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Intersil (NASDAQ:ISIL)

Q4 2013 Earnings Call

January 29, 2014 4:45 pm ET

Executives

Shannon Pleasant

Necip Sayiner - Chief Executive Officer, President and Director

Richard D. Crowley - Chief Financial Officer and Senior Vice President

Analysts

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Craig A. Ellis - B. Riley Caris, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Harsh N. Kumar - Stephens Inc., Research Division

Philip Lee - JP Morgan Chase & Co, Research Division

Atif Malik

Vincent Celentano

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Intersil Corporation Earnings Conference Call. My name is Tracy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

And I would like to turn the call over to Ms. Shannon Pleasant. Please proceed, ma'am.

Shannon Pleasant

Thank you. Good afternoon, and thank you for joining us today. I am here with Necip Sayiner, Intersil's President and Chief Executive Officer; and Rick Crowley, Intersil's Chief Financial Officer. We will discuss our quarterly financial performance and provide a summary of our outlook. After our prepared comments, we will have a question-and-answer session.

Our earnings press release and the accompanying financial tables are available on the Investor Relations section of our website at ir.intersil.com. This call is also being webcasted and a replay will be available through February 12.

Please note that the comments made during this conference call may contain forward-looking statements subject to risk and uncertainties that could cause our actual results to vary. These risk factors are discussed in detail on our filings with the Securities and Exchange Commission.

Also, the non-GAAP financial measurements that are discussed today are not intended to replace the presentation of Intersil's GAAP financial results. We are providing this information because it may enable investors to perform meaningful comparisons of operating results and more clearly highlight the results of core ongoing operation. Non-GAAP financial measures referenced during today's call can be found in the reconciliation of GAAP to non-GAAP results provided in today's earnings press release.

I will now turn the call over to Intersil President and CEO, Necip Sayiner.

Necip Sayiner

Thank you, Shannon, and hello, everyone. We had another solid quarter of improving fundamentals, allowing us to close 2013 as a much more stable and profitable company than we were a year ago. We successfully restructured the company to operate at a level more consistent with our profitability goals, while enabling continued investment in strategic R&D projects.

Non-GAAP operating expenses were down 19% in 2013 compared to 2012. This refocused the company's investments in target areas that we believe can sustain high-quality revenue growth, reducing our exposure to product areas where we were not seeing a good return. We established stronger pricing and margin discipline to allow us to walk away from commodity products. We are actively working to reduce product costs which is driving structural gross margin improvements. In 2013, gross margin improved 70 basis points, and we expect this to continue in 2014.

Finally, we're placing a stronger emphasis on product differentiation that is expected to drive long-term gross margins even higher. These initiatives and others we've embarked on since the management change last year enabled Intersil to double its non-GAAP net income in 2013, and the earnings growth is just beginning.

I'll talk more about our focus in 2014 after Rick reviews the details of our Q4 performance.

Richard D. Crowley

Thank you, Necip. Fourth quarter revenue of $146 million represented our second quarter in a row of year-over-year improvement, with revenue increasing by 6% compared to Q4 2012. We view this as an important signal of stabilizing revenue, a key goal in 2013. Year-over-year improvements will continue to be a major milestone we will track this year as we work to transform the revenue profile. While revenue was seasonally down in the fourth quarter as expected, modest improvements in gross margin and lower-than-expected operating expenses allowed the company to deliver better operating margins and earnings, a good indicator of the improving quality of the business.

First, I'll summarize our GAAP results. Fourth quarter operating expenses, which include $5.6 million in amortization of acquisition-related intangibles and $3.9 million in stock compensation expense, decreased to $60 million. R&D expense was $27.5 million and SG&A expense was $26.9 million. GAAP gross margin was up slightly at 55.6%. Operating income was $21.2 million or 14.5% of sales. We reported net income for the quarter of $7.5 million or $0.06 per share. The Q4 GAAP tax rate was 65%.

For the full year, the company's improved operating model resulted in GAAP net income of $2.9 million or $0.02 per share, which is inclusive of the restructuring charges we reported throughout the year. This is a significant improvement relative to the $38 million loss the company reported in 2012.

The non-GAAP results, which exclude amortization of acquisition-related intangibles and stock compensation, were also very solid. Non-GAAP gross margin improved again modestly to 55.8% in Q4, and for the full year, improved to 55.3%. We are benefiting from lower costs and reduced exposure to commoditizing products. These factors, combined with a lower mix of traditional computing revenue, should allow us to see modest gross margin improvement again in the first quarter and throughout 2014.

Q4 non-GAAP operating expenses were $50.8 million, below our projections, and a 23% decrease compared to the same period last year. Non-GAAP R&D investment of $25.8 million was lower sequentially, and SG&A expense of $25 million was about flat to Q3. Excluding the one-time items unique to our fourth quarter, including holiday shutdowns, the normalized run rate for Q4 non-GAAP operating expenses would have been about $52 million to $53 million.

For the year, non-GAAP operating expenses were $226.2 million, a meaningful decline over 2012, reflecting the restructuring completed last year. As we drive towards our hiring goals to augment our technical teams, we expect to see the R&D investment go up beginning in Q1 which, along with seasonal increases typical in the first quarter, will result in non-GAAP operating expenses moving closer to the low end of our 2014 quarterly target range of $55 million to $58 million.

Q4 non-GAAP operating income increased to $30.6 million, resulting in operating margin of 21%. This is a dramatic improvement from the same period last year. Non-GAAP operating margin for the full year was 16%, an impressive increase in profitability over 2012. The Q4 non-GAAP effective tax rate was about 17%, bringing the full year non-GAAP tax rate to 16%.

Due to the expiration of the R&D tax credit at the end of 2013, we expect our 2014 non-GAAP effective tax rate to increase to 20%, and this is the rate you should use when modeling the first quarter. Should the R&D tax credit be reinstated for calendar 2014, we would expect our non-GAAP tax rate to return to approximately 16%. The higher tax rate negatively impacts our projected first quarter non-GAAP earnings per share by about $0.01.

Non-GAAP diluted shares outstanding were 131.6 million for the quarter. Non-GAAP net income was nearly flat with last quarter at $25.5 million or $0.19 per diluted share, a great result. The business is now capable of providing ample profitability as we continue to work on the top line.

We have good news on the balance sheet as well. Cash and investments increased to $195 million by quarter end. The cash balance has not only stabilized but moved up, a result of very high operating cash flow during the quarter of $46 million, which was driven by solid profitability and a continued improvement across our balance sheet metrics.

Capital expenditures were $3 million for the quarter. Net inventory declined to $62 million or 88 days. We're comfortable with this inventory level, and expected to remain in this general range. Accounts receivable balances decreased with lower sales in the quarter, and days sales outstanding declined to 31 days.

In 2014, we are focused on continued improvements on our operating performance and financial position relative to 2013. We believe the financial discipline that has been implemented will result in steady improvements in gross margin and further strengthen our balance sheet. I believe the progress made in 2013 is just the beginning, enabling Intersil to not only provide one of the sectors highest dividend payouts, but also one of the industry's highest quality turnaround stories.

With that, I'll now turn it back over to Necip.

Necip Sayiner

Thank you, Rick. As Rick mentioned, our revenue increased in the fourth quarter year-over-year by 6%, and all of that growth was driven by our industrial and infrastructure products.

Industrial and infrastructure represented 60% of company revenue in Q4 and 59% for the full year. Our key investment areas grew in 2013, offset by steep declines in our video surveillance or security products, which faced a challenging pricing environment very early in the year. Security has now stabilized, and at less than 5% of company revenue, is no longer a significant headwind for our industrial and infrastructure business.

We would like to give you some additional color on the products that make up our industrial and infrastructure revenue, so you can better appreciate the opportunity we see in this category. In the fourth quarter, the largest bucket, power products, represented close to 20% of total company revenue. This includes many of our most promising industrial and infrastructure products, digital power controllers, modules and switching regulators, as well as other general purpose power devices. These power products are benefiting from the explosion in infrastructure for cloud computing, increasing demand for telemetry and energy efficiency in infrastructure applications and communications backbone to support the growing Internet of things. A key area of continued investment, these products are expected to be up sequentially in Q1 and drive growth in 2014.

Our automotive product, which represented about 10% of total revenue in Q4, were up double digits last year. We have been increasing our penetration of OEM accounts to augment our presence in the aftermarket infotainment systems and gaining traction in power sockets. So while we're anticipating a seasonal decline in Q1 in aftermarket revenue, good design win visibility gives us confidence that this diversifying business will continue to see strong growth in 2014.

Our military and aerospace products, which also represented about 10% of company revenue, were up sequentially in Q4. As you know, this is a lumpy business, and while it will show a sizable decline in Q1, we believe it will be a modest growth driver in 2014. Intersil remains one of the very few companies with a deep portfolio of radiation hardened devices ideal for space applications.

The remainder of the industrial and infrastructure revenue is made up of a diverse set of maturing products, addressing the broad market. And while there are a number of puts and takes in this bucket, we would expect it to be generally stable to slightly down in 2014. All together, we're anticipating our industrial and infrastructure revenue will return to annual revenue growth in 2014, in line with the GDP at low to mid-single digits and then accelerate into 2015.

Consumer revenue in the fourth quarter declined seasonally as expected and was 19% of company revenue. Declines were driven primarily by anticipated reductions in gaming after a very successful ramp and inventory rebalancing at a few large customers.

For the full year, consumer revenue was down 2%. Consumer revenue began transitioning in 2013 from unsustainable sockets, such as gamma buffers for TVs and sporadic switch sockets in handsets, to products that are in our strategic focus areas, such as buck-boost regulators in handsets and display power management ICs for tablets. By the end of 2014, we expect that the large majority of consumer revenue will be aligned with our focused investment areas. This means that we'll not only see a reversal in the growth trending consumer over time, but that the quality of the revenue driving that growth will be materially better.

Looking ahead, success for us in the consumer market requires 3 critical elements. First, we need to fully capitalize on the increasing complexity of power management in mobile devices. This complexity, combined with shrinking form factors and a need for longer battery life, favors our core strengths. These strengths were behind our dominance of the PC market for many years and will put us in a position to achieve a similarly strong position in mobile devices, where our customers applications are not dictated by the Intel architecture.

Second, we need to pursue higher integration to capture more power management content within our target applications to make our wins stickier. We've validated with our customers that we have something unique to offer by leveraging our modulation, buck-boost charging and display technologies. Tapeouts of more integrated products are beginning this quarter. As long as we remain focused on strong execution, the consumer market will be our first opportunity to claim success with our more focused and differentiated product strategy.

And third, we need to execute to maximize our penetration at our Tier 1 customers. Intersil has long-standing relationships with every major consumer brand on the market. The company in the past has not been focused enough on ensuring we are positioned to win not only the current generation, but the next-generation sockets at these strategic accounts. That is no longer the case. We view these relationships as critical to our long-term success, and we are investing to ensure we have the right products at the right time.

Our computing business was about 21% of revenue in the quarter and 21% for all of 2013. While down meaningfully for the year, computing revenue was better than expected in the second half, actually increasing sequentially in Q4. We're still anticipating a seasonal decline in Q1, compounded by secular declines throughout 2014. This headwind, however, will become much less material as we exit 2014 and new product developments begin generating meaningful offsetting revenue.

Now for the Q1 guidance. We're expecting a slightly larger-than-normal seasonal revenue decline with revenue in the range of $134 million to $140 million. We believe gross margin percentage will improve slightly, while non-GAAP operating expenses are expected to go up to $53 million to $54 million due to typical seasonal increases and the addition of rebalancing hires joining our ranks. We anticipate GAAP earnings of $0.03 to $0.05 per share. Earnings per share on a non-GAAP basis, excluding amortization and stock compensation, are expected to be $0.13 to $0.15.

2013 was a story of restructuring, refocusing and redefining what success looks like. 2014 will be a rebuilding year as we position the company to win in high-growth opportunities and expand share in our target markets. We can now see the picture taking shape as we have shed poorly conceived product vectors and reduced spending to become more nimble and competitive. We have a singular focus on leveraging some of the very best power and precision analog technology in the industry to capture more than our fair share of the $10 billion power management market.

I expect that by this time next year, we will be seeing signs of revenue acceleration, we will have made measurable progress towards best-in-class growth and operating margins and we will be delivering continued earnings expansion. Our new products will be winning key sockets in mobile, cloud infrastructure and green technology. We'll be supporting the electrification of vehicles and we'll continue to be in every major satellite shift into orbit. Intersil will have made meaningful progress towards delivering on the promise of sustainable, high-quality revenue and earnings. Our early success certainly demonstrates we now have to get there.

With that, I'll take your questions.

Shannon Pleasant

Thank you, Necip. We'd now like to open the call for your questions. Operator, please review the question-and-answer instructions with the call participants.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Tore Svanberg from Stifel.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Necip, I was hoping you could talk a little bit more about your visibility in Q1, maybe talking about linearity of bookings or even backlog levels and maybe some puts and takes on which segments will outperform relatively the other.

Necip Sayiner

Sure. Tore, we've had solid bookings in October and November. December was a weaker month than we have expected. But certainly, January month-to-date has more than compensated for the softness. So currently, we're seeing favorable order patterns, particularly in our industrial-facing businesses. If I look at consumer and computing, I expect those businesses to be seasonally down in the range of 10%, 15%, 20%. Our industrial business will be about flat sequentially, but there are a number of puts and takes in that piece and I'd like to give you a little more color. The power products will see sequential growth into Q1, so will the broad market industrial business. I think these are pretty typical and seasonal. We will see a decline in our aerospace business with radiation-hardened products, which is rather lumpy. And in automotive, we do see in Q1 generally a decline in the aftermarket. So all put together, we're looking at a flattish infrastructure business into Q1 and declining consumer and computing segments.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good. And just a question on your consumer business for 2014. You talked about leveraging your expertise in PCs to really attack the smartphone market more meaningfully. Now you sounded optimistic about that business in '14, but I'm not sure if you sort of said that you expected to grow or not. So if you could elaborate a little bit more on that, that would be great.

Necip Sayiner

Sure. I think in 2013, we've made a lot of progress in the consumer side of our business moving the revenue base from some products that didn't really have the longevity or the differentiation we would want to product areas where we will continue to invest heavily going forward. Along the way, we've given you some examples of design wins we've been securing with either smartphone -- leading smartphone vendors or tablet vendors. I expect this to continue in 2014 with our existing products, but more importantly, we are going to start seeing the first crop of our new products in mobile power. I've alluded to some tapeouts starting in Q1 that will continue into Q2 and beyond. And our target would be for those products to be ready for production to start generating revenue towards the end of 2014. So we would leave the year with good momentum with both design wins from previous products and new products starting to ramp.

Operator

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

Gabriela Borges - Goldman Sachs Group Inc., Research Division

This is Gabriela Borges on behalf of Jim. I want to ask on gross margins. How should we think about gross margin expansion in 2014 both as a function of mix shift as legacy computing winds down and also a function of some of the operational initiatives that you're taking to reduce cost in COGS specifically?

Richard D. Crowley

Sure. We've not explicitly stated a gross margin target, but we did post a 70-basis-point improvement in 2013, and we'd expect to do that or better in 2014, as you alluded to, partly due to mix and the other part due to ongoing cost-reduction plans that we have underway that will continue to provide some benefits to us as we go throughout 2014.

Necip Sayiner

So in terms of mixing, it's not just the -- at the computing market which has a favorable impact on gross margin, but I also want to add us having reduced our exposure to some of the low-margin product areas throughout the year. So that will start being visible in the quality of revenues, particularly in the consumers area.

Gabriela Borges - Goldman Sachs Group Inc., Research Division

That's helpful. And then as a follow-up, if I could. With computed being stronger-than-expected in the second half 2013, could you give us an update on how to think about the falloff? Is the $20 million run rate still the rate -- right rate to be modeling over the next couple of quarters?

Necip Sayiner

Well, computing has given us pleasant surprise in the latter half of 2013. In the fourth quarter, we've seen our revenues go up, both in Haswell platforms, as well as the older processor core platforms and our desktop shipments, so we are now over $30 million. As the $20 million target goes, while we think this is directionally correct, the absolute $20 million number may prove to be too conservative.

Operator

Your next question comes the line of Craig Ellis from B. Riley.

Craig A. Ellis - B. Riley Caris, Research Division

The first question, Necip, it's helpful to get the breakout of some of the key industrial drivers and the mix. Given the growth opportunities that you see for this year, how would you expect the mix of those key drivers to change as we go through the calendar year?

Necip Sayiner

I think that our key investment areas and the areas that will drive growth for the business in 2014 are almost perfectly aligned. We've increased our investment in industrial and infrastructure power, that also happens to be an area where we are going to see nice growth for the year. And obviously, the 2 facts are related, so that's an area where we have good differentiation and we want to build more products around that technology. Automotive, as I mentioned in my prepared remarks, will continue to provide us with strong growth in 2014, and I expect both of those lines to continue to drive good revenue growth into '15, both based on the design win visibility we have with our existing products, as well as the products that we're going to be bringing to market in 2014.

Craig A. Ellis - B. Riley Caris, Research Division

And then a follow-up for Rick. Rick, we're seeing some nice gross margin expansions. It's clear that mix is at play, but can you just help us with what the utilization level is in the Palm Bay fab, and how we can think about utilization as we go through what should be a rebound in growth as we move into the second and third quarter?

Richard D. Crowley

Sure, Craig. I think the utilization of the Palm Bay fab is actually probably one of the lesser swing factors anymore in our gross margin. What we're trying to do between the mix and the other cost reductions. We have some -- taken some efforts and actions to reduce the costs in our internal manufacturing, but also externally as well. And that we see the utilization being pretty stable throughout this year, still a bit under utilized. But as we look into '15, we can see some capability of some stuff in-house to help improve that to give us some tailwind next year.

Craig A. Ellis - B. Riley Caris, Research Division

So your point is that product mix is the real driver and the mix between segments and within segments?

Richard D. Crowley

Well, I think it's a combination. It's not just mix. It's mix reducing our external cost from our subcontractors, as well as improving our yields, which is another lever that we have.

Operator

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

Ross Seymore - Deutsche Bank AG, Research Division

I guess the first one for Necip. When you talk about the 2014 in the I&I outlook, you talked about, I think, low to mid single-digit growth. If I'm looking at that, that looks like there's basically no sequential growth for any other quarters this year. Can you talk a little bit about is there a seasonal impact? Is there something that's structurally going away within that? And I appreciate all the detail you gave in the subsegments underneath that, but just trying to understand the moving parts there.

Necip Sayiner

Sure. I think it's worth explaining a little further because I think what we represent under industrial and infrastructure has many moving pieces, and it's a little different than what you might see in a typical industrial business where it would be stronger in the first half and tail off a little bit in the second half. And we've seen actually just the opposite and this is consistent with prior years as well. If you take out the 14-week period in the second quarter, you'll see that our I&I revenue has actually improved into the second half. Part of that is coming from just growth in business, in automotive and power. But there are some other components, such as mil/aero business that doesn't quite fit into the typical seasonality mold. So if I look at it this way, you'll see that in many of the businesses, automotive, mil/aero, the first quarter in 2013 proved to be low point in terms of revenues and progress throughout 2013. So when we talk about a drop in revenues in infotainment, aftermarket infotainment and radiation-hardened products, that's not a typical. So if I look at the forecast we have for this business in 2014, I think it's more likely to follow a similar pattern as it did in 2013. We will certainly see an uptick in the second quarter, I think that's one of the stronger quarters for any industrial business. But I do see that strong pattern to continue into the second half unless we see a major downtick in the global economy.

Ross Seymore - Deutsche Bank AG, Research Division

Great. And my follow-up question is more for Rick. Congrats on the OpEx control in the fourth quarter. I realize some of that is temporary. But as far as that $55 million to $58 million quarterly run rate, how should we think about you moving back up to that rate, because I think you're guiding just a bit below that for the first quarter?

Richard D. Crowley

Yes. Ross, I think what we observed is the organization settles after the restructuring and so forth. Things are coming in naturally a little bit lower than we had originally anticipated going on in the restructuring. However, we are hiring and we're focused on quality and we've got pretty good momentum coming into Q1 in that front. So we may be operating this year depending on how the revenue progresses as we go through the year, closer to the lower end of that range. When exactly we hit that, I don't know. Well, I'm not really going to predict exactly. But I think that as we see it today, it might be operating more towards the lower end of that range and the higher end, barring a large uplift in revenue in the back half of the year.

Operator

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

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I guess just first question. Strategically, in terms of the team that you've would looked to put in place and some of the hires that you've been looking to make, is that essentially complete right now? Are there still areas that you guys are looking to add headcount or looking to just sort of add resource at this point?

Necip Sayiner

Well, in terms of the management team, I think we had the team in place. In terms of adding resources, we still have significant number of open requisitions to recruit to. These are the result of additions we are able to make because of the rebalancing actions they've taken a couple of quarters ago. I would say that we are about 1/3, maybe a little more than that, through that recruiting. We still have approximately 50 open requisitions, many of which are in design and applications for the business units, and I expect those to be complete sometime by middle of the year.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

And that's contemplated in the operating margin and the OpEx guidance already?

Necip Sayiner

Yes, this is essentially what will take us from where we are today to the target range we've articulated. There are some additional expenses we'll incur as there will be additional tapeout activity due to the programs I alluded to. But big portion of that R&D increase will come from the addition of new hires.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay, great. As a follow-up, if you could just clarify some of what you said with regards to the computing market and perhaps the magnitude of the, I guess, long-term computing revenue, you might have been a bit conservative there. As you say that, I still assume that the parts of the computing market that you've intended to exit, such as VCORE, you're still intending to exit that, and I suppose, it's the magnitude of some of the residual revenue, the markets that you intended to stay in within the computing market that just looks like it's likely to be a bit higher on a quarterly basis?

Necip Sayiner

I should provide some clarifications. We did not say we are going to exit the VCORE market. What I've said explicitly is that we are going to look at the traditional PC market as part of the continuum for mobile devices. We will continue to take part in the computing power, but that is not going to be our sole focus going forward. We are going to be taking that technology and directing it to smaller form factors. So when I talk about the revenue progression in 2014 into '15, clearly, there is a decline in 2014 because of the share loss in Haswell generation. I fully expect that headwind will seize as we enter 2015, because there will be revenue from -- offsetting revenue from some of the new initiatives I've talked about.

Operator

Your next question comes the line of Harsh Kumar from Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

Necip, a couple of questions. First of all, I think you laid out a plan a couple of quarters ago when you took home at Intersil. What do you think -- and you guys have come a long way, but what do you think is the most critical part of execution that may or may not still be left? If it is, one, I'm wondering if you could just talk about that, what's like the big thing you've got to focus on in the near to mid term?

Necip Sayiner

Well, thank you for the question. I think, while we're still in the early innings of the turnaround, I think much has been accomplished, certainly more than I projected 9 months ago when I joined the company. So I think our team did a whole lot in 9 months to turn the company around. But when you look at 2014, there will be 2 categories of things you can look for. In one category, looking at things from a financial metrics lens, I would say that we would be stabilizing the revenues. This has been a key metric for us. And in our first quarter guidance, midpoint is about 4% up from prior year, so I think we're starting the year on the right foot. And this stable revenue will have higher quality so you could look for improving gross margins from us throughout the year. Rick laid out a stake in the ground by saying we're going to do at least as well as we've done in 2013. And finally, you're going to see a more consistent profitability from the business. This hits our target model 20% last quarter, 21% in the fourth quarter, and if you do the math for Q1 guidance, this leads you to high teens. So it is going to be measurably higher than the ups and downs of prior cycles. That's the financial lens. And then if you look at what's important for us for the business to drive growth into 2015 and '16, it's all around execution, execution in R&D programs, execution in sales and marketing or driving design wins. And as we go through the year, we're going to try to give you as much visibility as we possibly can without sacrificing confidentiality on how we're doing in terms of executing to those programs and design wins.

Harsh N. Kumar - Stephens Inc., Research Division

And Necip, that's very helpful. I noticed your CapEx, Rick, is down to about $3 million. That seems very low for a company of your size. Can you talk about if this is not officially a lower number, and -- or is this sustainable?

Richard D. Crowley

Well, we put up $19 million for all of 2013, and we do expect to spend a little bit less than that in '14 as we complete the initial phase of our 8-inch fab conversion. So somewhere in the low to mid teens, probably, is realistic for us, I think, from a capital expenditure standpoint given the fact that we've got a -- given our revenue profile right now. And of course, as new products kick in and as growth -- revenue growth begins to become apparent, then we may have to spend more than that on an annual basis for back-end capacity and things like that. But we should be in our relatively fab-lite model fairly capital efficient. So I don't think you should expect huge increases in the CapEx front.

Harsh N. Kumar - Stephens Inc., Research Division

Rick, very helpful. And one last one for me and then I'll leave the floor. One is a follow-up on Ross' question earlier about OpEx run rate. So my understanding listening to you was that, don't get -- from a modeling angle, don't try to model $57 million, $58 million, but rather keep it on the low end exiting the year maybe $56 million, $57 million, depending on the run rate of revenues. Is that a fair way to look at it?

Richard D. Crowley

Well, we're not going to give specific exit of the year OpEx guidance at this point. But I think from the conversation we've had here and from our Q1 guidance, you can tell that we have some requisitions that we're going to be filling for Q1 and Q2, and then you -- probably increase the activity as we go through the year, and that leads me to believe that, as we get into the latter half of the year, that while we may not get to be operating at the low end of the range, we certainly should be operating near the low end of the range depending on how things go. We may bounce around quarter-to-quarter, depending on tapeouts and so forth. But at this point, we don't see hitting that, the higher end of the range this year.

Operator

And your next question comes from the line of Chris Danely from JPMorgan.

Philip Lee - JP Morgan Chase & Co, Research Division

This is Philip Lee calling in on behalf of Chris. Can you remind us of what utilization rates were last quarter and where you see them trending this quarter?

Richard D. Crowley

One thing we said earlier, the utilization rate of our fab is not really meaningful relative to our gross margins. So it's not something that we're going to disclose.

Philip Lee - JP Morgan Chase & Co, Research Division

Okay. And as a follow-up, can you rank order your segments by growth rate on a go-forward basis? And do you wish to share any revenue projections for '14?

Necip Sayiner

Well, I think based on the product cycles and life cycles of our customers' products, we have most visibility into industrial and infrastructure. So that's why I chose to put the stake into the ground for that portion of our business, and it is the largest segment, so that should grow in the low to mid single-digits in 2014. I expect both automotive and power products to drive that growth in the industrial business and mil/aero, I think, will be a modest contributor as well. So that's pretty much the rank order between I&I sub-product groups.

Operator

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

Atif Malik

It's Atif for Terence. Can you talk about the breadth of your design wins in the consumer products, especially in the Chinese handset market? And as a follow-up, do you expect the Tier 1 smartphone may good to be more than 10% of your sales for this calendar year?

Necip Sayiner

No, to the last question. We have talked about design wins where the design win revenue is material. We haven't talked about a subsegment of customers, as your first question alluded to, so I'm going to refrain from going there. But I will say that with the products where we are continuing to make investments and they primarily are in the mobile power arena, our penetration into end customers has increased over the past 2 quarters.

Operator

And your last question comes in the line of Steve Smigie from Raymond James.

Vincent Celentano

This is Vince Celentano. I'm speaking on behalf of Steve. I was hoping that within the aerospace and defense segment, if you could give me a longer-term growth of projection? And what impact you see the sequester have going forward?

Necip Sayiner

Well, that's a business that has been somewhat steady or was low single-digit growth rates. Obviously, it is a high-margin segment of our business. And I expect with the expansion of SAM, our products have been and will continue to drive -- will continue to see modest rate of growth in that business for several years.

Vincent Celentano

Great, great. And as a follow-up, you've made an investment a few years back in an ELDRS Facility in Palm Bay. I was wondering if there's any yield -- if any payout?

Necip Sayiner

Well, I am not going to be able to specifically answer that question since essentially no one around the table here has been here more than 1 year. But we are using that facility, and it's critical to the products that we are providing to our end customers.

Does that answer your question?

Vincent Celentano

Yes.

Operator

Thank you for your question. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a good day.

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