Fairchild Semiconductor International Management Discusses Q4 2012 Results - Earnings Call Transcript

Jan.24.13 | About: Fairchild Semiconductor (FCS)

Fairchild Semiconductor International (NYSE:FCS)

Q4 2012 Earnings Call

January 24, 2013 9:00 am ET

Executives

Dan Janson - Vice President of Investor Relations

Mark S. Frey - Chief Financial Officer, Executive Vice President and Treasurer

Mark S. Thompson - Chairman and Chief Executive Officer

Analysts

Ross Seymore - Deutsche Bank AG, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Dean Grumlose - Stifel, Nicolaus & Co., Inc., Research Division

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Shawn M. Harrison - Longbow Research LLC

Ada Menaker - Auriga USA LLC, Research Division

Operator

Good day, and welcome to the Fairchild Semiconductor Fourth Quarter and Full Year 2012 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn conference over to Mr. Dan Janson. Please go ahead, sir.

Dan Janson

Good morning, and thank you for dialing in to Fairchild Semiconductor's fourth quarter and full year 2012 financial results conference call. With me today is Mark Thompson, Fairchild's Chairman and CEO; and Mark Frey, our Executive Vice President and CFO.

Let me begin by mentioning that we'll be attending the Stifel Nicolaus Technology and Telecom Conference on February 5 in San Francisco, the Susquehanna Semiconductor Summit in New York on March 5 and the J.P. Morgan Tech 101 Corporate Access Day in Philadelphia on March 14.

Now we'll start today's call with Mark Frey, who will review our fourth quarter financial results and discuss the current status of first quarter business. Mark Thompson will then discuss our product line results, end markets and operational performance in more detail. Finally, we'll reserve time for questions and answers. This call is scheduled to last approximately 60 minutes and is being simultaneously webcast from the Investor Relations section of our website at fairchildsemi.com. The replay for this call will be publicly available for approximately 30 days.

Fairchild's management will be making forward-looking statements in this call. These statements, including all statements about future results and performance, are made based on assumptions and estimates that involve risk and uncertainty. Many factors could cause actual results to differ materially from those expressed in forward-looking statements. A discussion of these risk factors is provided in the quarterly and annual reports we filed with the SEC.

In addition, during this call, we may refer to adjusted or other financial measures that are not prepared according to generally accepted accounting principles. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses that should be considered by investors in conjunction with GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures at the Investor Relations section of our website at investor.fairchildsemi.com. The website also contains a variety of useful information for investors, including an extensive financial section to facilitate your investment analysis.

Now I'll turn the call over to Mark Frey.

Mark S. Frey

Thanks Dan. Good morning, and thank you for joining us. I'm sure most of your have had a chance to review our earnings press release, so I'll focus on just the key points in my comments. Our fourth quarter results reflect our focus on asset management as we've further reduced inventories, lowered expenses and generated strong cash flow. We reduced channel and internal inventory by a combined $23 million in the quarter to now enter 2013 quite lean. Our balance sheet is very strong, and we have the lowest debt level in our history.

Let's review some of the details, starting with the income statement. For the fourth quarter of 2012, Fairchild reported sales of $333 million, down 7% sequentially and 2% lower than the fourth quarter of 2011. Gross margin was 30%, down nearly 4 points from the prior quarter due primarily to lower factory loadings as we further reduced inventories and higher incremental 8-inch startup costs.

R&D and SG&A expenses were $87 million in the fourth quarter, which was better than guidance due primarily to cost reduction programs. Recall that this level of spending includes no accrual for variable compensation.

Fourth quarter adjusted net income was $12 million and adjusted EPS was $0.10. Our adjusted tax expense was a favorable $2 million due to a favorable exchange rate impact on our deferred tax assets. At a 15% tax rate, our adjusted EPS would have been $0.07.

Now I'd like to review our fourth quarter sales and gross margin performance for our 2 major product groups. Sales were down 9% from the prior quarter for our PCIA business, driven by seasonal weakness in auto, some demand softness in the mobile end market and distribution channel reductions. The industrial and appliance demand improved during the quarter, and we shipped in line with consumption, and had we shipped in line with consumption, would have been up about 10% sequentially. PCIA gross margin was down 2 points from the prior quarter at 29% due to lower factory loadings and higher incremental 8-inch startup costs.

In our MCCC business, sales were down 3% sequentially, driven primarily by some demand weakness in mobile. Gross margin decreased 6 points to 35% due primarily to lower mobile mix, decreased factory loadings and higher than normal inventory write-downs.

Turning to our balance sheet. We decreased internal inventory dollars by about 2% sequentially, and are at a comfortable level that gives us the ability to respond quickly to demand changes. Days sales outstanding or DSOs decreased to 37 days, and days of payables were flat at 45 days. Free cash flow was a positive $49 million, which was driven by lower capital spending, reduced internal inventory and improved cash conversion cycle time. We ended the fourth quarter with total cash and securities exceeding our debt by $159 million.

Starting in the first quarter, we will begin to move some 8-inch fab equipment internally to gain better economy of scale and lower our manufacturing cost structure. We expect to incur a bit more than $10 million of mostly non-cash costs related to these activities, which will be spread over 2013, and will be adjusted out of our pro forma results.

For the full year 2012, we spent $14 million to repurchase more than 1 million shares. We spent $152 million or 11% of sales on capital investments. We also reduced debt by $50 million and sold our remaining auction rate securities. Even with these significant investments in the business and share reductions, we still exited the year with an improved net cash position.

Turning now to favorable -- to forward guidance. We expect sales to be in the range of $330 million to $350 million for the first quarter. Our current scheduled backlog is nearly sufficient to achieve the low end of this range. We expect adjusted gross margin to be 29%, plus or minus 50 basis points, due primarily to lower factory loadings and incrementally higher startup costs at our 8-inch wafer fab in Korea. We anticipate R&D and SG&A spending to be in the range of $90 million to $93 million, as we begin accruing again for variable compensation and increased payroll-related taxes. The adjusted tax rate is forecast at 15%, plus or minus 3 percentage points for the quarter. Consistent with our usual practices, we are not assuming any obligation to update this information, although we may choose to do so before we announce first quarter results.

Now I'll turn the call over to Mark Thompson.

Mark S. Thompson

Thanks Mark. I'll start today by discussing some encouraging signs we're seeing in our business and why we believe we're well-positioned to support improved demand. I'll also review some of the significant growth opportunities that we believe will drive our 2013 results. Finally, I'll wrap up with a brief review of some operational highlights from the fourth quarter.

We are seeing some positive signs in demand, which began early last quarter and have continued through Q1 so far. Distribution sell through was down just 2% sequentially in the fourth quarter compared to a normal seasonal decrease of about 6%. This enabled us to reduce channel inventory by about $17 million from the prior quarter to the lowest level since we emerged from the recession and well below a year ago at the same time.

Bookings also inflected positively, and were substantially higher than the prior quarter. Lead times remained short so many customers continue to order on a short horizon, but order rates clearly improved in fourth quarter, and continued to do so this quarter. We have a solidly positive book to bill so far this quarter. We are also seeing improved demand for our industrial and appliance products. Recall that our customers in this business reduced inventories for more than a year, and finally appear to be increasing demand again.

Consumption demand is up 2 quarters in a row now for this business, and we expect to grow sales sequentially in the first quarter. Our Smart Power Module sales increased more than 25% sequentially in the fourth quarter, as appliance makers began ramping production, especially in China. After a seasonally weak fourth quarter, our automotive business enters the first quarter with a strong backlog position that should enable them to deliver good incremental sales growth in Q1. While first quarter is typically the weakest seasonally for mobile, we are encouraged by our design win momentum, and expect solid growth in this segment in 2013.

Early signs for improving demand are becoming apparent, and we're focused now on ensuring that we can support growth opportunities. We're working closely with our distributors to optimize our channel inventory mix. We have significantly reduced our slower moving inventory, especially for products supporting the industrial and appliance end markets. This enables distributors to maintain a higher stock of fast-moving products to maximize sales. Overall, our channel inventory is a comfortable range at less than 10-week supply and we expect to hold it at this dollar level in the first quarter. Our internal inventory is also well-positioned to support any turns business that comes up for the quarter.

Finally, we're reviewing our capacity needs to ensure we can support the expected new product and program ramps, especially in the second half of the year. After 2 years of elevated capital spending, including significant investments in 8-inch wafer fab capacity, we now expect a number of years of lower spend. We forecast capital spending in 2013 to be roughly $100 million, down substantially from the last 2 years.

Looking beyond the first quarter, I want to now review some of the significant growth opportunities that will drive our results in 2013. In the mobile market, we're winning designs for a number of our latest technologies. Fairchild's power conversion products, using our patented constant current technology that enables lower bond costs and exceptional efficiency, continue to increase shipments and gain share. We expect this trend to continue through 2013, as design wins ramp into production.

We're also gaining share for low and mid-voltage MOSFETs in mobile, especially for charger and battery protection circuits. We're working closely with the a few key mobile customers on some exciting new analog switch opportunities that has potential of significant sales growth in the second half of 2013. We also expect numerous design wins to ramp into production for our analog audio and mobile power management solutions. In total, we expect solid sales growth for our mobile business this year.

We estimate that we under-shipped consumption in our industrial and appliance business by more than 8% in 2012. Now that the inventory destocking phase appears complete, we expect our ability to start shipping in line with actual consumption to be a significant growth driver in 2013.

In addition, China has adopted tighter efficiency -- energy efficiency regulations that will force a faster adoption of inverter-style variable speed motors and appliances. We have a wide range of discrete and module solutions to enable our customers to build significantly more efficient appliances, industrial fans and pumps. We expect our products serving the automotive market to post solid sales growth in 2013, as customers continue to adopt more energy-efficient powertrain solutions. We're an industry leader in developing discrete and module solutions to control ignition systems and a wide range of electronic pumps and motors. The success in converting a hydraulic power steering pump to a DC Stepper Motor is driving our customers to replace other less efficient mechanical pumps and motors. We're currently designing a number of new products to support this transition. We expect continued strong growth in our mid-voltage power management solutions supporting performance, computing, data center and telecom applications. While still just a few points of total company revenue, this relatively high margin business will grow steadily over the next few years.

Turning now to Q4 results for our sales channel and other operational performance. Sales into distribution channel were down 4% sequentially, as we continued to reduce inventory. Sales into OEM and EMS channels were down near 11% due to weakness in the mobile sector. Factory utilization decreased sequentially and remains below 80%. Lead times remained short for virtually all our businesses. Overall product pricing in Q4 was down less than 2% from the prior quarter and we expect similar performance in the first.

In closing, we see a number of encouraging signs that indicate a positive inflection in demand. We enter 2013 with lean inventories and a very responsive supply chain, poised to capture turns business in a short lead time environment.

Looking beyond the current quarter, we're working on numerous exciting growth opportunities that will enable us to improve sales and margins during 2013. I'm particularly encouraged to see the industrial and appliance customers increasing order rates again after more than a year of correction. Lower forecasted capital spend, coupled with the potential for improving demand during the year, should drive significantly better cash flow in 2013. As we grow our net cash position, we'll explore the adoption of more formal program to return cash to shareholders. Thank you, and I'll turn the call back to Dan.

Dan Janson

Thanks, Mark. We'll now open the call to questions. [Operator Instructions] Thanks. Let's take the first question, please.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Ross Seymore.

Ross Seymore - Deutsche Bank AG, Research Division

Just a couple of questions. I guess, first on the revenue side of things, in the fourth quarter, looks like the mix changed a little bit against what you guys historically have prioritized, with computing up and mobile down, if you can give any color of what's happening there? And then the bookings commentary that you gave, any similar end market color as to what's strongest and weakest in recent trends?

Mark S. Frey

Dan, I'll let you talk about the bookings. In terms of the revenue, Ross, we were a little surprised too. We saw really strong business in the charging applications in computing, and we had a pretty good showing in the Windows 8 slots, which are actually attractive slots to us. So it's the kind of computing we'd like to have. And I think Mark already alluded that mobile was a bit weaker than we had originally anticipated. Dan, maybe you know if the symmetry of the orders was about the same.

Dan Janson

Right. On the booking side, Ross, bookings were strong on a broad-based basis. Virtually all the end markets showed some pretty good strength. And as we said in the prepared remarks, we were particularly happy to see the industrial and appliance business come back quite strongly after 6 quarters of correction.

Ross Seymore - Deutsche Bank AG, Research Division

Great. And I guess as my follow-up, changing over to the gross margin side of things, if I recall it right, last quarter, you had expected a flat revenue so the gross margin might actually be flat to up a bit sequentially, and now you're guiding it kind of flat to down. Can you talk about what changed that? And just remind us the magnitude of the underutilization charges and start up charges and how those will come out as the year progresses.

Mark S. Frey

Great, Ross. The underutilization was about 4 points, and we did run the plans in Q4 a bit lighter than we originally expected, and some of those charges kind of bleed in to Q1 because of the way the accounting works. And there's about another $2 million in the 8-inch startup cost, which we incurred in Q4, but that will ramp up a little more in Q1. Plus the kind of higher than normal inventory write-downs was a bit more than we expected.

Ross Seymore - Deutsche Bank AG, Research Division

So going forward that -- they're staying elevated? And how I guess, how should we think of them going...

Mark S. Frey

They'll stay elevated for another couple of quarters, and then, obviously, the qualification cost will go towards 0. And we expect the inventory write-downs will kind of get back into their normal range of $2 million to $3 million.

Mark S. Thompson

And I guess, the one other thing I'd add to that, Ross, is that we have already raised the build plan twice in the first quarter in response to the demand profile. So the combination of things that stacked up in the fourth quarter that wind up showing up in some of the first quarter have actually already been reversed.

Ross Seymore - Deutsche Bank AG, Research Division

And that will show itself in 2Q gross margin mainly?

Dan Janson

Exactly.

Operator

[Operator Instructions] And we'll take our next question from Christopher Caso.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Just as a follow-up to the gross margin questions. Can you quantify, assuming that the factory loadings continue to increase, what impact that has on incremental margins? In other words, how much of incremental revenue should we expect to drop down to bottom line? And then if you could quantify, as the startup costs go away once the new fabs starts, I guess there's a -- there should be an increase in depreciation cost and a decrease in the startup cost. What net effect should we expect of that as we net out those 2 events?

Mark S. Frey

Well the underutilization, as I said, is about 4 points, and it begins to get pretty well absorbed as we approach $400 million in revenue. The 8-inch cost, you're right, will kind of transition over to some higher operating costs once we turn the facility on. And currently, they're about 150 basis points. I would expect that to go down to about 50 basis points, but it's really hard to say. It's hard to predict a ramp-up of technologies on a new line and a new facility. And then the inventory write-down cost, again, we expect that we're pretty much behind them and that's about 50 basis points.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay. Great. And just as a follow-up with regard to the bookings commentary and some of the improvements you're seeing. Obviously, we're coming out of a period where the inventory level at your customers and distributors is pretty low. If you can comment on the extent to which perhaps some of this early improvement we're seeing is a normalization of customer inventories where people weren't ordering for awhile as they were cutting inventories. And how much of it do you think is actually the end demand starting to improve? Obviously, tough to call from your vantage point, but interested what your customers are telling you right now.

Mark S. Thompson

Sure. So our experience over numerous cycles is that those 2 actually always wind up being coupled, is until people actually, actually run out of inventory or -- and they see end demand stepping up is when they begin to order, and we've seen that, a very sharp turn in that. It began in the fourth quarter and the picture that we're hearing from our customers is that they have -- particularly on the industrial side is -- are clearly in a worrying about supply mode, and so I think it's a combination of the 2. Certainly, we see through to the end markets, and see very broad -- modest, but broad improvement in those, and the combined channel inventory for them and the customer inventory is quite low. And so I think those 2 things, combined, are what's driving quite a sharp inflection in the order rate.

Dan Janson

Chris I'd say one other thing too. As we said in the prepared remarks, our POS in Q4 was better than normal seasonal. So that would obviously argue that it's actually being consumed. It's not just restocking, although we don't have, obviously, perfect visibility into those customers' inventory position. The other point I would make, back on your question about gross margins, I think it's an important one to note, when you looked at our Q1 guidance, it's down a bit from -- and Ross asked the same question, it's down a bit from where we were in Q4, but almost a full point of that is incrementally higher 8-inch startup costs, right? And as Mark Frey was saying earlier, that's not going to stay in the numbers for too much longer, just another couple of quarters until we get the calls done.

Operator

And we'll take our next question from Craig Berger.

Craig Berger - FBR Capital Markets & Co., Research Division

I guess, my first question is with you having drained $17 million out of the distribution channel and that drain likely going to 0 and possibly a small restock, I guess I'm wondering with basically flat to slightly up guidance and a $20 million favorable swing in that metric for you guys, why isn't the Q1 revenue guidance better? Or does that imply your organic business is down 6 or 7 points sequentially?

Mark S. Thompson

So Craig, a couple of things. There is some embedded caution, I guess, in the numbers that we put out there. We're early in the inflection, and so January is normally quite weak. It's actually been unusually strong. It's not over yet. We've booked $100 million of orders so far, but I think it's a little -- it tells a little premature to range such a high number. Obviously, the other piece of it is, is that point-of-sale, we don't have enough data points on point-of-sale to -- and that's really -- so the backlog certainly supports a number above our -- at the top end of our estimate. But while we don't want to drain the channel, we also don't want to increase it in the first quarter. So in the end, I think what we'll do is we'll ship to demand in point-of-sale. And as I tried to include in my opening commentary, maintain the dollars in the channel flat, which we think is the right number. And so if point-of-sale strongly aligns across the quarter with incoming order rate, then you would expect to see that number go above the top end of our range, but we don't have enough statistical information yet to feel comfortable floating that number out there, and then wondering why it didn't happen if the point-of-sale winds up, Chinese new year winds up being prolonged or something like that. So there is embedded caution, but I think the key thing I'd say is no. In the -- there is not embedded weakness in the strategic business. It's just being early in the inflection that has us with some residual caution.

Mark S. Frey

Craig, I'll add that we do have a couple of businesses that will be seasonally down in Q1 in MCCC so what we are doing is we're absorbing that and still guiding for slight growth.

Craig Berger - FBR Capital Markets & Co., Research Division

Great. And then is my follow-up question. Can you comment on any potential 10% customers and/or where you stand with your large mobile customers? I talk with investors, there's not a clear understanding as to what inning of penetration you're in with your various mobile analog and FET products, if you could shed some light on that? And then also just comment on when we could expect material gross margin improvement as this mobile stuff mixes in, and what you guys have said is closer to 50% gross margin?

Mark S. Thompson

Sure. A couple of things. So our 2 largest mobile customers are both north of $100 million revenue in 2012. The -- one of those has other businesses as well, and the combined total is very close to the 10% number, and of course, it's a trailing one. So we would expect that, for sure, that one will go above 10% in 2013, and the other one could, but it's got, at just north of $100 million. It would have to grow substantially in order to tip north of 10%, so it could, but I wouldn't predict it for 2013. If I look at the -- try to size where the numbers, if I would quantify the -- and this is largely an accounting thing based on improving utilization and start to roll off start-up costs for the 8-inch and that sort of thing, we would expect some number in the 200 to 300 basis points better in the second quarter. And then across the year, the big mobile programs won't hit before the end of the second quarter, so they could have some uplift in the second, but I haven't reflected it in those numbers. They should impact the third and the fourth quarter in terms of mobile mix.

Operator

And we'll take our next question from Tristan Gerra.

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

What -- where would you be looking at adding capacity this second half if demand is picking up substantially, and what kind of threshold will you be looking at to do that?

Mark S. Thompson

Tristan, I don't think we have any meaningful capacity problems for 2013. We feel very comfortable. If you look at the additional capacity we get from, for example, the 8-inch line in Korea, it gives us great adaptability to either accelerate simplification of our footprint or to support a broad range of low, mid and high-voltage business so -- and on the analog side, I also feel quite comfortable. We can certainly get well into the 400s before we start to think about turning on some additional capacity.

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's useful. And in terms of geography outlook, is it fair to assume that the white appliance inventories in China are back to normal level? And which geography are you the most positive on from a growth standpoint this year?

Mark S. Thompson

So first part of your question, yes. By all our analysis that we've done, the inventories even in China for high-end appliances, that is efficient appliances, is in -- is very clean. And so there, we do not expect to see inventory reductions. In fact, I think it will -- there'll be some prospective build that will support the penetration of some of the new appliance families that are coming out. In terms of what's strong, and it's a little harder other than China to call geographies because they're so interconnected. So for example, while Europe is pretty weak from a GDP growth point of view, we're actually seeing pretty decent demand, not only from some industrial stuff, but like solar has worked through its inventory correction and doesn't come back a lot but comes back a little. And we see better deployment of high-efficiency engines across a number of settings of the sort that are supported by the leading European, the German-tier ones in automotive, for example, so we see that going up. I've already -- we already commented in mobile going up. And while we remain careful not to have too much exposure to computing, as we commented, we were surprised by the level of uptick on some of the new Windows platform stuff and our advanced charging solutions. So it's not Vcore stuff, but tremendous interest in higher power density chargers and our systems support that. So we actually see the pattern, likely pattern for 2013 being everything modestly up as opposed to, sometimes, you get one thing way up and one thing flat or down. So that's, right now, again, it's always a little worrisome, 24 days into the year to call it. But that's the pattern that we've seen from the recovery, and it's the pattern that we've see from the order rate and supported by the conversations with the customers.

Operator

And we'll take our next question from Chris Danely.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Just to follow-up on the last question. What should we be thinking about for seasonality for quarters 2, 3 and 4? And then also, how much is mobile down in Q1? And should we expect it to be sort of flattish to down again in Q2 and then up in Q3?

Mark S. Thompson

So seasonality for us gets smaller and smaller each year. And so when we analyze, I've used the term, I might have invented the term, post-seasonal. I think we're at the point where seasonality is small enough that things like macro inventory corrections and economic gyrations tend to be more important than specific seasonality. And we certainly saw it in the fourth quarter, right, whereas, traditionally, point-of-sale was much more modest, was much larger in its correction the fourth quarter, it was only down a couple of points, right? So I think, absent economic gyrations, absent inventory corrections, we would expect to have relatively little seasonality associated with our business. So based on that, if it stays benign, then we shouldn't expect to see big shifts, either up or down, resulting from seasonality, but rather just by general moves of the market and our positions in those markets. The second or maybe it was the first question on mobile, the numbers that we've put in for the first quarter, the estimates, would have mobile very close to flat in the first quarter relative to the fourth. And we would certainly expect it to be that or better in the second, and could be some better than that if -- depending on when some of the ramps actually occur. Our current estimates are -- would have -- those would happen right on the cusp of the second and the third quarter. They might leak into the second or they might stay primarily in the third. So we would expect Q2 to be modestly better in mobile if it's purely a third quarter event, but not flat to down.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Great. And as my follow up, just on gross margin, we've -- or you guys have talked a lot about on this call the sort of the headwind from the 8-inch fab this year, and then you get the tailwind next year. Can you just go through what the headwinds and tailwinds are and has that impact changed over the last 6 to 9 months? Because I think this is like the fourth out of the last fifth quarters where you guys have missed gross margins. So just trying to get the reason for that.

Mark S. Frey

Well the -- first of all, we plan to put the fab into production in the second half, and so we did expend about 70 basis points in Q4 for the qualification costs. That goes up to about 150 basis points for Q1 and Q2, and then we'll begin to taper off. Now as you turn the facility on, you'll get an initial couple quarters of inefficiency as you're ramping products, both yield-wise and obviously, you've turned on depreciation. And then what you see is the elimination of those costs, let's say, 150 basis points in 2014, plus the favorable cost structure impact of having an 8-inch capability.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

And have those numbers or estimates changed at all over the last 6 to 9 months?

Mark S. Frey

Not really. We pulled a few more of them into Q4 than we had originally expected to be able to get a jump on being able to commercialize the facility.

Operator

And we'll take our next question from John Pitzer.

John W. Pitzer - Crédit Suisse AG, Research Division

A couple of questions. Just going back on the mobile side of things. I'm just trying to understand, usually, you don't see weakness in the calendar fourth quarter, and a lot of other mobile chip companies have actually shown upside, and then you're guiding flat for Q1. So I'm just kind of curious, was the mobile weakness relatively broad-based? Or was it kind of 1 or 2 customers that you can touch and feel, and just help me understand why the flat guidance for Q1, albeit off the lower base in Q4?

Mark S. Thompson

Well normally, normal pattern for mobile would be flat to slightly down in Q1 versus Q4. We've seen that pretty consistently so that's not unusual. There was one large customer for which there was some inventory correction that was going on, and it impacted our numbers and it's reflected in what we put out there.

Mark S. Frey

Plus, John, our seasonality is measured sequentially, and we had a very robust Q3, and so we're measuring against a level of business that frankly surprised us on the upside in Q3.

John W. Pitzer - Crédit Suisse AG, Research Division

That's helpful. It makes sense. And then, I guess guys, just as my follow-up, you guys have done a great job taking down inventory in the channel. I'm just kind of curious, you've talked about getting back to just consumption levels, which would be good growth from where you have been under-shipping in demand, but is this the new normal for inventory? Or how do you -- how should we think about inventory restocking relative to lead times or the demand environment? Or is that just something that we shouldn't expect in future quarters?

Mark S. Frey

Well first of all, I've observed and I continue to expect that all layers of the supply chain will get more efficient. We've seen that a day, a year, since the '01 crash, and I'd see no reason why that would not diminish. We obviously operated in the 11- to 12-week range for a number of years and after the '08, '09 recession, we changed our targets to 8 to 9. At 8, it's pretty uncomfortable. We really are kind of supply constrained. So in the 9 to 10, I think, is a comfort range. We're actually at about the middle 9-week range. And from a consumption standpoint, if we just ship to consumption, then our weeks will obviously go down as the market consumption grows. So that's really kind of the way we've laid it out for the year in terms of our supply chain expectations.

Operator

We'll take our next question from Steve Smigie.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

I just wanted to follow-up a little bit. You mentioned 2 $100 million customers, and I was just trying to understand, the one you obviously mentioned, the large one, they've got other business. But for the second one, is that $100 million customer one that continues to grow? Or because I know you have, for example on the handset side, some guys that are sort of falling off as things are weaker, so is that second customer one that might fall off and you have another customer that's growing that could potentially replace them as a substantial customer?

Mark S. Thompson

So Steve, I think, with -- I've been in the supply and the mobile business since 1992, and my observation is that share shifts are a part of life, and can't really be predicted in any meaningful degree. So by way of strategy, we have positioned ourselves to be really equally relevant to the top 5. And so we keep our map of our top 5 and make sure that we've got sort of the right coverage, the right programs, including how we work with the chipset reference designs, and there's a whole ecosystem around that, that supports that. And so neither of our $100 million customers are the ones that I would -- are certainly not ones in decline and -- but that doesn't say they couldn't become ones in decline down the road. I would say that to a reasonable approximation, we are share shift agnostic in the greater picture.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay great. And then just with regard to your MOSFET portfolio, can you talk a little bit about how big MOSFETs are at this point as percentage of revenue, and what's the trend there? Obviously, you've been walking away from some probably low-voltage FETs, but is it just going to be the sort of mid-high voltage stuff that's going to grow for you going forward? Or do you still have low-voltage FETs potentially having growth?

Mark S. Thompson

Well, yes, we certainly have quite a bit of growth segments. I mean, we've been deliberately distancing ourselves from commodity Vcore, and we really use that as opportunistic fab-filling stuff, but -- and it's also little hard to answer the question because we've got so much package level integration going on. But if I had to pick a number, I'd say it's about 50% of our revenue is driven primarily by the MOSFET.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Last question, any, since -- new COO has come onboard, any sort of significant changes we should expect, any insights that he's had that would signal some future changes in strategy coming?

Mark S. Thompson

Well let me go on record here of saying he's been awesome so -- but I can't quite quantify awesome for you just yet, but there's -- I mean, Vijay brings immense depth in operational capabilities, but also in how you bridge new products to operations as well. So I think what we can expect to see is an acceleration of progress. Realistically, not starting until the second half of 2013, but I think becoming quite visible in 2014 in advanced analog, system-in-a package and overall manufacturing execution, which obviously will flow straight to margins.

Operator

And we'll take our next question from Kevin Cassidy.

Dean Grumlose - Stifel, Nicolaus & Co., Inc., Research Division

This is Dean Grumlose, calling in for Kevin. I have a couple of questions on how you may view opportunities for China-based smartphone providers. First, do you believe that you'll be able to address these opportunities with your current product lineup? Or is a different set of products going to be required?

Mark S. Thompson

So it's a mix. We have a distinct China strategy, and there's 1 or 2 of the top players that we include in our top 5, and so that's I think -- because, obviously, they get their own dedicated team because that's how we -- that's how you have to approach success in mobile, is you have to have a dedicated team from account, all the way through engineering. And so the top 5 will have those, then we'll have our reference design. But we've got 70-ish design and support people in China, who divide their time between or who, in aggregate, are divided between the top 2 players in China, and then all the other reference design stuff, which to your point, is associated with the high silicons and the media techs and so on and so forth. So the ecosystem doesn't look different. It just have some different names, and there's some different specifications to your point, but we believe China is very important. We think it's going to become relatively more important, and we've strategically aligned to be a part of that.

Dean Grumlose - Stifel, Nicolaus & Co., Inc., Research Division

In the particular case of multimode phones, does this require a different solution, and perhaps, does this offer the opportunity for increased content per platform?

Mark S. Thompson

I don't have an answer. So there are some unique solutions required, and it could result in some increased content, but I don't have a definitive answer to that right now.

Operator

And we'll take our next question from Brendan Furlong.

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

I just want to circle back on -- yet again on this gross margin issue. A lot of moving parts when we look past the March quarter with the 8-inch. You have industrial coming back. You have demand coming back, and utilization will be aligned within gross margins. Smart Power Modules, industrial, auto, all improving, which qualify your gross margins. Working -- trying to work all those things together, what's the magnitude, potential magnitude of what you can see in gross margins in Q2 or left in Q2?

Mark S. Frey

Well we're not obviously guiding for Q2. But as Mark alluded, we are adding to our build schedule, and we generally see favorable seasonality of our MCCC business relative to our PCIA, and therefore, that's a mix improvement. The 8-inch qualification costs really won't -- they'll be about the same as Q1, but the utilization, obviously, it depends on how much we grow in the quarter, and what we can load the plants to. But we do see a meaningful positive movement up in the margin, I think Mark said in the 2-point range.

Mark S. Thompson

Yes 200 to 300 basis points improvement in the second quarter based on what we know today. And then if you go to the sort of the next step and again, we -- it's very difficult to call how rapidly or long any given recovery will run. But when we're at target utilization and the 8-inch costs are gone, but it's not turned back on, we're comfortably north of 35. And then, of course, you build on that depending on whether we do footprint consolidations, pace of better mix stuff. So current mix, the targeted utilizations, the 8-inch costs of north of 35, and then build from there.

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

That's very helpful. I guess the -- my follow-up question would be, a lot of discussion on what distributors are doing in the quarter, in auto [ph] looking in Q1, but the direct OEM customers, what are the indications from them in terms of their entry situation and what they're saying about demand trends into the margins in quarter.

Mark S. Thompson

I wouldn't say that there's a big distinction between what the tone of the direct customers is versus distribution. I mean, we really try to see through our distribution partners. They provide logistic services and stocking, inventory management and so forth. But we don't get our demand signals from our distributors. We get them from the end OEMs whether they be big or small. So I think there isn't really a distinction between the two.

Operator

And we'll take our next question from Shawn Harrison.

Shawn M. Harrison - Longbow Research LLC

Okay, I'm going to beat the gross margin question to death here. I just want to make sure I have all my math right based upon the commentary throughout the call. First, as we look into the second quarter, right now, just solely from utilization, you should see a 200 to 300 basis point increase, at least, based upon how the world looks now, correct?

Mark S. Frey

Correct.

Craig Berger - FBR Capital Markets & Co., Research Division

And then as we maybe get into the back half of the year, you would see 150 basis point increase if we didn't see any further improvement in demand just from the 8-inch costs rolling off?

Mark S. Frey

Correct.

Shawn M. Harrison - Longbow Research LLC

But then I believe you may have said earlier that there's initial, I guess, yield issues, as you bring 8-inch capacity online. Does that somehow add what would be, I guess, the incremental gross margin drag from that or is that...

Mark S. Frey

That would be 100 to 150 headwinds, but then what you typically have is good seasonality in our higher-value products. So that's a tailwind to margins in the second half.

Mark S. Thompson

I would also back up to a question about -- that Steve asked about the impact of our new COO. Vijay is very, very operationally deep, and he is all over this. So I think this will be, for us, a new standard of migration of both process and product from a plant to another plant. So it's hard to quantify, but we'd expect that -- those headwinds to be minimized.

Shawn M. Harrison - Longbow Research LLC

Okay. So the best way to think about it is gross margin step-up into the second quarter, as you turn the facility on those initial yield issues, mitigate, or essentially offset some of the startup cost, and then as you look into the back half of the year, the further upside potential in gross margin is volumes and mix?

Mark S. Thompson

Correct.

Shawn M. Harrison - Longbow Research LLC

And then whatever the new CEO -- COO, excuse me, can bring to the table as well?

Mark S. Thompson

The new CEO as well too.

Shawn M. Harrison - Longbow Research LLC

Sorry. And then just on operating expenses, how should we expect kind of the dollar amount to track to the year? I know in 2012, you reigned in a lot of expenses and even in the fourth quarter?

Mark S. Frey

Well we did do that. We are kind of holding a flat spending or a modest R&D program increased posture as we enter the year that obviously translates into higher accounting OpEx simply because of the variable compensation as we've said. And early in the year, you get some things like FICA withholding that, that adds expenses that will then taper off later in the year. Then what we are waiting for is to see what the character, the momentum in our sales growth becomes. But obviously, we will try to ramp our spending with those businesses, but still be on a trajectory to get to our target OpEx structure, which is in the low-20% range.

Shawn M. Harrison - Longbow Research LLC

Okay. And then, finally I guess, just on the PC business, it came back, as you said, unexpectedly, during the fourth quarter, but kind of the lower end of that segment, do you think you've kind of hit the bottom in terms of disengaging from customers?

Mark S. Thompson

Yes I think most of that's done. We -- it is an attractive flex business that in the few percent of sales range is good to keep on the print for because if you have some under utilization or something like that, you're better off with some of that business. But yes, so I think fluctuating in the, let's say, 2% to 6% of sales range is actually where we would probably seek to keep it and roughly where it is today. I think, today, it's about 3%.

Operator

And we'll take our next question from Ada Menaker.

Ada Menaker - Auriga USA LLC, Research Division

First, can you give a bit more color on your design wins in industrial and appliance and how those are going to ramp, and what margins are like for those?

Mark S. Thompson

So there's a range of those. So I'll try to cover what those are, but it's -- they're also -- they tend to be smaller sort of more granular kind of things. So if you look in lighting, for example, LED lighting, we've got an array of those, both high reliability kind of stuff like street lighting and -- but also some of the smaller power supply, like commercial and residential. The -- if you look at one of the bigger ones, there's a big conversion in Europe right now that's going on where they've specified re-circ pumps, for example, for buildings, have to meet a new efficiency standard, starting January 1. That's probably the biggest single ramp that's in the kind of $5 million to $10 million for 2013 versus 2012. And then on the air-conditioning side, there's a mix of both smaller SPM kind of -- Smart Power Module kind of deployments for fans in addition to our traditional deployments on the compressor side, which tend to be higher power. And then, I don't know if you're question incorporated automotive into industrial, but the -- we see continued proliferation in power steering and the beginnings of eliminating other parasitics like water pumps, for example, from converting those from mechanical to brushless DC motors. So those are kind of the big moving parts of that. But spread across dozens of customers, small, mid-size and a few large Chinese appliances customers.

Ada Menaker - Auriga USA LLC, Research Division

And are you going to see any impact from the restoration of the R&D tax credit?

Mark S. Frey

Not material.

Operator

We'll take our next question from Craig Berger.

[Technical Difficulty]

Operator

We'll take our next question from Steve Smigie.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Just wanted to follow-up on your technology around your charger business for the cell phones? Obviously, that's going to be a big part of your success going forward. Recently, one of your competitors said that on an older patent, they were found to not be violating that's system general. And I know it's pretty old but can you just give some color around risk that there might be to either further lawsuits against your existing charger technology from similar folks and just a general patent update there?

Mark S. Thompson

Yes so I'll try to -- I mean, on the -- if I start with the technology and then go -- or no, I'll go backwards. So on the IP side, I expect that there will be continued posturing from the usual postures. But just as it hasn't really meant anything commercially, I don't expect it will mean anything commercially as we go forward. I think the reality is, is that there's many different technologies that come together to make these systems work. And so a single specific topology that you may or may not have a patent on doesn't -- isn't really what these things are about. Again, the basic circuits, there's no originality in them, and it's really how they're combined and how often topologies are combined. So they're not even pure plays necessarily. So if you look at what -- if you take a general look at what's going on in charging today, we're -- you're seeing a very interesting blurring of what used to be a phone charger and what used to be a notebook charger. So notebook chargers are traditionally, say, 50 to 90-watt, big brick-ish kind of things that you could hurt somebody with if you hit them with it. And certainly, the smartphones now have these nifty little cubes, right. Everybody has got their own version and color of one that are kind of in the 6-plus or minus watt range that the pads are in the kind of 10-ish watt range. But what the world really wants is they want something that's somewhere in the middle, as traditional notebooks sort of shed power consumption and become more like tablets and phones get bigger and bigger and become more like tablets. The real sweet spot is in the kind of the 10- to 20-watt, but nobody wants to go back to carry an ugly wall-warty things around. So there's tremendous interest and batteries get bigger and bigger, right, and people are unhappy with the times for charging and so forth. So the real win in this is a 10- to 20-watt charger that's a sugar cube size, which drives you to incredibly high levels of efficiency, but also requires active communication between the battery and the charger. That's where the world's going. Lots of people want to get there. We happen to have a leadership position there, and feel like we're very well-positioned to be one of the people that will be very strong players in that future space. But if you do the numbers, some or all the smartphones and all the notebooks, and then assume that there's at least $1 in silicone, $0.50 to $1 in silicone in that strain, you can see it's going to be a thing that a lot of people are going to chase.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Okay, if I can sneak one more in at the end. I just -- okay, just in terms of the Smart Power Module business, you've obviously had some more positive color here, some of its efficiency standards that you mentioned. But the past cycle, there was a lot of stimulus that helped drive that business. And I think there's another program that came in, in June. So is that June program that restarted part of what's driving the success here, and is that going to end at some point, causing another sort of inventory backup? Or is it going to be more carefully managed, do you think, by the OEMs this time?

Mark S. Thompson

Yes it's hard -- normally, one of the things I think I've consistently said is that the industry is pretty smart and doesn't repeat old mistakes. One of the things that we certainly saw is that the Chinese OEMs, supply chain systems are much less well developed than those in the west, but this is painful for them too. So I'm sure that they will this next cycle do a better job of it. My view of stimulus in any form is that it doesn't increase demand. It just changes its timing, and so the real view of this is appliances increasingly will be deployed all over the world in high-efficiency implementations, and the emerging middle class in places like China will drive attractive demand in those for a long period of time. And their government, just like ours, will do their best to try to screw that up. But in the end, it's the proliferation of the middle class that really drives that growth.

Dan Janson

Thanks, Steve. And so with that, that will conclude our call. Thank you for your interest in Fairchild.

Operator

And that does conclude today's conference. We appreciate your participation. You may now disconnect.

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