Good day, ladies and gentlemen, and welcome to the ON Semiconductor Quarter 4 Earnings As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Parag Agarwal, Vice President of Investor Relations and Corporate Development. Sir, you may begin.
Thank you, Chelsea. Good morning and thank you for R Semiconductor Corporation's 4th quarter 2015 quarterly results conference call. I apologize for the confusion this morning regarding the call. The delay was due to an issue with our provider and I can assure you that, that was the only reason for the delay. I am 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 Web site at www.onsemi.com. A replay will be available on our Web site approximately 1 hour following this live broadcast and will continue to be available for 1 hour following this live broadcast and will continue to be available for approximately 30 days following this conference call along with our earnings release for the Q4 of 2015. The script for today's call is posted on our website. Additional information related to our end markets, business segments, geographies, channels and share count is also posted on our website. Our earnings release and this presentation include certain non GAAP financial measures.
Reconciliations of these non GAAP financial measures to the 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 and other forward looking statements regarding future events or 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 the forward looking statements are described in our Forms 10 Ks, Form 10 Qs and other filings with the Securities and Exchange Commission.
Additional factors are described in our earnings release for the Q4 of 2015. Our estimates may change and the company assumes no obligation to update forward looking statements to reflect actual results, changed assumptions or other factors, except as required by the law. During the Q1, we will be attending the Susquehanna Semi Storage and Tech Summit on March 10 in New York City. Now, let me turn it over to Bernard Gutman, who will provide an overview of Q4 2015 results. Bernard?
Thank you, Parag, and thank you everyone for joining us today. Let me start by providing an update on overall business results. As evident from the recent results many semiconductor companies, the macroeconomic environment continues to be challenging and demand trends are sub seasonal. However, the healthy supply side dynamics with low channel inventories and reduced utilization are helping to mitigate the impact of soft demand. Have noticed a steady improvement in booking trends in the current quarter, although the macroeconomic picture hasn't changed much.
Despite the challenging macro conditions, our performance in the Q4 was strong. Although we slightly missed the midpoint of our revenue guidance, we over delivered on factors that are well within our control. Our operating expenses for the Q4 were well below our guidance and we were able to deliver strong EPS performance under the circumstances. We're fully committed to delivering a strong economic performance operating performance even if macroeconomic conditions remain challenging. In 2016, we intend to accelerate our progress towards our target financial model, which we provided to the investment committee at our 2015 Analyst Day.
During the year, we plan to take measures to improve our cost structure and position the company to deliver higher margins on a sustainable basis. Keith will touch upon the topic later in his prepared remarks. Now let me provide you an update on our 4th quarter 2015 results. ON Semiconductor today announced that total revenue for the Q4 of 2015 was approximately 8 $40,000,000 a decrease of approximately 7% as compared to the Q3 of 2015. GAAP net income for the Q4 was $0.13 per diluted share.
Excluding the impact of amortization of intangibles and restructuring and other special items, non GAAP net income for the 4th quarter was 0 point 33.3% as compared to 34.1% in the Q3 of 2015. Non GAAP gross margin for the 4th quarter were 33.2% as compared to 34.1% in the Q3 of 2015. The 90 basis points sequential decline was largely driven by lower utilization in the 4th quarter as compared to the 3rd quarter. As we had planned, we reduced utilization of our factories in the Q4 to manage internal and distribution channel inventory levels. Average selling prices for the 4th quarter decreased by approximately 2% as compared to the 3rd quarter.
GAAP operating margin for the Q4 of 2015 was approximately 6.6 percent in the prior quarter. Our non GAAP operating margin for the 4th quarter was 11.1%, down approximately 70 basis points as compared to the Q3 of 2015, primarily due to lower margin lower gross margin in the 4th quarter. The impact of lower gross margin on operating margin was offset by strong expense control in the 4th quarter. GAAP operating expenses for the 4th quarter were approximately $224,000,000 as compared to approximately $239,000,000 in the 3rd quarter of 2015. Non GAAP operating expenses for the 4th quarter were approximately 186,000,000 dollars down approximately $16,000,000 as compared to the Q3 of 2015.
The decline in operating expenses was driven by solid execution on cost and expense controls in times of heightened microeconomic uncertainty. We exited the Q4 of 2015 with cash, cash equivalents and short term investments of approximately $618,000,000 an increase of approximately $61,000,000 from the 3rd quarter. Operating cash flow for the 4th quarter was approximately $157,000,000 as compared to approximately $128,000,000,000 in the 3rd quarter. We spent approximately $66,000,000 of cash for the purchase of capital equipment. During the 4th quarter, we used approximately $22,000,000 for the repayment of long term debt and capital leases and we used approximately $20,000,000 2,000,000 shares of our common stock at an average price of $10.46 At the end of the 4th quarter, approximately 628 $1,000,000,000 remained of the total authorized amount of $1,000,000,000 under the current stock repurchase program, which was announced on December 1, 2014.
At the end of the Q4 of 2015, on semiconductor days of inventory on hand were 122 days, up approximately 6 days from the prior quarter. In the Q4 of 2015, distribution inventory decreased by approximately $21,000,000 quarter over quarter and distributor resales decreased by approximately 6% quarter over quarter. For the Q4 of 2015, our lead times were up slightly as compared to the 3rd quarter. Our global factory utilization for the 4th quarter was down as compared to the 3rd quarter. As we had indicated in our 3rd quarter earnings conference call, we reduced factory loadings in the Q4 to manage inventory levels.
Now, let me provide you an update on performance by our business units, starting with the Image Sensor Group. Revenue for the Image Sensor Group was approximately 184 20 15 was approximately $293,000,000 down approximately 6% quarter over quarter. Revenue for the applications product group was approximately $253,000,000 down approximately 8% over the Q3. Revenue for the Q4 of 2015 for the System Solutions Group was approximately $110,000,000 as compared to $128,000,000 in the 3rd quarter, a steep decline in appliances related revenue in China, broad based weakness in Japan and well publicized weakness in the premium segment of smartphone market contributed to weaker than expected revenue for our system solution group. Now, I would like to turn the call over to Keith Jackson
for additional comments on the business environment. Keith? Thanks, Bernard. Let me start with laying out our priorities for 2016 and then I will reflect on our accomplishments for 2015. Lastly, I will address the overall business environment and trends in various end markets.
For 20 16, are 3 main objectives for us. 1st, implement cost control measures that will accelerate our moves towards our target model. 2nd, meet the integration targets for our pending Fairchild acquisition and position the acquisition to deliver targeted synergies. And third, continue to build on our momentum in strategic growth markets of automotive, wireless devices and select areas of industrial. Now, let me expand on each of these objectives starting from implementing measures to achieve our target model.
During the year, we intend to make structural changes in our manufacturing network to reduce our fixed cost footprint in order to drive gross margin expansion. Additional cost reduction on the manufacturing front will include reduction in overhead and in variable costs. Furthermore, during the year, we plan to improve our operating expense efficiency independent of synergies from our pending acquisition of Fairchild. We will be sharing additional details with you as specific measures are implemented during the course of the year. Moving on, I want to ensure that we are able to deliver the targeted synergies from our pending Fairchild acquisition in a timely manner.
We remain on track to close the acquisition in the Q2 of 2016. The integration teams from both companies are working closely and early indications point toward a smooth integration in a timely manner. The 2 companies have similar operations and organizational structures and we are well positioned to realize targeted synergies in a timely manner after closing the transaction. Let me also comment on the status of our Fairchild acquisition. We have a fully executed merger agreement with Fairchild and are very confident of our position, despite the presence of a competing bid.
We've always exercised discipline in deploying our capital and if a competitive situation arises, we will exercise the same discipline. Lastly, let me discuss our continuing momentum in the automotive, industrial and wireless end markets. We have been outgrowing the industry in these markets and we expect that our success in these markets will continue in 2016, driven by design wins with new products. Though Optina has been a key driver of our growth, especially in the automotive market, our performance on an organic basis exceeded that of the industry in 2015. I believe that 2016 will be a pivotal year for Onsim Exector as we close the pending Fairchild transaction and make strong progress towards our target financial model.
Now let me briefly address our achievements in the past year. Although much of 2015 was clouded by macroeconomic uncertainty, we delivered strong operational and financial performance. We successfully integrated Aptina and results from Aptina far exceeded our expectations and the guidance we provided to the investment community. We believe that we are in early stages of realizing full potential of our acquisition of Aptina. With Aptina, we believe that ON Semiconductor is among the best positioned companies to benefit from steep adoption of ADAS in automobiles.
As I noted earlier, we outgrew the semiconductor industry on an organic basis in 2015. We exceeded our annual commitment of capital return to shareholders and we repurchased approximately $348,000,000 of our stock. Lastly, we announced the acquisition of Fairchild in November of 2015. Now let me comment on the business trends in the 4th quarter. During the Q4, the pace of bookings was subdued through much of the quarter.
From a revenue perspective, we saw weakness in Japan and China. As Bernard indicated in his prepared remarks, the global macroeconomic environment remains challenging, which we believe is impacting the overall semiconductor industry. However, we are not seeing a noticeable change in the underlying fundamentals of our business and our design win momentum remains strong. We have noticed a significant improvement in bookings in the current quarter, but given the recent history of false starts and prevailing macroeconomic overhang, we remain cautious. However, we remain confident in our ability to outgrow the semiconductor industry driven by the strength of our design wins in the automotive, industrial and smartphone end markets.
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 Q4 and was up approximately 6% quarter over quarter. 4th quarter revenue for automotive was driven by strong regional performance in China, Japan, South Korea and the Americas. Revenue from key application areas, including active safety, body and eye lighting grew strongly quarter over quarter in Q4. Our momentum in CMOS image sensors for automotive applications remained intact, driven by steep adoption of ADAS and viewing cameras.
We are leveraging our leadership in automotive image sensors to expand into adjacent areas, such as power management for ADAS systems. Our design win pipeline for automotive continues to grow as we target new applications in fast growing segments of the market. We also continue to grow our presence with a broad range of automakers through share gains in existing products and applications. Revenue in the Q1 for automotive end market is expected to be up quarter over quarter. The communications end market, which includes both networking and wireless, represented approximately 18% of our revenue in the Q4 and was down approximately 6% quarter over quarter, primarily driven by weakness in the premium segment of the smartphone market.
Our design win momentum in the smartphone market remains intact, and our design wins continue to drive increased content in new generations of smartphones. We are winning sockets with our optical image stabilization solutions, ESD protection, EMI filter, LDOs, E squared PoMs, small signal diodes and MOSFETs. Revenues in the Q1 for the communications end market are expected to be down quarter over quarter due to normal seasonality. The consumer end market represented approximately 12% of our revenue in the 4th quarter and was down approximately 26% quarter over quarter. The decline in consumer was driven by weakness in the white goods, action sports camera and gaming markets.
During 2015, we benefited from our presence in new categories such as action, sports camera and wearables. We also secured a win on a virtual reality platform, which should drive revenue in the current year. Revenue for the Q1 for consumer end market is expected to be down quarter over quarter due to normal seasonality. Industrial end market, which includes military, aerospace and medical represented approximately 23% of our revenue in the 4th quarter and was down approximately 10% quarter over quarter. In addition to seasonality, global macroeconomic weakness contributed to the revenue decline.
We saw significant weakness in our major industrial customers with exposure to manufacturing. Also, our security related revenue was down significantly due to macroeconomic slowdown in China. In 2015, we significantly improved our market position in security related imaging markets with year over year revenue growth of 15%. Revenue for our medical business was approximately flat quarter over quarter. During the quarter, we launched a few key ASSPs for the hearing aid market.
These products have received a strong customer reception and these products should cement our position as a leading silicon supplier for the hearing aid market. Our medical related revenue posted a healthy growth in 2015. Our military and aerospace related revenue posted strong growth in the 4th quarter. During the 4th quarter, we saw strong traction products for industrial IoT applications from our recently closed acquisition of Axsome. Revenue for the Q1 for industrial end market is expected to be flat to down quarter over quarter.
Computing end market represented approximately 12% of our revenue in the 4th quarter and was down approximately 12% compared to the Q3. Our Skylake related revenue grew strongly quarter over quarter, but we did experience weakness in parts of the market, such as hard disk drives and power supplies. Furthermore, we made a decision to shift some of the computing related production capacity to drive our growth in automotive. Revenue for the Q1 for computing end market is expected to be flat quarter over quarter. We expect to see a strong ramp for Skylake related computing revenue throughout the current year.
Now, I'd like to turn it back over to Bernard for other comments and our other forward looking guidance. Bernard? Thank you, Keith.
Now for Q1 of 2016 outlook. Before I get into the details of the guidance, let me state that we're cognizant of the prevailing macroeconomic conditions and our guidance reflects our caution regarding macroeconomic factors. Based on product booking trends, backlog levels and estimated turns levels, we anticipate that whole on semiconductor revenues will be approximately $800,000,000 to $840,000,000 in the Q1 of 2016. Backlog levels for the Q1 of 20 16 represent approximately 80% to 85% of our anticipated first quarter revenues. We expect inventory at distributors to be flat quarter over quarter on a dollar basis.
We expect our total capital expenditures of approximately $60,000,000 to $70,000,000 in the Q1 of 2016. For the Q1 of 2016, we expect GAAP and non GAAP gross margin of approximately 31.8% to 33.8 percent. Factory utilization in the Q1 is likely to be flat as compared to the Q4. We expect total GAAP operating expenses of approximately $221,000,000 to $233,000,000 Our GAAP operating expenses include the amortization of intangible, restructuring, asset impairments and other charges, which are expected to be approximately $35,000,000 to $37,000,000 We expect our total non GAAP operating expenses of approximately $186,000,000 to 196,000,000 dollars We anticipate GAAP net interest expense and other expenses will be approximately 13 $16,000,000 for the Q1 of 2016, which includes non cash interest expense of approximately $6,000,000 We anticipate our non GAAP net interest expense and other expenses will be approximately $7,000,000 to $10,000,000 GAAP taxes are expected to be approximately $2,000,000 to $6,000,000 and cash taxes are expected to be approximately $5,000,000 to $10,000,000 We also expect share based compensation of approximately $11,000,000 to $13,000,000 in the Q1 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 Q1 of 2018 is expected to be approximately 417,000,000 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 Forms 10Q and 10 ks. With that, I would like to start the Q and A session. Thank you.
And Chelsea, please open up the line for questions.
Thank Thank you. And our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Thanks for letting me ask the question.
I guess, Keith, the first one for you is, if you could give any color on the bookings trends. I know you mentioned repeatedly that macro is weak, but you also said that bookings are strong. Any more color on what those bookings are doing by either end
This is not This is not atypical, but this is much stronger than normal that we saw. It is pretty broad based. And the only areas that might be perhaps a little less than normal seasonality would be the industrial market and everything else is looking a little stronger than we would expect going into January.
I guess following up on that industrial point, you guided your industrial business to be down sequentially in the Q1. What's driving that? I guess flat to down specifically, but what's driving that? I thought seasonally that would be an area that could actually improve.
Yes. Normally it is, but we're still seeing inventory burn off in China specifically and rather muted growth in Europe and North America. So we normally do expect Q1 to be up more than what we're seeing in Industrial.
And our next question comes from the line of John Pitzer with Credit Suisse. Your line is now open.
Yes, good morning guys. Thanks for letting me ask the question. Keith, I just want to go back to the operational side of the business. I mean, last year at the Analyst Day, you guys threw out a gross margin target of about 40% longer term. And if you look over the last several quarters, we've seen gross margins come down by 300 to 400 basis points.
To what extent is this sort of just the new mix of the business and we have to live with lower gross margins? To what extent do you think you can So,
So, Colin, I have a couple of comments there. 1, as we mentioned multiple times, we get about a 50% fall through on revenue. And as we entered the second half of last year, we saw the inventory corrections taking place and the revenues decline. So there's a pretty much direct hit there. Utilization, big factor as you also know in order to keep inventories in check, we were taking additional actions there giving us even lower utilization.
From an actual mix perspective, rather than hurting us, it actually is helping us. We are seeing the gains in the mix side. They're just not big enough to offset the underutilization of the factories or the lower revenues right now. So I think the story is still intact. As we see the revenues come back, as we go through 2016, I think you'll see not only the 300 or 400 that you saw go away, but a couple of 100 basis points more as we continue to reduce our fixed cost structure, as I mentioned in my opening remarks, and we get some of those revenues back.
That's helpful, Keith. And then On the ASP front, the last couple of quarters, you've been at sort of the lower range of that down 1% to 2%. Anything going on there? And I guess longer term, as China seems to be intent to kind of get into the semi market and enter through either a Fairchild, if not Fairchild, another company who does standard products. How should we think about sort of pricing pressure longer term, especially if the Chinese get a foothold here in the business?
Well, we've been operating, as you mentioned, closer to that 2% mark, which is higher than a normal year. And I think it's reflective frankly of companies adapting to the weaker than expected markets in the second half. We are not seeing any signs of increased pricing pressures. So we think that there's not an increasing issue going on, but it has lasted for more quarters at these levels than we're used to. I think the China piece of the equation yet to be seen.
This is really all the pricing we're seeing right now is still coming from Western Companies. And again, I guess, we'll have to wait and see how that plays out.
Thanks, guys.
Thank you. And our next question comes from the line of Chris Danely with Citigroup. Your line is now open.
Hey, thanks, guys. Keith, can you talk about, to the extent you can, any impact in timing of the cost reductions that you mentioned in the script today?
Yes. They're going to be going on throughout the year. So you'll hear us announce new specifics on each of our calls. But beyond that, I'm really not able to give you more than that. Most of these involve changes in factories.
And so you'll hear us announce them and then the actual impact will occur several quarters later.
Okay. And then one more question on the competitive bid from Fairchild. Is there any circumstance or anything that you could foresee that would cause you to raise your bid? Or is your bid pretty much $20,000,000 and whatever happens, happens?
Well, at this point, we don't see any reason to raise it. And as I said, we'll act prudently and appropriately is about all I can share with you.
That's fine. Thanks guys.
Thank you. And our next question comes from the line of Chris Caso with Susquehanna Financial. Your line is now open.
Thank you. Good morning. A question regarding utilization and what you're doing with the fabs right now. I know you had plans to take down the utilization last quarter. It sounds like you're continuing that into the Q1.
Perhaps you could talk about the impact of that on channel inventory as you go into the Q1 and on your own internal inventory and when you think that inventory drain might be complete? Obviously, in the channel, I think we're coming into the quarter with some pretty low inventory levels to start with.
We're actually, we believe, quite lean in the channel itself. And I'm expecting that there's going to be some impact as we get into Q2 from the bookings acceleration that I mentioned earlier that will cause them to have to do some restocking. Internally, we will probably not take that number down in Q1 because we are preparing for higher sales in the Q2. So we're looking for fairly flattish internal performance on the inventories for the company.
Okay. And as a follow-up to that, as you mentioned, bookings looking better as you go into Q2. Could you remind us what you consider to be normal seasonality as you go into the Q2?
2nd quarter tends to be kind of 4% to 6% range from Q1.
And the areas that typically are stronger or weaker seasonally as you go into the 2nd quarter?
Pretty much everything is stronger in the 2nd quarter. There are no segments that are normally down.
Got it. Thank you.
Thank you. And our next question comes from the line of Craig Ellis with B. Riley. Your line is now open.
Thanks for taking the question. Keith, I wanted to follow-up on the manufacturing efficiencies. Can you talk about what the implications are for your capital spending this year? And what's a good number to look at for capital intensity for 2016,
is Bernard. We still are on the model of 7%. We're a little bit higher. It was a little bit lumpy in 2015, but in 20 16, we expect to be in that 7% mode.
Okay. And then the follow-up is related to the target financial model. John asked about the gross margin target of 40%. You also have an 18% operating margin target. Can you talk about your confidence in getting to both the 40% and 18% targets next year?
Do you have greater confidence in 1 versus the other? And what demand backdrop do you need to get to those 2 targets?
Well, we based our model on a $4,000,000,000 revenue and obviously the challenge in the back half of twenty fifteen and at least what we're seeing so far and as we start 2016, it would point to potentially a lower revenue, and that will definitely affect the timing of the achievement of the target model. But we still think at the revenue level, it is our target and are moving towards that.
And to clarify that, Bernard, do you think the savings that you have lined up for this year, which will directly impact COGS and indirectly it sounds like impact overhead, do those keep the business model even in a difficult demand environment or are those margin expansive in the kind of demand environment that we're looking at this year?
Well, I expect they will be margin enhancing.
And our next question comes from the line of Tristan Gerra with Baird.
You've talked about orders picking up for Q2, yet industrial still weak. Are you still looking at the inventory a inventory normalization for white good appliances and industrial by Q2, which I think was your commentary from a quarter ago?
Yes. So we put white goods in the consumer sector, as we report. And we are expecting that inventory correction to continue in Q1, but be largely complete at that time.
Okay. And then any quick estimate in terms of what you think the mix of Skylake will be in Q1?
So, we think our overall computing, as I mentioned, will be roughly flat. Skylake should increase in double digits, but we think that the hard drive and peripherals markets will continue to be a little bit soft in Q1.
Great. Thank you.
Thank And your next question comes from the line of Steve Smiggy with Raymond James. Your line is now open.
Thanks. This is Vince Valentino in for Steve. I was hoping you could talk about any new smartphone wireless charging design wins you may have gone during the quarter and when do you expect the ones that you currently have now to
ramp? So there are some ramping now from Korea handset makers. And as we understand it, there'll be more around the June time frame other customers.
Okay. And do you think 2016 is a year where we can see from wireless charging from wearable or PC applications?
Most likely not. We're still working design wins there. I think that's wearables specifically will most likely be next year.
Okay, great. Thank you.
Thank you. And our next question comes from the line of Ian Ng with MKM Partners. Your line is now open.
Yes. Thank you. You talked about reducing the fixed portion of your manufacturing footprint. Do you have a sense of the new quarterly revenue run rates to fully utilized manufacturing? And I seem to recall in the past, the argument against reducing capacity was you couldn't really monetize the equipment and that this limits servicing higher revenues.
So just a sense of what's changed since then?
Really, there's a couple of things going on. You've heard us mention our agreement with Fujitsu on a joint venture. That opens up significant capacity to us at some very attractive costs. And so we're actually not limiting or reducing our dollar volume capabilities with these footprint changes. So that piece of the equation is a little different than you described.
So we're expecting to be able to to continue to increase our capability to generate revenue, while shrinking our footprints. Relative to revenues, we mentioned before, we like to aim at around 85% utilization as kind of a normal run rate, gives us ability to swing up if the market warrants it and doesn't require a lot of work on the downside. And those numbers are reachable at revenue levels similar to the last time we were there, which would have been Q2 of last year.
Thanks for clarifying. And in your prepared remarks, you talked about being in the early stages of achieving the Aptina potential on ADAS. So just what are the catalysts for ADAS this year? Is it really propagation of this feature across the automotive tiers? Is it adoption of autonomous driving at some point?
Is it if certain suppliers like FireEye win or not? Just get a sense of the catalysts there.
Yes. No, the catalysts are really more models adopting well, all models adopting the rear cameras and then more models adopting ADAS. It's just an expansion. Autonomous driving is not a factor at this point. And we do work with several partners in the field.
So we're not dependent on any one partner with from a success perspective.
Great. Thank you, Keith.
Thank you. And our next question comes from the line of Rajvindra Gill with Needham and Company. Your line is now open.
Hi, this is Josh Buckhalter on behalf of Raji. Thank you for taking my questions. I was hoping you could provide a little more granularity on what led specifically to the OpEx decline in on a dollar basis in Q4 and how should we kind of think about a run rate going forward? Is it more tied to revenue or is there a dollar target? Thank you.
So this is Bernard. Remember in our Q3 earnings call, we announced that we were taking both temporary and permanent reductions, and that's what you see in the 4th quarter results. We were even favorable to those numbers. In the Q1, we expect some of those to come back. The temporary nature of some of our savings will come back.
So we expect to still be better by the permanent reduction. So in the our midpoint of our guidance is 191. So that's at least for short term, that's what we expect our OpEx to be. Beyond that, we don't expect to have any major changes except just for inflationary merit based increases.
Okay. Thank you. That's helpful. And then given the step down in revenue in the Q1 and your commentary about bookings increasing so far in January. I know you don't guide to beyond the Q1, but can we start to think about maybe an above seasonal quarter given that qualitative commentary?
Yes, I think it's really too early to prognosticate there until after Chinese New Year this week.
Okay. It's worth a try. Thank you, guys.
Thank you. And our next question comes from the line of Harlan Sur with JP Morgan. Your line is now open.
Good morning. Thanks for taking my question. On the move to a more low cost and variable based cost structure with more outsourcing, I think you had previously mentioned talking about kind of mid teens as a percent of your production output this year to be outsourced relative to I think kind of the 5% that you did last year. Do you now have a higher target mix in mind or are you just accelerating that move to kind of the 15% range?
No, actually, our outsourcing model is, has been and will continue to be approximately 20% outsourced, 80% insourced. We think that's a great flex point for us and allows us to be most effective with our capital. These are really a shift inside of network that we're discussing, not a shift outside of network.
Got it. Okay. And then on the disti inventories, on a dollar basis, they were down. Can you just help us quantify days of inventory in disties in Q4 and help us understand whether they declined in days Q3 to Q4? I believe you guys were sitting at around 9.5 weeks exiting the September quarter?
It's they're pretty flat in terms of weeks.
Okay. Thank you.
Welcome.
Thank you. And our next question comes from the line of Betsy Van Hees with Wedbush Securities. Your line is now open.
Good morning. Thanks so much for taking my questions. Thanks Keith very much for the clarification on the inventory work through in China and white goods in your consumer bucket. But with regard to industrial being flat to down quarter on quarter, I believe that you said that you were still seeing inventory also in China specifically that needed to be burn off. What products need to be worked through?
And how long is this going to take? Is this a 1 to 2 quarter issue?
Yes. We actually think Q1 will see the majority of that, and it's really all building related sales. So it's pardon me, it shows up in equipment, it shows up in power supplies, it shows up in a broad sector of things that buildings require.
Thanks. That was very helpful. And then my follow-up question is that in 2015, you guys bought back $372,000,000 of your $1,000,000,000 stock buyback. So with the stock hitting a 52 week low today, how should we be thinking about the strength of your buyback in light of the pending acquisition of Fairchild and the challenging macro backdrop?
Thank you, Nishu.
Yes. So right now, obviously, with the impending acquisition of Fairchild, we are kind of on a wait and see mode, and after that, we'll be discussing it again.
All right. Thanks very much.
Thank you. And our next question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is now open.
Hi. This is Vinay calling in for Craig. Thanks for taking my question. I had a follow-up on communications. So you're seeing weakness in the high end similar to a lot of your peers.
Just wanted to touch upon like what are the trends you're seeing at China OEMs and what kind of visibility do you have for the business for this year?
So China OEMs, there definitely seems to be some share consolidation to a small subset of the suppliers there. Overall, we're actually not seeing a big weakness, but we're certainly seeing more growth in that kind of mid tier than we are at the high end. So our expectations for China based handset companies is to grow this year, probably in the mid to high single digits.
Got it. That's really helpful. For my follow-up, can you just talk about like the image sensor business? Like post Aptina, you talked about improving gross margins for the business for the next couple of years. Can you just talk about any gross margin initiatives specifically apart from just mix and how is that playing out and what should we expect this year?
Well, we do have several manufacturing in sourcing and cost reduction efforts underway. And those are not maybe as big as some of the mix changes, but they're certainly in the tens of bps for impact in 2016.
Got it. Thank you.
And our next question comes from the line of Shawn Harrison with Longbow Research. Your line is now open.
Hi, good morning. I apologize if some of these are duplicate if I got on late. But I thought I heard a comment earlier about potential restocking activity necessary in the Q2. And I was wondering if that view is more of kind of just based upon what you're seeing in bookings rates versus inventory in the channel? Or are you actually hearing anecdotal commentary from distributors?
And if so, was it the Western distributors or particularly within China where you think a destocking event should occur?
Yes. We have a lot of data points that we use. We look at the orders on us from our distributors. We look at the orders on them from their customers and we also look in general of what's going on with our OEM. And when we look at that, in essence, we're seeing more orders from the OEMs and on our distributors customers for them than we are orders on us from our distributors.
So that's how we get there with that conclusion.
Okay. Is this globally focused or is there
a regional dynamic at play? It's primarily Asia.
Okay. And then as my follow-up, as I said, sorry if I missed this, but Sanyo, did that break even in the December quarter
as it's been doing for
the past couple of quarters?
No, slightly negative. We had very significant headwinds revenue there on the consumer piece of that business in the Q4 as we announced. We don't expect that's a lasting thing, but it certainly was a big impact in Q4.
Okay.
Thank you, Keith.
Thank you. And our next question comes from the line of Chris Rolland with FBR and Company. Your line is now open.
Hey, guys. Thanks for the question. Just a follow-up there on Sanyo. So you said it was slightly negative. Maybe if you guys could give us a new kind of breakeven quarterly run rate?
And then also kind of how should think about a more sustainable run rate for these guys going forward?
Yes. The 3rd quarter rates are what we expect to be more sustainable. We will continue to bring down our breakevens on that business because we're not aiming for breakeven, we want profit. And we'll be able to discuss that as part of our overall company cost improvements that I mentioned at the beginning of my remarks. So as we go through the year, we'll get the specifics on that, but you can expect the breakeven to continue to come down for that business.
And we should see that business operating back up in the 120s very shortly.
Okay, great. And then also perhaps you guys can talk about maybe some maximum debt metrics that you guys might take on for the company. Is there anything that we can think about in terms of a max range for, let's say, like EBITDA to debt or sorry, EBITDA to debt interest expense or just total debt to EBITDA?
So I don't want to get into too much specifics, but pretty much we think that what we have out there right now to do the Fairchild acquisition is appropriate in terms leverage capability.
And if you could just remind us what kind of interest rate you think you might be able to get to finance the Fairchild deal?
The indicative terms that we obtained when we on the commitment papers when we did the announcement in November was a LIBOR plus 3.50 on a term loan B with a LIBOR floor of 0.75. The crate markets have tightened a bit since then, so it probably will be a little bit higher.
Great. Thanks so much, guys.
Thank you. And I'm not showing any further questions at this time. I would now like turn the call back to Mr. Parag Agarwal for closing remarks.
Thank you, everyone, for joining the call today. We look forward to seeing you at various conference during the quarter. Thank you and bye bye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.