ON Semiconductor Corporation (ON) Q2 2012 Earnings Report, Transcript and Summary

Ken Rizvi - Vice President of M&A, Real Estate & Investor Relations and Treasurer Donald A. Colvin - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Chief Financial Officer of SCI LLC and Executive Vice President of SCI LLC Keith D. Jackson - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Semiconductor Components Industries LLC and President of Semiconductor Components Industries LLC

John W. Pitzer - Crédit Suisse AG, Research Division Ross Seymore - Deutsche Bank AG, Research Division James Schneider - Goldman Sachs Group Inc., Research Division Christopher B. Danely - JP Morgan Chase & Co, Research Division Craig Berger - FBR Capital Markets & Co., Research Division Parag Agarwal - UBS Investment Bank, Research Division Craig A. Ellis - Caris & Company, Inc., Research Division Mark Lipacis - Jefferies & Company, Inc., Research Division Terence R. Whalen - Citigroup Inc, Research Division Christopher Caso - Susquehanna Financial Group, LLLP, Research Division Patrick Wang - Evercore Partners Inc., Research Division

Good afternoon. My name is Holly, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the second quarter 2012 earnings conference call. [Operator Instructions] I would now like to turn the conference over to Ken Rizvi. Please go ahead, sir.

Thank you, Holly. Good afternoon, and thank you for joining ON Semiconductor Corporation's Second Quarter 2012 Conference Call. I'm 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 onsemi.com, and a replay will be available for approximately 30 days following this conference call, along with our earnings release for the second quarter of 2012. The script for today's call is also posted on our website. Our earnings release in this presentation includes certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most direct comparables under GAAP are in our earnings release and posted separately on our website in the Investor Relations section. In the upcoming quarter, we will be attending the Pacific Crest Technology Forum on August 13 and the Citi Annual Technology Conference on September 6, as well as the Deutsche Bank Technology Conference on September 11. During the course of this conference call, we will make projections or other forward-looking statements regarding the 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 events or results 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. Additional factors are described in our earnings release for the second quarter of 2012. Our estimates may change, and 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, who will provide an overview of second quarter 2012 results. Donald?

Thank you, Ken, and thanks to everyone joining us today. ON Semiconductor Corporation today announced that total revenues in the second quarter of 2012 were approximately $744.8 million or approximately flat compared to the first quarter of 2012. If the legacy ON Semiconductor business recorded revenues on a sell-in basis, similar to many of our industry peers, revenues in the second quarter would've grown by approximately 6% compared to the first quarter. During the second quarter of 2012, the company reported GAAP net income of $6.9 million or $0.02 per fully diluted share. The second quarter 2012 GAAP net income includes net charges of $58.1 million from special items, which are detailed in schedules included in our earnings press release. GAAP gross margin in the second quarter was 34.7% and non-GAAP gross margin, 35.7%. Gross margin in the second quarter benefited from approximately $3.4 million of insurance proceeds received during the quarter. Second quarter 2012 non-GAAP net income was $65 million or $0.14 per share on a fully diluted basis. We exited the second quarter of 2012 with cash, cash equivalents and short-term investments of approximately $756.4 million. During the quarter, we also reduced our total debt by approximately $119 million, which included the retirement of $96.2 million of 0 coupon convertible senior subordinated notes. At the end of the first quarter, total day sales outstanding were approximately 54 days, up approximately 2 days compared with the first quarter of 2012. ON Semiconductor's internal inventories were at approximately 123 days, up approximately $26 million. Included in our total internal inventory is approximately $70 million of bridge inventory, approximately 13 days, primarily related to the consolidation of certain factories. Distribution inventories were up sequentially by approximately 1% on a dollar basis in the second quarter and were at approximately 10.5 weeks exiting the quarter. Cash capital expenditures during the second quarter of 2012 were approximately $64 million. Now I would like to turn it over to Keith Jackson for additional comments on the business environment.

Thanks, Don. Now for an overview of our end markets. During the second quarter of 2012, our end-market splits were as follows: the automotive end market represented approximately 26% of sales; the consumer electronics end market represented approximately 22% of sales; the industrial, military, aerospace and medical end markets represented approximately 19% of sales; the computing end market represented approximately 20% of sales; and the communications end market, which includes both wireless and networking, represented approximately 13% of sales. On a direct billing basis, no individual ON Semiconductor product OEM customer represented more than 5% of second quarter sales. Our top 5 product OEM customers during the second quarter were: Continental Automotive Systems, Delta, Panasonic, Samsung and Sony. On a geographic basis, our contribution from sales in Asia, excluding Japan, represented 56% of revenue. Our sales in the Americas represented approximately 17% of revenue. Sales in Japan represented approximately 14% of revenue and sales in Europe represented approximately 13% of revenue during the quarter. Looking across the channels, direct sales to OEMs represented approximately 60% of second quarter 2012 revenue. Sales through the distribution channel were approximately 33% of second quarter revenue, and the EMS channel represented approximately 7% of revenue. Now I'd like to provide you with some details of other progress we've made. In the automotive end market, sales were relatively flat quarter-on-quarter. We remain confident, however, that the automotive market will be a strong contributor to our long-term growth. Overall, electronic content in new vehicles continues to grow and we continue to gain share with our solutions for LED lighting, park assist and start-stop applications. During the quarter, we saw new design wins ramp at North American suppliers utilizing our SmartFET, switcher and LED lighting products for body, powertrain and engine management applications. In addition, we have won new designs with Japanese and European automotive customers for engine and transmission control and angular position sensors. I'm also excited to announce that a highly collaborative design effort with one of our key automotive sound system customers has resulted in ON Semiconductor securing all power sockets within their next-generation amplifiers. The flexible and efficient power architecture we developed enables our customer to quickly modify designs and their system to enhance sound quality based on each vehicle. Sales into the computing end market were up approximately 6% sequentially in the second quarter. We continued to gain traction with design wins in several areas including hard disk drives, gaming, commercial desktop and server markets with our mixed-signal ASICs and MOSFETs. We continue to see growth in our market share for CPU core power management solutions within Ivy Bridge platforms at key notebook customers. In addition, we are seeing strong interest for our innovative high-frequency voltage regulator controllers in ultrabook applications. Within our power solutions portfolio, we also released an industry-leading, low-load standby power AC-DC controller. Looking forward, we expect to see sequential growth in the computing end market driven by our expansive product line and market share gains in Ivy Bridge notebooks. In the communications end market, while revenues were down sequentially in the second quarter, we continue to be excited about the design momentum we're seeing for our auto focus, haptic and image stabilization solutions. These products originate from our SANYO Semiconductor Products Group and represent another example of the growing opportunities to cross-sell our product lines. During the quarter, we commenced shipments during -- supporting the first major design win for our auto focus products with a leading global smartphone OEM. In addition, we're seeing strong adoption of our latest EMI suppression solutions, common mode filters and ESD protection devices into multiple smartphone designs and various manufacturers. Now I'd like to turn it back over to Donald for other comments and our forward-looking guidance. Donald?

Thanks, Keith. Third quarter 2012 outlook. Based upon product bookings trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $725 million to $765 million in the third quarter of 2012. Backlog levels for the third quarter of 2012 represent approximately 80% to 85% of our anticipated third quarter 2012 revenues. We anticipate that average selling prices for the third quarter of 2012 will be down approximately 1% to 2% compared to the second quarter of 2012. We expect total cash capital expenditures of approximately $50 million to $60 million in the third quarter of 2012. For the third quarter of 2012, we expect both GAAP and non-GAAP gross margin to be approximately 33.5% to 34.5%. We also expect total GAAP operating expenses of approximately $195 million to $200 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairment and other charges which are expected to total approximately $20 million. We expect total non-GAAP operating expenses of approximately $175 million to $185 million. We anticipate GAAP net interest expense and other expenses will be approximately $16 million for the third quarter of 2012, which includes noncash interest expense of approximately $6 million. We anticipate our non-GAAP net interest expense and other expenses will be approximately $10 million dollars. GAAP taxes are expected to be approximately $5 million to $7 million, and cash taxes are expected to be approximately $2 million to $4 million. We also expect stock-based compensation expense of approximately $7 million to $9 million in the third quarter, of which approximately $1 million is expected to be in cost of goods sold with the remainder in operating expenses. This expense is included in our non-GAAP financial measure. Our current fully diluted share count is approximately 460 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. Unfortunately, given the global economic uncertainties, we are not expecting to see normal seasonal growth in the second half of 2012. However, as a company, we remain committed to maintaining our strong free cash flow generation. In the second quarter, for example, we executed a cost reduction program within our SANYO Semiconductor Products Group that resulted in headcount reduction of approximately 10% of that division. Given the expected slower growth environment, we are also finalizing a cost reduction plan for the legacy ON Semiconductor business. This plan includes targeting a reduction of our nonmanufacturing headcount in certain high-cost regions of approximately 10%. When combined with the cost reduction actions already taken at SANYO Semiconductor in the second quarter of 2012, our total cost reduction programs are expected to reduce our non-GAAP operating expenses on a quarterly basis by approximately $10 million the $15 million compared to the second quarter of 2012 non-GAAP operating expense of approximately $185 million. While we are seeing some benefit from the overall cost reduction programs in the third quarter as reflected in our guidance, we expect to see the full benefit from these programs in the fourth quarter of 2012. In addition, given our current available production capacity, we also expect to reduce capital expenditures. While there will be a carryforward of capital expenditures in the third and fourth quarter of 2012 from equipment already purchased, we currently expect to reduce our 2013 capital expenditures to approximately $125 million to $150 million based on the current demand environment. Our Board of Directors and its Special Committee have authorized the company to execute a share repurchase program for up to $300 million of common stock during the next 3 years. We intend to begin implementing the repurchase program later this month. However, the timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors including the company's stock price, corporate and regulatory requirements, restrictions under the company's debt obligations and other market and economic conditions. Now let me make a few comments on the second press release we issued this afternoon about my resignation and the launching of the search for a new CFO. I joined ON Semiconductor in 2003 and from the start was committed to working with the management team and the board to improve our capital structure, grow our free cash flow and assist the company's transformation into a global supplier of semiconductor products and solutions. During this period, we have significantly reduced our net debt position, improved our EBITDA and became a top 20 supplier of semiconductors globally. None of this would have been possible without the help of my dedicated team of finance professionals. I am leaving the finance function in very capable hands. With that, I would like to start the Q&A session.

Holly, can you open up the Q&A, please?

[Operator Instructions] And your first question comes from the line of John Pitzer, Crédit Suisse. John W. Pitzer - Crédit Suisse AG, Research Division: Just quickly on the gross margin guidance for the September quarter, revenue is essentially flat, but gross margin is down sequentially. Is this mix? Is this action you're taking around utilization to control inventory? Could you give me a little bit of understanding? That would be helpful.

Yes, it is completely getting the inventory back down. We grew inventory and our run rates in the factories anticipating more normal seasonality. Now it has become evident that, that will not be the case. We're slowing the factories down to start to get at that inventory quickly. John W. Pitzer - Crédit Suisse AG, Research Division: Keith, anywhere you can quantify where utilizations were in the June quarter and where you're expecting to go into the September quarter?

So in the June quarter, front-ends were kind of running approximately 80% and back-ends in the 90s. I would expect that number in the September quarter will come down anywhere from 5% to 10% on both parameters. John W. Pitzer - Crédit Suisse AG, Research Division: And then lastly and quickly, just any commentary around end-market trends you're seeing for the September quarter, which buckets you expect to be kind of outperforming versus underperforming?

Yes. On -- from Q3, you can see we're guiding relatively flattish, so there's not a significant movement in any one market. We do expect the consumer [indiscernible] to be up a bit, probably stronger than some of the others as there will be some holiday season builds going on, perhaps some uplift on the computing side for the same reason. But most of the markets will be relatively similar to Q2.

Your next question comes from the line of Ross Seymore, Deutsche Bank.

Just talking about the OpEx side of things. With the headcount cuts that you're doing and then the cost reductions, what is that normalized level of OpEx going to look like as we get into the fourth quarter, please?

Well, we gave guidance on what the savings should be and we gave the basis on the second quarter run rates. For the second quarter, we were $185 million, and we saved between $10 million and $15 million of savings. So if you take that $185 million and take off $13 million, you come to $172 million. So I think that's what the kind of run rate we're targeting in the fourth quarter for operating expenses, after we have implemented the cost reductions we are reviewing currently.

Great. And then as far as the gross margin side of the equation, Keith, in the prior question you said you're trying to get ahead of the inventory. Is that something that you expect that utilization hit to be a 1-quarter event? Or is it going to take longer than 1 quarter to adjust this?

It certainly will not take more than 2 quarters. It really depends on the September demand and sell-through. But at this stage, we're hoping to react early to minimize impact in future quarters.

Your next question comes from the line of James Schneider, Goldman Sachs.

I was wondering if you could talk -- not to beat a dead horse on the gross margins, but you did very well last quarter when you culled some of your lowest-margin products to get to raise the gross margin profile overall. Do you expect you would take any further actions along those lines going forward or how should we think about that?

So many of those actions actually have been taken. It will take it a while or just the cycle time to kind of get through the last-time buy for each product on a product-by-product basis. So I expect you will continue to see some positive results from the culling through the next 3 quarters.

That was helpful. And then as a follow-up, could you maybe talk about the pricing environment out there? Expecting prices down 1% to 2% sequentially in Q3, do you think that is getting better at this point? Or do you expect to see that same level of pricing pressure continuing over the next couple of quarters?

I expect pricing pressures will be very similar to Q2 for the next couple of quarters. Lead times are short in the industry. There certainly is no big push to exceed the capacity in the industry. So simply put, there's still going to be some pressure there, and it should remain similarly competitive with Q2.

Your next question comes from the line of Christopher Danely, JPMorgan. Christopher B. Danely - JP Morgan Chase & Co, Research Division: And thanks to Donald. I think I speak for many when I say that we are despondent over him flying the coop here. At any rate, can you just talk about -- it sounds like you expect the market to remain fairly depressed in Q4. What should we be thinking about revenue growth, or I guess lack thereof, in Q4? And how about gross margins in Q4 and beyond, if there's any other factors impacting that?

So we don't give more than 1 quarter at a time. What I can tell you is that normally, Q4 looks very similar to Q3. It would be a normal pattern for us. There are some ups and downs as we kind of guess at the market in Q4. There may be some new models of products out for Christmas sales that can stimulate a little bit of demand, but there's also the normal seasonal factors that impact it. So in general, we don't have any reason to believe our past trends will be dramatically different. Going forward, obviously, we do expect, as we mentioned earlier, the automotive content to continue to grow. Each model year, we see a few more opportunities. So with similar kinds of automotive sales, we should be seeing some growth into the first quarter on the automotive and electronic side. Christopher B. Danely - JP Morgan Chase & Co, Research Division: Great. And just my follow-up, Keith, can you just maybe take us through where the end markets ended up in Q2? And what were your original expectations, so where was the biggest miss? And then which do you expect out of the various end markets the first to come back, and where are you a little more concerned?

Okay. Let's see here. Which should be more specific data? In Q2 versus Q1, down was communications for us. Definitely saw some of the impact in the handsets from squeeze on chipset availability that showed up there. That was a surprise to us. Computing was up; automotive, relatively flat; consumer, flat; industrial, down very slightly. Again, none of those, were surprises. Medical, up a bit. And the mil, aero and networking again relatively flat. So really the only big surprise was on the communications side for us.

Your next question comes from the line of Craig Berger, FBR Capital Markets. Craig Berger - FBR Capital Markets & Co., Research Division: Donnie, congrats, and we'll miss you. With respect to, I guess, the SANYO business, can you give us a postmortem on how you think that's changed? I mean there is a lot of revenues gone versus say 6 quarters ago. It kind of feels like you're planning on that not coming back in any meaningful way. Just any thoughts on things that have changed since you made that acquisition.

Yes. I mean we've talked about some of the major events in the past, the flood being the most significant. The key there is we're now back in full manufacturing from a product perspective. But a lot of those customers are hurting and losing market share on a global basis. So a good number of those were customers in Japan. And for various reasons, including the strong yen, they have been losing share to others. So the climbing back has not been as fast as we might have anticipated. Having said that, there are new generations of products that are being designed in that consumer market space. We are seeing our design wins show that we'll be getting share back as those new products kick in. So I do think we'll get recovery, just not as quickly as we thought. Craig Berger - FBR Capital Markets & Co., Research Division: And on looking out over the next year, how do we think about gross margins in light of your cost reduction efforts and capacity efforts? What kind of revenues might you need to do a 36% or a 38%?

I think we -- I'm not sure we've got our eyes on 36% or 38% at this stage. I think we can get up toward that 30% range as we get into next year with revenues that are not significantly higher than we're at. To get the 36%, 38%, you are going to require a lot more revenue.

Your next question comes from the line of Parag Agarwal, UBS.

So just wanted to get more clarity on the restructuring measures that you're taking. It looks like that most of these measures should be completed by the end of the year. So just wondering, do you think that the measures you are taking are deep enough that you'll be in a good position starting the next year?

Yes, we do believe that. We've looked at it pretty carefully. In other words, we're not counting on big revenue increases to make life better. We have all of these that we're talking about in OpEx, we described earlier, but also we still are closing our Aizu factory on the COGS side. And we have various other measures in place from a factory sizing perspective. So we do believe these are the right types of actions to be taken in the likely economy over the next year.

Okay. And just a question about the share buyback. Clearly, it's tough time in the cash flow and the balance sheet will be -- and that kind of stuff. So what is the rationale behind this buyback program at this point of time?

Well I think the -- our company see the stock being depressed because of the weak conditions in the market. And I mean covers [ph] has been suffering from that same malaise. We did mention business got a bit weaker in June. Going through July, it's kind of stabilizing a bit now. Hopefully, we will be surprised by the end of the year. So it gives us support to the stock. And if we're in an environment of lower revenue growth, buying back the stock is a way to get EPS acceleration with a lower revenue growth basis. So this is something that we are going to embrace. We have planned this over a 3-year period. As you heard on the call, we're reducing our capital expenditures and our OpEx. So we will continue to generate good cash. We will pay down our debt. And in addition to that, we should be able to buy back a significant amount of our shares to give earnings accretion.

Your next question comes from the line of Craig Ellis, Caris & Company. Craig A. Ellis - Caris & Company, Inc., Research Division: My good wishes to Don as you move on to your next steps. Keith, you mentioned that there were some nice design wins in the PC business. Can you just go into more detail on where those are occurring, and if that's a share gain that's coming to ON?

Yes. We've been gaining share in the Ivy Bridge platforms. And so as those ramp as a percentage of the total of books made here in Q3 and onward, we're expecting to get nice increases in our dollar content. But we're also are very well-positioned for the Haswell platform. We've got a series of CPU power control parts already in the marketplace that are being very favorably received. So we think our momentum on the notebook side continues to gain steam. On the desktop side, we're well north of 50% market share now. And again, we are confident that, that will continue here for the next generations. Craig A. Ellis - Caris & Company, Inc., Research Division: And just as a follow-up, Keith, can you quantify what your notebook share is? And where do you see it going as you move into Haswell?

Well, it's been kind of mid-20s or so. And we think in the Ivy Bridge platform, it'll get into the mid-30s or so.

[Operator Instructions] And your next question comes from the line of Mark Lipacis, Jefferies. Mark Lipacis - Jefferies & Company, Inc., Research Division: Donnie, thanks a lot for all the help. I wish you the best. I guess the question I have is you're down from peak revenues about $160 million. And I'm wondering if you could give -- provide us a framework for like what percentage of that do you think is channel cleaning out inventories versus just weaker end markets versus share losses, versus just culling the SANYO product line?

The bulk of that is the SANYO product line. And so from that perspective, there's clear share lost. We did the culling. And then due to the Thailand flood, there were certainly some market share loss on the SANYO side. If you look at them, they were up at the almost $300 million range in Q3 of last year and they're just over $200 million here in the second quarter. So $100 million of that, $60 million or so was that -- the balance of the $60 million, we believe is mostly specific market-related, inventory change-related, et cetera. Mark Lipacis - Jefferies & Company, Inc., Research Division: Okay. And did you talk about how the order patterns were shaping up this quarter so far relative to what you saw at the end of last quarter? That's all I have.

Yes. The activity Donald mentioned earlier, we saw significant slowing in new order patterns as we got into June, which was not expected. That continued into July, but it looks like it has now stabilized and is starting to pick up a bit.

Your next question comes from the line of Terence Whalen, Citigroup.

This one refers to channel inventory. It sounds like channel inventory may have increased about 6% as a percentage of your revenue. What I was interested in is understanding what areas, what end markets and what regions that channel inventory grew?

There was really only 1% channel inventory growth in total on a dollar basis. And from a weeks basis, there was no movement at all. So in essence, the sell-through accommodated all of the increased shipments into distribution. A little bit of a mix shift there, if you will. From a regional basis, to give you an idea of the inventories, they're strongest in North America and Europe, leanest in Asia. And as we get into the third quarter, clearly, no one wants to build inventory in the channel. So I'm not expecting -- again, we're not expecting increases there.

Great. And then as my follow-up question, it sounds like your capital planning for next year may have gone down versus prior plan. It certainly blew up my modeling. What are you thinking from the capital side of things? And do you view further capacity reductions to boost gross margin as a lever that's becoming more attractive given the growth outlook that you're seeing?

Certainly from a need for new capital, we have run, as you've mentioned, $160 million hotter than we're running right now. And even at that, we had more powder. So the capacity piece of our capital plan will be down very substantially. There are always hot new technologies in certain areas that need to grow, so there will be some capital for capacity. Most of it will be, again, focused on the new technologies that are ramping quickly. Other than that, as far as total demand, we mentioned Aizu will be closing. That takes out a significant operating piece of our front-ends. We think that, that will put us in a position we need to be. And on the assembly test side, we will be continuing to look at what makes sense there as we go through time.

Your next question comes from the line of Steve Smigie, Raymond James.

This is actually Elizabeth Powell [ph] calling in for Steve. You guys have already captured a significant part of market share in desktop power. Is there anything unique about ultrabook power management that you think gives you guys a chance to gain similar dominance on those platforms?

Yes, I mean, we believe we've got again a more efficient architecture and performance levels for the ultrabooks. We're looking at higher frequency solutions. And in essence, power density is extremely important in the ultrabooks. So the combination that we can provide to give them very dense efficient power, we think can provide similar kinds of opportunities for us in ultrabooks.

Okay. And then in the past, you're ahead of the curve in terms finding markets that were about to take off, investing in computing, in autos right before everyone else did. Is there a particular market you're investing in now that you think is going to be a large dryer for you in the next 18 months?

There's a -- from an actual market perspective -- it depends on how you define things. From an application perspective, certainly, we are seeing significant demand in the LED lighting across all of our marketplaces. We're seeing significant demand building. And we think next year we'll be coming out for power modules to enable efficient appliances and industrial motors, et cetera, as a second area that's going to be a nice conversion opportunity.

Your next question comes from the line of Chris Caso, Susquehanna.

And I also want to echo all the best to Donald. It's been a pleasure working with you. As far as my question, can you talk about where your shipments are versus consumption right now? And I understand that year-over-year growth rates have mainly been impacted by SANYO, but do you think at this point that your shipments out of ON are fairly well in line with your customers' consumption levels right now? Or are we a bit above or a bit below?

I think we're a bit below and kind of in 2 areas. We mentioned what was going on in the distribution. They are again continuing to get leaner, and they're telling us that the part of the impetus, particularly in Asia is that their customers are getting leaner as well. And so everybody's just being very, very cautious. So whether it's OEM or disti, we actually think there's a leaning out going on across the entire supply chain.

Okay. So there is a little bit of room to -- well, I guess at this point then, there's likely when business conditions stabilize, we would likely see some increase in inventory levels...

I think that's true. I mean the other evidence I would give you is we're getting a lot of orders for immediate delivery, much more so than normal. So we're seeing a lot of folks that have indeed continued to push on being very lean and then they get in a jam and have to order stuff quickly.

Okay. If I could just -- one other follow-on, with respect to -- I think you said it was about $100 million in reduction on the SANYO run rate. I would expect getting that business higher or whether or not it gets back up to the $300 million level, would really be a function of those customers in Japan regaining their own market share. It's not a question of ON penetration at those customers. It's really a structural issue within that customer's market, is that right?

No, not really. There are roughly -- if you look at their business, roughly 60% of it is influenced by Japan customers and 40% is outside customers, predominantly Asia. We think the growth path in those non-Japan -- the Japan customers is actually quite strong. I mentioned earlier some of those power modules earlier, we talked about the auto focus and image stabilization in the handsets, and there's several other products that we believe actually have very good growth potential outside of Japan. So I would expect that by the end of '13 or going into '14, the ratios would be quite flipped with a lot of growth opportunities coming outside of the Japan-based customers.

Your next question comes from the line of Ramesh Mitra [ph], National Securities.

In regards to your visibility for a quarter out, is that significantly worse than where it has been historically for this time of the year?

It has not changed appreciably from normal.

Okay. So your customers are still -- for deliveries a quarter out, people are still ordering at the same pace.

Yes. Pretty much same pace.

Okay. In regard to raw materials pricing, are you seeing any impact from that, either your gross margins in Q3 or further on out?

We haven't factored any in. We've not seen any big movement. Clearly, the pressure from metals appreciation, et cetera, is way down. So there's not a lot of cost on the raw material side going up, which lessens the pressure on us. The question is how much of that can we recapture, and obviously, we're out trying to work on that.

Your next question comes from the line of Patrick Wang, Evercore Partners.

And best of luck on the next step, Don. I guess my first question is just on the cost cutting that you guys talked about with SANYO. It sounds like you've got -- done a lot of work there. And, Keith, you talked about hitting 30% or getting them to 30s for gross margins at some point next year. I'm just curious if you could help us with some of the moving pieces for the next few quarters. And I guess if we'll see any movement in the next couple -- in the next quarter or 2 just within that SANYO business.

Okay, sure. So there's 2 major sections on the cost cutting. We did just announce on the OpEx side very significant moves to trim the spending there, get them closer to where we think the run rates on the sales are going to go. And then on the operational side. The operational side, closing the factories, et cetera, is largely accomplished. We've closed the factories we've planned on closing. What happens is you have a period of several quarters while you bleed off the buffer inventories. And so you really don't see those changes until they're gone. In the case of these factories in Japan, we built more buffer inventory than we normally would, that will last a little longer. But -- so you won't be seeing any immediate changes, but you should see gradual changes. The other piece of the factor to get up in the 30s is the remaining factory that we've been consolidating into needs to start ramping. And they're running at roughly 60% utilization right now, and they really can't get up into that 80% plus range where you need for the margins until that buffer inventory is gone. So it is a process. It'll get better bit by bit until we can get the buffer inventory out, which should be 2 to 3 quarters, and then we can start getting the utilization up on the remaining factory to get the efficiency in gross margins.

Do you have a sense if there are any updated targets in terms of revenues for that type of business to get to 30?

We need to be -- I guess what I'll say right now is we need to be kind of in the $230 million a quarter range of revenues to get that above breakeven. With the current cost structures, with the efficiencies we talked about in manufacturing, you should start seeing something positive very quickly at that stage.

And at this time, there are no further questions. We'd like to thank everyone for your participation today. This concludes the conference call.

Thanks.