Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Freescale Semiconductor (NYSE:FSL)

Q1 2013 Earnings Call

April 25, 2013 5:00 pm ET

Executives

Mitchell Haws

Gregg A. Lowe - Chief Executive Officer, President and Director

Alan Campbell - Chief Financial Officer and Senior Vice President

Analysts

James Covello - Goldman Sachs Group Inc., Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Jeffrey A. Harlib - Barclays Capital, Research Division

Glen Yeung - Citigroup Inc, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Joseph Zachariah

Mark Kelley - Barclays Capital, Research Division

Operator

Welcome to Freescale's First Quarter Results Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the meeting over to Mitch Haws. Sir, you may begin.

Mitchell Haws

Thank you, and thanks to all of you, and welcome to our First Quarter 2013 Conference Call. With me today are Gregg Lowe, our President and Chief Executive Officer, and Alan Campbell, our CFO.

Before we begin today's prepared remarks, I would like to remind everyone on the call that today's discussion does contain forward-looking statements that are based on our current outlook, and as such, do include certain risks and uncertainties. Please refer to the cautionary statement in today's press release and review our 10-K and other SEC filings for more information on the specific risk factors that could cause actual results to differ materially. The company does not assume an obligation to update any of these forward-looking statements to reflect subsequent events or circumstances.

Finally, we will reference today certain non-GAAP financial measures, and we have posted the appropriate GAAP financial reconciliations to our website at freescale.com.

With that, let me turn the call over to Gregg.

Gregg A. Lowe

Well, thanks, Mitch, and good afternoon, everyone. I'll spend a few minutes highlighting our Q1 results and give you an update on the progress we're making on our strategic initiatives. Alan will then provide additional commentary and insight into the financials.

Now looking at the Q1 results. Revenues were $981 million, coming in nicely at the upper end of our guidance, and up 2.5% from Q4. Revenues improved sequentially based primarily on growth in our auto and networking businesses, along with sequential growth in IP revenue. Gross margins were 40.6%, 140 basis points ahead of Q4. The adjusted loss per share was $0.03 per share, an improvement of $0.12 from Q4.

The sequential improvement we generated in both revenues and gross margin is a positive step, but we still have more ahead of us to reach the level of improvement we believe we can achieve. We continue to make progress on the key strategic initiatives we outlined to you last quarter. Recall, we had an objective of having 90% of our R&D spend allocated to our focused product groups by 2015. We're already at 85% and expect to reach 90% well ahead of our target date, so the team is making good progress in reallocating our resources into the right areas.

Customer-facing headcount is up 18% in the Asia-Pac region, and we have directly called on more than 200 potential new customers in the region already. We're on track to open up 10 new sales offices in China by the end of 2013.

So while there is clearly a lot of work left, we're starting to make some solid progress.

With that, let me turn the call over to Alan.

Alan Campbell

Yes, good afternoon, and thank you again for joining today's call. As I review the Q1 financial results in more detail, please note I will be focusing on the results excluding the impact of certain onetime items and adjustments. We believe this is a more meaningful representation of our ongoing financial performance.

Revenues in the first quarter, as Gregg mentioned, were $981 million, representing a sequential increase of 2.5%. Sales grew 3% compared to Q1 of last year.

Looking at the product groups in more detail. Our Microcontroller sales were $177 million in the first quarter compared to the $197 million in the fourth quarter of 2012, a decline of 10%. Compared to last year, Microcontroller sales were up 19%. Sequentially, sales were negatively impacted by the normal seasonality associated with our consumer portfolio. On a year-over-year basis, Microcontroller revenues benefited from increased sales in the distribution in Asia, as well as higher sales of application processors into the general embedded and automotive markets.

Our Digital Networking sales were $202 million compared to $195 million in the fourth quarter of 2012, representing a growth of 4%. Compared to last year, sales declined 4%. Sequentially, networking sales benefited from higher spending on next-generation networks, primarily 4G and LTE investments in the Chinese and U.S. markets, and higher sales of products used in certain enterprise solutions. Sales did decline on an annual basis, primarily due to decline in the general embedded products.

Automotive Microcontroller sales were $254 million. This compares to $236 million in the fourth quarter, a growth of 8%. Compared to Q1 of last year, automotive sales were up 6%. Sales benefited both sequentially and a year-over-year basis from the positive vehicle market trends in the U.S. and in China.

Analog & Sensor net sales were $177 million compared to the $175 million in the fourth quarter of 2012 and $177 million in the first quarter of last year. Our Analog & Sensor sales benefited on a sequential and a year-over-year basis from higher sales into the automotive market, offset by declines in the consumer end market.

RF net sales were $86 million compared to the $97 million in the fourth quarter of 2012, a decline of 11%. Compared to Q1 of last year, our RF sales were up 28%. Sequentially, sales declined following a strong growth in the fourth quarter of 2012. On a year-over-year basis, RF sales increased due to increased spending on 3G and 4G wireless networks, particularly in China.

Other net sales, which includes IP licensing revenue and wireless handset sales, were $85 million compared to $57 million in the fourth quarter of 2012 and $106 million in the first quarter of last year. Sequentially, other net sales benefited from higher IP licensing revenue. On a year-over-year basis, revenues declined due to lower sales in the wireless handset market, consistent with our prior decision to exit that market. This decline was offset by an increase in IP licensing revenues.

Finally, sales to distribution increased 5% sequentially and were up 3% compared to the same period last year. Our distribution inventory was slightly down compared to the fourth quarter. Weeks of inventory were at 9.2. This compares to 9.7 in the fourth quarter and 10.7 for the same period last year. Our book-to-bill ratio in the first quarter was 1.01.

Now moving on to gross margin and operating expenses. Gross margins were 40.6% compared to 39.2% in the fourth quarter. The 140-basis-point improvement was a result of higher factory utilization and higher revenues, including IP, offsetting the impact of pricing and product mix.

Compared to the first quarter of last year, adjusted gross margins were down 170 basis points, primarily due to the lower utilization associated with our plan to reduce inventory, as well as product mix, offset by the impact of higher revenues, including IP.

Our internal front-end factory utilization was 79% in the first quarter. This compares to the 71% in the fourth quarter and 81% in the same period last year.

Operating expenses were down $3 million sequentially based on operating expense reductions we initiated in the fourth quarter. On a full-year basis, our operating expenses increased by $10 million as a result of higher selling, general and administrative expenses and an increase in share-based compensation expense.

The adjusted net loss per share was $0.03, and this compares to a loss per share of $0.15 in Q4 and a loss in Q4 -- of $0.04 in Q1 last year.

EBITDA in Q1 was $178 million or 18% of sales. That compares to $152 million or 16% of sales in the fourth quarter. In Q1 of last year, EBITDA was $192 million and 20% of sales. Adjusted EBITDA was $812 million on a trailing 12-month basis.

Cash and cash equivalents were $767 million. This compares to $711 million in the fourth quarter. Cash benefited from the first quarter from higher profitability and improvements in working capital. We made progress again in the first quarter with working capital, which represented a $31 million source of cash in the quarter. Inventory dollars declined $33 million sequentially and $52 million from the same period last year.

Our inventory days were at 118. This compares to 123 in the fourth quarter and 134 days for Q1 of last year. Excluding the inventory related to the Toulouse transition, our days were at 111.

Capital expenditures for the quarter were $22 million or 2% of sales, below our model of 3% to 5% over a cycle. Looking into Q2, we would expect an increase in capital expenditures, closer to the mid-point of the above range. Given our consistent execution in managing cash, we continue to have solid liquidity. Our cash and cash equivalents, coupled with our ongoing revolver of approximately $400 million, enables us to continue to invest in the business, fund our capital expenditures and continue to delever.

Let me now take a few minutes to discuss the second quarter. Based on our current outlook, we expect the second quarter revenues to be in a range of $1 billion to $1.04 billion. The revenue guidance would imply at a high level, overall, our Microcontroller revenues are expected to be up from Q1, driven by seasonality and improving trends, both in general purpose MCUs and application processors.

Digital Networking revenues are expected to grow again sequentially due to continued solid trends in enterprise business and improved wireless infrastructure activity, particularly LTE.

Automotive Microcontroller revenues are also expected to grow slightly into the second quarter.

Analog & Sensor revenues are expected also to be slightly up from Q1. RF sales are expected to be in line with Q1. And finally, other net sales are expected to be in line also in Q1. We expect gross margins to increase 90 to 130 basis points sequentially.

At this point, I'll now turn the call back to Gregg.

Gregg A. Lowe

Well, thanks, Alan. Before we move to the Q&A session, I wanted to offer a few closing comments. We're building the foundation for future growth by charting a course that has the buy-in of our stakeholders, namely customers and our employees. The management team we've assembled is starting to hit its stride, and we remain committed to helping deliver the growth and profitability we know we can achieve. We've made modest progress in Q4 and Q1 that we'll continue into the second quarter, but there's a lot left for us to achieve. We're looking forward to sharing our success with you as we move forward.

And at this point, we will open up the call for any questions you might have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jim Covello of Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

If I could start, I believe you said 79% utilization rates in Q1. What are the plans for utilization rates in Q2 and Q3, and what are the other puts and takes on margins for the next couple of quarters?

Alan Campbell

I'll take that one, Jim. The utilization rates, that increased obviously into the first quarter from the 71% in the fourth. As we look out into the second, we expect it to be flat to slightly up. We continue to modulate the utilization. We did reduce inventories quite significantly in the first quarter by some $33 million, as well as our inventory reduction and our distribution. So we'll continue to modulate that, Jim, pending the kind of market outlook, but flat to slightly up into the second quarter. As far as the impacts on gross margin, our gross margin most though continued to be impacted by some of the building blocks that we've discussed before, utilization being one. We do still expect to see a fall-through from the utilization of 25 to 30 basis points.

James Covello - Goldman Sachs Group Inc., Research Division

That's incredibly helpful. And if I could ask on my follow-up, as I look through the balance sheet, you have about $2 billion worth of secured notes at about 9.25% and 10.25%, respectively. It seems like you guys should be able to refinance those at a meaningfully lower rate, which would be pretty significantly accretive. And I wondered if you had any comments or thoughts on your ability to do that as we go through the year?

Alan Campbell

Yes, we do have 2,000 -- nearly $2 billion of 2018 notes. They will become callable in -- closer to the end of the year going into the first quarter. The price at the moment is probably in a range of 13%, 14% premium on that call price at the moment. So we'll continue to look at that, Jim, and see what are the economics as we going forward. I think as you've seen in the past, we continue to execute pretty well on some of the capital structure activities. And again, the best I can say, we'll continue to look at this and look at the economics relative to some other issues.

James Covello - Goldman Sachs Group Inc., Research Division

And all-in, that could be about $0.25 accretive or so potentially, am I doing the math there right?

Alan Campbell

They actually are slightly north of $0.25 accretion. At today's rate, it's probably closer to $0.30.

Operator

Our next question comes from Ross Seymore of Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

From an end-market perspective, the Microcontroller area being down like it was, I know you said seasonality hit the application processors side. But it seems like that would have had to almost be cut in half to get the magnitude down. Was there anything else going on there in the industrial or in general purpose Microcontrollers?

Mitchell Haws

Ross, this is Mitch. Remember, part of the revenue makeup now includes apps processors within the Microcontroller product group, so that is seasonally a weak quarter. There is a portion of Microcontrollers that's also consumer focused. So I think, outside of typical seasonality, I don't think there was anything amiss. And to kind of follow up on that point, as you look into the second quarter, that business is totally up sequentially. And in both Q1 and Q2, it will be up over last year.

Ross Seymore - Deutsche Bank AG, Research Division

Great. And I guess for my follow-up, a couple expense items. On the OpEx side of things, Alan, how should we think about the second quarter and then relative to revenue growth in the back half of the year? And then, I guess, following up on Jim's question, the interest expense, how should we think of that barring any discrete items and the debt calling, et cetera, as we work through this year?

Alan Campbell

Yes, so from an OpEx standpoint, we did reduce OpEx coming into the first quarter. The reduction in the OpEx was a result of some of the actions we did take in the fourth. The full impact hadn't -- is not seen in the absolute numbers because we also did take some additional accruals associated with variable compensation, associated with our improved financial performance. As we look into the second quarter, I would expect our OpEx to be relatively flat, maybe slightly up. And that's also the case with interest. That's fair to say that interest, barring any other transactions, will be pretty much flat each quarter through the year.

Ross Seymore - Deutsche Bank AG, Research Division

Is there -- remind me, isn't there some debt that you -- not the $2 billion, but some debt that is callable, a couple hundred million dollars that's relatively expensive this year? And if so, why would we not expect you to pay that down?

Alan Campbell

Well, that's a fair comment, I did say barring any other transactions. So in the absence of doing any transactions, the interest would be flat. We have some notes due in 2014, just under $100 million. And we've got some senior floating notes also in '14. So the '14 balance is $150 million, just over $150 million, Ross.

Operator

Our next question comes from Stacy Rasgon of Sanford Bernstein.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Firstly on the gross margins, so they've been coming up, I think it was a little stronger than anticipated. I'm curious to know how much of that actually was the IP and what are your plans for IP next quarter? Also, we have a case right now where your utilizations are almost flat year-over-year. I guess, 79% now, 81% last year, but your gross margins as a whole came in, I think it was something like 170 basis points lower than you were a year ago even with the benefits of some of the other structural actions you've taken between now and then. So give us some idea of, I guess, the puts and takes of the margin walk from last year to this year in the wake of utilization and some of the other drivers, as well as an idea for the impact of IP in your guidance on gross margins, both for this quarter and for next year -- or for next quarter? Sorry.

Alan Campbell

Yes, so I think I said -- as I said also, Stacy, on the script, the elements of improving gross margin are all intact. We did improve 140 basis points sequentially, and we did decline 170 basis points on an annual basis. Utilization and inventory were the biggest swingers of those 2, sequential improvement and annual decline. So if you think about the inventory reduction, for example, in the first quarter, we reduced inventories by $33 million. If you compare that to the same point last year, we reduced inventories by over $50 million. So there's been quite an aggressive position taken, which has a negative impact obviously on the gross margin. So we're not seeing the full impact of the utilization impact, if you like. The utilization on a year-on-year basis, we said also, was 81% going down to 79% or 200 basis points. So a slight negative on the overall utilization, but the bigger negative was on the inventory side. In terms of IP, IP will be relatively flat going into the second quarter.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

But this quarter was IP stronger than expected? I think you had said you would expected other revenue to be up slightly but it was up a lot. And your gross margin performance this quarter was quite a bit better than guidance. I think it was supposed to be something like 75 to 100 basis points; you came in at 140. Was that upside actually driven by IP upside or was the upside from something else?

Alan Campbell

It was a combination, candidly. I think IP did facilitate some of the improvement in gross margin. I think it's important to say, though, that utilization also helped, offset by some of the inventory reduction. But we also saw improvements on the operational side of the house, as well as procurement. So all the elements, as I said before, are kind of hitting on the gross margin. We do expect a nice kind of sequential improvement, not step functions on gross margin.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

That's very helpful. I guess one more follow-up along those lines. Just can you remind us the Toulouse savings. I think you were supposed to get something like $5 million to $10 million of the annualized savings in the numbers this quarter. Can you remind us, I think it's $70 million that's supposed to feather in by the end of the year. How much of those Toulouse savings do you expect to be hitting next quarter, and are they all in by the end of the year?

Alan Campbell

So we did say the annualized impact for Toulouse would probably be $70 million. This is going to be a function of how fast we can bleed off of our existing inventory and take that capacity and load our existing facilities. And so in the first quarter, there was approximately $7 million. That was about a 30 basis point sequential improvement, so we did see some in Q4 of last year. So it will move from that $7 million that will improve. There will be a slight benefit going into the second quarter and it will continue in 2014.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Got it. So how much of the total savings are in right now as of the end of Q1?

Alan Campbell

That's probably about 40% of the overall savings, so it works out about 7 on 17, 35%.

Operator

Our next question comes from Will Stein of SunTrust.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Can you talk to us about where you expect inventories to track over the coming year owing to Toulouse and other adjustments, on a days basis perhaps?

Alan Campbell

We have taken inventories down quite significantly on a year-on-year basis, as we said. Last year, inventories were 134 days, and we ended the first quarter about 118 days. We continue to kind of monitor and plan the inventory relative to the capacity utilization, relative to the end business. So that could continue to modulate. The expectation is that we would see inventories relatively flat going into the second quarter.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Flat on a days or dollar basis?

Alan Campbell

On a dollar base.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

And throughout the year, should we think about it on a days basis going down to close to 100? Or is that -- are you -- is that too aggressive?

Alan Campbell

Again, it will be a function of what's going on in the market. So rather than giving a specific target, we would expect the days to continue to decline. It will decline associated with the bleed-off of some of inventory we built, associated with the closure of our Toulouse plant, the France facility. So we did have a target intently of 100 days. I don't think we'll get there by the end of the year, but we'll continue to look to bring days down.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Great. And then one other question, if I can. You've talked about a shift in the sales strategy, allocating more resources to Asia and more to distribution from direct. And I think on this call, you've talked a little bit about the sales offices you're opening in China. I think you mentioned 10 offices by the end of the year, so congrats on that. Can you update us on the reallocation of sales resources to the channel and how that's progressing?

Gregg A. Lowe

Okay. So first off, the priority of Asia was obviously a key thing that we made a decision on coming out of the strategic review. I'm really pleased with the progress we've made there. We'll probably see a pretty nice bump this quarter as well as some of the hiring we did, some of the folks will be starting with us this quarter. So I think we'll see continued progression on that. The expansion of the new accounts as well is also very good as well. We've got 200 new potential customers that we actually called on over the last quarter or so. And obviously, that gives us -- that's a good start, I think, towards our goal of doing multi-100s on top of that. As it relates to distribution, we've got very good partnerships with all of our main distributors. I've met with all of them. And we're sort of -- when you talk about the reallocation of resources to distribution, it's really taking these additional resources we have, calling on customers that generally will be buying through distribution and working together with them to manage the business. Our distributors are really excited about this. They see this as sort of a rejuvenation of our broad portfolio efforts, and I think it's going to pay off really nicely for us.

Operator

Our next question comes from John Pitzer of Credit Suisse.

John W. Pitzer - Crédit Suisse AG, Research Division

Gregg, I guess my first question, when you look at the sequential growth in margin and then the expected sequential growth in June, how would you characterize your growth relative to industry? Do you feel like you're keeping up with industry, you're starting to regain some share here? And if it's not the latter, when and kind of in what revenue buckets would you expect the share gains to start coming back the quickest?

Gregg A. Lowe

Well, we've had a decent start to the year, and we came in at the top end of our range. And that drove then a 2.5-or-so percent increase in revenue for Q1. And the industry results aren't completely in yet. But I would say compared to where most people came in, it seems like that was pretty good progress. So I think that was -- it's a good start to the year. Relative to Q2, we've got another growth on top of that. So obviously, that's 2 growth quarters in a row, which is, again, a nice way to start a year. I think the company is working really hard and is very, very focused on the 2 objectives we have, which is top line revenue growth and margin expansion. We've accomplished that now in the first quarter, and we're planning to do that in the second quarter. But I think this is going to be -- this is a very, very early part of this game. A lot of people ask me what inning we're in, and I think we're still getting ready to start, in some respects. We've got a lot of effort that's kicked off, but it's very early in the process. So I would anticipate -- well, first off, you'll see us continue to focus on those items, and I'll anticipate that we'll continue making progress.

John W. Pitzer - Crédit Suisse AG, Research Division

And then, Gregg, you've always had a very strong track record in block and tackling and execution. And I'm just kind of curious, given your focus in the strategic review that you had, as you think about abilities to cut cost in the business, are we at a point where there's more operational efficiencies you can drive to the bottom line independent of revenue growth? Or are you of the mindset that any incremental operational efficiencies in one area, the best use is to reallocate it into other areas? How should I think about that?

Gregg A. Lowe

I think in any business, there's always going to be room for improvement in just about all aspects of it. And I don't sit here with the opinion that everything from an operational standpoint is humming. We certainly have a lot of work to do there. The focus of the company is top line revenue growth and margin expansion, and operational efficiencies can actually help both of those. When you have everybody focused in a certain area, I think it makes it very, very clear to all the individuals in the company what it is we're trying to do. And I think that's a real positive thing.

John W. Pitzer - Crédit Suisse AG, Research Division

And then, Gregg, my last question, just on the Digital Networking division. You guys talked about strength in LTE. A lot of us on this side of the phone have been kind of waiting for that LTE CapEx cycle to start to reaccelerate. I'm kind of curious, do you think this is sort of a one quarter and done phenomenon and lumpy? Or do you think we're now at the beginning of kind of an upturn in that CapEx that most of us have been waiting for now for 2 or 3 quarters?

Mitchell Haws

John, this is Mitch. As you know, that market can move somewhat. I think what has helped us over the last quarter and helps us again in Q2 is, in a lot of cases, 50% market share. So we have very broad exposure to a whole bunch of different customers. And it just so happens that LTE is where you're seeing that investment start to take place, and we're pretty well levered to that cycle. So at least for Q1 and Q2, good visibility. If you look within that, there are portions of enterprise that have grown sequentially as well. So I think it's a function of a very diversified customer base and at this point in time, being exposed to the geographies and the customers and the technologies that are showing good growth. But to your direct question about LTE, opting in the first quarter and is another benefit to the business coming in Q2.

Operator

Our next question comes from Jeff Harlib of Barclays.

Jeffrey A. Harlib - Barclays Capital, Research Division

Just -- can you talk a little bit more about the Automotive business in terms of how you're seeing the supply chain and also the differences between what you're seeing in North America and Europe, given some of the continued weakness in Europe?

Gregg A. Lowe

I think, if you take a look at inventory in the automobile industry right now, I believe the U.S. light vehicle inventory is sitting at around 61 days, I believe. That's sort of at the low end of where they normally sit. So the U.S. has actually been a source of strength, I think, and obviously we have a pretty nice exposure there. On the opposite side of it, Japan, I think, has been a little weaker than normal; Europe, probably a little bit weaker than normal as well.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay. And just on distribution -- or I should say on your investments in Asia, can you talk about what kind of products those are focused in and also when you expect maybe some material revenue benefit from those investments?

Gregg A. Lowe

Well, it's expansion of our sales efforts, and our sales folks are responsible for selling the entire portfolio of products. So that would include the 5 big categories that we've decided to really focus on, and that's Microcontrollers, Digital Networking, Automotive MCU, the Analogs & Sensors business and then RF. So they won't be focused on any one particular business. Obviously, if we have app engineers that are added to that bunch, they would be targeted in one of those product areas. But the sales folks will be selling the whole range of products. We're expanding into cities where there is sizable amounts of market that we basically haven't been touching, and we're doing that as we speak. In terms of the translation of that into revenue, the things in Asia and China, specifically, tend to happen or tend to develop faster than they normally would in the U.S. But of course, if it's -- we'll be expanding into, for instance, automobile manufacturers and automobile markets in China -- that's not a 3 quarters or 2 quarters from now revenue starts to go. So there will be sort of a normal -- there will be a gestation period associated with that. I would not anticipate that the sales folks that we're adding to the organization today to have a material impact on revenue even through this year. It's going to take a little while.

Jeffrey A. Harlib - Barclays Capital, Research Division

Okay. And last, for Alan, just on the utilization being up from 71% to 79%, while the company reduced inventories, how do I look at that? Is that because Toulouse came out of capacity? I'm just trying to understand the math there.

Alan Campbell

Yes, the increase in utilization really was across the portfolio that use our existing facilities within the company. So Toulouse was a small portion of the inventory deduction. The inventory deduction really was across the board. I think it's fair, Jeff, though, that we didn't necessarily get the full benefit of the utilization as one would have expected from the 71% to 79% because of this inventory deduction, which was always our plan. I think we've been fairly consistent in saying we were going to reduce inventories. We did reduce them also in Q4.

Operator

Our next question comes from Glen Yeung of Citi.

Glen Yeung - Citigroup Inc, Research Division

Gregg, I've never heard anybody answer the question of what inning we're in by saying we're still in the pregame warmups. That's a good one. My question is on visibility in the business today and just a sense as to whether or not you think visibility has gotten any better for you. It sounds like your utilization rate is kind of flat, book-to-bill is up. I'm going to assume lead times are still relatively lean here. Maybe just a feel from you how you think the visibility is shaping up.

Gregg A. Lowe

I would say visibility hasn't changed much at all. It's still quite cloudy, I guess. Lead times haven't changed, and I think people are just keeping everything relatively tight. So we're kind of focused on this one quarter at a time. We have visibility obviously into second quarter. That's given us an ability to project that we're going to be up somewhere between $1 billion and $1.04 billion. And so -- but beyond that, there's really not much else out there that can tell us one thing or another.

Glen Yeung - Citigroup Inc, Research Division

Is it your sense that the customers are happy to work with a lower level of inventory, kind of at this level going forward? Or is it really just because lead times are short?

Gregg A. Lowe

I don't know that they're happy to work with the lower level of inventory. I think customers are -- they remember up times, they remember down times. And they're just trying to manage their business with relatively lean inventories. I think that has been the case with distributors as well. And everyone is just trying to keep inventories relatively lean, which is partly because lead times are pretty -- are relatively stable at this point.

Glen Yeung - Citigroup Inc, Research Division

Just one more, which is, given, Gregg, your background, you came from a company where sales -- the sales effort was one of the leading sort of pitches from the company. It sounds like you're trying to build all the sales efforts, specifically focused in Asia. But I wonder if, in general, it's in your mindset that you want to sort of have the same idea at Freescale, have a sort of leading-edge independent sales force as one of the main calling cards of the company.

Gregg A. Lowe

Well, we have a very -- I've spent a lot of time with customers and, therefore, with our sales team. And we have a really fabulous bunch of guys and women and guys out in our sales organization, whether it's the folks that are calling directly on customers, working with distributors or our FAEs that are out there solving problems and debugging things and so forth. It's a seasoned group that's been through a lot, and they've developed excellent relationships with customers. So I think the -- I think we have a strong sales organization that I think is in place. Where I think we've missed over the last couple of years is specifically the growth in Asia and, specifically, China. Our increase in -- we basically haven't really increased, in any kind of material way, our team in Asia, while the market has been growing like crazy over the last 4 or 5 years. And so I think it's a case of we had something in place and it needed to grow and it didn't, while the market was expanding very, very rapidly. So it is a bit of a catch-up, I'll admit, in China. But the team is fully on board with it and is driving it really hard. We've already opened up a number of sales offices. We'll do 10 by the end of the year. I talked about the 18% increase in Asia-Pac, that's actually over 20% in China, specifically. So I think we're in catch-up mode in that area, but I think the team is driving it pretty good.

Operator

Our next question comes from Doug Freedman of RBC.

Doug Freedman - RBC Capital Markets, LLC, Research Division

I guess, Gregg, building on your focus in China and growth in China, what products are you seeing most attractive to sell in that market? Where is your best foot forward?

Gregg A. Lowe

I think in -- well, a couple of things: One is we have a relatively solid position and a decent market share with our Automotive MCU business in China. And that, of course, is going to be a nicely growing segment of the market, I think. China is already one of the bigger producers of vehicles. But I think the electrification or the electronics in those cars is going to be growing probably at a faster rate than Western countries and even Japan just simply because of the growth of the middle class and so forth and wanting more features in cars and so forth. So that's an area where we already have a pretty decent market share and a pretty decent position that, I think, this incremental -- this increase in sales will help with us. Our general purpose Microcontroller business is seeing a lot of traction right now in China, primarily because of the breadth of portfolio of the support levels and the low-power kind of characteristics of the things that we're coming out with right now. There is a lot of excitement in those product areas as well. I think the other businesses will also benefit from this increase as well. But just -- I don't want to just say it's just those 2, but those 2 do jump out and stand out as areas that will probably benefit very nicely from this.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Moving on from there, you guys have made a recent -- relatively recent switch with your MCU strategy, using and incorporating ARM cores. What percentage of the new products being introduced today are ARM-based solutions? And where do you -- can you give us any sort of metrics that we might be able to track to see how that transition is impacting your business?

Gregg A. Lowe

I don't know that we want to get into the specifics on that, Doug. I would say that there's been a pretty sizable shift to the ARM portfolio. I can't cite you the exact percentages, but it's a sizable percentage of the products that are in development right now are ARM-based. The Kinetis family that was introduced a while ago is seeing just tremendous traction. The Kinetis L series that's more recently introduced -- tiny microcontrollers that have very, very low power, lowest-power 32-bit microcontrollers out there today -- has seen a lot of really good traction. So it's a substantial percentage of our business that's been -- the substantial percentage of our new products that are being introduced are based on that.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Great. And I guess for my last one, if I could. Just this cycle definitely seems to be manifesting itself a bit different than any of the past cycles, that being when we go through an inventory cycle, we tend to come out with better than seasonal growth. You're not alone in seeing what I would call more normal seasonal. What is this telling you a bit about the end market, what you're seeing out there? And is there any way for us to get a sense of when we might see something better than normal seasonal? Are there design wins? Are there any early indicators that you can identify that we should be paying attention to?

Gregg A. Lowe

I don't know that I can help you on this one, Doug. I've been in the industry a long time, and it seems like every cycle feels different from any other one when you're in the middle of it. And then you look back on it and you say, well, here's why and so forth. So we're in the middle of something. We've got -- we saw a pretty decent growth in first quarter. We're projecting growth in second quarter. We're just handling this one quarter at a time.

Operator

Our next question comes from Joe Zachariah, and he's from Needham & Company.

Joseph Zachariah

I'm calling on behalf of Raji Gill. I was hoping to circle back to John's question on LTE, looking to understand a little bit more about the dynamics and how much of the Digital Networking business is tied to China and the LTE growth cycle there?

Mitchell Haws

Joe, this is Mitch. So if you look at the makeup of Digital Networking, probably 60% would be focused in wireless infrastructure with -- I don't know if I want to get specific around China end customers, but that is, if you look at the trend, where a lot of the growth has occurred. So the remaining 40% touches enterprise and a number of other applications. But more than half of the revenue we generate in Digital Networking is focused on wireless infrastructure, and those are -- the China-based customers are 2 of the biggest.

Joseph Zachariah

And I guess, separately, can you talk about any market share gains in multi-core processors, where you are seeing them being incorporated?

Mitchell Haws

Well, as Gregg referenced earlier, trying to call share in the first quarter is a little tricky, but we've talked about base stations somewhat. There are a variety of different applications on enterprise, riding and switching, obviously, but there's a number of other kind of subcategories within enterprise that we've had some success as well and design wins from a couple of years ago that you're starting to see ramp through the business.

Operator

Our final question comes from Blayne Curtis of Barclays.

Mark Kelley - Barclays Capital, Research Division

This is Mark Kelley on for Blayne. I just wanted to go back and talk about TD LTE a little bit more. Everyone keeps talking about a second half ramp, but it doesn't seem like orders have been -- have materialized yet. I guess, what are you guys seeing to that end? And is there anything else you can point to historically, maybe from the TD-SCDMA rollout that we can look at for how things should progress?

Mitchell Haws

Yes, Mark, it's difficult to look at the back half. If you've followed this industry, as I know you have for a while, it can be notoriously lumpy in the course of a year. The best way I can answer that, if you look at the RF business for us, as well as Digital Networking, and look over the past couple of quarters and look into Q2, you have seen the ramp in TD-SCDMA benefit RF. Business was done a little bit sequentially but well up over last year. Digital Networking benefited in Q1 and again in Q2, so they don't track each other quarter-to-quarter. But it does suggest that there is some investment in China around TD-SCDMA. We got the benefit of that. There is LTE spending, not only in China, but also you've heard some positive talk about that in the U.S. So those are the 2 things that are driving it. And as I mentioned earlier to I believe it was John's question, when you have a share position like us, you touch a whole bunch of different customers. And that tends to be good tailwind in a market like this, where irregardless of where you're seeing the pickup, we touch enough customers, we get the benefit pretty quickly.

Operator, I think that's the last question. We'll do a -- Gregg, do you want to do a quick summary, and we'll be over and out?

Gregg A. Lowe

Well, thanks, and thanks, everybody, for joining us on the call. I think we've set off on our strategic path. We've got the company focused. I think we've got the employees focused on 2 things, and that is top line revenue growth and expanding margins. I think that focus has generated a lot of energy inside the company. We've put a couple of nice quarters in a row here. We're certainly very, very early in this. We've got a lot of work to do. But I'm really excited about the progress we've made. So thank you very much for your interest in Freescale.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Freescale Semiconductor Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts