Fairchild Semiconductor International Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.23.14 | About: Fairchild Semiconductor (FCS)

Fairchild Semiconductor International (NASDAQ:FCS)

Q4 2013 Earnings Call

January 23, 2014 9:00 am ET

Executives

Dan Janson - Vice President of Investor Relations

Mark S. Frey - Chief Financial Officer, Executive Vice President, Principal Accounting Officer 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 Hettenbach - Morgan Stanley, Research Division

Christopher Rolland - FBR Capital Markets & Co., Research Division

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

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

Aashish Rao - BofA Merrill Lynch, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

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

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Shawn M. Harrison - Longbow Research LLC

Operator

Good day, and welcome to the Fairchild Semiconductor Fourth Quarter and Full Year 2013 Earnings Conference Call. Just a reminder, today's conference is being recorded. At this time, I'd like to turn the 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 2013 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 Technology, Internet and Media Conference on February 10 in San Francisco, the Susquehanna Semiconductor Summit in New York on March 4, as well as the Morgan Stanley Technology, Media and Telecom Conference in San Francisco, also on March 4.

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 management will be making forward-looking statements in this conference 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 quarterly and annual reports we file 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 the 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 discussion over to Mark Frey.

Mark S. Frey

Thanks, Dan. Good morning, and thank you for joining us. I'm sure most of you had a chance to review our earnings press release. So I'll focus on just the key points in my comments. Fourth quarter income statement performance was in line with expectations while we delivered excellent balance sheet results with good inventory control and strong cash flow. Let's review some of the details starting with the income statement.

For the fourth quarter of 2013, Fairchild reported sales of $341 million, down 6% sequentially and up 2% from the fourth quarter of 2012. As expected, lower mobile demand and year-end inventory reductions in distribution were the primary causes of the sequential revenue decline. Adjusted gross margin was 31%, down 1 point from the prior quarter due to less favorable product mix and project costs related to our fab streamlining efforts. R&D and SG&A expenses were down 5% sequentially to $90 million due to further cost reductions and about $2.5 million of nonrecurring favorable items.

Fourth quarter adjusted net income was $14 million, and adjusted EPS was $0.11. The adjusted tax rate was 10%. Full year revenue for 2013 was flat compared to 2012 at $1.4 billion, as sales growth in our discrete and module solutions for industrial, appliance and automotive applications was offset by lower demand from the mobile and PC end markets.

Fairchild reported net income of $5 million or $0.04 per diluted share in 2013 compared to $25 million or $0.19 per diluted share in 2012. Adjusted net income for 2013 was $35 million or $0.27 per diluted share compared to $71 million or $0.55 per diluted share in 2012, due to higher R&D spending and less favorable product mix.

Now I'd like to review our fourth quarter sales and gross margin performance for our 2 major product groups. Sales were down 11% from the prior quarter for our MCCC business driven by lower demand from the mobile end market, as well as channel inventory reductions. MCCC's adjusted gross margin was down 1 point from the prior quarter to 37% due primarily to fab streamlining project costs, underutilization charges and normal pricing dynamics. In our PCIA business, sales were down 3% sequentially, driven primarily by normal seasonality and year-end inventory reductions in distribution. Adjusted gross margin was flat at 30%, as this segment carries most of the underutilization charges from the start-up of the new 8-inch fab in Korea.

Turning to our balance sheet. We reduced internal inventory by $12 million or 5% sequentially. Days of inventory remain about flat with the prior quarter at 88 days due to the lower fourth quarter sales level. We are pleased to exit the year with sequentially lower inventory dollars and are very comfortable at this level. Days of sales outstanding or DSOs decreased to 34 days, while payables were flat at 37 days.

Free cash flow was $81 million for the fourth quarter and $101 million for the full year of 2013. We ended the fourth quarter with total cash and securities exceeding our debt by a record $220 million, giving us our strongest balance sheet in the history of the company.

Turning now to forward guidance. We expect sales to be in the range of $340 million to $355 million in the first quarter. We expect adjusted gross margin to be 28% to 29%, due primarily to lower factory loadings from the prior quarter, the resumption of some payroll-related taxes and ongoing fab streamlining costs. We have increased factory loadings this quarter and expect to recover the underutilization impact to gross margin in the second quarter. We anticipate R&D and SG&A spending to be $93 million to $95 million due to the resumption of FICA and other payroll-related taxes and the lack of non-recurring favorable items from the prior quarter. 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, and good morning, everyone. Incoming order volume increased noticeably in December and then again in January. The incoming order rate and POS rate to date are more than sufficient to meet the high end of our guidance range. Overall, we enter 2014 with solid demand momentum, short lead times and an excellent inventory position. For the fourth quarter, we reported sales and gross margin roughly in line with expectations while delivering better-than-anticipated earnings fall-through on sequentially lower operating expenses. We also reached an important milestone for the company, as we achieved a record net cash position that enable us to initiate the enhanced stock buyback program for 2014.

I'll begin my prepared remarks with a review of demand by end market. I'll then update you on our efforts to improve operational efficiency and increase our manufacturing flexibility. Finally, I'll review some current quarter results and operational metrics.

Turning to demand by end market. The Industrial and Appliance end markets, which accounted for 41% of our fourth quarter sales continue to benefit from strong demand. We won a number of new designs at large Chinese appliance manufacturers, which enabled the highest power module sales in 3 years. Demand was also strong at a major industrial pump manufacturer, which is migrating to more module control variable speed motors. Total sales into the industrial and appliance market were up 11% in 2013. We expect continued growth for our high-power discrete and module solutions during the fourth -- first quarter.

Our sales into the mobile market decreased from the prior quarter as expected, due to year-end channel inventory reductions and incrementally lower demand. We continue to gain share with our latest power conversion designs that enable significantly faster charge times through the use of adaptive charging and a new communication protocol.

Fairchild solution is uniquely designed and certified on the Qualcomm Communication protocol, as well as our own. This enables customers to use multiple PMIC suppliers instead of being limited to just one, as is the case when they use our competitor's solution. There is significant interest at leading customers to adopt this new chip-charging technology. In addition to the communication chip -- the addition of the communication chip more than doubles our content in the battery charger. We expect strong demand from our charging solutions in 2014. We also have a number of new designs for power and signal solutions that we expect to drive share gains throughout the year.

Sales into the automotive sector were down seasonally, 3% sequentially in the fourth quarter. For 2013, we saw a strong demand for our integrated module and discrete powertrain solutions, enabling us to increase sales more than 8% for the year. We expect continued robust demand for our automotive products in 2014, as we expand penetration at key customers.

Demand from the computing end market were seasonally lower than the prior quarter. Sales into the notebook market benefited from a Japanese competitor exiting the market. Our exposure to consumer notebooks was less than 2% of total fourth quarter sales. We expect steady growth in the other sectors of computing, including performance computing, cloud applications and servers.

Sales into the consumer market were slightly higher sequentially due primarily to increased gaming demand. Demand for products supporting the TV sector was roughly flat with the third quarter and well above the first half average. We expect sales into the consumer market to be seasonally lower in the first quarter.

Putting all this together, we're guiding first quarter sales to be higher sequentially led by seasonally strong demand for our products supporting automotive, industrial and appliance markets.

At our last earning call, I discussed our efforts to increase operational efficiency and manufacturing flexibility to better support our customers while improving financial performance. We made good progress cross qualifying processes in our new 8-inch wafer fab in Korea, as well as other internal fabs and external foundries during the fourth quarter. This project is on track to enable us to streamline our internal manufacturing to greater -- to deliver greater flexibility and significantly lower cost by the middle of 2015.

After reviewing our schedule, various meeting venues and the timing of some key new products and operational improvements, we decided it would be more appropriate to hold our Investor Day in early September in New York City. We'll provide more details as we get closer to the event.

I also want to announce that we recently acquired a private high-performance sensor company, which we have been collaborating with for more than a year. Their technology is very complementary to Fairchild's own sensor solutions and we expect to release our first jointly developed product this quarter. They currently report $3 million to $4 million in sales per quarter, and we expect them to be modestly accretive to gross margin and earnings from Day 1. Expect to hear much more about our sensor solutions in future communications.

Turning now to Q4 results for our sales channels and other operational performance. Distribution sell-through is up 1% sequentially, and we reduced channel inventory approximately $10 million. Sales into the OEM and EMS channel were down about 11%, primarily due to weaker demand from the mobile sector. Factory utilization decreased into Q4 as we reduced both internal and channel inventory. Lead times remained short for virtually all of our businesses. Overall product pricing in Q4 was down about 1% from the prior quarter and we expect similar performance in the first quarter.

In closing, we reported solid sales growth for our power products supporting industrial, appliance and automotive markets in 2013, and we expect demand to remain strong this year. Sales into the mobile market did not grow as expected in 2013, as top customers adjusted to slower high-end smartphone growth. We expect modest growth for mobile applications in 2014.

With our latest sensor acquisition and anticipated design wins this year, we expect to steadily grow sensor revenue during 2014. Our order rates are up significantly in the last 1.5 months, giving us solid momentum entering the new year. We are aggressively cross-qualifying processes to enable greater manufacturing flexibility in 2014. And remain on track to significantly improve our operational performance by mid-2015.

Finally, we're excited to launch our enhanced stock repurchase program late last year that authorizes the company to buy back up to $100 million during 2014. We repurchased nearly 1 million shares last quarter and expect to significantly step up our volume in 2014 with this new authorization. The share repurchase program illustrates Fairchild's confidence in our ability to grow sales, earnings and cash flow, as well as our commitment to our shareholders.

Thank you. 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 go first to Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

First question is a little bit on the gross margin side of things. Mark Frey, could you walk us through what the charges were from both a start-up perspective with the 8-inch fab, as well as the underutilization in the fourth and first quarters? And then, I think you mentioned how they might go away in the second quarter, anything you can do to quantify that would be helpful as well.

Mark S. Frey

Sure. The cost related specifically to qualification efforts for fab streamlining. It was around $1.5 million. And the underutilization impact quarter-to-quarters total is about 3 points.

Ross Seymore - Deutsche Bank AG, Research Division

And so you expect that 3 points to reverse itself in the following quarter? So the second quarter, all else being equal, would go up 3 points sequentially?

Mark S. Frey

All else being equal, yes.

Ross Seymore - Deutsche Bank AG, Research Division

And did -- how about the start-up charges, do they reverse in any way, shape or form in the second quarter?

Mark S. Frey

No. They continue.

Ross Seymore - Deutsche Bank AG, Research Division

And then, I guess, the follow-up question, one for Mark Thompson. Can you walk us through a little bit, your sensor strategy and when we should expect to see that become meaningful to revenues above and beyond the contribution from the small acquisition you just mentioned?

Mark S. Thompson

Sure. We expect from -- we closed the deal that I mentioned, the day before yesterday. So it will have a fractional. And in fact, the numbers we did not include in our estimates for this because there's always uncertainty associated with things until they're actually closed. So there will be a little bit, about $2 million to $3 million, of additional revenue for the first quarter that were not reflected here. We will be -- we've been working together on a very low-power solution for mobile applications for the last year, and we expect to show that to the world this quarter. And there's been tremendous interest from all of the characters you'd expect to have tremendous interest in that. Exactly the rate at which that turns into demand across the year, we'll have a better feel for a quarter from now, after we have a chance to put it in a bunch of people's hands and look at how it maps into their various product launches and how they want to deploy it. But we expect that to start to be meaningful by year's end and steady industrial growth from the recently acquired company.

Operator

And we'll take our next question from Chris Caso with Susquehanna.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I guess, I'll start with the Mobile segment. And if you could discuss that a little bit more. I guess we understand what happened last year with respect to certain product launches and success or not success on some of the customers' side. As we look into 2014, be clarified a bit the comments about modest growth. What do you think is happening with regard -- I guess, what are your assumptions with regard to what's happening with units at your customers', your own content and perhaps pricing?

Mark S. Thompson

So a couple of different things. What we've seen consistently for at least 3 quarters now is the 2 largest players, the same quarter 1 goes up, the other goes down. So we're also seeing a clear mix shift from the very high-end smartphones to a notch down, which has -- which do have less content. So the unit growth doesn't translate necessarily into total dollar growth. We also see increasing share from a couple of key China makers. And so if you map all that together, the big gains opportunities that we see are primarily on the adaptive charging, the fast charging, which we have strong silicon content in the adaptors, growing as it becomes smart and interactive with the phone and content in the charger IC. None of that becomes that material until the second half of the year. And so what we model is roughly flat for mobile in the first half of the year, and then expect to see some gains on the second half, as adaptive charging becomes more widely utilized across a variety of platform.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay, and then on the operating expenses, I guess the first -- if you can give us some color with respect to the variable accruals, I assume some of those will reverse in the fourth quarter and then kind of come back in the first quarter, if you'd give some indication of kind of how you're accruing a variable comp for 2014. And then, I guess you had earlier alluded to some new sort of longer-term targets. I guess, to whatever extent you're comfortable kind of sharing the OpEx targets or just kind of general margin structure as we go forward into 2014?

Mark S. Thompson

Sure. We did have variable comp accruals in Q4 and we expect them to be roughly equivalent in Q1 in our planning. So we're not seeing the whipsaws that we discussed with you last year. The contributors to the change in expenses from Q4 to Q1, as we said, are payroll taxes. People tend to go on vacation less in Q1. We're preparing for our next POWI trial, so that's driving over $1 million of increase. And we are still investing in some technology areas where we are adding capabilities and resources. But we also aggressively are attacking some core costs. So headcount was down about 200 people in Q4, roughly divided half manufacturing, half non-manufacturing. Those kinds of trends will continue. And our target is to keep in dollars below $95 million, but in percent, try to get to 25% as soon as we can.

Operator

And we'll take our next question from Craig Hettenbach with Morgan Stanley.

Craig Hettenbach - Morgan Stanley, Research Division

Yes, just want to follow up on the sensor tuck-in and just more broadly that's a market you guys have been talking about from design and sampling, it has been a drain on margin. So can you talk about your level of confidence in terms of the trajectory of revenue coming and when that starts to help on the margin front?

Mark S. Frey

So I guess maybe when you -- operating margin has been a drain on -- it hasn't been a drain on gross margin. The -- so as I commented, we'll have a run rate in the $3 million to $4 million at margins starting now -- at margins considerably above company average. And we expect -- and those are essentially all in the industrial space. And we expect to see the beginnings of mobile revenue later this year and then material growth during 2015. So that's the way to think about that. So the base of $3 million to $4 million growing sequentially across the year, and then mobile starting to become important either sometime late this year or early next.

Craig Hettenbach - Morgan Stanley, Research Division

Okay. And then if I could follow up on the industrial within that segment, any update on appliances in terms of adoption for variable speed motors and the outlook this year? And then also just the trends you're seeing in industrial by geography?

Mark S. Frey

Sure. The trends are continued adoption of brushless DC motor, this has been one that has been very steady for several years. It continues to be steady. And we continue to be one of the lead players in making that happen. So we expect that to grow steadily across the year with the usual seasonality of the first half, particularly for the air conditioning centric piece of that. The first half of the year is generally stronger than the second half, everything else is fairly linear across the year. We see very broad-based adoptions for that technology everywhere, but slow in the U.S. The U.S. has been behind the rest of the world in its rate of high-efficiency solutions, although it's beginning to look like it might begin to accelerate a little bit. But it's really very broad-based. Europe has been very serious about this for a long time. China has become very serious about this. Korea is serious about it, Japan is serious about it. It's really everywhere you look, except for the U.S.

Operator

And we'll take our next question from Christopher Rolland with FBR Capital.

Christopher Rolland - FBR Capital Markets & Co., Research Division

So perhaps you guys can talk about whether it was your decision or whether order patterns didn't allow for it. But your decision to draw down inventories perhaps this quarter, and to lower factory loadings. It seems like days were fine here. Why carry that gross margin hit over to Q1 and why not sort of smooth it out? What was your thinking there?

Mark S. Frey

Well, we don't 100% control it. Obviously, our distributors have to place orders and accept deliveries from us. But we collaborate with them a lot. It's not -- it's something we, like, schedule for the Q4. We're going to clean everything up in Q4. But as we enter Q4, we thought that we could operate in the channels more efficiently. And so we drew [indiscernible] It's also very hard to actually calculate. So the performance itself is plus or minus $5 million because we don't learn what our sell-through is until each week, we get a reporting every week, but often the very end of the quarter is either tapered very high or tapered very low. In the case of December's, it tends to taper off. But you don't know what that rate's going to be. So I would say that the drawdown in channel exceeded our expectations going into the quarter, but were still consistent with the belief that we were going to try to bring them down. For internal inventory, I think the analytical approach was about the same. We thought we had more than we needed. About 1/3 of the drawdown, by the way, is raw material. And so it's got a cash impact, but it doesn't affect the allocation of fixed costs, et cetera.

Mark S. Thompson

So let me just add a little bit to Mark's comment. Obviously, we don't control the point-of-sale, but we do control the build plan. And so it was a conscious decision to make sure that we basically try to enter each year as clean as we can. One other thing I'll say, though, is we talked a little before about doing a lot of work on our supply chain to get our lead times into the 6-week range. Everybody, including us, has been experiencing a lot of order volatility. There's not a lot of certainty in the end markets. And so with that, there's inevitably a little bit of a mess that gets built across the year, as people place orders and you build it and then you cancel it, and then you have to figure out what you're going to do about it. We have the best mapping now of supply chain into demand with very short lead times that I expect -- so the last 2 -- if you look, this pattern occurred as we went from 2012 to 2013 as well. And so if you go back and you look, we had depressed margins in Q1 of last year because we also have a significant impact, actually a bigger inventory fix that we drove at that time. I expect this pattern will not remain. I think we fixed the core problem in getting much more responsiveness to our supply chain. And I expect that we may do a little bit of tuning, but I think that this is the last time that we will see this pattern.

Christopher Rolland - FBR Capital Markets & Co., Research Division

Okay, great. Also, given the slightly softer 4Q and then the Q1 uplift there looks particularly good, more than I had expected. In both segments and particularly in MCCC, maybe you can talk about how much of this do you think was year-end inventory drawdown versus replenishment then in Q1? Do you think this effect was bigger than it's been in years past? Is that part of what's explaining that uptick in Q1?

Mark S. Frey

So it's a little early to -- we're only 3 weeks in. And so I'm reluctant to draw a lot of conclusions from it. But what I think that -- everybody, to some extent, does a little bit of supply chain and inventory tuning-up at year's end. We know that the industry in general has very thin inventories. And so I think what we're seeing is that as we -- each year, I think, there's been less of this midyear correction that's occurred. And so I think with lean inventories, people are needing to build to demand. The other way to look at it is that, having under-shipped the channel in the fourth quarter by about $10 million, if we had shipped to consumption in the fourth quarter, we'd have an estimate that was the midpoint of guidance would be roughly flat in Q1 to Q4. So there's actually not a huge amount of swing. The other dynamic is that there's normally a little bit of build ahead that occurs prior to the Chinese New Year shutdowns. And so we expect some of that built into this. So the order rates are very strong right now. As I commented, they're above what we need to do the high end of our guidance range. But we do expect that we've modeled an average correction for around Chinese New Year in reduction of demand and to the other side of that. So that's the way we think about that as well. But we'll -- Q1 is always an interesting challenge. This one looks like it'll be more interesting in a positive way than average. And if it turns out that the strength continues, we'll obviously comment to that effect. But nothing -- I wouldn't draw any conclusions at all until the other side of Chinese New Year.

Mark S. Thompson

The other thing that I would add is that, unlike last year where our Q1 was up 4%, that was driven mostly by mobile, one large mobile customer. This year, what we're seeing is not a replay of that on the mobile side. Like we said in the prepared remarks, mobile, we expect to be probably modestly down a bit in the first quarter. This is much more broad-based. And as Mark said, we come in with a leaner inventory position than we had a year ago, and a much more broad-based order rate lead-in to the first quarter.

Operator

And we'll take our next question from Tristan Gerra with Robert W. Baird.

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

You expect mobile share gains in the second half of this year, and it seems like you perhaps lost some market share at a key mobile customer last year. Given the ones that you expect this second half, what's your market share expectation by year end relative to what you had at the beginning of 2013? Any commentary you may have about market share in the smartphone charter business and the competitive landscape would be useful.

Mark S. Frey

Sure. So Tristan, we did see some of the interface solutions get integrated at one key customer, so that was a part of what you were mentioning. And to some extent, that was expected. You never know exactly the rate at which that will occur. We -- so the way to think about share is that we are very highly penetrated in charging -- in the charger for one of the key OEMs. We expect to get highly included in the charger of the other, of the top 2. And then of the rest of the world, particularly China, very high levels of interest in that as well. So that's the way to think about, it's very OEM-specific, typically, the way these things play out. So we're well situated at one, expect to get situated similarly at the other one by year's end. Add a couple of the China players to that. And then -- and that's not all including adaptive charging. And then as adaptive charging rolls out, we expect content to increase, as you get not just a controller but also a communication chip as well, that goes in. And then there's the charging IC that's the companion to that, inside the phone. So that's the way to think about the share gains. OEM-specific and application-specific.

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

Okay. That's very useful. And then any sense or estimates out there in terms of the adoption rate of high-efficiency motors in white good appliances in the U.S., Europe and also what it might be in China currently?

Mark S. Frey

It depends on the application. And so what we see is that the highest penetration rates in China, for example, have been in air conditioners where it's partly by government regulation that drives that. If you go to Europe, for example, penetration rate in things like dishwashers is very high. And then so it's already probably largely converted. But roughly speaking, I would say that the market is still, at most, 50% converted to Brushless DC in aggregate. So the potential for that continued growth is very good.

Operator

We'll take our next question from Chris Danely with JPMorgan.

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

Can you just talk about where overall utilization rates were in Q4 and then where you expect them to be in Q1?

Mark S. Thompson

Well, Chris, we don't give specific utilization rates right now at this level. But utilization rates were down in Q4 as we drained inventory. And as we said in the release in the call, the prepared remarks, that we've raised factory loadings already in the first quarter. So we expect utilization to go higher from here.

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

Can you quantify after all of the restructuring is done, how much higher overall utilization rates would be? Would it be 5%, 10%, 15%?

Mark S. Thompson

I don't know that we're ready to make that discussion right now because we haven't been explicit in what kind of footprint reduction that we're contemplating. We're in the middle of that right now. As Mark said in the prepared remarks, right now, we're focusing on cross-qualifying processes both within our new 8-inch fab in Korea, as well as some of the other fabs in the company and especially foundries. So stay tuned for that, we'll give you more details in the future.

Operator

We'll take our next question from Aashish Rao with Bank of America.

Aashish Rao - BofA Merrill Lynch, Research Division

Sorry, Mark, another clarification question on gross margin and utilization. The underutilization in charges in Q1, I think you've said approximately 3 points or so, is that reflective of lower loadings in Q4, which is resulting in a higher cost basis in your book revenues in Q1, because I would have thought with healthy inventory levels, sequential sales growth, typical pickup into the middle of the year, you noted that you'd already raised utilization levels. Then shouldn't underutilization charges be a tailwind to gross margins?

Mark S. Thompson

Well, they will be in Q2. But let's say, if you take a model where your inventory is 90 days. So it's exactly 1 quarter. The stuff you make in Q4, on average, you ship in Q1. And you have to apply your cost structure to the product that you make in a given quarter, not what you ship. And therefore, we've tended to always be 1 quarter lagged on the effective utilization oscillation.

Aashish Rao - BofA Merrill Lynch, Research Division

Got it. And then, could you also provide some color on total capacity now with the Korea fab being fully operational, both on the front-end wafer and back-end assembly and test? What steady-state revenue level will you need to be at to avoid any underutilization charges?

Mark S. Frey

Well, the question is actually going to be less relevant to our operations going forward. But today, our capacity did increase with the 8-inch capacity in Korea. Back end is about the same. We haven't really changed the back end very much this year. Going forward, we expect to take our less efficient internal capacity off-line, as we consolidate around our more efficient 8-inch capacity and as we qualify foundries. And therefore, I mean, the direct answer to your question is we could ship back in the 430 or 440 range with today's capacity. Going forward, it would be a very flexible statement because we would have access to more external resources in addition to our internal capacity. So it is definitely shifting. Our nominal internal capacity statement will probably come down over the coming year. But we, as Dan said, we have not worked the details on that yet.

Mark S. Thompson

The simple way to think of it is that probably the internal capacity, presently, is fairly close to a maximum. And then what we're working through is -- and simultaneously, we're also bringing up foundry capability. And then over the next year, roughly speaking, we'll be taking off-line some internal capacity that's inefficient and bringing up external capacity. So that's exactly the chart that we want to provide the investment community with at our Analyst Day. And why we don't want it to be a broadbrush, we want to be fairly quantitative about the timing for all the events and who and where and so forth. So that's what we'll be back with in the third quarter.

Operator

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

John W. Pitzer - Crédit Suisse AG, Research Division

Mark Thompson, I was hoping for some clarification around your comments on mobile. I thought I heard you say that mobile will be down a little bit in the March quarter; flat, half-on-half, before kind of a hockey stick in the back half of the year and I'm wondering, is the half-on-half or in the first half, I'm sorry, is that from a fourth quarter run rate? Because if it is, it kind of implies the back half of the year you're getting to close to $100 million of quarterly revenue in mobile. And I'm just trying to figure out how much of the growth in the back half of the year is a reflection of some hope of restocking, because you're undershipping demand today versus overall unit growth in the industry versus some of these new sensor opportunities you've been talking about, or new sockets you've been talking about. If you can help me quantify kind of those 3 buckets, it would be helpful.

Mark S. Thompson

So John, I wouldn't think of it as a hockey stick at all. I think we modeled some modest softness in the front half of the year, and then some accelerating gains in the second half of the year. But the overall deltas are small, I mean relatively small. And so if you map all that out, I mean, I think, content wise, at the top 2 players, it should stay fairly steady in the first half. How their mix will sell, we're not really sure. We expect to see some content gains in China. And then some more broad-based content gains toward the second half -- in the second half of the year. But as I said, if you net all that out, we think mobile will be down slightly in the first half as reflected in our Q1 numbers, for example, and then up modestly in the second half, enough to have the whole year be up slightly, we think.

John W. Pitzer - Crédit Suisse AG, Research Division

And then, Mark, just longer-term within that mobile bucket. Sitting at about 25% of revenue today, I'm just kind of curious as how you structurally think about that market longer-term. Is this sort of the right percent of revenue? As you think about -- I think you mentioned a sensor, smart sensor acquisition you did. Was that kind of to exploit the handset market further or are you of the mindset that this is the right level from here and the incremental sort of strategic thrust will be trying to build businesses in other end markets?

Mark S. Thompson

So what we've seeked to do is really try to build out both things, so but really concentrate on technical capabilities that we know everybody needs and wants. And maybe be a little bit less customer-specific than we've been historically. So if you look -- there are really 2 broad thrusts that we've taken on in mobile. One is around rapid charging and that, everybody -- the demand on the battery is only going up. If you look at a use of video Web access, et cetera, increased data rates, all those things put demand on the battery. So bigger batteries, the desire for faster charge times. So the total silicon in the charging circuit for any of the phones, whether it's a very high-end smartphone or sort of the midtier smartphone is going to at least double, as that gets deployed. The second thing is position information for mobile devices provided by advanced sensing solutions is the other thing that everybody needs. And so the strategy for both of those is to have leading positions in those -- and that we think will be very broadly penetrated over a period of time. In both cases: a, the technology isn't totally worked out either on the supplier end like us or at the OEM end. So each one has a little bit of its own roadmap and so forth. So that's -- those are the 2 big blocks for mobile. Now in both cases, they have utility in other places, right? So very precise digitization of motion is something that has very broad applicability. The Internet of things has become the buzzword of the quarter. But better than that is sensing capabilities and sort of motion position is really central to that. So the technologies for rapid charging are pretty mobile-centric. But the technologies for position sensing and motion sensing have very broad applicability in industrial, automation, all kinds of places like that. But the net of the whole thing is that we would expect to -- we're positioning ourselves to have share gains as more dollars get allocated to the capabilities in both places. And so the dollar content per mobile device will go up over time. So exactly how that maps is it will probably result in mobile becoming a larger share of our total revenue over time. But we do not have a sole mobile-centric strategy. We think it's a very important space. We take it very seriously. We intend to have a leadership position in that, through these architecture changes, but not 50% or 75% of the company. It's going to be an important piece of our strategy, not our strategy.

Operator

And we'll take our next question from Steve Smigie with Raymond James.

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

Mark, just some follow-up questions on the fast charging. In terms of the timing of that, you said in the second half, will that be in time for major product launches from the 2 big OEMs in the second half or is this more -- the second half revenue you're looking at, is that more sort of other players out there?

Mark S. Thompson

So we're not planning on huge launches in the second half. And to some extent, the OEMs haven't -- or maybe they have their map, but we don't know what it is yet. Anytime a new technology comes along, people will try to sensibly try to deploy it in a low-volume setting first, to debug it and make sure that they like it and so forth. So we're assuming that in the way we look at this is that, people will find a place to try it out a bit and make sure that they find its bugs -- there will always be bugs -- before it sort of gets wrapped across all of their major platforms. So that's baked into our thinking is -- and that's behind my comments that I made to John a few minutes ago, is that we don't -- we're not modeling big gangbuster events in the second half of the year. Rather, clarity around how these things will get trialed and then we expect that to become a very important thing in 2015. But basically, just getting mapped in, in 2014.

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

Okay. And but to follow up on that and then I'm going to extend into another category. But the follow-up is, when you say second half, should I think that's probably more likely fourth quarter? And then just as another question on the sensors. Is that -- is what you acquired is that more MEMS sensor technology or is that something else?

Mark S. Thompson

It's MEMS-related, but it's more algorithm-centric than hardware-centric. The ability to model -- the ability to take a very large feed of data like from a sensor and turn it into a very low bandwidth feed that you -- these have much better capability of doing computational determination. So it can run -- the whole thing that we want to get to is the ability to run the sensor all the time, which today it's run -- it's typically run in bursts. And so once your power -- your capability's to run it all the time at very low power, then people will run it all the time and a whole series of other interesting things happen. So this is one more key building block to allow us to reach that goal.

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

And when would we see the fully functional MEMS solution out there, and is that first solution, is that going to be straight to 9-axis or is it something else?

Mark S. Thompson

It's going to be what? Something -- I'm sorry I couldn't hear.

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

I was sort of asking the timing of the solution. I mean, you've got everything done, and then would you go to a 9-axis solution, is that where you're going for your first solution or will it be something else?

Mark S. Thompson

So you can do 6 or 9 or even more than that. But, yes, I mean, generally speaking, accel, gyro and magnetometer is the solution that's sort of at the center of what most people want to do. But you have to have the ability to run it all the time. And that's what's missing today. Power levels of all the existing solutions are too high to permit them to be run all the time.

Operator

We'll take our next question with Kevin Cassidy, Stifel.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

I just, I want to discuss a little more about the automotive market. Where is your exposure within the automobile and are you expanding that?

Mark S. Thompson

So where we're positioned in -- we have a very concentrated view of the car. So we're not -- we don't try to do infotainment or body control or any of those kinds of things. What we have is we, today, have 3 major applications that we pursue. All aimed at allowing the OEM to build more fuel-efficient cars. So we do single-coil ignition, the IGBT is for that, where it's single coil per cylinder rather. We do direct injection IGBTs for both diesel and gas and we do power modules for to allow the conversion from hydraulic to electronic power steering. We are looking at higher power modules for hybrid and that will be the next place that we go but exactly the same theme, which is delivering solutions, very high-efficiency solutions to allow cars to get better fuel mileage. So that's how we're concentrated in our applications. And that's where we'll stay.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And how about geography? Are you exposed to more U.S.-based or Europe or Asia? How does that split up in automotive?

Mark S. Thompson

In automotive? So we're fairly broadly based. Our biggest concentrations have been historically in Europe with the big Tier 1s there. That of course, is relevant to both China and U.S. So Europe would be #1, U.S. #2. Korea is a fast-growing place for us. As the European -- as the Korean car companies have come up in sophistication, they have strong interest in these and then -- and so the indigenous China market as well is another place that we're concentrated on growing. So Europe is less of a growth opportunity. Korea and China, big growth opportunities and probably roughly -- U.S. looks roughly like Europe.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. If I could ask one more question. Is automotive, in general, a better gross margin business for you than the others?

Mark S. Thompson

It's above the company average right now, yes.

Operator

We'll take our next question from Shawn Harrison with Longbow Research.

Shawn M. Harrison - Longbow Research LLC

I'm hoping for a couple of clarifications on kind of the fab streamlining cost. When do those abate during 2014, if at all?

Mark S. Frey

They won't abate in 2014. The program will really stretch for about 18 months before we get full kind of impact of the -- of the impact. And then we'll see significant -- what we said is in the tens of millions of dollars of fixed cost reductions.

Shawn M. Harrison - Longbow Research LLC

Got you. So mid-2015, as you said earlier?

Mark S. Frey

Yes.

Shawn M. Harrison - Longbow Research LLC

Okay. Second, just on the comp, that you want to keep SG&A below $95 million. I think there was some maybe previous commentary that you were looking to get it even further below that. Is that something that you're still working on or is this kind of looking at both the R&D and SG&A structure of the company where you need to be versus what you see the revenue growth profile out 12 months?

Mark S. Frey

We're working on it all the time. And we don't take like a massive restructuring view of it. We look, we go organization by organization. And we have, across the year, identified opportunities. As I say, we're adding resources at the same time. So you've got a more complex set of inputs. And we would seek to get it closer to $90 million. It really depends on what the revenue level's going to be. 25% is, I think, a goal we're more focused on.

Shawn M. Harrison - Longbow Research LLC

Okay. And then finally just on the share repurchase program this year. I wasn't sure, do you plan on using the entire amount? And if so maybe, is it going to be linear throughout the year or are you going to be more focused and trying to do large chunks, if possible?

Mark S. Frey

So we are trying to do a steady buyback program. And so what we will try to do is, a, spend the money in 2014. So that is one of our goals. And be opportunistic. So by increasing amounts if the share price fluctuates down and less as it fluctuates up. But we're going to try to buy at least 50% of that allocation in any given quarter even if the price is robust. So it's going to be a bit of a project. But that's how we're going to try to do it. So if we fall behind in 1 quarter, we'll try to catch up the next and so forth. But it will be a formula-driven that accelerates share purchase in the case of price weakness. But we will try to spend the money this year.

Shawn M. Harrison - Longbow Research LLC

Maybe you've been buying here quarter-to-date 20 days in or is that something that you'll look to after the earnings call?

Mark S. Frey

We do have a program that allows us to acquire more or less modestly during the blackout periods. And then we have a 10-18 model that allows us to be more opportunistic, after the earnings call's over.

Operator

And ladies and gentlemen, we have time for one final question today. It is a follow-up from Steve Smigie with Raymond James.

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

Mark, I was hoping you could talk a little bit more about the fab strategy here. I notice you guys put a lot of thinking into this. Can you talk more about why you elected to go with the 8-inch in Korea. Is there a better engineering pool or taxes? Or what drove that and presumably some of that came from decisions from Vijay coming in, and he's had a pretty good track record and success at Maxim. Should we expect more Maxim-like products coming out of that facility? Is that one of the decisions there?

Mark S. Thompson

So the decision to put it there was not -- wasn't a tax incentive. I mean, we had get some favorable tax treatment but it's small. It was really that, that was the best combination of engineering and cost that we could see. And so that's why we chose to put it there. And so yes, I mean, Vijay has some very -- a tremendous track record of building supply chains that have tremendous costs capability, technology capability and flexibility and that's exactly what's being built here. And so I guess, I would certainly -- Maxim-like is a reasonable description of it, in a roughly equal in and out, which gives you a lot of flexibility in terms of both access to technology and also the ability to adapt to an uncertain world, which we know we all live in. So that is exactly what we're building. But very strong power capabilities from that and broadly capable in the sense from very low-power applications to very high-power applications is what the Korea fab will be.

Dan Janson

That will conclude our call today.

Operator

Thank you, Mr. Janson. This does conclude today's conference. We appreciate your participation.

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Fairchild Semiconductor Corporation (FCS): Q4 EPS of $0.11 beats by $0.02. Revenue of $341.1M (+2.0% Y/Y) misses by $1.48M.