Good morning. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the ON Semiconductor first quarter 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. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. If you would like to ask a question via the web, please enter your question in the Q&A field of your event console and click submit. Thank you. Mr. Parag Agarwal, you may begin your conference.
Thank you, Jonathan. Good morning, and thank you for joining ON Semiconductor Corporation's first quarter 2015 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 investor section of our website at www.onsemi.com. A replay will be available on our website approximately one 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 first quarter 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 commonly comparable measures in the 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 of 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. 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 Forms 10-K, Form 10-Qs, and other filings with the Securities and Exchange Commission.
Additional factors are described in our earnings release for the first quarter of 2015. Our estimates may change, the company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or other factors, except as required by the law. During the second quarter, we will be attending the Jefferies Technology Conference in Miami on May 12th, Bank of America Technology Conference in San Francisco on June 3rd, and Raymond James One-on-One Conference in Boston on June 9th. Let me turn over to Bernard Gutmann, who will provide an overview of first quarter 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. During the first quarter, we continued to build on our strong order momentum. The strength in orders has continued so far during the current quarter. Our margin expansion trajectory remained intact, driven by unrelenting focus on execution, continuing mix shifts towards industrial, automotive, and smartphone markets, and expanding operating leverage. We believe that we have a significant headroom for margin expansion. We remain on track to achieve the margin targets we set at our recent Analyst Day event in February. Our design win pipeline continues to grow, driven by wins in automotive, industrial, and smartphone end markets. We haven't seen any negative impact on demand pricing or on our earnings from the much-talked-about volatility in the global currency markets.
Our share repurchase program is off to a solid start. During the first four months of the $1 billion, four-year program, we repurchased approximately $120 million of our stock. Now, let me provide you an update on our first quarter 2015 results. ON Semiconductor today announced that total revenue for the first quarter of 2015 was approximately $871 million, an increase of approximately 1% as compared to the fourth quarter of 2014. Revenue for the first quarter was negatively impacted by approximately $8 million as compared to the fourth quarter due to the strengthening of the U.S. dollar. This negative impact on our revenue was slightly higher than our expectations of $6 million. GAAP net income for the first quarter 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 quarter was $0.20 per diluted share. GAAP gross margin for the first quarter was 34.5% as compared to 32.1% in the fourth quarter of 2014. Non-GAAP gross margin for the first quarter was also 34.5%, up approximately 40 basis points quarter-over-quarter due to higher utilization and a favorable mix of industrial and automotive. Average selling prices for the first quarter decreased by approximately 2.5% as compared to the fourth quarter. However, excluding the impact of currency, average selling prices declined by a little more than 1% quarter-over-quarter.
Given that we usually see higher ASP declines in the first quarter as newly negotiated annual pricing contracts become effective at the start of the year, we are very pleased with the pricing trends in the first quarter. GAAP operating margin for the first quarter of 2015 was approximately 7.9% as compared to approximately 1.7% in the fourth quarter. Our non-GAAP operating margin for the first quarter was 11.5%, up approximately 120 basis points as compared to the fourth quarter of 2014. Higher gross margin and lower operating expenses was the key drivers for sequential increase in the non-GAAP operating margin for the first quarter. GAAP operating expenses for the first quarter were approximately $232 million, as compared to approximately $263 million in the fourth quarter of 2014.
Non-GAAP operating expenses for the first quarter were approximately $200 million, down approximately $5 million as compared to the fourth quarter of 2014. We exited the first quarter of 2015 with cash and cash equivalents and short-term investments of approximately $429 million, a decrease of approximately $88 million from the fourth quarter of 2014. Operating cash flow for the first quarter was approximately $84 million as compared to approximately $162.5 million in the fourth quarter. We spent approximately $65 million of cash for the purchase of capital equipment. During the first quarter, we used approximately $39 million for the repayment of long-term debt and capital leases and issued debt of approximately $6.5 million. We used approximately $97 million to repurchase approximately 9 million shares of our common stock at an average price of $11.20.
At the end of the first quarter, approximately $879 million remained of the total authorized amount under the current stock repurchase program, which was announced on December 1, 2014. We remain on track to generate annual free cash flow of $400 million in the near to midterm. We define free cash flow as cash flow from operations less capital expenditures. Based on current booking strength, we remain upbeat on our near to midterm outlook. Keith will provide additional details on booking trends. At the end of the first quarter of 2015, ON Semiconductor days of inventory on hand were 119 days, up approximately two days from the prior quarter in anticipation of higher revenue in the second quarter. In the first quarter of 2015, distribution inventory decreased by approximately $11 million quarter-over-quarter, and distributor resales declined by approximately 6% quarter-over-quarter.
In terms of days, distributor inventory was approximately flat quarter-over-quarter at approximately 10 weeks. For the first quarter of 2015, our lead times were approximately flat as compared to the fourth quarter. Our global factory utilization for the first quarter was approximately flat quarter-over-quarter in the mid-80s percentage range. Now, let me provide you an update on performance of our business units, starting with Image Sensor Group or ISG. Revenue for our Image Sensor Group was approximately $171 million, as compared to approximately $166 million in the fourth quarter. Aptina was nicely accretive to our non-GAAP EPS and will remain on track to generate $0.08 of non-GAAP EPS accretion from Aptina in the current year. Revenue for our Standard Products Group in the first quarter of 2015 was approximately $303 million, up approximately 2% quarter-over-quarter.
Revenue for our Application Products Group was approximately $264 million, up approximately 2% quarter-over-quarter. Revenue for the first quarter of 2015 for our System Solutions Group was approximately $133 million, down approximately 6% quarter-over-quarter. Despite a 6% decline in revenue, SSG was accretive to our non-GAAP net income in the first quarter. Revenue for SSG was negatively impacted by weakness in the Japanese yen as compared to the U.S. dollar and seasonality for the first quarter. As the Japanese fiscal year ends March 31, customers typically reduce inventory levels on their balance sheets during the March quarter, and therefore, we see a much more accentuated decline in our SSG revenue in the March quarter. Before I turn over the call to Keith, let me further clarify the impact of volatility in foreign exchanges in our business.
In many recent discussions, we have indicated that we have a natural hedge in place due to our highly diversified global manufacturing base, and any headwind to our revenue is offset by corresponding reduction in cost. The strengthening of the U.S. dollar may lead one to believe that our European and Asian competitors should have a cost advantage. Let me point out that the semiconductor supply chain is very complex and diversified, and we believe that hardly any competitive advantage is gained from volatility in foreign exchange rates. Competitive advantage in our industry has been, and in our view, will always derive from innovative products and operational and manufacturing prowess, which provide a sustainable cost advantage. In the recent past, we haven't seen any meaningful change in competitive behavior by our competitors, even those based in Europe and Asia.
Pricing across all end markets, geographies, and product lines have been in line with historical trends. At this time, there are no indications pointing to any change in competitive dynamics in the industry due to a strengthening of the U.S. dollar. Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?
Thanks, Bernard. I'm very pleased with our results for the first quarter and outlook for the second quarter. Despite an overhang of a few macro-related uncertainties and weakness in a few end markets, we were able to deliver strong results. Our growth momentum continued in the first quarter with sequential revenue growth of approximately 1% exceeding our expectations. Bookings continued at a solid pace in the first quarter, and our bookings momentum has remained intact thus far in the current quarter. Bookings have been broad-based across various end markets and customers. We believe that our expansive product offerings and new products for automotive, industrial, and smartphone markets are the key contributors for an accelerated pace of bookings. Customer interest in our portfolio continues to increase, and customers are increasingly relying on us to enable truly differentiating features in their products.
We expect to see launch of many such products enabled by our innovations in the second half of the year and in next year. With increased bookings, our visibility into the remainder of the year has improved significantly. Not only are we seeing bookings for the current quarter, but also for the second half of the year. The robust pace of bookings for the second half of the year is the key driver for our increased confidence for outlook for the remainder of the year. Our design pipeline continues to grow as investments we made during the last few years are yielding strong results. Our focus on key technologies and growth segments has resulted in wins and marquee platforms for smartphones and other fast-growing consumer devices.
In the automotive segment, our momentum in fast-growing advanced driver-assist systems market remains intact, we continue to be market leader with approximately 70% share for image sensors for ADAS-related applications. Interest in our wireless charging solution continues to increase, we are seeing a strong customer pull. In addition to the leaders in the mobile devices, consumer, and computing markets, we are engaged in various stages of discussion with key players in the automotive markets. Based on current indications, we expect to see a strong ramp for our wireless charging products in 2016. Let me provide a brief update on Aptina. We remain on track to deliver $0.08 of accretion to our non-GAAP EPS from Aptina in the current year.
Integration of Aptina is expected to be completed towards the end of the current quarter, we should see higher contributions from acquisition synergies in the second half of the year. We continue to focus on capital efficiency, cash flow generation, capital return to shareholders. As I have indicated earlier, most of the investments needed to achieve a competitive cost structure and scale have been largely completed, our goal going forward is to leverage our past investments to generate strong cash flows. Generating shareholder returns is a key priority for us, we intend to return most of our free cash flow to shareholders through our $1 billion stock repurchase program. I'll provide some details of the progress in our various end markets. The automotive end market represented approximately 33% of our revenue in the first quarter and was up approximately 8% quarter-over-quarter.
We continue to gain increasing traction with our image sensors in the automotive market. We have high penetration with our image sensors in the rearview camera market at the OEM level in North America, Japan, and Korea. For advanced driver-assist systems, our 1-megapixel image sensors continue to ramp in Europe and North America. We benefited from strong sales of light trucks in North America as we have higher content in light trucks. Our Standard Products Group posted strong quarter-over-quarter growth with record automotive revenue in the first quarter. We continue to grow our sales in the fastest-growing applications within automotive. These applications include automotive cameras, ADAS, door electronics, park assist, LED lighting, advanced ignition systems, and engine control. Our automotive design win momentum continued in the first quarter of 2015. We continue to add to our design win pipeline for our intelligent power modules from our SSG business.
Our latest win is with a major Japanese OEM for an electric radiator fan. We were selected by a major European tier 1 customer to supply our NCV7520 pre-driver medium-voltage MOSFETs and a high-speed CAN for engine management systems. In our continuing effort to align ourselves with key global automotive OEMs, we achieved a milestone in North America by being selected by a leading OEM to supply a custom LIN relay driver for a broad range of vehicles. Revenues for the second quarter in the automotive end market are expected to be up quarter-over-quarter. The communications end market, which includes both networking and wireless, represented approximately 16% of our revenue in the first quarter and was down approximately 9% quarter-over-quarter, primarily due to normal seasonality and ongoing inventory adjustment in the Chinese handset market.
We continue to gain share with the global smartphone leaders and with the Chinese smartphone OEMs, and we expect to see revenue impact of our wins starting in the second quarter. Key drivers of our share gains include our autofocus and optical image stabilization modules, battery protection FETs, battery chargers, ESD protection, and power management ICs. Furthermore, we are winning designs for our RF tuning solutions as penetration of LTE accelerates in the Chinese market. As I indicated earlier, interest in our wireless charging solutions remains strong, and we remain engaged with key players in the mobile device ecosystem, with wins on new generations of reference platforms. Revenues for the second quarter in the communications end market are expected to be up quarter-over-quarter. The consumer end market represented approximately 14% of our revenue in the first quarter and was down approximately 6% quarter-over-quarter.
We continue to increase our penetration in the Chinese white goods market with our intelligent power modules. A key customer in China began production of appliance incorporating our 3 amp and 20 amp intelligent power modules. We saw a strong demand for our image sensor solutions from action sports camera customers. Furthermore, demand for our 1080p image sensor for home monitoring applications and B2B conferencing was also a key driver of consumer revenue. Demand from handheld gaming applications was weak due to normal seasonality. We expect to see strong acceleration and demand from action sports camera applications for the remainder of the year. Revenue for the second quarter for our consumer segment is expected to be up slightly quarter-over-quarter. The industrial end market, which includes military, aerospace, and medical, represented approximately 24% of our revenue in the first quarter and was up approximately 2% quarter-over-quarter.
Sales were driven on several fronts for this segment, including security, scanners, industrial motors, circuit breaking, medical imaging, and hearing health. A program transition related to legacy CCD customer negatively impacted our industrial revenue, but this transition was expected and built into our guidance for the quarter. We continue to see strong demand from our industrial customer base. Production ramp of our new design wins in the industrial motor drive space is driving growth for our intelligent power modules. Robust growth in the security market generated strong demand for our image sensing solutions during the quarter. Specifically, we had strong traction with our third-inch, 720p sensor at leading security OEMs in China. Furthermore, China is beginning a large transition to 1080p security cameras, which will utilize our 2 megapixel, third-inch and 3 megapixel, third-inch sensors.
We are seeing good penetration globally in the top tier machine vision camera manufacturers for the Python 1.3 megapixel, 5 megapixel, and 25 megapixel devices. The demand from commercial and residential building segments continues to improve, and we saw strong sales for our circuit breaking ASICs. In the medical market, we saw strong growth from our imaging and hearing aid customers. Revenue for the second quarter for our industrial segment is expected to be up quarter-over-quarter. The computing end market represented approximately 12% of our revenue in the first quarter and was up approximately 3% compared to the fourth quarter. We believe we are beginning to see the first signs of expected share gains in computing. It appears that customers have begun to shift their computing business to us well ahead of the publicized exit of a major competitor in the computing market.
We expect our share gains in the computing market to accelerate in the second half of the year with the launch of Intel's Skylake platform. Not only should we benefit from share gains on Skylake platform, but we should also have significantly higher dollar content on the Skylake platform. Revenue for the second quarter for our computing segment is expected to be flat quarter-over-quarter. 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 second quarter of 2015 outlook. Based upon product booking trends, backlog levels, and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $876 million-$916 million in the second quarter of 2015. Backlog levels for the second quarter of 2015 represent approximately 80%-85% of our anticipated second quarter 2015 revenues. Our second quarter revenue is being negatively impacted by approximately $3 million due to the strength of U.S. dollar relative to European and Asian currencies. However, the impact to our bottom line from foreign exchange volatility is neutral, as we have a natural hedge in place due to a significant cost base in Europe and Asia. We expect inventory at the distributors to stay flat quarter-over-quarter on a dollar basis.
We expect total capital expenditures of approximately $65 million-$75 million in the second quarter of 2015. For the second quarter of 2015, we expect GAAP and non-GAAP gross margin of approximately 34%-36%. We expect our total GAAP operating expenses of approximately $233 million-$245 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be approximately $35 million-$37 million. We expect total non-GAAP operating expenses of approximately $198 million-$208 million. We anticipate GAAP net interest expense and other expenses will be approximately $9 million-$11 million for the second quarter of 2015, which include non-cash interest expense of approximately $2 million. We anticipate our non-GAAP net interest expense and other expenses will be approximately $7 million-$9 million.
GAAP taxes are expected to be approximately $8 million-$11 million, and cash taxes are expected to be approximately $5 million-$7 million. We also expect share-based compensation of approximately $13 million-$15 million in the second quarter of 2015, of which approximately $2 million 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 second quarter of 2015 is expected to be approximately 435 million shares, based on the current stock price. Further details on share counts and earnings per share calculations are provided regularly in our quarterly and annual reports on Forms 10-Q and Form 10-K. With that, I would like to start the Q&A session. Thank you, and Jonathan, please open up the lines for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. Again, that's star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Ross Seymore with Deutsche Bank. Please go ahead.
Good morning, guys. This is actually Matt Simon calling in on Ross's behalf. Great results here. The question I have is, you decided that you didn't see any bookings volatility that your peers have seen. I guess, what's the reason behind that, and are you worried that you've yet to see it?
Obviously, we don't know what we don't know, but our bookings continue to be strong, we've seen no indication at all of any kind of perturbation. I guess I don't know how to answer that one.
Okay. It was mentioned that the booking strength has given you some increased confidence for the second half of the year. Could you shed a little more light on that, maybe with some end-market detail or qualifying it somehow?
We're certainly seeing more backlog than is normal for us to place in the third and fourth quarter. It is driven primarily at this time by the smartphone marketplace, computing marketplace, and automotive marketplace. In all those cases, we've got some great new design wins, which are ramping in the second half, and those orders are in place now. Those three markets at least look very strong as we go into the second half at this point.
Okay, great. Thanks very much.
Your next question comes from John Pitzer with Credit Suisse. Please go ahead.
Good morning, guys. Congratulations on the good results. Thanks for letting me ask the question. Keith, I was wondering if you could spend a little bit of time just talking about the competitive landscape for Aptina. Clearly, the image sensing market in auto ADAS is an area of pretty strong strength for you, we are getting some signals of sort of industry capacity going up on the image sensing front. How do we think about that relative to the competitive dynamics, and can you talk a little bit about sort of the capacity needs that you have for your own imaging sensing business? Thanks.
Sure. Well, there are two other very strong players, both of which have very significant handset exposure, and the capacity on the handset side remains, I think, a key area for expansion. As you look at the automotive, it's more than just the ability to produce pixels. You have to have the entire package for the automotive wins, particularly in safety-critical applications, and we think we continue to have an edge there with our many years of experience. Relative capacity, we have been working to increase capacities both internally and with our external partners and are very comfortable we can see very strong growth and share gains supported for our image sensors this year.
That's helpful, Keith, and maybe as my follow-up for Bernard. Bernard, I wonder if you could just walk through the bridge from the current gross margin of about 35% to sort of the target margins. How much revenue growth do you need to see to get to that 40% target? How much of it's mix, how much of it is utilization versus other things? Thank you.
If I recall from what we presented in the analyst day, our model is for $4 billion. About 250 basis points of that improvement from the existing approximately 35% to the total is volume related. Approximately 160 is mix, 160 basis points, and about another 120 was related to manufacturing efficiencies or continued improvements in the cost structure within our manufacturing footprint. Finally, the last piece was about 60 basis points associated with CFA and probe insourcing for the existing Aptina acquisition.
Helpful. Thanks, guys.
You're welcome.
Your next question comes from Vivek Arya with Bank of America Merrill Lynch. Please go ahead.
Thank you for taking my question, and very good results and execution here in Q1. I'm wondering, Keith, I know you're not seeing much direct impact from all the FX volatility, but do you think there is any indirect impact, for example, your distributors behaving any differently or any demand shift from emerging market customers, et cetera?
We monitor all of that very closely and really have not seen any changes in the environment or the pricing behavior based on the home currency for our competitors. We haven't really seen any order pattern shifts in the emerging countries either. Again, most of our industry uses dollar-denominated contracting, and so it's just not something that is able to gather any hold, I don't think, on the marketplace.
Got it. As my follow-up, could you remind us how much exposure you have to the China smartphone OEMs, across which kind of products, whether it makes a difference, 3G versus 4G, and how is the overall demand environment shaping up in Q2?
Okay. Most of our exposure is in smartphones, both 3G and 4G. Content-wise, we have more in 4G than we do in 3G. Right now, that backlog, as I mentioned in my commentary, we're expecting to see up here in the second quarter. We're starting to see some recovery there in China and acceleration in the 4G model. That's looking quite good for us. We're very excited, as I mentioned earlier, about the second half, where we're seeing advanced orders come in quite strongly.
Got it. One last quick one. Could you remind us also how much It was interesting to see your progress in the computing and the PC market because of share gains. Everyone else exposed to PCs is suffering, or was suffering in Q1. Could you remind us how much content you have now, and how much can it get to in the back half as you start to gain more content with Skylake?
Yeah. Depending on the platform, in notebooks, we have somewhere between $7 and $12 of content. That goes up by, I think, almost $3 in the Skylake platform when that transitions in.
Thank you.
Your next question comes from Chris Caso with Susquehanna Financial. Please go ahead.
Yes, thank you. Good morning. Just a question on your commentary relative to what we've seen from some others. Clearly, it doesn't look like that you're seeing some of the weakness that others have been talking about. Would you characterize that as perhaps within the end markets, you're seeing similar commentary from your customers, I mean, I'm sure you've heard what your competitors have been saying. Is it that ON has specific programs to specific platforms which are helping you to offset that, or is it that you're just not seeing what the competitors are talking about right now?
Yeah. That question from earlier, same thing. We clearly have had some platform share gains with our new designs. So as those start to ramp, generic weakness could be masks. There's just no way for us to separate that out based on history. Again, from looking at our customer base we have, they seem to be performing fairly well. I will say, handset-wise, it's very key which customers you have, because the performance between the various customers in that marketplace varies widely.
Okay, thanks. As a follow-up, just a question about wireless charging. We're a little closer into the second half right now. I know you've got some visibility on some of the Qualcomm reference designs. Can you talk a little bit about more of where we would likely see some revenue coming in from wireless charging designs and about the timing of when we start to see some of that revenue come in and when the ramp would occur?
The first models incorporating the wireless charging that we've seen right now will begin ramping in Q3, and then more models will be coming on each quarter after that.
Great. Thank you.
Your next question comes from Craig Ellis with B. Riley. Please go ahead.
Thanks for taking the question, and congratulations on the quarterly execution, guys. Just wanted to follow up on the prepared comments regarding the Aptina integration. Sounds like that's going well. What are the gives and takes as we think about the operating expense dynamics beyond the second quarter, given that we're coming in on the conclusion of the integration activities there?
In the back half of the year, we expect to see some increase in OpEx associated with our normal inflationary/merit increases, as well as some potential for incremental stock-based comp, depending on how strong the back half of the year, offset partially by some of the Aptina and other synergies. In general, it's slightly up.
Okay. Looking at the growth in the business, it's coming through, I think as the company outlined at Analyst Day. Keith, going back to the capacity side of the equation and the Fujitsu joint venture that the company signed last year, when do you see that starting to contribute to output, and how should we think about the cost structure and the margin performance of parts that are produced on that capacity?
Actually, we've started manufacturing ramps already here in the second quarter with our partnership there, and we're quite pleased with the progress. That was really all about qualifying our processes in that factory, and those are ahead of schedule. From a cost perspective, that cost there is very competitive to slightly better than our Gresham factory. We're very pleased on the cost front as well. What it really gives us is a large runway for growth in 200-millimeter wafer capacity.
Thanks, guys.
Your next question comes from Christopher Rolland with FBR Capital Markets. Please go ahead.
Hey, guys. Thanks for the question. This is Joe on for Chris. I was hoping to follow up on the Aptina front. I was just curious what the mix was between outsourced capacity and internal capacity, what you guys see the utilizations internally are, and then with the increased competition there, do you see any impact on pricing?
Okay. I'll take those in order. The wafer fab portion today is 100% outsourced. What we insource is the probe test and color filter array manufacturing steps. For the remainder of this year, that is the likely mix that'll go forward. Our internal capacities are, again, in the low 80s for that business, and we are continuing to ramp capacity. Not a lot to talk about on the mix side. From the competitive side, it's a very competitive market, has been. We have focused on the highest quality imagers, and therefore many of our design wins based on just outdistancing the competition on technology. From that perspective, we think we will be able to increase margins as we go through the year.
Great. That was extremely helpful. I guess as my follow-up, on the communication side, perhaps you can discuss the industry dynamics there, where inventory levels are, when you see that segment picking back up.
Yeah, we saw continued inventory burn-off in Q1 from the China handset market. We believe that that's mostly behind us because the orders picked up strongly for the second quarter and are being laid in even stronger for the third quarter. From an inventory perspective, I think we left March in a very good situation, and what we're seeing now is the benefits of that for the rest of the year.
Thanks, guys. Congrats on the strong result.
Your next question comes from Ian Ng with MKM Partners. Please go ahead.
Yes. I wanted to share my congratulations in a difficult environment. First question in wireless charging, could you rank order some of the emerging market opportunities outside of smartphones, whether it's consumer, PCs, or automotive? It looks like Skylake will support wireless charging, but I'm assuming that's more of an older standard that you won't be involved in.
Correct. We believe that the computing platforms will change over in 2016 to the newer standards, we don't see anything this year from the computing side. We are seeing big pull, as you said, from the wireless first. Following that should be computing in early 2016, automotive probably by the end of 2016, and a variety of consumer and wearables smattered continuously from now on. We're seeing various levels of uptick, but all of it really, I think, is going to be a huge 2016 story.
Great. Thanks for that. My follow-up, for image sensors, could you talk about the implications of OmniVision getting acquired by a China entity? Would that be a positive or a negative? Would that make the China business more competitive, perhaps favoring a local supplier?
I think over time, there can be some influence on the market from a favored China supplier. I think in the short term, there's going to be lots of confusion and changing, some announced intention to change manufacturing, et cetera. We're looking forward to some short-term opportunities, we're just going to keep driving on the technology side, so that our products basically will be favored, and the local favoritism won't matter.
Great. Thanks, Keith.
Your next question comes from Steven Smigie with Raymond James. Please go ahead.
Great. Thanks a lot. All my congratulations on the nice numbers and guide. I was just curious, as you ramp the Fujitsu capacity, are you viewing that more as a competitive advantage, or is it just that's where the industry's going, so you've got to be there? Just a little context around that, particularly as you've got a number of 6-inch wafers going to 8-inch. If you could just tie in the relative shift from 6 to 8. Thanks. Okay. Again, lots of questions there. I guess, the answer is in the analog space in which we perform, the process is really the key differentiator in our product performance. Wafer dimensions can make a difference, but basically what we're doing is we're taking existing 200-millimeter products and moving them to a new 200-millimeter factory.
It gives us expansion capacity but doesn't directly change the mix of 6 to 8-inch. The reality is we're just growing the 8-inch very quickly. 6-inch is staying full but not growing as fast. The net of that is in Bernard's earlier comments about the mix shift over time is going more favorable for us, it's not because of a decline in the older technologies.
Okay. It's very helpful. Thanks. Just on compute, do you have some sense at this point how much of the share that your competitor's leaving behind, you're going to be able to capture?
Yeah. There's roughly 30% or so that's being vacated in Skylake.
My question is, do you know how much of that 30% you think you'll be able to get?
Oh, we are expecting to pick up most of it. I can't give you exact numbers, but from a design win perspective, we look like we have the opportunity to be over 50% share in that market.
Okay, great. Thanks. Thanks again.
Your next question comes from Kevin Cassidy with Stifel. Please go ahead.
Yeah, thanks for taking my question. You had mentioned that average selling prices were better than seasonal, after you exclude the FX effect. Even though this was a contract period or a starting of a new contract, can you say what the dynamics are there? Why was it a better pricing environment?
I think it's a very stable market. We don't have any major changes from a volume perspective in the industry. It moves slightly down in the first quarter as it normally does. You don't have major amounts of capacity coming on. The net of that is you don't have suppliers that feel overly anxious about keeping the factories full, and that just gives us a very stable environment.
Okay, great. The contracts for this year, I guess the decline for the year, is it better than expected or better than seasonal?
I think it's better than expected, better than a normal year. Yes.
Okay. If I could ask one other question about security cameras. You had mentioned that as an area of strength. Can you say, were those commercial or were they consumer cameras?
The bulk of them are commercial. We're also in the consumer side, but the bulk of the sales are in the commercial side.
Okay, great. Thanks.
Your next question comes from Harlan Sur with J.P. Morgan. Please go ahead.
Hi. Thanks. Good morning, solid job on the quarterly execution. On SSG, you delivered non-GAAP EPS accretion, I believe, at $133 million in revs, nice job on the continued expense discipline there. Maybe you can just tell us directionally how that segment will trend in Q2. At Analyst Day, you talked about traction and expansion at SSG into wireless, automotive, and industrial. What are some of the near-term drivers within these verticals for SSG?
Okay. SSG should be up in the second quarter. Continued margin expansion there. From a vertical market perspective, clearly, we've had the most gains in the smartphone arena. Wins at the high end of the camera side have been quite strong. I would follow that with the industrial white goods piece. That market we continue to gain share in in this near term, then 2016 is really going to be the story on the automotive side. Many wins so far this year and late last year, but it takes a little over a year to get those into production.
Great, thanks for that. How do the demand trends in the China white goods market look? It seems like you're looking for growth here in Q2. If you could just confirm that. How much of that is seasonal versus just great product traction with some of your IPM solutions?
Yeah, normally, the first half of the year is stronger seasonally. We are actually seeing some inventory in the China and white goods marketplace that has slowed some of what we'd call normal pickup in Q2. We're actually looking for something that's fairly flat in Q2 on the white goods side because of additional inventory there in China.
Great. Thank you.
Your next question comes from Christopher Danely with Citigroup. Please go ahead.
Hey, good morning, guys. This is Sean Bakke calling in for Chris. Great job on the quarter. I want to circle back on the industrial business. Looks like a couple of your competitors talked about softness there. I was wondering if you guys could give us a little color on what you're seeing out there in terms of industrial demand.
Yeah. Of course, everybody's industrial is a little different. I'll just remind you of that. In our case, we have medical, mil-aero, and the traditional building-related industrial all in the same category. We actually saw a very strong performance on the medical side, with new products picking up in the imaging medical systems and in hearing aids. We saw kind of flatness on the military side. Then on the building-related piece, we did see some big pickups, mostly from new product wins and new generation of technology going into the new buildings.
Okay, that's helpful. Maybe a more general question. Can you guys kind of rank your end markets in terms of strength for Q2, and how do you expect that to trend, and how does that look the rest of the year? Thanks.
Yeah. We try to give you some hints there in our guidance. I think the handsets will be up strongest, and then you can follow that with automotive, industrial Yeah, consumer and computing, in that order.
Great. Thanks again, guys.
Your next question comes from Betsy Van Hees with Wedbush Securities. Please go ahead.
Thanks, and let me echo my congratulations as well on the quarter and the guidance. You mentioned the strength that you're seeing in terms of the bookings that are going beyond the current quarter are smartphone, computing, and automotive. It sounds like you're seeing better than seasonality at this point, and I was hoping you could remind us what typical seasonality is for you in the September quarter. Thank you.
Yeah. That's been changing over the last few years, both I think as our mix has changed, plus we're seeing the markets in the last few years have a more muted second half, than we used to see three or four years ago. At this stage, generally speaking, the third quarter has ranged somewhere between 4% and 8% up on a normal year. We're certainly seeing something that looks at least normal for us.
Thanks for that. Do appreciate that. Harlan mentioned about the SSG business and that it was down a little, does it seem a little bit more than what you were expecting, and you're going to have it grow this quarter. Are we going to see this business grow year-over-year, or are we going to look for another decline and then 2016 will be the year of revenue growth for this business?
You should see revenue growth this year. I will say that the yen is a big impact. That yen movement from a revenue top-line side has been a big drag on this. Those numbers going from roughly JPY 80 a little over a year ago to JPY 120 now makes the top line more challenging. With our cost structure there, the bottom line continues to be, as you saw, quite accretive, despite that top-line pressure.
Great. Thanks so much. Once again, congratulations on the quarter and the guide.
Thank you.
Your next question comes from Craig Hettenbach with Morgan Stanley. Please go ahead.
Yes, thanks. Just following up on some of the commentary, the strength you're seeing, particularly in some of the verticals of wireless autos. Any thoughts on just the broad-based distribution channel and visibility there? I know you commented inventory is going to be flat, just from an order perspective and linearity.
Yeah. Our data is indicating to us that we actually grew faster in our distribution channel than our distributors did based on their recent releases. It looks like we're gaining a little bit of share. That helped us to decline some of the inventories in the first quarter, in distribution. As we look forward, what we're looking at is trying to match the demand, not grow or shrink inventory at this stage, because we think it's going to definitely be needed for growth in Q3. That's really the way we're managing it, and in general, again, we're seeing a pickup in Q2 from all of the distributors, and that's consistent with their public comments.
Got it. As a follow-up, any update on SSG in terms of just growth outside of Japan and traction you have from a design perspective?
That's clearly where all of the momentum has been, offsetting the lackluster economy there in Japan. As I mentioned, the real key designs and the stuff near term is in the handsets, and that's all outside Japan. The white goods, which is a mixture of inside and outside, but more in China than it is in Japan. Lastly, automotive, which will be Japan, North America, and Europe-based as you get into 2016.
Right now, if you look at Japan, it's down in the low 30s and continues going down as a % of the total SSG revenue.
Got it. Thanks for all that.
Your next question comes from Gabriela Borges with Goldman Sachs. Please go ahead.
Great. Thanks so much for letting me ask a question. Congratulations on the strong results. I wanted to follow up on some of the earlier questions on the industrial end market. If we separate out the strength in medical for a moment, maybe any color that you could give us on geographies in your core industrial customer base, any changes in demand between geographies? Thanks so much.
I don't know that there was a distinct pattern of strength there. For us, the industrial is strongest in Europe, in North America, and then China. China was pretty lackluster. Europe and North America picked up nicely for us.
That's very helpful. Thank you. As a follow-up, if I may, just any color near term on puts and takes to gross margin, the step up that you're seeing in 2Q, is that primarily utilization or are there any mix shift benefits? I think the continued progress on that Aptina cost structure as well. Thanks.
It is the traditional three areas, but for the biggest part, it is the revenue uptick that falls through at about a 50% fall through. We should see a little bit of additional benefits on the CFA insourcing and a little bit of gradual shift in mix as we continue growing automotive, industrial, and smartphones at a faster pace than the other two.
Great. Thanks again.
There are no further questions at this time. I will now turn the call back over to Mr. Parag Agarwal.
Thank you for joining the call today. We look forward to seeing you at various conferences during the quarter. Goodbye.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.