May 6, 2009
Executives
Keith Jackson - President and CEO Donald Colvin - CFO Ken Rizvi - IR
Analysts
Tristan Gerra - Robert Baird Steve Smigie - Raymond James John Barton - Cowen & Company John Pitzer - Credit Suisse Venk Nathamuni - JPMorgan Craig Berger - FBR Capital Markets Romit Shah - Barclays Capital Parag Agarwal - UBS Terence Whalen - Citigroup Ramesh Misra - Brigantine Advisors John Vinh - Collins Stewart Mark Lipacis - Morgan Stanley Kevin Cassidy - Thomas Weisel Partners Patrick Wang - Wedbush Morgan
Operator
At this time, I would like to welcome everyone to the ON Semiconductor first quarter Earnings 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. (Operator Instructions).
Thank you. I will now turn the call over to Mr.
Ken Rizvi. Sir, you may begin your conference.
Ken Rizvi
Thank you, Marcelo. Good afternoon and thank you for joining ON Semiconductor Corporation’s first quarter 2009 conference call.
I am joined today by Keith Jackson, our President and CEO, and Donald Colvin, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com and will be available for approximately 30 days following this conference call, along with our earnings release for the first quarter of 2008.
The script for today’s call is posted on our website and will be furnished via a Form 8-K filing. Our earnings release and this presentation include certain non-GAAP financial measures.
Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release and posted separately on our website in the Investor Relations section. In the upcoming quarter, we will present at the JPMorgan Technology Conference on May 18 and the UBS Technology Conference on June 8.
During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words believe, estimate, anticipate, intend, expect, plan, 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 results or events to differ materially. Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-K, Form 10-Qs and other filings with the SEC.
The company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors. Now, let’s hear from Donald Colvin, our CFO, who will provide an overview of the first quarter results.
Donald.
Donald Colvin
Thank you, Ken, and thanks to everyone who is joining us today. ON Semiconductor Corporation today announced that total revenues in the first quarter of 2009 were $379.1 million, a decrease of approximately 22% from the fourth quarter of 2008.
During the first quarter of 2009, the company reported a GAAP net loss of $33.9 million or $0.08 per fully diluted share. The first quarter 2009 GAAP net loss included net charges of $47.6 million, or $0.11 per share from special items, which are detailed in schedules to our earnings release.
First quarter 2009 non-GAAP net income was $13.7 million or $0.03 per share on a fully diluted basis. We exited the first quarter of 2009 with cash and equivalents of $402.4 million.
This was down approximately $56 million versus the fourth quarter of 2008. During the first quarter of 2009, we reduced our debt by approximately $79 million which represented just under $100 million in face value.
We also exited the quarter with the lowest net debt position in the company’s history as a public company of approximately $529 million. At the end of the first quarter, total days sales outstanding increased towards historical norms at approximately 46 days.
ON Semiconductor total inventory was down approximately $36.3 million to $299.2 million or approximately 102 days. Included in our total inventory is approximately $10 million of inventory written-up to fair value related to our acquisitions and approximately $10 million of bridge inventory built during the quarter in preparation for our announced closures of four front-end manufacturing lines.
Distribution inventories came down by approximately $28 million in the first quarter at just under 13 weeks. Cash capital expenditures during the first quarter of 2009 were approximately $23 million.
The majority of the first quarter capital expenditures were related to capital equipment received in 2008 and paid for in the first quarter of 2009. We still anticipate 2009 total capital expenditures of approximately $60 million.
During the first quarter, R&D and SG&A expenses were lower than expected due to aggressive cost control measures as well as the benefits from the settlement of intellectual property infringement cases of approximately $15 million. Now, I would like to turn it over to Keith Jackson for additional comments on the business environment.
Keith Jackson
Thanks Don. Now for an overview of our end-markets.
During the first quarter of 2009, our end-market splits were as follows: The computing end-market represented approximately 24% of first quarter 2009 sales. Industrial, military and aerospace represented approximately 20% of sales.
The communications end-market which includes wireless and networking represented approximately 20% of sales. The automotive end-market represented approximately 17% of first quarter sales.
The consumer electronics end-market represented approximately 14% of sales and medical represented approximately 5% of sales. During the first quarter on a direct billings basis, no ON Semiconductor product OEM customer represented more than 5% of sales.
Our top five product OEM customers were: Continental Automotive Systems, Delta, LG Electronics, Motorola and Samsung. On a geographic basis, our contribution from sales in Asia, represented approximately 56% of revenue.
Our sales in the Americas represented approximately 23% of revenue and Europe represented approximately 21% of revenue during the quarter. Looking across the channels, direct sales to OEMs represented approximately 54% of first quarter 2009 revenue.
Sales through the distribution channel were approximately 34% of first quarter revenue and the EMS channel represented approximately 12% of revenue. During the first quarter, ON Semiconductor revenues broken out by our new segments were as follows.
Standard Products Group represented approximately 31% of sales. The Digital & Mixed-signal Product Group represented approximately 24% of first quarter sales.
The Computing and Consumer Group represented approximately 23% of sales and the Automotive and Power Group represented approximately 22% of sales. We will publish the quarterly revenue, gross margin and operating margin break-out of these segments in our Form 10-Q filing for this period.
Now, I would like to provide you with some details of other progress we have made. In the first quarter of 2009, we reduced our internal inventories substantially and believe there was a further leaning of inventory levels throughout the supply chain.
As an industry, we believe we shipped fewer products than the end-market consumed. Since January, we have also seen a stabilization in our overall business as well as continued progression in order activity for the second quarter of 2009.
Our book to bill remains comfortably above one. While there is still great uncertainty in the macro economy which can potentially dampen the recovery for semiconductors, we are cautiously optimistic that we have passed the bottom of the current semiconductor cycle.
In the computing end-market, we are positioned as the leader for desktop power management and our notebook presence continues to grow. We believe we can grow our market share in next generation notebook power management from the teens to over 20% exiting this year.
Our overall product portfolio which includes controllers, MOSFETs, audio amplifiers, protection devices, thermal management and standard products continue to position ON Semiconductor as a leading supplier of power management products to the computing end-market. We have also recently introduced a SenseFET which combines our capabilities in thermal and power management.
This product is winning designs with a key leading notebook manufacturer. In the netbook market, we have secured design wins with two of the top three netbook suppliers for our power management products.
We are also developing products and solutions specifically designed to meet the needs of the netbook market which should expand our netbook SAM to above $3.00 per unit. Looking into the second quarter, we have seen positive booking trends for the computing end-market as our customers prepare for a seasonal second half uptick in sales of computing products.
In the wireless end-market, after a decline of over 20% when compared to the fourth quarter of 2008, we are beginning to see stabilization in order patterns from our customers. Along with new design wins for analog switches, audio amplifiers and protection devices, we continue to see new design activity for our BelaSigna DSP products with Korean and indigenous Chinese handset manufacturers.
The BelaSigna product family comes from our acquisition of AMI Semiconductor. In addition, we are winning new designs for the handset market based on the image sensor products acquired from AMI Semiconductor focusing on ambient light and proximity sensor applications for the wireless end-markets.
These designs are scheduled for 2010 production ramps. Similar to the computing end-market, we continue to see positive booking trends in the wireless end-market as customers resume order activity and prepare for second half seasonality.
In the first quarter of 2009, we further invested in our technology capabilities by announcing a license and IP agreement whereby ON Semiconductor is now able to internally produce and offer mid-range digital products. This agreement enables a further extension of our digital capabilities to support next generation military/aerospace, communications, industrial and computing end-market needs of our customers.
We are also seeing expansion opportunities from the recent acquisition of Catalyst Semiconductor. With our strong customer presence with leading distributors, EMS and OEM customers and cost effective manufacturing capabilities, we believe we can significantly grow the revenues associated with this business over the next 18 months.
In the first quarter, we continued to win awards from our customers. We were named Best Global Partner by Chicony Power, formerly Hipro Electronics, as the leading notebook and desktop computing power supply manufacturer for our products and solutions supporting energy efficient ATX power supplies and notebook power adapters.
In addition, ZTE Corporation, a leading global provider of telecommunications equipment and network solutions awarded us their Best Global Partner award for the fourth consecutive year for our energy and cost efficient products and solutions and our outstanding customer support. Now, I would like to turn it back over to Donald for other comments and our other forward-looking guidance.
Donald?
Donald Colvin
Thank you, Keith. Second quarter 2009 outlook.
Based upon current product booking trends, backlog levels, manufacturing services revenues and estimated turns levels, we anticipate that total revenues will be approximately $395 million to $410 million in the second quarter of 2009. Backlog levels at the beginning of the second quarter of 2009 were up from backlog levels at the beginning of the first quarter of 2009 and represent approximately 80% of our anticipated second quarter 2009 revenues.
We expect that average selling prices for the second quarter of 2009 will be down approximately 1% to 2% sequentially. We expect cash capital expenditures of approximately $20 million in the second quarter of 2009.
For the second quarter, we expect GAAP gross margin of approximately 31.5% to 32.5%. Our GAAP gross margin in the second quarter will be negatively impacted from, among others, expensing of appraised inventory fair value step up associated with our acquisitions.
We expect non-GAAP gross margin of approximately 33.5% to 34.5%. Non-GAAP gross margin excludes special items which we expect to be approximately $7 million to $8 million.
For the second quarter we also expect total GAAP operating expenses of approximately $130 million to $135 million. Our GAAP operating expenses include the amortization of intangibles, stock based compensation expense, restructuring, asset impairments and other charges which total approximately $25 million.
We also expect total non-GAAP operating expenses of approximately $105 million to $110 million. We anticipate interest and other expenses will be approximately $11 million for the second quarter of 2009.
We also anticipate non-cash interest expense of approximately $9 million from the adoption of FASB Staff Position number APB 14-1 relating to our convertible senior subordinated notes. GAAP taxes are expected to be approximately $4 million and cash taxes are expected to be approximately $3 million.
We also expect stock based compensation expense of approximately $15 million to $16 million in the second quarter of 2009. This is up from first quarter 2009 levels based on our annual 2009 awards.
We currently expect stock based compensation expense to decline from second quarter levels in the back-half of 2009. Our current share count is approximately 425 million shares based on the current stock price.
Further details on share count and EPS calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K. With that, I would like to start the Q&A session.
Operator
(Operator Instructions). Our first question is from the line of Tristan Gerra with Robert Baird.
Please go ahead with your question.
Tristan Gerra - Robert Baird
Your revenue guidance for Q2 implies about 30% decline year-over-year. Based on customer feedback, is it fair to assume that current levels of [your old] demand reflects less than this decline including any lasting effect of inventory reduction and also what would you be your sell-in sequential growth estimate in Q2?
Keith Jackson
Tristan, we believe we will continue to have a slight drain of inventory in the supply chain, in the channel in Q2. So, the answer to your question, I do believe semiconductors will get a little bit leaner in Q2 than they were in Q1, indicating a further demand constriction over the end consumption.
So, that is the generic answer and then relative to a sequential on a sell-in basis, our sell-in will go up, but less than the end demand because again we will be burning some off. So, that number would probably closer to 10 plus percent than what you see in the sequential sell through.
Tristan Gerra - Robert Baird
Okay and also your ASP guidance for Q2 is also declined than normal trends and also in Q1 which is counterintuitive given the excess inventories in the whole food chain earlier in the year and the low utilization rate. What is making the cycle decent and would you expect this trend to continue?
Keith Jackson
I will speak quickly and then let Donald add in. First of all, our first quarter normally sees our largest declines, because we do our annual contract pricing in the first quarter of a year.
So, actually, that is traditionally our biggest decline in any given set of quarters for a year. So, just to set that part of it straight, we typically do see the biggest declines because of the annual contracts we renew every year in the first quarter.
We also saw some pressures in the first quarter. We did a high amount of turns in Asia, and certainly on some of the commodity products, the market squeezes a little more than we expected.
So, just under 3% for Q1, I think is definable between the annual contracts and a little extra pressure in a very, very slow season. As we get into Q2, we don’t have the annual contract impact.
The numbers we see there are less than 2%, as you can see from our guidance and we are very comfortable right now in the turns market that we are seeing, that pressure actually is not as strong as it was in the first quarter. So, all of that adds up to what we think will less significant in Q2.
Operator
Our next question is from the line Steve Smigie with Raymond James. Please go ahead with your question.
Steve Smigie - Raymond James
I was hoping if you could give us a little update on what the timing of the closure of the facilities look like, not the specific time which you provide in your press release, but what the expense drop off would look like. Is that going to still have some big step downs as those facilities come offline or is it going to be more gradual impact on gross margin and COGS on the factory closing?
Thanks.
Keith Jackson
Well, I think we have always said that the step function is not everything as the last minute and that we have announced closure of four facilities which are ongoing and this is why we built some bridge inventory. So, our inventories would have gone down by an additional $10 million if we didn’t have the special customer bridge built in the first quarter.
So, these are positives on building some bridge inventory, but we have been winding down the activities in several of our factories try up to closure. So, we have seen some savings.
Now, what is we have to say is that we should see other additional savings in a meaningful manner in the fourth quarter of this year on a sequential basis. So, what are these numbers?
They are probably in the $5 million to $10 million savings per quarter in COGS compared to the current run rate. So, that is a kind of benefit we are simulating.
In addition to that, we also run our factory very, very low in the first quarter, just over 40% for the front-end. We are now stepping up our manufacturing activity, so that will help gross margin particularly going forward in the year.
So, I think you can see that Keith mentioned, first quarter was a bottom. Every indicator and there is some certain thing suggest that and we have a lot of goodness to go forward as we close down the factories completely, and as we ramp up production in the remaining factories.
Steve Smigie - Raymond James
Okay. Great.
Just on order patterns, can you talk about how that went through month-by-month throughout the quarter into April? And then just curious obviously you guys had some pretty nice guidance that came in pretty solid Q1.
I realize your sell through but was there some sort of pickup in OEM orders that allowed you to ship out the revenues anticipated, how that that worked up? Thanks.
Keith Jackson
So order patterns Steve did pick up nicely after the Chinese New Year. Just basically continue to grow.
April was a very strong month, setting us up not just for Q2 but actually starting to see some visibility into the third quarter. So simple answer is, it is been a building year with January being the weakest, and months strengthening from there.
Relative to OEM versus distribution, interest, enough of those numbers actually track fairly closely. We haven't seen a divergent pattern there.
So our sell through on this Steve looks very similar to the trends on our OEM sell through. So, there is really no pattern to look for other than it looks like the entire supply chain got a little bit to lean and that is when we served [over] anymore.
Operator
Our next question is from the line of John Barton with Cowen and Company. Please go ahead with your question.
John Barton - Cowen & Company
Thank you. Keith, could you go back to the pricing for second.
You explained the reason for the pricing in March, annual contracts et cetera. If it is the [non-pricing] environment you are looking at for the June quarter.
As you look into the back half for this year, we assume that we have seen the bottom for the semiconductor industry. Is there any reason to think that pricing would be out of the norm for the back half or how do you expect your competitors to act in the back half?
Keith Jackson
Well, again, I don’t see anything out there that would make it an abnormal pattern. We have seen capacity come offline.
We do believe as I have said in earlier conferences that this year will be down from 2008, but I think folks have taken some pretty appropriate actions across the industry to get their cost structures aligned with that. So, I guess, I really don’t see anything that is going to prompt an abnormal reaction.
John Barton - Cowen & Company
In the press release you highlighted the fact that the June quarter backlog is stronger than the March quarter backlog because customers are feeling more comfortable with the current demand environment et cetera. Are we at a point where they are actually starting to book into the September quarter or are we getting any increase visibility out further in time?
Keith Jackson
Yes. We are and as I mentioned earlier we are actually seeing some orders being placed outside of our lead times, which means our lead times are still fairly short but they are placing orders in July and August anyway.
So we are definitely seeing that, and at least as of today the order pattern would be strengthening for Q3 over Q2.
John Barton - Cowen & Company
Last question if I could Donald. There are some temporary cost savings within your OpEx in particular first times off et cetera.
How should we think about those cost potentially coming back in to the model?
Donald Colvin
Excellent question and totally related to the uncertainty over the future. We only gave guidance of one quarter at a time for valid reasons and those of you who have been along for the ride in the last few quarters will understand that our record at the end of last year was great and so we are really humbled by that and you are right we have temporary savings, particularly in salary front and you estimate them to be in the region of 10 million a quarter or so.
I think what could be fair to say is that we are trending a positive way to get some of that back in the second half, but we are not sure of that because we have to get a little better visibility on the third and fourth quarter backlog and that is a question, neither of us are going to take a bet on now. So I think what you could assume as a modest increase sequentially depending on how strong your top line revenue growth is.
If you see revenue growing seasonally, which I would say, will be 5% plus in your model, then you can assume $2 million to $3 million per quarter increase in the third and the fourth quarter sequentially, something like that is probably the best modeling, but I will repeat we do not know what the September quarter is going to be and I remember not so long ago sitting in the same room thinking that Q4 revenues of last year would be flat over Q3 and that did not happen so we have been humbled by the decline in our business. Someone mentioned Tristan, actually 30% year-over-year so we are going to be careful in announcing dramatic up come in the second half.
Operator
Our next question is from the line of John Pitzer with Credit Suisse. Please go ahead with your question.
John Pitzer - Credit Suisse
Don, you talked about utilizations of 40% in the March quarter and ticking up. Any guidance for the June quarter and I guess the implications for your own inventories.
Do you feel, June may decline again, are you at the right level or do you need to build some here?
Keith Jackson
It is Keith. We will be declining internal and most likely distributions inventories again in the second quarter.
Although, we have been bringing it down dramatically, they are still higher than we like on a days basis. So, we will be bringing them down.
I would expect our utilization to be closer to 50% than 40% which is in the first quarter is around 40%.
John Pitzer - Credit Suisse
Then Keith just relative to end-markets going into the June quarter, are you seeing sequential across all end-markets or can you help me characterize, which are growing, which aren’t growing and then specifically, as you start seeing some visibility build into the September quarter, is there any end-market specifics that is driving that or is that just a general statement?
Keith Jackson
So, the generality part of that is that consumer related markets, so computing, communication, the handset market, the game boxes et cetera, those are doing proprietary orders for a somewhat seasonal year. So, we are seeing those orders come in first.
The large capital equipment markets; the industrial, the automotive piece of the equation continues to play that very close to the chest and those orders are not accelerating above and beyond the consumption rate.
John Pitzer - Credit Suisse
So Keith, would you expect the industrial orders to be down again sequentially in the June quarter?
Keith Jackson
I don’t know yet. Typically, they are down in the third quarter not the second quarter.
At this stage, I would not be looking for a significant decline in the second quarter, but I don't know that whether it will be up or down yet.
John Pitzer - Credit Suisse
Then my last questions guys. Donald just given some of the [rhetoric] coming out of Washington about foreign tax jurisdictions and what not.
Given your effective tax rate relative to your peers is significantly lower, I know some of that is NOL based, but some of it is your tax structure. How do we think longer-term relative to what could happen at Washington realizing that it is probably premature to figure out what exactly over pulls that of Washington might be?
Donald Colvin
A lot of people are asking questions John and I think you are right. They (inaudible) no matter what in IT I don't believe it will be applicable till 2011.
So, it is not exactly for tomorrow or next week, but if you take the worse case scenario, where enact everything that was said, then clearly that is going to be more taxes for all companies including ourselves the difference being between cash taxes and P&L taxes. So, if you take the worse case, every company in America will probably go to something like 40% tax rate, but as far as the P&L is concerned, as far as cash is concerned, after they enact it, we will have well over $1 billion of NOL which should protect us for something like four or five years after the 2011.
So, that is a very simplistic analysis and something to full disclosures of and we don't know but that is the worst case. Our interpretation is that there will be some hybrid version of the worse case.
So, it is certainly not something that is I am losing any sleepover, but I certainly hope that Congress wishes to reason and doesn’t penalize all North American resident companies with what would be probably the highest corporate tax rates in the world.
Operator
Our next question comes from the line of Chris Danely with JPMorgan.
Venk Nathamuni - JPMorgan
This is Venk Nathamuni calling for Chris Danely. Just a clarification on your comment about inventory levels.
You did mention that inventory levels should go down at both distribution and internally for the quarter, but do you get a sense for which of the end-markets have worse inventory problems than the others. For example, the computing inventory level much better than it was for wireless and if you could add some color on that.
Keith Jackson
I would expect to see some decline in the automotive and industrial portions of the business from a channel and in internal inventory levels. I don’t think you will see much of a decline in computing, and I would be surprised at a decline in the wireless handset business.
So, it is really the markets that have not yet ticked up which will be driving that decline.
Venk Nathamuni - JPMorgan
Comment on gross margin; you said utilization rate should go up from about 40% this quarter to 50%. Why wouldn’t gross margins go up dramatically more than what you are forecasting for the upcoming quarter?
Donald Colvin
Well, I think the gross margin; if you look at stripping out all the step up inventories and all the rest, we came in about 31%, just over 31% in the first quarter and we are going to 34% in the second quarter. So, I think that is quite a nice uptick.
So, I don’t think there is any parting there. So, that is a nice improvement, 300 basis points improvement in gross margin is I think totally supported by the increase in revenue and activity.
Operator
Our next question is from the line of Craig Berger with FBR Capital Market. Please go ahead with your question.
Craig Berger - FBR Capital Markets
Thanks for taking my question, guys and nice job on the numbers. Can you help me understand with all these fab closures going on, I think you said once, 5 million to 10 million of COG savings in Q4, another 5 million to 10 million step up in which quarter?
Donald Colvin
The second quarter of 2010.
Craig Berger - FBR Capital Markets
Okay so.
Donald Colvin
And that is, this is [desaving] would be incremental to the run rate we have today. So you can add them together.
Craig Berger - FBR Capital Markets
And so with that type of plan, where do you see revenues needing to be to get to right here 40% gross margin?
Donald Colvin
Well, a lot of people I wish asking these question and I gave my speech on how uncertain the future is and how our recent path breaker is looking great. What I can see is that we had published just a year ago over and we had analyst day here in May of last year, our corporate model which were 600 million at 45% gross margin.
We have not republished our model but what we can say is that our internal stimulation suggests that the 45% gross margin will be significantly less than the 600 million that was a previous number. I mean, I am not going to give a big heavy disclosure on that note.
We are planning another Analyst Day in November and we want to keep some surprises and some good news for that, but that the cost reductions that we have accelerated will bring it down materially from the 600 million we previously announced and so then but the 45% gross margin, we just have to extrapolate between the midpoint of a range for the second quarter for your progression and revenue is going to be. The faster revenue growth, the faster our gross margin will get to 40%.
As we mentioned, our second quarter, our June guidance is 30% approximate year-over-year decline. If we get to a situation where we got 20% year-over-year decline in the September quarter that will do great wonders for our gross margin.
So again, we have no idea how that September quarter is going to turn out. It is all to do with the progression in revenue and where you guys do your stimulation.
As I said, we have been chastened by the recent past.
Craig Berger - FBR Capital Markets
Can you comment on a few things. One what are you seeing with the lead times, are you seeing any lead time expansion and that could cause customers to replenish?
And also can you comment on why the stock comp expense is going up so much, is that 15 million to 16 million this quarter?
Keith Jackson
On the lead times Craig, we are running approximately six on our highest volume lines. In some of the areas that starting to extent a bit, I can certainly see those reaching eight weeks during this quarter for a lot of those lines.
It is nothing like what we ran even a year ago which we were kind of the eight to 10 weeks. So, that is kind of the range on the ASP side.
Donald Colvin
And on the stock comp, one of the elements is we issued or we are planning to issue, we haven’t issued any performance based RSUs, restricted stock. The way the accounting treatment goes for these is similar to double declining depreciation.
There is a lot of upfront expenses. So that peaks out in the second quarter of this year and will materially decline as we reach next year.
So, that is the element that explains the increase in the non-cash based stock compensation.
Craig Berger - FBR Capital Markets
Last one, can you update us on catalyst, how is the integration? What is the revenue growth opportunity so far?
Keith Jackson
Catalyst integration moves along for us. We won't have them fully in our systems for a few more months.
So the IT work continues but the sales force is completely after speed, they are out selling. The manufacturing teams are well along their way in qualifying our internal factories for that.
So, all of that is progressing pretty well. We do expect to see significant expansion in the second half of this year in the revenues based on all of the customer qualifications that have been going on for the last four, five months.
So, really looking for a nice celebration in the September and December quarters.
Operator
Our next question is from the line of Romit Shah with Barclays Capital. Please go ahead with your question.
Romit Shah - Barclays Capital
Good afternoon. Thanks for taking my question.
To the best you can could you guys just help us understand the difference between you and Fairchild? Keith, you mentioned that you expect selling rates to be less than sell-through in Q2.
If I look at the guidance between the two companies, Fairchild guided revenues up I think 15% to 20% sequentially. They have recognized on sell-in, and I am just struggling to reconcile that versus your outlook of mid single-digit growth.
Does that have to do with end-market exposure or just a market share shift that we should be thinking about? Thanks a lot.
Keith Jackson
I don’t think there is any market share implied in any of those numbers. I think we have different distribution models, and what appropriate stocking is et cetera.
So, I think most of the difference between the two numbers is all about how much inventory you stick into distribution. I don’t think there is any end-market implications.
Romit Shah - Barclays Capital
Then Don, can you give us how stock comps splits this quarter between cost of goods sold and OpEx?
Donald Colvin
Yes. It is usually about one-third, two-third.
One-third COGS, and two-thirds OpEx.
Operator
Our next question is from the line of Parag Agarwal with UBS. Please go ahead with your question.
Parag Agarwal - UBS
Question on the computing market; could you guys comment on how the competition is shaping out especially in the notebook market and are you guys getting share in that market?
Keith Jackson
We do believe we are gaining share and in my commentary, I actually kind of gave you some forward guidance there with appropriate disclaimers, but we think we are going to kind of go from the low to mid teens of market share in power management to the over 20% during the year. So, we think exiting the year, we will pick up quite a bit of share and it is all based on design wins we have got in the new platforms and in the netbooks.
So, we were actually seeing some pretty good momentum there.
Parag Agarwal - UBS
Okay and my next question, what is your target inventory level?
Keith Jackson
So, we like to keep something south of 90 days internally and around 13 weeks in distribution in normal times, whatever normal times are, and then there is transition periods that seem to constantly be going on that impact that but that is kind of the targets.
Operator
Our next question is from the line of Terence Whalen with Citi. Please go ahead with your question.
Terence Whalen - Citigroup
The first one relates to some of the commentary on order patterns. It sounds like orders build strength month-to-month throughout the first quarter and I think you alluded to a very strong April month as well.
I guess my question is, if 1Q were sort of back-end loaded with orders, would you expect 2Q to be a little bit front-end loaded in terms of the order strength or a little bit more linear?
Keith Jackson
So, again, I will go to typical seasonal patterns. We would actually have it back-end loaded not front-end loaded, because most of the consumer bills take place in September-October of the year and typically you have kind of eight-week lead time.
So, normally, seasonally what we would see is the strongest month would actually be June, in the April-May-June timeframe.
Terence Whalen - Citigroup
So, you anticipate orders could actually strengthen from here into August-September...?
Keith Jackson
Yes, I actually don’t know that. As Donald said, we are being very cautious on predicting the future.
All I can tell you is that so far, it started off quite well and we will have to wait till June gets here to know the answer to that question.
Terence Whalen - Citigroup
Okay, and...
Keith Jackson
Seasonally, that happens normally.
Terence Whalen - Citigroup
Thank you. That is clear.
My follow-up would be, let’s see, I guess you have cited some interesting share gain in PC. What would be an area outside of PC that you think you guys are also getting share another area that we could look at?
Thanks.
Keith Jackson
We continue to have, we believe, more dollar content in the various mobile devices arena, and whether those are PC lights or cell phone heavies, I am not sure what you want to call those, but that continues to be a very big growing market for us with the more fuller featured mobile devices and that is quite strong. Even though the market is still in decline in automotive, I would expect significant share improvement.
Operator
Our next question is from the line of Ramesh Misra with Brigantine Advisors. Please go head with your question.
Ramesh Misra - Brigantine Advisors
In terms of the order patterns, again, from what you are seeing right now, would you anticipate the second half versus first half, normal seasonality trends to persist or do you see that being meaningfully different, partly because of the environment and also partly because of the acquisitions?
Keith Jackson
So, I believe that, I guess you are asking for a best guess right now. We don’t see anything that would make a dramatic shift to normal seasonal patterns.
The inventory overcorrected as it always does when there is a market move in the first half, which would give you some comfort in the second half being stronger, but that is the normal seasonality as the second half stronger by roughly 5% sequentially as you go into Q3 and Q4. So, we are not seeing anything that suggests anything dramatically different than normal seasonality.
Ramesh Misra - Brigantine Advisors
Okay. In regards to your turns business, it seems like Q1 came in a little stronger than expected.
I mean, are you beginning to see some customers with concern of extremely low inventories and kind of scrambling a little bit?
Keith Jackson
Yes. We spent a lot of dialogue now with customers who are very concerned.
They know they are not placing orders and they are concerned that they are going to have to, but they don't want to place orders, and so there is a lot of dialog on how confident should I be that you guys will have material for me if I needed and that's a very different dialog than you had in the December quarter. So, it's definitely moving around, people are starting to pay attention to their supply chain.
I believe that also will be reflected in the ASPs as we talked about earlier with a little lessening on the pressure, but in general, the answer is, there is lot more attention being paid now in concern to the September quarter than we have seen in the past.
Ramesh Misra - Brigantine Advisors
Then a final question for Don. Can you just go through the moving parts in your long-term debt, Donald?
Obviously, it came down very much; quite substantially you bought some repurchased some of it back. Can you just itemize the different...?
Donald Colvin
The long-term debt has mainly got converts in there. We have taken the face value down of our zero coupon by $130 million, so we got just over $600 million of converts, but we have got a $175 million of bank facility.
So, the total of converts and bank facility is above $800 million and then there was a lot of miscellaneous stuff, so they are small ones, leases, equipment leases and things like that. Our strategy has been opportunistic, both in the fourth quarter and in the first quarter.
We paid down near-term zero coupon convert. The reason for that being it is an out of the money convert that we expect to be put to us in April of next year and that's why we have paid down over the two quarters approximately 50% of that convert or approximately a $130 million of face value.
We will continue to be opportunistic in the future. There are certain legal constraints on how we go about buying bad debt or paying down debt.
I think our track record is showing that we can be imaginative and take advantage of this functions and places in the market. We will continue to explore these opportunities.
What I can say is, our overall strategy still remains strengthen the balance sheet by driving the business to generate cash and use that cash to pay down the debt. That is what we have been doing since last summer and we will continue to pursue that strategy.
Operator
Our next question is from the line of John Vinh with Collins Stewart. Please go ahead with your question.
John Vinh - Collins Stewart
Hey Donald, just a real quick question on OpEx; can you clarify the increase in OpEx in Q2? Is that primarily because of the IT settlement gain of $50 million in Q1, is that why we are seeing the increase in OpEx there?
Donald Colvin
This was an unpredictable gain. We are still pursuing other avenues there.
We may have other gains in the future but it is fairly unpredictable. Therefore, we are not forecasting in the second quarter.
John Vinh - Collins Stewart
So, by exit out, it looks like OpEx is kind of flat to up, and can you also clarify how should we be thinking about OpEx for the rest of the year? Are there other costs?
Donald Colvin
I think, I mean, we give only one quarter guidance and other one will get into giving guidance for the third and fourth quarter. I just remind you that I was asked the question on some of the temporary cost reduction measures, and I was saying as long as the revenue grow sequentially in the second half 5%, then you could add an another couple of million of expenses per quarter.
So, a lot of that would be an OpEx. So, I was just repeating what I said in guiding you through to maze, but as I said we only give guidance one quarter at a time for good reason.
John Vinh - Collins Stewart
One more follow-up question on pricing. Some of your peers have talked about pricing pressures in the computing segment that they expect to continue in Q2.
Are there still areas where you still see some pricing issues in Q2 or has pricing largely stabilized at this point?
Keith Jackson
So, each market and product category has little different sets of pressures in them. So, what we give you, of course, is a corporate aggregate number.
That doesn't mean that there isn't any pressure anywhere. So, the answer to your question is very well could be certain areas we still see some pressure.
Computing is quite large for us however and I am actually not seeing anything that would indicate to me that that is a segment which we will see increased pressure over Q1 and really not seeing in computing, let's say, I think it's improving over Q1. So, I am not seeing the same trend that you are reporting.
John Vinh - Collins Stewart
Okay and then just one more follow-up question on the Catalyst integration. Can you talk about maybe what you think the incremental revenue contribution in the second half is as you start to see the acceleration there and is there a gross margin incremental benefit from the integration into your [operations] out there?
Thank you.
Keith Jackson
Definitely they impact. I actually don't have the gross margin calculated, so I actually can't give you those numbers, because I haven't calculated that way, but definitely getting things integration and into our Philippine factories will have a positive on the corporation's gross margin overall and we believe that business is going to grow in the second half.
So, it should be a good story, but just keep it in perspective, it is something like 5% of sales. So, it is not going to double our gross margins.
Operator
Our next question is from the line of Mark Lipacis with Morgan Stanley. Please go ahead with your question.
Mark Lipacis - Morgan Stanley
Keith, question for you; I may have heard you wrong, so please correct me if I did, but in the earlier part of the script, I think you said that you expect to drain in the channel inventories, but I think later on you said something like, the supply chain became too lean and then started ordering again. So, I was just trying to reconcile that, if you could help, I appreciate.
Keith Jackson
I guess, if you look at the entire supply chain, there is (inaudible) suppliers than we have our intermediaries which are the distributors and then we have the end users. What I believe is still too lean is the end users.
So, I think they had to start placing more orders and of course that kind of ripples back through. Having said all of that, there are still pieces of the market that are not growing like the consumer driven pieces, and I think in those areas we will continue to lean out the channel.
So, the net for us as a company is going to be a slight drain in both internal inventories and distribution inventories in Q2.
Operator
Our next question is from the line of Kevin Cassidy with Thomas Weisel Partners. Please go ahead with your question.
Kevin Cassidy - Thomas Weisel Partners
In the automotive, can you give a little more detail on what your exposures are for Europe and North America and Asia?
Keith Jackson
Our exposure is now over half of our business is in Europe and some thing less than 10% is in Asia and the balance is in North America. So, from a just a pure mathematical perspective, that is where it goes.
The percentages, I would expect to continue to increase in Europe and Asia and decrease in North America based on what we are seeing with those end-market places. So, I gave you kind of a snapshot, but the point is I think it will continue to be more and more non-North American overtime.
Kevin Cassidy - Thomas Weisel Partners
Okay great. There is another market segment in notebooks of the consumer ultra low voltage notebook.
Do you have an idea? Do you see that market is anything different than the standard notebook or is it sort of...?
Keith Jackson
So, you've got net books on one end and you've got full featured notebooks on the other end and you've got this low voltage thing kind of in the middle, I'm afraid time will have to tell how that really shakes out for us. We are well positioned for all three of those at this point.
Kevin Cassidy - Thomas Weisel Partners
Do you think your dollar content is any different in the CULP?
Keith Jackson
Well the dollar content on the low voltage notebooks is higher than the net books and lower than the full featured notebooks.
Kevin Cassidy - Thomas Weisel Partners
So, it does just fit right in the middle?
Keith Jackson
It fits right in the middle.
Operator
And our next question is from the line of Patrick Wang with Wedbush Morgan. Please go ahead with your question sir.
Patrick Wang - Wedbush Morgan
Just a couple of questions, based on what you know today, is it fair to assume that your inventory drain ends next quarter?
Keith Jackson
I would believe that would be our plan. We would be looking at being more neutral in the second half.
Patrick Wang - Wedbush Morgan
And then just on the ASPs here, if you could talk about some of the ASP erosions you're seeing between, I guess your variety of analog parts versus your discretes?
Keith Jackson
It is most severe. The ASP declines are most severe on the discretes and pardon me, least severe on our complex analog, and it's not quite a continuous gradation in between, but to our first approximation that's what it looks like.
Patrick Wang - Wedbush Morgan
On the analog side is it, I mean can you ballpark that, is that kind of 3% to 5% erosion on an average or is it little better or worse than that?
Keith Jackson
We had less than 3% for the entire quarter company average. So, the analog piece of that would be much less than 3%, probably closer to 1%-1.5%.
Patrick Wang - Wedbush Morgan
And then last question for Donald. If you could give us an update regarding your thinking behind how to use the cash and maybe perhaps your plans are paying down debt for the rest of this year?
Donald Colvin
Well, I think I've answered that question, but again I said our strategy is to run the business under all circumstances. We generate cash and we have proved that in the first quarter and use the cash generation to pay down debt.
We have paid down just under a 100 million of face value of debt in the first quarter. We paid there are 66, I believe in the fourth quarter of last year.
So, that is the strategy we want since last summer, and we will continue to drive the business to generate cash to pay down debt. So, that’s what we’ll do and we’ll be opportunistic on or retain that to take advantage of any pricing disfunction in the market and any bargains that can become available.
Patrick Wang - Wedbush Morgan
Okay but no, I guess no guidance in terms of how much you’re going to pay down the rest of this year?
Donald Colvin
No, we will for a variety of reasons I think it's we have some maturities, which I believe are in the order of $60 million to $70 million, which are obliged to be down. Next year it's in the order of 160.
Thanks Ken 160, so, I mean coupled these two together we get about 250 over this year and next year. So, we are obliged to pay that off and at the timing of that we will keep our options open and any additional payoffs or pay downs, we will keep our options opened as well.
Operator
Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. This does bring us to the end of today’s conference call.
We would like to thank you for joining us and for your participation. You may now disconnect.