market are expected to be up strongly quarter over quarter due to normal seasonality and ramp of design wins in new platforms. The consumer end market represented approximately 11% of our revenue in the 2nd quarter and was up approximately 5% quarter over quarter.
The light goods market, which has been weak due to excess channel inventory of finished goods, posted strong growth in the Q2. Other growth drivers included gaming and set top boxes. Revenue for the Q3 for consumer end market is expected to be up quarter over quarter due to normal seasonality. The computing end market represented approximately 12% of our revenue in the 2nd quarter and was up approximately 15% compared to the Q1. The growth in computing market was driven by the much anticipated ramp of the Skylake platform.
We also benefited from strength in power supplies for servers and workstations. Revenue for the Q3 for computing end market is expected to be up quarter over quarter due to normal seasonality and the continuing ramp of the Skylake platform. Now I'd like to turn it back over to Bernard for forward looking guidance. Bernard?
Thank you, Keith. Now for the Q3 of 20 16 outlook. Based on product booking trends, backlog levels and estimated turns levels, we anticipate that toll on semiconductor revenues will be approximately $885,000,000 to $925,000,000 in the Q3 of 2016. Backlog levels for the Q3 of 2016 represent approximately 80% to 85% of our anticipated 3rd quarter revenues. We expect inventory of distributors to be flat quarter over quarter on a dollar basis.
We expect total capital expenditure of approximately 45 $1,000,000 to $55,000,000 in the Q3 of 2016. For the Q3 of 2016, we expect GAAP and non GAAP gross margin of approximately 34.6% to 36.6%. Factory utilization in the 3rd quarter is likely to be flat as compared to the 2nd quarter. We expect total GAAP operating expenses of approximately $225,000,000 to $237,000,000 Our GAAP operating income include the amortization of intangibles, restructuring, asset impairment and other charges, which are expected to be approximately $25,000,000 to $27,000,000 We expect total non GAAP operating expenses of approximately $200,000,000 to 210,000,000 dollars We anticipate GAAP net interest expense and other expenses will be approximately 31 point $5,000,000 to $41,500,000 for the Q3 of 2016, which include non cash interest expense and pre acquisition interest expense of approximately $22,000,000 to $29,000,000 GAAP net interest expense includes interest related to the pre funding of acquisition of Fairchild Semiconductor. We anticipate our non GAAP net interest expense and other expenses will be approximately $9,500,000 to $12,500,000 Cash paid for income taxes is expected to be approximately 5 $1,000,000 to $9,000,000 We also expect share based compensation of approximately $13,000,000 to $15,000,000 in the Q3 of 2016, of which approximately $2,000,000 is expected to be in cost of goods sold, and the remaining amount is expected to be in operating expenses.
This expense is included in our non GAAP financial measures. Our diluted share count for the Q3 of 2016 is expected to be approximately 420,000,000 shares based on the current stock price. Further details on share count and earnings per share calculations are provided regularly in our quarterly and annual reports on Form 10Q and Form 10 ks. With that, I would like to start the Q and A session. Thank you.
And Christie, please open up the line for questions.
Thank you. Our first question is from the line of John Pitzer of Credit Suisse. Your line is open.
Yes. Good morning, guys. Thanks for letting me ask the question. Keith, I guess my first question is, I'm sure you saw this morning that Fairchild also reported earnings, put up very strong revenue results, but the margin profile I think was a lot weaker than a lot of us were expecting, gross margins down sequentially versus expectations for them to be up. I'm wondering since they don't have a conference call, can you give us some insights relative to the work you've done through your integration teams exactly what's going on?
Should I view this margin profile as Fairchild just really trying to clean themselves up before you take receipt of the asset? Or how should I think about that?
I can't share specifics on them since we're not closed the transaction yet, but I would not anticipate the margin profile that you see as a continuing expectation. I think they will bounce back nicely in the near future.
That's helpful. And then guys maybe for my follow-up. Bernard, you talked about in your prepared comments some levers you could pull to improve profitability. Good revenue results this quarter and the guide, OpEx was a little bit higher than I would have thought. Can you just elaborate a little bit about some of those levers?
And I guess help me better understand relative to revenue growth, how should I think about OpEx growth?
Sure, John. So on the levers, we have talked about those in the past being manufacturing footprint, being also potential migration from 6 to 8 inches just in general productivity improvements, our normal operating our normal operational improvements in the factories. Also potential look, now that we are a bigger company, at potentially not focusing on certain areas or divesting for certain less profitable areas. And in general, when we said on our normal model, we have 50% fall through on incremental revenues. Leverage on operating expenses, we should still see it there.
We had a few things in the first in the second quarter that contributed to OpEx being higher. Some of it was indeed the fact that we had taken some temporary measures to offset costs in the 4th and first quarter, which now we went back to normal levels. We also had a few expenses associated with the Fairchild transactions that we did not pro form a out that are contributing to that level. In general terms, right now, our expectation is that OpEx is we're not going to change our investment levels in OpEx and the only increases we should expect are inflationary increases. In the Q3, our expenses are going up because we have our focal merit increase.
That's the main reason our operating expenses are going up.
Thank you.
Thank you. And our next question is from the line of Chris Danely of Citigroup. Your line is open.
Hey, thanks guys. On the end market results, it looks like auto was a little below guidance, but PC was a little above guidance. Can you just talk about what led to the beat the miss on those end markets?
Yes. So on the automotive side, we actually had 2 customers that were doing some inventory correction for their company specific situations, which had a little less growth in automotive than we had anticipated. And on the computing side, the adoption of the Skylake platform was actually slightly faster than we expected going into the quarter. So that gave a nice pop to the computing side.
Great. And then my follow-up relates to the Fairchild acquisition. So it looks like NXP is going to spin out their standard products business. Do you anticipate any impact, good or bad to your business Fairchild business?
Not significant. Basically the NXP business does not match the Fairchild profile to a high degree. So really not expecting much of a there.
Great. Thanks guys.
Thank you. And our next question is from Chris Caso of CLSA. Your line is open.
Yes. Thank you. Good morning. Keith, I wonder if you could just go through what would be the remaining milestones for the Fairchild deal closing and your conviction in getting there as you currently expect by the end of the month? In addition, the Fairchild update this morning talked about likelihood of selling their ignition IGBT business.
Is this a requirement for closures?
Okay. So on the closing milestones, we've been in communication with the FTC and had quite a few exchanges there. We believe that we're in a situation where we're going to have satisfactory conditions to close here shortly. They commissioners still have to vote on that, but we're not anticipating further issues. The Ignition IGBT business that was referred to is actually on Semi's Ignition IGBT business that is being sold, and we do expect that also to be closing shortly as part of the Fairchild merger deal.
Okay. And as a follow-up on automotive again, you talk about in your commentary high single digit growth. I assume that's over a longer term timeframe. Can you talk about some of the elements that get you there? And in addition, there's obviously some concern in the industry now about automotive units in total.
How sensitive is your auto growth, both in near term and short term to units versus content?
Yes. So that high single digits is actually true year on year, including this year. So it's not a future event. It's actually we expect that in 'sixteen as well. And it's really based on the adoption of the adaptive safety the advanced safety features and the adaptive driving features we think is going to be at a pace such that even with little to no growth in we have such a good position in the areas that are being adopted in new models so aggressively.
Great. Thank you.
Thank you. And our next question is from Vijay Rakesh of Mizuho. Your line is open.
Yes. Thanks, guys. Good quarter and guide here. Just on the back on the automotive side, when you look at just looking at the health of that industry, how is channel inventory for you and for the industry in general? And then if you could give us some geographic color on that inventory side?
Thanks.
Yes. In general, we've got good inventory positions around the world. I mentioned earlier a couple of customers had a little bit more than they desired in the Q2. That was mostly in Japan. And but the rest of the world seems quite healthy.
Got it. And as part of your Fairchild acquisition, do you expect any fab consolidation both for you or for the combined? Thanks.
Yes. We'll give more details on that after we close the transaction. But over the longer term, we will continue to reduce our footprint into larger more efficient factories.
Great. Thanks a lot.
Thank you. And our next question is from Ian Yim of MKM Partners. Your line is open.
Yes. Thank you. So it looks like we'll get an update on the magnitude of financial targets once you close the acquisition. But my question is, given you've got more time to prepare, should we expect any changes on the pace of synergies over the next 18 months once the deal closes?
In general terms, we feel very optimistic about achieving or exceeding those targets. We have stated that we will get about exceeding velocity of about 50% of those synergies after 6 months and that still is in our plans and the completion of the rest within the next 12 months.
Great, thanks. And I'm just trying to reconcile some of the commentary. Industrial up 15%, obviously that's pretty robust. I mean it feels like some of that should be replenishment versus true end demand, yet your channel inventory is down half a week. I mean, I'm just trying to reconcile how industrial could be up so strongly with channel inventory down, perhaps industrial specific was actually up?
Thanks.
Yes. That is 1st of all, seasonally, the first half is the best for industrial. And so you got a strong seasonal headwind. And then specifically, we actually did have some very, very good performance in that marketplace with the design wins we had. So we're sure there's some share gain in there as well, but it is normal for that market to be up strongly in the second quarter.
Okay. Thank you.
Thank you. Our next question is from Craig Ellis of B. Riley. Your line is open.
Thanks for taking the question. I just wanted to follow-up on the outlook commentary for the wireless business. You mentioned program ramps and seasonality, but could you be more specific with respect to the ramps that you're seeing either by geography or by class of customer, Tier 1, Tier 2, etcetera?
Well, we're expecting broad expansion in both China and non China handsets as you go through the Q3. It is the time that most of our customers launch their new models. And of course, they do all those builds for the Q4 starting in September. So it's really broad based and reflects the profile of our customer
base. Thanks, Keith. And then the follow-up is on the announced self help initiatives from last quarter. I think it was $15,000,000 in manufacturing and $8,000,000 in OpEx and that was SSG specific, I believe. But was any of that benefit realized in the reported quarter?
And if not, when would we expect to see that hit the income statement?
You should start seeing that in the Q3.
Thanks guys.
Thank you. Our next question is from Tristan Gerra of Baird. Your line is open.
Hi, good morning. Given your commentary of flat inventory dollars at distis for Q3 and reconciling with your revenue guidance for the quarter, how many weeks of inventories will that translate into exiting Q3 at this stage?
It will be approximately 10 weeks. Great.
And then what products are seeing lead time increases? And also is there any specific end market driver? And what's the lead time range that you're seeing currently for your products?
So we have kind of an 8 to 15 week range. And some of the end markets driving that are wireless, as we just mentioned, with some very nice ramps in the Q3, and then in specific spots in industrial. Great. Thank you.
Thank you. Next question is from Ross Mukherjee of Deutsche Bank. Your line is open.
Hi, guys. Keith, a question for
you on the communication side of things. You talked about the customer specific design wins and ramps in the Q3. There's been some concerns about excess inventory potentially building up in China and creating a need for some burn off in the Q4, how are you seeing that end market? We have not seen that to date. Certainly, we service that market a lot through distribution and those inventories are actually getting leaner.
So we certainly have not seen any of that yet. Then I guess my second question on the computing end market, you mentioned that the Skylake ramp was helpful in the quarter. How far through that progression do you believe we are? We're still in the low 25%, 35% range of Skylake versus other platforms. So we think it still takes to the end of the year before that becomes the majority platform.
Thank you.
Thank you. Next question is from Rajendra Gill of Needham and Company. Your line is open.
Yes. Thanks and congrats on good results. I'm wondering if you could talk a little bit about seasonality, given kind of the commentary you talked about the specific end markets and indications of some stabilization in the industry, any thoughts in terms of kind of seasonality patterns as we go into the second half?
Yes. So normally, our industrial market, I'll start with that one, is stronger in the first half than it is the second. So it kind of gets flattish as you get into the 3rd quarter. Computing normally would increase in the Q3, but specifically there, our increases are going to be due to Skylake platform ramps as opposed to more computers being built. Handsets almost always go up in the Q3.
That's when they launch new platforms and get ready for the seasonal builds at the end of the year. So that's usually up strongly. Consumer also tends to be up in the Q3, again, pre builds for the holiday seasonality. And if I missed any, automotive. Automotive for us, normally, it's slightly down in the Q3 as automobile companies take down their plants for new tooling on the new models for a week or 2.
So it's just slightly down to flat, but then picks up again in the Q4.
Okay, that's helpful. And can we talk about some of the Bernard, some of the gross margin drivers as we go into next year. You are benefiting from kind of a favorable mix shift, while utilization rates are kind of flat. Can you talk a little bit about kind of how you foresee the business mix over the next 2 to 3 quarters impacting the margins?
Sure. In general terms, mix will be a tailwind. We are purposefully focusing on automotive, industrial and wireless. All three have better than corporate average gross margins. Obviously, there's some seasonality patterns within that, but in general terms, the mix should be favorable.
And in general, just on utilization, our follow through model shows about a 50% incremental contribution to the bottom line based on incremental revenue. So in addition to that, we had talked about, we announced the $15,000,000 footprint consolidation that will help us as we go into the 2017 timeframe. And as we have said, will be announcing more things as they become clearer in the future.
Thank you.
Thank you. Our next question is from Steve Smiggy of Raymond James. Your line is open.
Great. Thanks a lot. I love my congratulations on the nice results. I was hoping you could comment a little bit more on PC as you look forward or compute in general. So you guys obviously gaining dollar content and share on Skylake.
What does that growth look like over the next couple of years? And does it make sense at this point given your success there to maybe go a little bit harder after the server market?
Yes. So on the PC front itself, we expect the Skylake transition to largely be over as we enter next year. So from a dollar content perspective, there are no big drivers for 'seventeen. Share gain, obviously, is things we continue to drive, but dollar content should be relatively stable through 2017. For the server area, there are more opportunities there in specifically the power area, and we do expect to have offerings in 2017 for that.
Okay, great. And then just maybe I'm parsing too finally, but your comments on the macro seemed a little bit more upbeat than last quarter. And I was just wondering if you're just getting a better little bit better read from customers, that's giving us more confidence or am I just reading too much into what you said?
Yes. No, actually the bookings have been up strongly and they've been much stronger in the summer season as it's approached than we normally see. So from an order pattern perspective, we're very encouraged. But from a macro perspective, listening to the financial prognosticators on the news, it's not so exciting. So I'm not sure how to reconcile those, Steve, but from the order patterns, we're very pleased.
Great. Thank you.
Thank you. Our next question is from Kevin Cassidy of Stifel. Your line is open.
Thanks for taking my question. Just with lead time stretching and inventory coming down, slight increase in utilization, Is there and maybe Keith to add on to your comment about your customer bookings increasing. Could it be that they're concerned of lead time stretching further?
Could be.
Basically, we've been in a, I guess, a very lean position for a long time now. And certainly, individual customers may be a little more sensitive to that with the ramps of particularly handsets in the Q3.
I see. And coming into the quarter, there was concern over image sensor from one of your competitors where the earthquake in Japan had damaged the factory. Did you see any increase in bookings due to that?
There may have been some temporary sales impact, but it was certainly over in the Q2.
Okay, great. Thank you.
Thank you. Next question is from Harlan Sur of JPMorgan. Your line is open.
Good morning and thank you for taking my question. From a bookings and backlog perspective, can you just give us some color on demand patterns by geography here in the September quarter?
Yes. I'll let Bernard answer. I don't know if there's any huge discernible one. The handset market is pretty much all China for us from a build perspective. And so that's going to show the strongest profile.
Yes. But in general terms, the relative strength we're seeing is pretty much across all the geographies.
Great. Thanks for that. And what were your specific utilizations in Q2? I know last call you had expected them to trend kind of in the high 70% range, but it looks like you guys drove a level that was higher than that.
Yes, just slightly above 80% in Q2 and expected to be very similar in Q3.
Great. Thank you.
Thank you. Next question is from Mark Lipacis of Jefferies. Your line is open.
Hi, thanks for taking my question. Keith, I think over the past 10 years of M and A, I believe you've been articulating the view that the markets had still been too fragmented to buck the normal quarterly ASP pressures that you guys have reported over time. And I'm wondering if you thought that with the Fairchild acquisition, does the industry get concentrated enough to the point where you're in a position to start resisting some of those downward ASP pressures? That's all I had. Thank you.
Yes. I wish I could say that. It's really got a lot more consolidation to go before the supplier side of it, the semiconductor side has enough strength against a very consolidated customer base.
Thank you.
Thank you. Our next question is from Hartaj Kumar of Stephens. Your line is open.
Yes. Hey, guys.
First of all, congratulations on good numbers. Two questions. If you look at the comm business, I think you're guiding for really good growth. Yes. And that's doing well.
That's Ron. And then I had a follow-up.
Okay. You cut out there. Can you please repeat the question?
Yes. So within Calm, I think you're guiding for really good growth. Is all of that from mobile or is the core networking business doing as well?
The majority of the growth is handsets. The networking side is a much smaller portion for us and continues to grow, but handsets will be the story in Q3.
Got it. And for my follow-up, I think, would you remind us when assuming you close the deal in about the end of the month, when would you start to expect the synergies? Is that mostly OpEx? And then your commentary suggested you're talking about meeting or exceeding those. Have you seen something new perhaps that you can share with us?
No, I think so the answer is they'll start showing up in the Q4. But I think as we've planned and spent more time there, I think we've confirmed what we expected and we now have solid plans in place for execution. So we've got high confidence as opposed to new discoveries.
Thank you.
Thank you. Next question is from Shawn Harrison of Longbow Research. Your line is open.
Hi, good morning. Two questions on, I guess, interest expense. Number 1, do you have an updated number in terms of what you anticipate the interest expense will be for the debt associated with Fairchild? And then also, is it safe to assume that you're still planning on the debt to be put to you in November and that you would retire that debt?
So for the Fairchild debt, we have a term loan B for 2,200,000,000 dollars at the LIBOR plus 4 50,000,000 with a LIBOR floor of 75 basis points. And we will also draw 2 $1,000,000 on our revolver at a slightly better interest rate. And yes, the current plan is to retire the convert them when it becomes due in December.
And then as a brief follow-up, maybe I'm parsing this too closely, but is your commentary or your view on automotive production, is it declined now given what you've seen over the Q2? You're more just commenting on what you're seeing on news headlines versus the incoming kind of production rates at your business.
Yes. We have not seen order rate declines or inventory growth in the channel for us on automotive. The commentary on Q3 is very specific to model changeovers and is again very normal course of business.
Perfect. Congrats on the quarter.
Next question is from Craig Hettenbach of Morgan Stanley. Your line is open.
Yes, thank you. Keith, just following up on the commentary about bookings and business versus macro and certainly strength in the business. Any other context, whether it's a year ago, the industry kind of had to go through inventory correction that way? Do you think that inventory has just been matched better to demand or anything else that you can help in terms of given that context of the business versus just what's the subdued macro?
Yes. I think there's no question that there was inventories being worked off in the first half. I think we commented on that in the Q1. Areas like white goods, for example, look like they've pretty much worked through that. And in the Computing and Consumer segments, likewise.
So I think the Q2 numbers and inventory reductions that we've seen in our supply chain indicate to me that most of those have been taken care of now. And so you're seeing just a bit of normal market behavior.
Got it. And then just a follow-up for Bernard just on inventory. If I look at 120 days kind of within your 110 to 120 target, Will Fairchild influence that in terms of as you bring that mix of business on and how the type of inventory you guys would like to hold?
In general terms, I expect that the model will not change drastically. They have been reducing their inventories over the last couple of quarters in a nice way. So they are going to be aligned or slightly lower than our number. So but in general terms, obviously, we'll look at from the synergistic point of view, if there is opportunity to take inventories out, we will do that. But I don't expect it to meaningfully change our model.
Got it. Thank you.
Thank you. And that concludes our Q and A session for today. I'd like to turn the call back over to Mr. Parag Agarwal for any further remarks.
Thank you, everyone, for joining the call today. We look forward to seeing you at various conferences during the quarter. Goodbye.
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