Parag Agarwal - ON Semiconductor Corp. Bernard Gutmann - ON Semiconductor Corp. Keith D. Jackson - ON Semiconductor Corp..

Ross C. Seymore - Deutsche Bank Securities, Inc. Christopher Brett Danely - Citigroup Global Markets, Inc. Tristan Gerra - Robert W. Baird & Co., Inc. Vivek Arya - Bank of America Merrill Lynch Mark Delaney - Goldman Sachs & Co. Christopher Rolland - Susquehanna Financial Group LLLP Harsh V. Kumar - Stephens, Inc. Craig A. Ellis - B. Riley & Co.

LLC Vijay Raghavan Rakesh - Mizuho Securities USA, Inc. Shawn M. Harrison - Longbow Research LLC Rajvindra S. Gill - Needham & Co. LLC Harlan Sur - JPMorgan Securities LLC John J. Donnelly - Stifel, Nicolaus & Co., Inc. Craig M. Hettenbach - Morgan Stanley & Co. LLC John William Pitzer - Credit Suisse Securities (USA) LLC.

Good day, ladies and gentlemen, and welcome to the ON Semiconductor First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

I would now like to introduce to your host for today's conference, Parag Agarwal, VP of Corporate Development and Investor Relations. Sir, please go ahead..

Thank you, Michelle. Good morning and thank you for joining ON Semiconductor Corporation's first-quarter 2017 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 Relations section of our website at www.onsemi.com.

A replay of this broadcast, along with our earnings release for the first quarter of 2017 will be available on our website approximately one hour following this conference call and the recorded broadcast will be available for approximately 30 days following this conference call.

The script for today's call and additional information related to our end-markets, business segments, geographies and channels are also posted on our website. Our earnings release and this presentation include certain non-GAAP financial measures.

Reconciliation of these non-GAAP financial measures to most directly comparable measures under GAAP are in our earnings release, which is posted separately on our website in the Investor Relations section.

During the course of this conference call, we will make projections or other forward-looking statements regarding future events or future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially from projections.

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-Ks, 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 2017.

Our estimates may change and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors, except as required by the law. For all synergy-related discussion on this call, we have used Fairchild's 2015 results as a base for all comparisons.

During the second quarter, we will be attending the Deutsche Bank AutoTech Conference in San Francisco on May 11, JPMorgan Technology Conference in Boston on May 24 and Bank of America Merrill Lynch Technology Conference in San Francisco on June 7.

Now, let me turn it over to Bernard Gutmann, who will provide an overview of the first-quarter 2017 results.

Bernard?.

Thank you, Parag, and thank you, everyone, for joining us today. Our execution momentum remains strong and we once again delivered solid financial results, which exceeded our guidance and street consensus for all key metrics.

Visibility into our business continues to strengthen, driven by strong demand for products in the automotive, industrial and communications end-markets.

At the same time, we're making strong progress in integration of Fairchild and we remain on track to deliver the higher-targeted synergies from our acquisition of Fairchild as communicated during our recent Analyst Day.

Our margin performance remained strong in the first quarter and we delivered operating leverage driven by strong performance on operations front. Our free cash flow more than tripled year-over-year during the first quarter.

Furthermore, to reduce our cash outlay for interest expenses, we re-priced our term loan B debt at lower interest rate and issued new convertible notes. Before I discuss additional details regarding our first-quarter 2017 results, let me highlight a change to revenue recognition – related to revenue recognition.

As we announced in our press release on April 4, starting from the first quarter of 2017, ON Semiconductor will recognize revenue from distributors using the sell-in method. As you are aware, prior to transitioning to the sell-in method, ON Semiconductor used the sell-through method to recognize revenue from distributors.

As a result of the change, the company experienced a one-time benefit in various line items in its consolidated financial statements. To provide transparency and clarity in our financial results, we have provided quantitative impact to various line items associated with this change.

Furthermore, in discussion of our non-GAAP results for the first quarter of 2017, we have excluded the benefit from this change and that benefit will not repeat. Our guidance for the second quarter of 2017 is not impacted by this change. Now, let me provide you additional details on our first-quarter 2017 results.

Total revenue for the first quarter of 2017 was approximately $1.437 billion, an increase of approximately 76% year-over-year and 14% quarter-over-quarter. First-quarter 2017 non-GAAP revenue, which excludes the one-time benefit of approximately $155 million from the change in revenue recognitions for distributors, was approximately $1.28 billion.

Our first-quarter non-GAAP revenue grew by approximately 57% year-over-year and approximately 2% quarter-over-quarter. GAAP net income for the first quarter was approximately $0.18 per diluted share. GAAP income, before income tax, for the first quarter was approximately $115 million as compared to $18.2 million in the fourth quarter.

Non-GAAP income, before income tax, for the first quarter was approximately $133 million. Net cash paid for taxes in the first quarter was approximately $18.4 million and diluted shares outstanding were approximately 426 million. Non-GAAP income, before income tax, for the fourth quarter was approximately $132 million.

Net cash paid for taxes in the fourth quarter was approximately $8 million and diluted shares outstanding were approximately 427 million. GAAP gross margin for the first quarter was 35% as compared to 30.5% for the fourth quarter. Non-GAAP gross margin for the first quarter was 35.4% as compared to 35.2% in the fourth quarter.

Better-than-expected non-GAAP gross margin in the first quarter was driven by strong operational execution and higher-than-expected revenue. GAAP operating margin for the first quarter of 2017 was approximately 12.8% as compared to approximately 4.4% in the prior quarter.

Our non-GAAP operating margin for the first quarter was 13.2% as compared to 12.9% for the fourth quarter. GAAP operating expenses for the first quarter were approximately $320 million as compared to approximately $329 million for the fourth quarter of 2016.

Non-GAAP operating expenses for the first quarter were approximately $285 million as compared to approximately $281 million in the fourth quarter.

Non-GAAP operating expenses for the first quarter were at the higher-end of our guidance due to higher revenue, accruals for variable compensation resulting from significantly better results and investments in ADAS-related strategic growth initiatives such as automotive radar and advanced image sensors.

We had strong free cash flow performance in the first quarter. We define free cash flow as cash flow from operations less capital expenditures. First quarter free cash flow was approximately $156 million as compared to approximately $179 million in the fourth quarter. On a year-over-year basis, our free cash flow more than tripled in the first quarter.

Operating cash flow for the first quarter was approximately $209 million and capital expenditures were approximately $53 million. Operating cash flow for the fourth quarter was approximately $229 million and capital expenditures were approximately $50 million.

We exited the first quarter of 2017 with cash, cash equivalents and short-term investments of approximately $729 million as compared to approximately $1.028 billion in the fourth quarter. During the first quarter, we re-priced our term loan B to reduce the interest rate to LIBOR plus 225 bps from LIBOR plus 325 bps.

We also issued $575 million of convertible senior notes due in 2023. These notes bear a coupon of 1.625% and are convertible into 48.2567 shares of ON Semiconductor's common stock per $1,000 principal amounts of the notes at maturity or under certain conditions.

To avoid potential dilution in our equity upon conversion of these notes, we entered into a note hedge and warrant transaction with the initial purchasers of these convertible notes. These transactions effectively raise the strike price for conversion of the convertible notes to $30.70 per share from $20.72 per share.

We used the net proceeds from the issuance of the convertible notes to pay down our higher interest rate debt. In the first quarter, we used approximately $445 million to redeem all of the outstanding 2.625% convertible senior subordinated notes due 2026, series B.

At the end of the first quarter of 2017, days of inventory on hand, adjusted for fair market value step-up, were 111 days, down 2 days as compared to inventory days at the end of the fourth quarter. For the first quarter of 2017, our lead times were approximately flat quarter-over-quarter.

Our global factory utilization for the first quarter was slightly up sequentially. Now, let me provide you an update on the performance of our business units, starting with the Power Solutions Group or PSG. GAAP Revenue for PSG was approximately $744 million and non-GAAP revenue was approximately $636 million.

GAAP revenue for our Analog Solutions Group for the first quarter of 2017 was approximately $504 million and non-GAAP revenue was approximately $462 million. GAAP revenue for the Image Sensor Group was approximately $189 million and non-GAAP revenue was approximately $184 million.

Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment.

Keith?.

Thanks, Bernard. I am very pleased with our strong execution. Our results clearly demonstrate the progress that we have made in transforming ON into a highly diversified and broad-based supplier of power, analog and sensor solutions for automotive, industrial and communications end-markets.

As we highlighted in our recent Analyst Day, ON Semiconductor has now established itself as a leader in the power semiconductor market. The company is now a provider of key enabling technologies for automotive, industrial and communications end-markets and our results are indicative of our strong momentum in key markets.

We continue to expand our margins and generate strong free cash flow. We are making strong progress in integration of Fairchild and we are tracking significantly ahead of our planned synergy targets.

We are on track to begin realizing manufacturing synergies from Fairchild towards the end of the year as we start insourcing Fairchild's backend operations. Recall that at our Analyst Day, we raised our synergy targets for Fairchild.

We now expect to exit 2017 with annual synergies run rate of $180 million as compared to our prior target of $160 million. We raised annualized synergies run rate exiting 2018 to $220 million from $200 million. Total annual synergies from Fairchild are now expected to be $245 million, up from $225 million.

We expect to achieve annual synergies run rate of $245 million by end of 2019. Performance of Fairchild continues to be strong. We had another record bookings quarter for Fairchild. During the first quarter, booking for Fairchild were at the highest level for the last three years.

We continue to see high level of customer interest in Fairchild products and our design win pipeline for Fairchild products continue to expand at a rapid pace. We expect to see strong growth in revenue contribution from Fairchild in the mid-term. Now, let me now comment on the business trends in the first quarter.

During the first quarter, demand trends and bookings were strong across most end-markets and geographies. While there has been discussion in the investment community regarding peaking of the semiconductor cycle, commentary from customers, coupled with our bookings trends points to sustained improvements in demand environment for most end-markets.

At this time, as opposed to demand, potential supply tightness arising out of improving demand environment is among the top concerns of our customers. Also, there have been a few negative data points regarding health of the automotive market. However, our bookings point to near-term seasonal trends on the back of a very strong first quarter.

I must also point out that our automotive revenue base is highly diversified in terms of geographies, customers and applications and, therefore, temporary softness in a particular geography or application is not likely to have a material impact on our automotive business.

Based on comments from the global auto OEMs and other market participants, we believe that global automotive units should grow by low-single-digit percentage rates in 2017. Now, I'll provide details of the progress in our various end-markets for the first quarter of 2017.

GAAP revenue for the automotive market in the first quarter was approximately $439 million. On a non-GAAP basis, the automotive end-market contributed revenue of approximately $405 million and represented approximately 32% of our non-GAAP revenue in the first quarter.

First-quarter automotive non-GAAP revenue grew by approximately 28% year-over-year and approximately 10% quarter-over-quarter. As I indicated earlier, our automotive business remains strong, driven by leadership in fast-growing applications such as ADAS and exposure to highly diversified customer base across the globe.

Our momentum in the automotive market for ADAS and viewing applications continues to accelerate. For the first quarter, image sensor revenue related to ADAS and viewing applications grew at an impressive high-teen percentage rate quarter-over-quarter.

Our design win pipeline continues to grow for ADAS and active safety applications as we expect robust growth in our ADAS-related revenue to continue. As Bernard indicated in his prepared remarks, we are making investments in ADAS to further accelerate our growth in this market.

Other growth drivers for automotive applications include LED lighting, power management, power discretes, body electronics, in-vehicle networking solutions and powertrain ASICs.

Our design win pipeline for automotive applications, such as ultrasonic sensors and power management, continues to grow and we are engaged with the leading global OEMs and Tier 1 integrators on numerous projects for upcoming platforms.

Revenue in the second quarter for the automotive end-market is expected to be up quarter-over-quarter compared to non-GAAP automotive revenue in the first quarter. The industrial end-market, which includes military, aerospace and medical, contributed revenue of approximately $355 million in the first quarter.

On a non-GAAP basis, the industrial end-market contributed revenue of approximately $320 million and represented approximately 25% of our non-GAAP revenue in the first quarter. First-quarter industrial non-GAAP revenue grew by approximately 64% year-over-year and approximately 6% quarter-over-quarter.

Strength in the industrial end-market was broad-based across products and geographies. We all well positioned to benefit from growth in machine vision and industrial automation applications with our CMOS and CCD image sensors. Our PYTHON line of CMOS image sensors for machine vision applications continues to grow at an impressive rate.

We have been repurposing products from our consumer end-market for industrial applications, which drive higher margins and long-term sustainable revenues. In the industrial end-market, we have seen strong traction for our power modules, which were originally designed for consumer applications.

We expect to see growth in 2017 for our defense-related revenue as depleted military stocks are being replenished. Revenue in the second quarter for the industrial end-market is expected to be up quarter-over-quarter compared to non-GAAP industrial revenue in the first quarter.

The communications end-market, which includes both networking and wireless, contributed GAAP revenue of approximately $282 million in the first quarter. On a non-GAAP basis, the communications end-market contributed revenue of approximately $243 million and represented approximately 19% of our non-GAAP revenue in the first quarter.

First-quarter communications non-GAAP revenue grew by approximately 75% year-over-year and declined by approximately 14% quarter-over-quarter due to seasonality and softness in the Chinese handset market. We believe that much of the softness in the Chinese handset market is largely behind us and we expect growth to resume in the second quarter.

Our content in major global platforms continues to increase and we are well positioned to benefit from impending ramps of new platforms. Revenue in the second quarter for communications end-market is expected to be up quarter-over-quarter compared to non-GAAP communications revenue in the first quarter.

The computing end-market contributed GAAP revenue of approximately $156 million in the first quarter. On a non-GAAP basis, the computing end-market contributed revenue of approximately $130 million and represented approximately 10% of our non-GAAP revenue in the first quarter.

First-quarter computing non-GAAP revenue grew by approximately 70% year-over-year and by approximately 1% quarter-over-quarter.

With products from Fairchild, we have won designs for power stage for cloud computing and server applications with addressable content of more than $30 and we expect revenue from these wins to start ramping in the near to mid-term.

Revenue in the second quarter for computing end-market is expected to be up quarter-over-quarter compared to non-GAAP computing revenue in the first quarter. The consumer end-market contributed GAAP revenue of approximately $204 million in the first quarter.

On a non-GAAP basis, the consumer end-market contributed revenue of approximately $184 million and represented approximately 14% of our non-GAAP revenue in the first quarter. First-quarter consumer non-GAAP revenue approximately doubled year-over-year and grew by approximately 1% quarter-over-quarter.

The greater-than-seasonal strength in the first quarter was primarily driven by white goods. Revenue in the second quarter for consumer end-market is expected to be up quarter-over-quarter compared to non-GAAP consumer revenue in the first quarter. In summary, our execution momentum remains intact and we continue to deliver solid results.

Our margins continue to expand and our free cash flow generation is accelerating at a rapid pace.

Though there have been significant investor consternation related to reports of slowdown in certain end-markets and potential peaking of the semiconductor cycle, our bookings trends and commentary from customers point towards an overall improving global demand environment. Now, I'd like to turn it back over to Bernard for forward-looking guidance.

Bernard?.

Thank you, Keith. Before I get into the details of our guidance for second quarter of 2017, let me remind you that the change in revenue recognition for distributors has no impact on our second quarter guidance.

Based on product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenues will be approximately $1.285 billion to $1.335 billion in the second quarter of 2017. Backlog levels for the second quarter of 2017 represent approximately 80% to 85% of our anticipated second-quarter revenue.

For the second quarter of 2017, we expect GAAP gross margin in the range of 34.5% and 36.4% and on a non-GAAP gross margin, ranges approximately 34.7% to 36.7%. Factory utilization in the second quarter is likely to be up sequentially. We expect total GAAP operating expenses of approximately $311 million to $332 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other changes, which are expected to be approximately $30 million to $37 million. We expect total non-GAAP operating expenses of approximately $281 million to $295 million.

We anticipate second-quarter the net other income and expenses, including interest expense, will be approximately $35 million to $38 million, which include non-cash interest expense of approximately $8 million to $9 million.

We anticipate our non-GAAP net other income and expenses, including interest expense, will be approximately $27 million to $29 million. Cash paid for income taxes in the second quarter of 2017 is expected to be approximately $12 million to $16 million.

We expect full-year 2017 cash paid for income taxes to be approximately 10% of 2017 non-GAAP pre-tax income. We expect total capital expenditures of approximately $75 million to $85 million in the second quarter of 2017.

We also expect share-based compensation of approximately $20 million to $22 million in the second quarter of 2017; 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 2017 is expected to be approximately 427 million shares based on our current stock price. Further details on share count and earnings per share calculations are provided regularly in our Quarterly and Annual Reports on Forms 10-Q and 10-K. With that, I would like to start the Q&A session. Thank you.

And, Michelle, please open up the line for questions..

Thank you. Our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is open. Please go ahead..

Thanks, guys, for letting me ask a question. Keith, one question for you and it's about the cycle topic that you addressed in the automotive side and then overall in the semiconductor cycle. When you mentioned that shortages are a bigger concern for your customers, people oftentimes hear that and think double ordering is a pending risk.

Can you talk a little bit about what you're seeing on either lead times, ASPs, any other indicators that make you feel comfortable that peaking (25:56) is not really the consideration that we should be focused on?.

Yeah. A couple of comments there. Lead times are really not stretching quickly as they normally do when you get into a double order situation. ASPs are also not accelerating at the same kind of paces, although they are starting to stabilize and as we mentioned, lead times are pretty steady.

So, that combination kind of indicates to us there's not quite double ordering. Also, as we look at the quality of the backlog, we do see significant growth in the backlog toward the summer time for all of the ramps in the communications industry and we see appropriate orders lead time wise for industrial and automotive.

So, at this stage, it just looks like a good demand environment and not something where any type of panic has started..

Thanks for that. And then, I guess, my follow-up one for you, Bernard. I know that revenues came in at the high-end of the range and so OpEx being towards the higher-end of the range makes sense there, but it was a little higher than I expected in both the quarter and the guide.

Can you just talk about the trajectory for OpEx for the rest of the year and how do we view the synergies that you're going to get from Fairchild on the OpEx line specifically going forward?.

Thank you, Ross. So, as we mentioned, the variable comp definitely was higher than expected, because the results were better. We also mentioned that we made some investments in ADAS and radar. In general, we expect OpEx as a percent of revenue to subside in the second half of the quarter, getting closer to our target model.

The synergies will continue coming in and we expect those to come in more towards the end of the year as we finalize the integration of our ERP systems for Fairchild..

Great. Thank you..

Thank you. And our next question comes from the line of Chris Danely with Citigroup. Your line is open. Please go ahead..

Thanks, guys. Just another question on the end-markets.

Can you just talk about the linearity of bookings by end-markets and how they changed throughout the quarter? Did every single one grow? Was there any change particularly in the automotive end-market in terms of bookings?.

Yeah. We did not see anything that was outside of seasonal in each of the markets. And so, there's really nothing to comment on..

Great. And then, for my next question, sounds like you guys are taking advantage of the cash flow from the balance sheet. Bernard, maybe talk about with the increased cash flow going forward.

Should we expect any further changes or what you'd like to do next to the balance sheet?.

As we have mentioned in the past, our target is to pay down the debt in the short term. We intend to get to about 2 times net leverage. So, any excess free cash flow that we generate will be used to pay down the debt..

Is there anything else callable in the next six months?.

No, but the term loan that we have is pre-payable at any time..

Got it. Okay. Great. Thanks, guys..

Thank you. And our next question comes from the line of Tristan Gerra with Baird. Your line is open. Please go ahead..

Hi. Good morning.

Could you quantify the utilization rates that you expect in Q2 and also if you could provide perhaps an initial outlook in terms of what you're seeing for Q3 in terms of order trends?.

So, for utilization, we are in the middle-80%s in the first quarter and we expect Q2 to be slightly higher than that..

And Q3 orders, we're certainly looking at the handset market to be up more this year than it was last year in the same timeframe with two major guys ramping new platforms. So, it's definitely stronger than we saw last year..

Great. Thank you..

Thank you. And our next question comes from the line of Vivek Arya with Bank of America. Your line is open. Please go ahead..

Thanks for taking my question and good job on the execution.

For my first question, maybe, Keith, back to this automotive business and the cycle question, if you look at prior cycles, how much of an early warning do you think the industry had when the cycle started to slow and why would it be different this time? I think you mentioned diversification and obviously, there is a secular content growth argument for automotive semis, but is there anything different now that gives you better visibility than you have had in the past if the cycle does start to turn?.

I think the cycles' turning shows up in order patterns. There is traditionally good order placement by our automotive customers. They place more than they have to based on lead times. So, I would say we get something like a five to six-month warning if things are going to change.

The primary difference this cycle versus any of them in the past is just the rapid adoption of advanced safety mechanisms, which use a lot of semiconductors. And so, as we mentioned in our Analyst Day, even with no growth at all in the SAAR, you can be expecting something in the mid to high-single digits growth for automotive revenues..

Thanks.

And as my follow-up, a question on the stock and this is a very frequent question from investors, your stock continues to trade at a low multiple, around 11 times forward even though semi have reiterated (32:01) to 18 to 20 times, including your close comp, Infineon, what do you think can help expand ON to be multiple? Is it better gross margin? Is it more consistent top-line growth, debt reduction? What do you think people are missing and what can help to close this very large gap? Thank you..

So, we believe that focus on free cash flow is going to be a significant bolster to the stock and also there is significant indebtedness that, as we pay that down, gives you additional leverage. So, those two factors should be very significant in increasing that multiple..

One last quick one as a clarification. Maybe, Bernard, when I look at the Q2 outlook, it is above expectation, but I think it's about 2% to 3% sequential growth, somewhat different than what we have seen in the past? If you could just help us put that in the context of seasonality. Thank you..

So, in general terms, we did have a very strong first quarter. So, on the heels of that first quarter, maybe the numbers are a little bit lighter than a normal seasonality. And, I'd say, we have a little bit of conservatism in our approach.

Seasonality with Fairchild, I don't think it's changing too much, except it makes Q4 a little bit more pronounced on the down, since Fairchild was typically seasonally first more down, offset by the little bit better Q1, but Q2 and Q3 should not be too different..

Okay. Thank you..

Thank you. And our next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open. Please go ahead..

Yes. Good morning. Thanks very much for taking the questions. First question is on the handset market. Keith, you talked about you've seen a little bit of weakness in the handset market in the first quarter. I think you'd originally been looking for seasonal or even better than seasonal in the first quarter.

So, any more color on what gives you the confidence that's starting to turn? And then, as you think about the handset market for later this year, if you could help us think about how much content is increasing on a net basis maybe year-over-year, I'd be interested in any sort of color on the content gain, would be interesting, too..

Yeah. So, seasonally, we dug pretty deep, talked with our customers. Clearly, in China, there was some supply chain tightening that some of our customers were employing is down a little more than seasonal.

But as we look at the uptake here in Q2 and their expectations they've set with us, we're expecting a significant growth back to a more normal second half of the year. Secondly, as far as content; content, there are two different ways. One way of looking that is just exposure geographically.

About half of our sales go into China and the other half are to the major OEMs that are not in China. You're seeing some very strong ramps. And so, we've gotten better content in all of the ramps there. So, I think you're looking at 20% to 30% more content in each of those.

And then, hopefully, with the specific exposure on the ramps, you should see very significant growth in the second half for handsets..

That's helpful. And then the follow-up question was on auto. You talked about the strength you're seeing in growth in ADAS applications.

Maybe you can help us understand just of your auto revenue, how much, at this point, is tied to ADAS?.

Well, total safety is about a quarter. ADAS, specifically, I don't know that I've got those figures..

Okay. Thank you very much..

Thank you. And our next question comes from the line of Christopher Rolland with Susquehanna. Your line is open. Please go ahead..

Hey, guys. Thanks for the question. Perhaps, you guys can talk about new Aptina capacity, both front-end and back-end. I think, SNIC (36:11) was putting some more online from you – for you guys.

Is that up and running now? And if not, where are we with capacity? What kind of utilization do we have for Aptina specifically?.

We're in a very good situation with capacity for image sensing business, running less than 70% full globally on a overall basis..

Okay. Great.

And perhaps, in your commentary, you talked about repurposing some products from consumer and moving them to industrial? I'm wondering what products you were talking about there and what kind of margin improvements we might see from those kind of actions?.

Yeah. So, those are basically the power modules that were going into white goods. They provide a variable speed motor control capabilities and basically with slightly different current and voltage targets, you can use them for industrial modules. And the margins go up somewhere around 150 basis points to 300 basis points, very significant change..

Great. Thanks so much..

Thank you. And our next question comes from the line of Harsh Kumar with Stephens. Your line is open. Please go ahead..

Yeah. Hey, guys. First of all, congratulations on strong commentary. Bernard and Keith, quick question for you. Almost every end-market that you participate and then 2Q is going to grow.

I was wondering if you could rank order or give us some color on how you feel about the different end-markets in terms of growth prospects just near term, mid-term, any color would be helpful. And then, I got another follow-up..

So, in the near term, in general terms, all of them are going to grow and obviously, our guidance is in that 2% to 3% range, though it's not a huge amount. So, pretty much all of them are about the same pace, not anything spectacular on one end-market. Remember, we're coming off of a very strong Q1.

In the longer term, we have – as we talked in the Analyst Day, the area of focus is the same, is industrial, automotive and smartphones..

And I would expect a significant wireless growth Q3 and Q4..

In Q3 and Q4..

Got it. Understood. And then, as a follow-up, you're doing better on Fairchild on every metric in terms of synergies. I was wondering if you could give us an idea of what you feel at this time about the timing of cross-sells, if there's any change that you want to communicate at this time..

Harsh, can you repeat that please?.

Yeah. Yeah. Cross-sells from Fairchild..

I see..

Cross-selling, that has been going on since day one. I think you've heard us set now two records since we've owned them. Not records just because they've added on, but records in their bookings levels going back in their history as a standalone company. So, we're actually getting a lot of pull already..

Thanks, guys..

Thank you. And our next question comes from the line of Craig Ellis with B. Riley. Your line is open. Please go ahead..

Yeah. Thanks for taking the question and nice job on the execution. Keith, just going back to some of the commentary on the pricing environment, we've got a much more consolidated industry than we have at any time in the past when there's been good growth.

So, my question is, to what extent do you think there's potential for more structural improvement in pricing? And if that were to occur, what would be the signs that it is in fact playing out?.

Well, there's two, I guess, main factors that go into that. One is perception, if you will, of availability. We've been watching that carefully with capital expenditures, which have been, I think, in good control for several years. So, I'm expecting that to contribute to some stabilization on the pricing side.

And I guess, the second thing to look at is part of the cycle. Certainly, we've indicated we're seeing continued growth there. That hasn't reached any type of double ordering levels yet, but that would certainly be a sign that you're going to see pricing movement.

And then, lastly, just in consolidation of the industry, I think it's still a lot of consolidation to go before that would have a meaningful impact..

Okay. Thank you. And then, Bernard, just following up on some of the expense commentary.

To what extent are the ADAS investments more of a structural impact to R&D intensity or are they more temporal where we would see a step-down in OpEx at some future quarter? And can you break out the magnitude of the impact to expenses ADAS versus the performance base accrual for the first quarter? Thank you..

So, in general terms, we're not changing our long-term target for OpEx. It's in our model. We have stated 21%. This is more repurposing some expenses. And as we said, we're going to get some synergies that will help reduce the number. So, in general terms, I don't expect a structural change. This is in the low-single digit in terms of impact by quarter..

Thank you. And our next question comes from the line of Vijay Rakesh with Mizuho. Your line is open. Please go ahead..

Hi. Thanks, guys. Great execution here. Just a couple of questions back on the automotive side. Keith and Bernard, so if you look at autos, I was wondering what the book-to-bill was and also how channel inventories looked in the different geographies..

So, we don't give book-to-bills out, but it was certainly greater than 1, which is why we predict continued increase sequentially. Relative to inventories from a component perspective, we think they are in very good shape.

From an in-car perspective, I know you've read all the reports we have, which says North America is slightly elevated, but we're in reasonable shape elsewhere..

Great. And just on the EV/HEV side, I know you guys with Fairchild got some exposure there.

What percent of your automotive is exposed to EV/HEV and if you can give us some growth expectations there as you look at this year, next year?.

Yeah. It's very small right now. We're looking at adding up to $300 a car on the EV basis, but those ramps won't be occurring till late of 2018 or 2019..

Got it. Thanks..

Thank you. And our next question comes from the line of Shawn Harrison with Longbow Research. Your line is open. Please go ahead..

Hi. Good morning. Congrats on the results. Two questions, if I may. Sorry, if I missed this, but was there an update to the free cash flow expectation for the year? It looks like if you continue this run rate, you'll be well above $600 million.

And then, second, just on maybe beating the double ordering concern into the ground, are you seeing any increased order activity because of lead times of, let's say, competitive products? For example, let's take MOSFETs, are way up at some of your peers.

And so, are you seeing distribution add more inventory, maybe when they don't need to of your product?.

So, on the free cash flow, we haven't said anything, but we expect to still be in that $500 million to $600 million, maybe moving a little bit closer to the higher-end. We did have a fairly low amount of CapEx and that some of it is timing. It's a little bit lumpy.

So, we expect some of that to catch up, but we're definitely still targeting to be in that $500 million to $600 million range..

On the distribution, double ordering, again, we really have not seen a lot of that. Our inventories there and our order patterns are still well within our models..

Thank you..

Thank you. And our next question comes from the line of Rajvindra Gill with Needham & Company. Your line is open. Please go ahead..

Thank you and congratulations on solid execution. Question on the Advanced Driver Assistance Systems and the transition to advanced safety.

Can you talk about your view of the number of camera sensors or radar sensors or LiDAR sensors that you expect happen over the next several years and how you're positioned competitively to benefit on that trend as you're clearly seeing it on your numbers today?.

So, we believe on the ADAS side, we've been winning about 70% of the new model platforms, which bodes very well for growth going forward. It's really the number of cameras varies as you would guess dramatically model-to-model and country-to-country.

But in all cases, you're looking at something that's going to be in the five to eight range – moving from five to eight over the next couple of years. So, overall we're saying that that has about a 20%-plus CAGR attached to that..

Now, within your auto business, would you say that the sensor business is growing the fastest or how would you rank in terms of LED lighting or power management modules?.

Yeah. So, I would say the ADAS would be the fastest growing, the LED lighting following that and then the various power applications being in third place..

And last question on the USB-C ramp. That clearly is happening.

Can you also talk about the competitive landscape there and do you see potential future competitors as USB-C interface starts to get more pervasive? And are there other end-markets outside of smartphones that you're seeing growth, such as fast chargers or other things?.

Yeah. You see USB-C growth in the entire infrastructure on the handset side and shortly on the notebook side. The competitive landscape there is fairly well established and I wouldn't expect surprises going forward..

Okay. Thank you..

Thank you. And our next question comes from the line of Harlan Sur with JPMorgan. Your line is open. Please go ahead..

Good morning and nice job on the continued great execution here. On your server-based and cloud-based platforms, I think you guys mentioned on the call, you see some tailwinds in the second half. That's a $30 in content. I think you guys mentioned could be as high as maybe $50 at Analyst Day.

Is that being driven by the Purley, Skylake ramp in the second half? And can you help us understand the design win momentum? Is that more Fairchild-driven or your core business or a combination of both?.

So, the cloud computing really came from Fairchild. And Purley certainly will advance that cause there and it really amounts to how fast these specific wins, the specific customers will be coming on, but all of that, we expect to see good strength with Purley..

Yes. Thanks for the insights there. And then, with the move to sell-in rev rec at disti, obviously, inventories will be sort of a key focus metric here. So, I think disti inventories for you guys were 10 to 11 weeks, I think, in the December quarter. That's below your target.

Where were they in the March quarter? What's your expectation for the June quarter? Thank you..

So, in general terms, we think a good level of inventory is 11 to 13 weeks. And we have been operating – as you said, in the fourth quarter, we're at the lower end of that and we have operating within that range for the last few quarters..

Thank you..

And there was not a significant change in Q1..

Yes..

Great. Thank you..

Thank you. And our next question comes from the line of Kevin Cassidy with Stifel. Your line is open. Please go ahead..

Hi. This is John Donnelly on for Kevin.

What drove the better white goods demand in the quarter? And was there any particular geography that was better than expected?.

It's really all China and we had a couple of major customers there both which had depleted their inventories and needed to replenish..

Great.

And then, for the growth in ADAS, could you maybe break down a little bit how much of that is due to an increase in the number of vehicles adopting the system versus increase in the average number of sensors per vehicle?.

Well, they're both going to yield the same results and we don't have any studies that give me a weighting on either of those..

All right. Great. Thank you very much..

Thank you. And our next question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is open. Please go ahead..

Yes. Thanks. Question on the industrial market.

Can you just talk about kind of the trends you're seeing through the distribution market and as well as just kind of key growth drivers for you in industrial this year?.

So, key growth drivers really are the power portion of industrial plus some of the new communication standards for wireless that you have in building automation and factory automation. We're seeing good growth there. The Fairchild acquisition did help us with some pull-through or cross-sell as was talked about earlier there with the ON products.

So, in general, we're looking for our power business and our communications businesses to benefit..

Got it. Thanks. And then, just a follow-up on the commentary about increased handset content.

Can you provide some color there in terms of maybe some key applications that should help you drive the content higher into the back half?.

So, a couple of – I think, first order of magnitude, rapid charging adds dollar content and that's being adopted more quickly here in the second half. And then, the rest of it is just next generation of all the things we've been participating in..

Okay. Thank you..

Thank you. Our next question comes from the line of John Pitzer with Credit Suisse. Your line is open. Please go ahead..

Yeah. Good morning, guys. Thanks for letting me ask a question. Congratulations on the solid results. Keith, I was wondering if you could talk a little bit about the Fairchild portfolio. Your Fairchild outgrew peers by about 400 basis points in the December quarter.

You didn't give us a revenue number for Q1, but if you kind of back in to your bookings comment, it looks like they probably outgrew peers by a similar amount in Q1. And typically, as you know, Fairchild tends to outgrow early in the cycle, but that doesn't always seem to be sustainable.

So, I guess, from your estimation, what's different about their portfolio or as being a part of ON that this outperformance can continue?.

So, I think there's two things here, John. One is they had some new technologies on the power side that actually we're ramping. So, the design wins were won in the second half of last year and they're ramping now and that's a nice tailwind for us.

But secondly, just part of the ON sales network and our distribution network, I think, has had a positive pull-through based on ON (52:24) service levels, et cetera. That's gotten us an extra kicker (52:27)..

Great. And then, Bernard, can you help us understand kind of the incremental margin leverage from here? I think you implied in your 2020 target of $2 of earnings power is somewhere around a 40% incremental op margin.

You came in about 34% this quarter, which was well ahead of what we've seen for, I think, like six or seven quarters, but still not up to that 40% level.

So, how do we think about incremental drop-through from here?.

So, it is basically the same as we communicated in the Analyst Day. We have about a 50% fall-through on incremental revenue. We have also the impact of mix shift and Keith mentioned some of it as we move stuff out of consumer into industrial.

We do have also the Fairchild synergies that are a significant incremental component and as we also talked, some additional manufacturing footprint consolidations. So, it is basically the same as we communicated in the Analyst Day..

All right. Thanks, guys..

Thank you. And I'm showing no further questions. And I'd like to turn the conference back over to Parag Agarwal for any further remarks..

Thank you, everyone, for joining the call today. We look forward to seeing you at various conferences during the quarter. Good-bye..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day..