Good afternoon. My name is Connor, and I will be your conference operator today. At this time, I would like to welcome everyone to the ON Semiconductor Third Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Parag Agarwal, Vice President of Investor Relations, you may begin your conference.
Thank you, Connor. Good evening and thank you for joining ON Semiconductor Corporation's 3rd quarter 2015 quarter results conference call. I'm joined today by Keith Jackson, our President and CEO and Bernard Gutman, our CFO. This call is being webcast on the Investors section of our website at www.awnsemi.com. A replay will be available on our website approximately 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 Q3 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 includes certain non GAAP financial measures. Reconciliation 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 or other forward looking statements regarding future events or future financial performance of the company.
The words believe, estimate, project, anticipate, intend, may, expect, will, 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 agreements or results to differ materially from projections. Important factors which can affect our business, including factors that could cause our actual results to differ materially 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 Q3 of 2015. Our estimates may change and the company assumes no obligation to update forward looking statements to reflect actual results, changed assumptions, other factors, except as required by the law.
During the Q4, we will be attending the Credit Suisse Technology Conference on December 1 in Scottsdale, Arizona. Now, let me turn it over to Bernard Gutmann, who will provide an overview of Q3 2015 results. Bernard?
Thank you, Bharat, and thank you, everyone, for joining us today. Let me start by providing you an update on overall business results. As many of our peers in the semiconductors industry have noted, the global macroeconomic environment remains challenging. Despite a rather challenging microeconomic environment, we were able to deliver relatively strong growth driven by share gains and ramp on our design wins across multiple end markets. Although our revenue grew at a reasonable pace in the Q3, being a broad based analog company exposed to multiple end markets and geographies, we're not wholly immune from the impact of prevailing economic challenges.
We saw weakness in the communications end market and broad based weakness in China. In response to soft microeconomic conditions, we have taken a number of measures to control costs and expenses. These measures include permanent actions such as targeted headcount reductions and temporary measures such as shutdown of facilities during holidays and elimination of non critical spending across the company. The impact of these cost reduction measures is reflected in our guidance for the 4th quarter. We are fully prepared to take further actions to reduce our costs and expenses if the macroeconomic conditions continue to be challenging.
Now let me provide you an update of our Q3 2015 results. ON Semiconductor today announced that whole revenue for the Q3 of 2015 was approximately $904,000,000 an increase of approximately 3 percent as compared to the Q2 of 2015. GAAP net income for the Q3 was $0.11 per diluted share. Excluding the impact of amortization of intangibles and restructuring and other special items, non GAAP net income for the 3rd quarter was 0 point 2 $3 per diluted share. GAAP and non GAAP gross margin for the Q3 were 34.1% as compared to 34.6% in the Q2 of 2015.
The 50 basis points of sequential decline was largely driven by lower utilization in the Q3 as compared to the 2nd quarter, unfavorable product mix and ASP pressure in certain markets. We experienced stronger than expected growth in Computing and Consumer, whereas growth in Automotive and Communications lagged expectations. Keith will provide additional details on the end markets in his prepared remarks. Average selling prices for the Q3 decreased by approximately 2% as compared to the Q2 of 2015. Despite a sequential revenue growth of 3% in the 3rd quarter, utilization of our factories was lower as compared to the 2nd quarter.
We reduced utilization of our factories to manage internal and distribution channel inventory levels. GAAP operating margin for the Q3 of 2015 was approximately 7.7%, flat quarter over quarter. Our non GAAP operating margin for the 3rd quarter was 11.8%, down approximately 50 basis points as compared to the Q2 of 2015, primarily due to lower gross margin in the 3rd quarter. GAAP operating expenses for the 3rd quarter were approximately $239,000,000 as compared to approximately $237,000,000 for the Q2 of 2015. Non GAAP operating expenses for the 3rd quarter were approximately $202,000,000 up approximately $6,000,000 as compared to the Q2 of 2015.
As expected, annual merit increases, which become effective in the Q3, were the primary contributor for the higher operating expenses in the 3rd quarter as compared to the Q2. We exited the Q3 of 2015 with cash, cash equivalents and short term investments of approximately $558,000,000 a decrease of approximately $20,000,000 from the 2nd quarter. Operating cash flow for the Q3 was approximately $128,000,000 as compared to approximately $102,000,000 in the 2nd quarter. We spent approximately $65,000,000 of cash for the purchase of capital equipment. During the Q3, we used approximately $30,000,000 for the repayment of long term debt and capital leases and we used approximately $100,000,000 to repurchase approximately 9,400,000 shares of our common stock at an average price of $10.64 At the end of the Q3, approximately $648,000,000 remains of the total authorized amount of $1,000,000,000 under the current stock repurchase program, which was announced on December 1, 2014.
We remain fully committed to our $1,000,000,000 stock repurchase program and the current pace we are tracking significantly ahead of ratable repurchases in our stock repurchase program. We believe that at current level the stock price does not reflect the potential of our company and use of our excess cash to repurchase our stock is a compelling investment. At the end of the Q3 of 2015, ON Semiconductor days of inventory on hand were 116 days, down approximately 2 days from the prior quarter. In the Q3 of 2015, distribution inventory decreased by approximately $21,000,000 quarter over quarter and distribution resales increased by approximately 1% quarter over quarter. In terms of days, distribution inventory declined to the lowest level in approximately the last year.
For the Q3 of 20 15, our lead times were approximately flat as compared to the Q2. Our global factory utilization for the 3rd quarter was down slightly as compared to the Q2. As I had indicated earlier, our factory utilization was lower than expected as we reduced loadings to manage inventory levels. Now let me provide you an update on performance by our business units. Starting with Image Sensor Group.
Revenue for our Image Sensor Group was approximately $189,000,000 up approximately 9% over the 2nd quarter. Revenue for our standard products group for the Q3 of 2015 was approximately 312,000,000 dollars up approximately 1% quarter over quarter. Revenue for our Application Products Group was approximately 275,000,000 dollars up approximately 5% over the Q2. Revenue for the Q3 of 2015 for the System Solutions Group was approximately $128,000,000 as compared to $136,000,000 in the 2nd quarter. A steep decline in appliances related revenue in China and broad based weakness in Japan contributed to weaker than expected revenue from our System Solutions 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 comment on the business trends in the Q3. Bookings during the Q3 were stable and we did not see any significant variation in booking trends throughout the quarter.
From a revenue perspective, we saw weakness in Americas, Japan and China. Gains in the security market helped us offset much of the weakness in China. As Bernard indicated in his prepared remarks, the global macroeconomic environment remains challenging, which we believe is leading to weaker than seasonal trends in our business. However, we are not seeing noticeable change in the underlying fundamentals of our business. Bookings thus far in the current quarter have been stable and current trends point to improving business conditions early next year.
Although the current macroeconomic environment poses significant challenges to our business, we continue to outpace the industry in revenue growth as our design wins convert to revenue. Our strategy of focusing investments in automotive, industrial and smartphone markets is yielding strong results. And I believe that our momentum in these markets should accelerate in 2016 as we launch additional new products. As Bernard indicated in his prepared remarks, in response to a slowing demand environment, we have taken a number of measures to manage our expenses. At this time, we don't see the need for a deep cut in our operating expenses, but if the macroeconomic environment continues to deteriorate, we will act to realign our costs with revenue.
Now I'll provide some details of the progress in our various end markets. The automotive end market represented approximately 31% of our revenue in the 3rd quarter and was approximately flat quarter over quarter, despite a weaker seasonality in the Q3. Demand remains strong for our image sensor solutions driven by the increased adoption of rearview cameras and ADAS safety systems. Our LED driver business continues to show growth driven by increased usage across all vehicle segments. Additionally, we saw good results in our automotive related power management analog products business as switch mode power supplies continue to proliferate in light vehicles.
Finally, our power MOSFET business continues to grow as we continue to expand our portfolio and package options. Our automotive related design win pipeline continues to grow at a rapid pace. During the Q3, we secured design wins for our VGA image sensor to support the 2018 United States mandate for rear camera rear view cameras. We also won design for substantial sensor interface IC opportunity for powertrain applications in Europe. For body electronics, we secured an important win at a key European automotive Tier 1 integrator for our SmartFET products for relay replacements.
Revenue for the Q4 in the automotive 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 Q3 and was up approximately 2% quarter over quarter driven by ramp of new programs during the Q3. We continue to increase our presence with the key players in the smartphone market. And so far this year, we have posted robust year over year growth in revenue from a few strategically important smartphone customers. We continue to be on track with our wireless charging program and we expect to see initial revenue ramp starting in early 2016.
Revenues for the Q4 and the communications end market are expected to be down quarter over quarter. The consumer end market represented approximately 15% of our revenue in the 3rd quarter and was up approximately 7% quarter over quarter driven by seasonality and ramp of new programs for the action sports camera market. In the Q3, a leading customer in the action sports camera market launched 3 new cameras using our image sensors. Growth in the consumer market was also driven by build of video game consoles ahead of the holiday season. Appliance related consumer revenue declined sharply in the 3rd quarter due to seasonality and excess channel inventory in China.
Revenue for the Q4 for our consumer segment 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 3rd quarter and was approximately flat quarter over quarter. We saw broad based weakness in the industrial market. However, share gains in the security market helped us offset much of the weakness. We've seen a significant slowdown in demand from our large global industrial OEMs.
We believe that a softening macroeconomic condition, especially in China, is the primary driver of slowdown in demand in the industrial end market. Residential construction remains a bright spot in the industrial market and we continue to grow our share in the residential circuit breaker market. In the security market, sales of our image sensors grew by more than 20% quarter over quarter. We also saw strength in other industrial sub segments such as our machine vision for our CMOS and CCD image sensors. We expanded the Python family of high performance global shutter sensors with the introduction of various members of the Python family ranging in resolution from 10 megapixels to 25 megapixels.
Revenue for the Q4 for our industrial segment is expected to be down quarter over quarter. Approximately 13% of our revenue in the 3rd quarter and was up approximately 10% compared to the 2nd quarter, driven primarily by ramp in Intel's Skylake platform. We believe that not only our content has increased in a significant manner on the Skylake platform, but we are also gaining share. We expect our market share gains and content increase to continue in 2016. Revenue for the Q4 in our Computing segment Now
for Q4 of 2015 outlook. Based on Now for Q4 of 2015 outlook. Based on product booking trends, backlog levels and estimated turns levels, we anticipate that toll on semiconductor revenues will be approximately $830,000,000 to 870,000,000 in the Q4 of 2015. Backlog levels for the Q4 of 2015 represent approximately 80% to 85% of our anticipated 4th quarter revenues. We expect inventory at distributors to decline quarter over quarter on a dollar basis.
We expect total capital expenditure of approximately $55,000,000 to $65,000,000 in the Q4 of 2015. For the Q4 of 2015, we expect GAAP and non GAAP gross margin of approximately 32.6% to 34.6%. We intend to reduce our factory utilization in the 4th quarter as compared to the 3rd quarter to manage our internal and channeled inventories. We expect total GAAP operating expenses of approximately $225,000,000 to $237,000,000 Our GAAP operating expenses include the amortization of intangible, restructuring, asset impairment and other charges, which are expected to be approximately $37,000,000 to $39,000,000 We expect total non GAAP operating expenses of approximately $188,000,000 to $198,000,000 The sequential decline of approximately $9,000,000 is driven by our expense reduction measures. We anticipate GAAP net interest expense and other expenses will be approximately $13,000,000 to $16,000,000 in the Q4 of 2015, 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 $8,000,000 We also expect share based compensation of approximately $11,000,000 to $13,000,000 in the Q4 of 2015, 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 Q4 of 2015 is expected to be approximately 418,000,000 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 Form 10 ks. With that, I would like to start the Q and A session. Thank you.
And Connor, please open up the line for questions.
Your first question comes from the line of Ross Seymore with Deutsche Bank. Your line is open.
Hey, guys. This is actually Matt Diamond on Ross' behalf. Thanks for letting me ask a question. I meant it was said that you're going to take utilization down in the Q4 to manage channel inventory levels. I'm curious, do you see that as a 1 quarter phenomenon?
Or given the broad based weakness that you and many of your peers are feeling, is this something that could carry over into the beginning of 2016 as well?
I believe we're nearing the end of that. We have reduced our channel inventory in dollars every quarter this year, and we are now operating toward the leanest end in that channel that we have with inventories. Remind you that we recognize revenue on a sell through basis and frankly the distribution channel globally has been reducing their inventories, which does not impact our revenues. So at this point, we see that happening again in the Q4. But as I mentioned, I think we're near the end of that cycle as we've reached the leanest points that we can still rationally service our customers.
And to clarify, we have reduced factory utilization not only in the Q4, but also in the Q3 as a result of that and in the Q2.
Duly noted. And the OpEx cuts, it was mentioned that some of them are going to be permanent. I'm curious if to what extent are they permanent? And to what extent could they come back in 1Q if macro ends up being actually a little bit better than expected?
So it's a mixture of probably half and half.
Okay. And last question, there's been a lot chatter about M and A recently. You've been involved in it heavily in the past, but at your Analyst Day, you committed to some internally focus goes much to the refreshment of shareholders. I'm curious, have your views on M and A changed at all in the current environment? If you could just comment on that then, sure, that'd be greatly appreciated.
Yes. We remain committed to returning capital to shareholders. As Bernard mentioned in his remarks, we believe that we will continue strongly buying our stock back at prices we believe are under the long term value. And any M and A would fit it within that framework. So we plan on continuing that.
We also mentioned in our conferences that we think tuck in for technology gains is the best strategy for us. We still believe that. As the industry accelerates in some of its consolidation, we will have to take that into account to make sure we do protect the company. But our primary focus again is capital return to our shareholders.
Excellent. Thanks very much.
Your next question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is open.
Thanks for taking my question. I'm trying to get a better picture of trends from your prepared remarks. I think, one thing you mentioned that current trends point to improving trends. But when I look at the lowered OpEx and the lowered utilization, it appears that you're still somewhat cautious. And I know in general, you tend to be conservative.
So what is your read of the macro environment? Is it just weak visibility? Are customers still feeling nervous? What is your general read of the demand environment?
My read of the demand environment is there's very slight growth globally. It's not a contraction. The end markets are not growing nearly as much as they were in places like China, but they're not contracting dramatically. So we think what we're seeing mostly is a supply chain correction. And so therefore, the cuts and changes we're doing reflect some near term actions to protect profitability, but not an expectation of any significant change in market demand.
Got it. Very helpful. And as a follow-up, you mentioned supply chain effects. Could you help us quantify what was sell in versus sell out trends during the quarter? And how many weeks of inventory distribution inventory do you have versus what is normal?
So our normal range has been somewhere around 11 weeks and we have been, as Keith mentioned earlier, decreasing inventory in the channel every quarter throughout this year. As we mentioned in the remarks, we decreased inventories by $21,000,000 And in terms of weeks, we're at the lowest point in the last year under 10 weeks.
Got it. Thank you. Your next question comes from the line of John Pitzer with Credit Suisse. Your line is open.
Yes. Good afternoon, guys. Thanks for letting me ask the questions. Keith, this might be a little bit on the nitpicking side, but in the prepared comments, you talked about ASPs being down about 2% sequentially. And I can't remember a quarter that they haven't been sort of flat to down 1%.
So I'm just kind of curious, you talk about kind of pricing pressure picking up. Can you elaborate there anymore how much of this was mix driven? Do you think this is going to continue? And how do I think about pricing going forward during the soft period?
Yes. We normally see, John, pricing pressures increased when the market makes changes. And in this case, I think the Q3 slowdown in the supply chain and reduction by distribution put some unexpected pressure on the competition and so they reacted with a little more pricing to try and offset that. So I really don't see that as a continued trend. I would be surprised to see that continue into the Q1.
That's helpful guys. And then maybe as my follow-up, gross margins came in a little bit light in the September quarter. And I guess I'm just trying to figure out or if you can help me better understand the bridge from here to kind of your 2017 target of 40% longer term? I'm just trying to figure out how much of this is going to be mix dependent? How much of this is going to be just more efficiently using your fixed assets?
Any help there would be appreciated.
Yes. Obviously, the slowdown that we saw right now is putting a making the transition to the 40% more prolonged. We based on that 40% on a $4,000,000,000 revenue and what we have seen right now going on this year with sub seasonal growth has made the transition to that goal more challenging. Mix definitely is a substantial portion. We talked about that in the Analyst Day.
It is a significant portion of the transition. And self help or best to better use of manufacturing assets is another one that will definitely contribute a lot, but we still need the revenue to get there. It's a combination of all three.
Then Keith, maybe I could take a last quick one in. The compute guidance for Q4 to be kind of flat, a little bit surprising to me given how early we are in the Skylake ramp. So are there moving parts within that where older platforms are declining and Skylake continue to grow or help me understand the flat guidance in Q4?
I think there's some opportunity for improvement there and it really all depends on the mix of units that the computing industry builds during Q4. So we've taken a shot at what we think will be the conversion to Skylake rates in Q4. But I believe that we have certainly called that certainly in a fashion that allows for some upside.
Thanks, guys.
Your next question comes from the line of Chris Caso with Susquehanna Financial. Your line is open.
Yes, thank you. Good afternoon. Just first question on gross margins and maybe just looking a little bit in the shorter term, can you talk about the impact on gross margins from utilization versus mix and I guess ASP and how that changes into the Q4? Obviously, it would seem that the utilization is kind of the easiest lever to move here and seeing how much benefit that would have going forward if that were to get better.
Yes. So with the complex network and product set that we have, it's pretty difficult to completely isolate those. I would still characterize the Q3 and Q4 being driven largely by utilization and probably in 2nd order by mix and third piece ASPs.
Right. And just within the utilization, could you remind us, does that impact the gross margins in the same quarter? Is there a quarter lag?
It is typically in the same quarter, although there is a little bit of a lag based on how it cycled through.
Okay. And within the communications market, based on what you had talked about for the Q3 and the sequential decline in the 4th quarter, the seasonality there doesn't seem to be quite that strong. And obviously, there's a lot of different dynamics with different OEMs going on there. Maybe you could just outline what you're seeing in that segment and why the seasonality isn't quite strong as we've seen in the past?
Yes. So our Q3, we were expecting much more growth in the handset business. What we did see definitely is a slowdown in China on the build rates and certain OEMs losing some share, which netted up to a modest growth in Q3. Q4 normally is not a growth sequentially. And so we think it's perhaps more normal seasonality in Q4 than not.
Great. Thank you. Your next question comes from the line of Christopher Rolland with FBR and Company. Your line is open.
Hey, guys. Thanks for the question.
You guys mentioned you're on track with your wireless charging program and expect to see initial revenue ramp starting in early 2016. So what kind of design activity are you guys seeing there? Do you guys have a design beyond the Qualcomm reference design? And what kind of guys are picking it up? Are they Chinese guys or from other geographies?
So the initial ramps are all with the Qualcomm reference platform and they are from Asia, not necessarily China, the first ones, but the China handsets are right behind that. For more of the transmit and pad side, it will be more towards midyear for us.
Okay, great. And then also when we look at your various end markets in 4Q, there were mostly downs there and not much more description. Can you guys kind of force rank that for us to give us an idea of what might be worse than others?
Okay. Let's see here. Typically, I guess, see if we got it here. The consumer will probably be down the most followed by comms and then industrial and then auto and computing we said were flat.
Okay, great. Thank you so much guys.
Your next question comes from the line of Craig Ellis with B. Riley. Your line is open.
Thanks for taking the question. Keith, I just wanted to go back to your comments about seeing an improved business environment in the Q1. Can you go into some more detail in terms of the things that you're seeing that lend that confidence?
Yes. We our bookings and backlog going into the Q1 as compared to where we were this time last quarter and as compared to our normal seasonality are stronger than both of those things. So what we're seeing, as I mentioned earlier, I believe a lot of this is inventory correction and we're seeing the signs that perhaps that is through and we're seeing the orders being placed for Q1 more in line with the market demand.
Thanks for that. And the follow-up question is for Bernard. Bernard, there's been a very robust and I think well appreciated move with the buyback on the part of investors. Are we at a level where we can now more confident look at averages over the last three quarters for what the company should be repurchasing as we look ahead? Or do we think about the intensity with which you'll execute the buyback from here?
The way I would answer it is, obviously, we'll look at the market and the stock price. We are definitely way ahead of the ratable portion. I would view in general being ratable over the 4 years. And at the same time, we do have to take into account the debt repayments we have throughout time that might moderate or increase the timing during the specific quarters.
Anything stand out on next year's debt repayment schedule that we should be aware of?
Well, we have a few things here and there and we have the convert of about $357,000,000 due in December of 2016.
Thank you. Your next question comes from the line of Steve Smiggy with Raymond James. Your line is open.
Great. Thanks a lot guys. And Keith, I'll say thanks for making the comments about the potential impact here. You did a good job of calling it back in October. Just curious on some of the following up on some of the other gross margin questions.
I think at Analyst Day, you had talked about potentially moving some manufacturing into some outsource facilities in Japan and I think those were going to be lower cost. So I was just curious is that happening or does the environment, software environment make that less likely? And if it is happening, how does that sort of play out for benefits to gross margin in the coming year?
Yes, it is happening, and it's happening at the fastest rate we're able and quite frankly, ahead of our expectations. I think the 2 primary benefits there, one certainly will be a cost basis, but the other one is going to be capital reductions.
So
the key for us, Steve, is getting all of our processes and products qualified. And that is a process that takes longer than we'd like, but involves our customers. But we're seeing a good ramp there, and I would expect that ramp to continue through 2016, both relieving the pressure on capital expenditures and improving margins. Just to put it in perspective though, at this stage, we're running much less than 5% of our total production there. And next year, we hope we can get that up in the high teens.
Okay, great. Thanks. I just want to follow-up on the ADAS space and the cameras there. I think you've got a pretty good tie in there to Mobileye. There's noise coming out of other players about trying to get in that processor market.
Do you work with other guys to try to be positioned as that ramps your cameras work there or is it not a major issue?
No, we do reference designs with all of the players in that marketplace.
Okay, great.
If I
could just sneak one last one in. Just in terms of the reduction in utilization to adjust for the inventory, You guys have talked about reducing inventory throughout the year and being at record lows. Is the move to reduce inventory here about that you just want to keep taking it lower to be cautious or is there certain there's just sometimes different pieces of inventory move up and that's why you have to work them down?
I guess we believe in controlling the inventory. Anytime you let that get away from you, the results are very bad. And I think you may have seen that with some other announcements. And so we're just a believer in keeping a tight lid on that. We also believe that as the market turns, it gives us much more upside potential.
Your next question comes from the line of Vijay Rakesh with Mizuho. Your line is open.
Hi, guys. Thanks. Just on the overall distill channel inventory, I know you mentioned it came down. How much it come down percentage wise quarter on quarter? And what's your historical levels been?
So it came down approximately what is that, approximately 8%, 9%. And we are almost at the lowest level we're close to the lowest level ever.
Got it. And if you look at your different the 2 big markets, automotive, industrial, where are channel inventories now in those segments? And if you could give us some more color by geography, how it looks like in China and U. S, Europe? Thanks.
Yes. The auto market, I think the inventories there are in very good control. I don't see any excesses at all in that channel. In industrial, there are some excesses in China. Just frankly, we mentioned some of those earlier on the call.
So maybe a quarter's worth is something that I would keep in mind there. And then geographically, the Americas and Europe generically tend to be in pretty good shape.
Got it. And just last question here on the wireless side. I know you mentioned you have in the press release you said design wins on the handset side. Obviously, it's been a little delayed. How do you see that ramp happening through next year?
Thanks.
Okay. So I think you're referring to wireless charging. And again, we get our first handsets that ramp kind of February timeframe. And then more handsets will come on in the Q2 and Q3, etcetera. So it's really kind of one major platform in Q1 and then more after that.
Thanks a lot. Your next question comes from the line of Ian Ng with MKM Partners. Your line is open.
Yes, thanks. First question for Bernard on the expense controls. So after the targeted headcount reductions, how much of your cost structure is fixed cost and how much is potentially variable such as doing things like shutdowns, looking at variable compensation, etcetera?
Within the OpEx, that's a pretty difficult Definitely, as you said, there is the bonus and to some extent, stock based comp, which we quote what those numbers are in the press release, it's $11,000,000 to $13,000,000 that are purely that can change with results. You can make any cost variable if you need to. So in tough conditions, we'll make sure that we make every cost variable except maybe depreciation. But right now, we don't feel we have the need to based on what we see as the long term demand.
Okay, great. And then automotive markets holding up looks like fairly nicely September as well as the December guidance. I mean is this really all ADAS and camera product cycles or are you somehow having more favorable OEM exposure? Also are you seeing any China weakness? You would think China would have some contagion to the European auto suppliers?
Yes, sure. So I'll start with the last first. China growth has definitely slowed to a trickle. So the growth in the auto market is much slower than it was a year ago. Our growth, however, is really not just the cameras.
That certainly is the most spectacular piece of the growth. But our design wins have been growing without throughout the car, led by our lighting solutions, front headlights, taillights, interior lighting, our safety solutions and our body power electronics.
Your next question comes from the line of Rajvindra Gill with Needham and Company. Your line is open.
Yes, thanks for taking my questions. The first question has to do with OpEx. As you kind of talked about that you're bringing OpEx down to reflect a different reality in terms of overall growth rates. And clearly, worldwide GDP growth rates are coming down industry. How should we think about OpEx growth going into 2016 or just your overall theory?
Will that grow in line with revenue growth? Or do you want are always going to manage where a process where revenue growth is going to outstrip OpEx growth?
In general terms, revenue growth should outstrip by some factor the OpEx growth. At the same time, we need to balance and make sure that we're investing enough in our R and D. But in our target model, we have we basically are counting on about 100 basis points of leverage on the OpEx line over the next 2 years.
I'm sorry, what was that, 100 basis points?
Yes.
And my next question is really has to do with the overall economy. You mentioned that this is more of a supply chain adjustment versus a contraction in demand. But it seems like the industry has been in an inventory correction mode for the last 3 to 4 quarters ever since October of last year, mainly driven because of China slowdown. So under an environment where you have maybe low growth and the supply chain is rebalancing itself, I mean, how should we look at your business going forward? You guys have been able to grow over the market this year around 10%, 11% year over year in 2015.
But going forward in the low growth environment, how should we look at your business and where are there opportunities where you're going to be able to grow above the market?
Yes. We still believe we're going to be outgrowing the markets. And as Bernard mentioned, we're not immune, so the absolute rate may change a bit. But we still believe in the models we did show at Analyst Day and in the 3 focused markets, you should be looking at mid to upper single digit growth for those markets, which should give you a blend number pretty close to mid single digit growth over the next several years. The inventory correction, again, I think the industry geared up for a China that was growing at 8%, 9%, 10% across the board in the industrial and electronic sectors That clearly has stalled, and it has taken several quarters to kind of get that in shape.
But as I mentioned earlier, I think we're also pretty close to the end of that correction.
Thank you.
Your next question comes from the line of Tristan Gerra with Baird. Your line is open.
Hi, good afternoon. Could you remind us what the percentage of Aptina today is consumer driven? And what type of market share Aptina has in automotive today? And where could it get next year?
Okay. So the consumer portion of Aptina, it's really more on the ISG side. Right.
I'll just have to step in. We don't track Aptina any longer. We do our total imaging sector, but we can give you those percentages.
Okay.
It is probably 15% of the total, probably driven to some extent by the sports action camera more than anything else.
Okay. And what type of market share gain do you see? And also if you could maybe give us an update on the gross margin progress that you expect as you reduce the consumer exposure in that business next year?
So I'll cover the growth piece of it and let Bernard talk about gross margins. We are expecting double digit growth in imaging for the company next year, mostly driven by automotive, which has our best margins. And we think that story stays intact. Some of the other markets like the security market where we've been gaining a lot of market share there, we'll probably grow but not grow as fast.
And from the margins point of view, first, I'd like to say we are on track to deliver what we said when we purchased the company, which is an $0.08 accretion or more in 2015 and $0.10 in 2016. We have seen improvements in the gross margin from the level when we purchased them, which was in the middle to high 20s. We're still not at the desired place, it's taking us a little bit longer as we have as we are still selling some legacy parts into mobile that will continue for a while. But in general, we are very happy and excited about the performance of this acquisition, giving us the, as Keith mentioned, double digit growth as well as a nice bottom line accretion.
Great. Very useful. Thank you.
Your next question comes from the line of Chris Danely with Citi. Your line is open.
Hey, thanks guys. On the OpEx cuts, is that going to be pretty evenly weighted between R and D and SG and A? And then assuming we get back to some semblance of normal seasonality next year if
revenues decline? In general terms, yes, it is pretty much across all the and L geographies within OpEx.
And so if we assume that revenue is down a little bit in Q1 seasonally, would you be able to hold OpEx flat? Could it go down again? And then if we just plug in kind of normal seasonality for next year, just in terms of the comps, you get like flattish growth. So in a flattish revenue growth environment, would you guys look to just keep OpEx flat? Would you cut a little bit more?
What would be the thought process there?
We would have to look at it in more detail. But in general terms, yes, we would be able to do that.
And then last question, Sanyos Semi, was that still breakeven?
It was virtually breakeven. It is close to $1,000,000
Got it. Thanks guys.
Your next question comes from the line of Shawn Harrison with Lomborg Research. Your line is open.
Hi, good afternoon. First question is just a clarification, if you could help me out with the auto exposure by geography, just China, U. S. And Europe?
Just in order of sizing, Europe is our largest market, followed by the U. S. And then Asia broadly. A little larger market shares in Korea, but China is now in the 10% or so range.
Okay. Very helpful. I believe earlier you cited that maybe $4,000,000 the OpEx cuts give or take were permanent. What percentage of maybe the cost coming out of COGS this quarter will be permanent versus will come back as you roll into the New Year?
In general terms, we have the same effort to reduce COGS both across COGS and OpEx. Now in the case of COGS, the reductions are more directly related to the factory activities. So it is much more difficult to see how many are permanent versus temporary. I would say that in the case of COGS, it's probably a little more on the variable on the temporary side than the OpEx.
Okay. Thank you.
Your next question comes from the line of Harlan Sur with JPMorgan. Your line is open.
Hi, good afternoon. On your commentary on trends pointing to a potential improvement in the first half of first part of next year, Keith, you mentioned confidence level being driven by slightly higher backlog for Q1, better booking trends for the out quarter. Is it more of a return to seasonal trends or is that being driven by more by new product ramps? And I know it's early, but any color on what segments or programs or end markets have a higher likelihood of driving that potential improvement in early next year?
Yes. I think there is a significant amount of our design positions. So for example, we expect the percentage of computers built on Skylake will continue to increase, which gives us a non seasonal growth or much above seasonal growth opportunity. We mentioned some of the wireless wins that will continue to ramp in that Q1. Seasonally, we also see automotive and industrial usually pick up in the Q1.
We think that will continue to happen. But in general, my comments were around seeing things that were potentially a little better than seasonal as the Q1 is starting to shape up.
Great. Thanks for that color. And then within your comms outlook for the Q4, you addressed the mobile device sub segment. I'm just wondering directionally, qualitatively, what are you seeing in the wired wireless and data center networking segments of the market? Thank you.
So the data center and wired portion of our business is quite small. It's less than 5% of our exposure and we don't see any significant trends worth talking about there. The handset piece, again, normally we do see more builds in the Q3 than we see in the 4th and that looks seasonal to us as opposed to continued inventory reduction.
Great. Thank you.
Your next question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is open.
Yes, thanks. Keith, just picking up on the comment around the industry consolidation and protecting the company as it accelerates. Just given standard product markets are pretty fragmented, same for analog, just curious in terms of things like scale you think about or technology pieces
with those comments? Yes. I would say technology is something we watch heavily in our ability to invest at appropriate rates, so we can grow above the market is something that's quite important. If you see too many companies consolidate in that analog space, you fall behind in your ability to continue to invest at rates that will allow you to continue to be relevant. So really that's the thought process that we look at as we go forward.
Got it. Thanks for that. And then just a question on the current environment, particularly within China, which has seen the reset. As you kind of went through late summer into early fall here, any comments specifically about China in terms of the level bookings activities or how far along you think you are in terms of that inventory reset, particularly within distribution?
I think we're getting pretty close in most of the markets in China with the exception of the appliances and some of the industrial. Those two areas, I think, will continue to contract supply chain wise in the Q4 and maybe early 1st. But the rest of it seems to be getting pretty well balanced. And so I'm not sure what else I can comment on.
That helps. Thanks.
Your next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is
open. Good afternoon. Thanks for taking my question. Maybe just a follow-up on the earlier questions on the Image Sensor Group. Maybe you could talk a little bit about your differentiation in the automotive market and the industrial market and if you're seeing any change in the competitive environment as that as those end markets continue to grow secularly?
Thank you.
Yes. So very different markets and different dynamics in the auto sector. It really is automobiles. And so we've got some great IP, some great systems approaches and great partners in the systems area, which we think gives us a very, very strong situation. Additionally, the automotive safety standards or ASIL standards become very important in our history and experience there in automotive, I think gives us an advantage over the competition.
On the industrial side, it is very competitive. Many of those applications are not technology differentiated. And so there it is really more about having the right products at competitive costs. And we have been working diligently since our acquisition there to make sure we're using the ON network and able to generate good margins as that business has high demand, but generally again is much more cost competitive than any of the other markets. And I think we're making great progress there.
Margins for that business have been coming up steadily. I think we've got 500 basis points or so of improvement this year.
That's very helpful. Thank you. And as a follow-up if I could on the bookings trends and the booking patterns that you saw in the Q3. Maybe you could just comment on linearity and when you got the sense that weaker macro might be weighing on the bookings patterns, which are leading to the below seasonal 4Q guide? Thanks.
Yes. So in my prepared comments, we talked about pretty stable bookings environment throughout Q3. Normally, they accelerate very strongly toward the end of the quarter. So as you hit September, you usually see a significant improvement in that rates. That did not happen.
So we would have started recognizing that, if you will, in September.
And maybe just last one, one last clarification if I could. On Q4, what would you typically expect to see in terms of bookings linearity? Thanks.
They would normally tend to decline as you go through the quarter. You get a lot of short term turns in October. And by December, everybody's pretty happy. So in general, you would expect a decline as you go through the quarter.
Makes sense. Thank you.
There are no further questions at this time. I will turn the call back over to Mr. Agarwal.
Thank you for joining the call. This concludes the call for today. Goodbye.
This concludes today's conference call. You may now disconnect.