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ON Semiconductor (NASDAQ:ONNN)

Q2 2010 Earnings Call

August 04, 2010 5:00 pm ET

Executives

Ken Rizvi - Director of Treasury, Investor Relations & Corporate Development

Keith Jackson - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Semiconductor Components Industries LLC and President of Semiconductor Components Industries LLC

Donald Colvin - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Treasurer, Chief Financial Officer of SCI LLC, Executive Vice President of SCI LLC and Treasurer of SCI LLC

Analysts

Craig Berger - FBR Capital Markets & Co.

Terence Whalen - Citigroup Inc

James Schneider - Goldman Sachs Group Inc.

Parag Agarwal - UBS Investment Bank

Andrew Connor

Ross Seymore - Deutsche Bank AG

Scott Herlin

Ramesh Misra - Brigantine Advisors

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

Patrick Wang - Wedbush Securities Inc.

John Vinh - Collins Stewart LLC

Craig Ellis - Caris & Company

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the ON Semiconductor Second Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Ken Rizvi to begin.

Ken Rizvi

Thank you, Paula. Good afternoon, and thank you for joining ON Semiconductor Corp.'s Second Quarter 2010 Conference Call. I'm joined today by Keith Jackson, our President and CEO; and Donald Colvin, our CFO.

This call is being webcast on the Investor Relations section of our website at onsemi.com, and a replay will be available for approximately 30 days following this conference call, along with our earnings release for the second quarter of 2010. The script for today's call is posted on our website and will be furnished via a Form 8-K filing.

Our earnings release in this presentation includes certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release and posted separately on our website in the Investor Relations section.

In the upcoming quarter, we will be presenting at the Pacific Crest Technology Forum on August 10, and the Citigroup Technology Conference on September 8.

During the course of this conference call, we will make projections or other forward-looking statements regarding future events, or the future financial performance of the company. The words believe, estimate, anticipate, intend, expect, plan, or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially. Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-K, Form 10-Qs and other filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other factors.

Now let's hear from Donald Colvin, who will provide an overview of the second quarter results. Donald?

Donald Colvin

Thank you, Ken, and thanks to everyone joining us today. ON Semiconductor Corp. today announced that total revenues in the second quarter of 2010 were $583.3 million, an increase of 6% from the first quarter of 2010.

During the second quarter of 2010, the company reported GAAP net income of $78.7 million, or $0.18 per fully diluted share. The second quarter of 2010 GAAP net income included net charges of $24.7 million, or $0.06 per fully diluted share for special items, which are detailed in the schedules included in our earnings release.

Second Quarter 2010 non-GAAP net income was $103.4 million, or $0.24 per share on a fully diluted basis and includes stock-based compensation expense. During the second quarter of 2010, our GAAP and non-GAAP operating expenses included approximately $4 million of acquisition-related expenses from our M&A activities that were not previously forecasted.

We entered in the second quarter of 2010 with cash and cash equivalents of approximately $467.1 million, a decline of approximately $94 million from the previous quarter. We also exited the quarter with the lowest net debt position in the company's history, at $286 million. In the second quarter, the company prepaid $170 million of senior secured credit facilities and used cash of $22 million for the acquisition of Sound Design Technologies on June 9.

At the end of the quarter, total days sales outstanding were flat with the first quarter of 2010 at around 50 days. ON Semiconductor's internal inventory increased slightly from the first quarter on a days basis to approximately 86 days. Included in our total internal inventory is $22 million of inventory related to our acquisitions, or bridge inventory build related to our announced closure of front-end manufacturing lines. Net of the bridge inventory and inventory from recent acquisitions, our inventory days would've been approximately 80 days in the second quarter.

Distribution inventories remain low at approximately eight weeks exiting the second quarter. The cash capital expenditures during the second quarter were around $53 million, bringing year-to-date capital expenditures to around $94 million.

We currently anticipate spending total capital expenditures for 2010 of approximately $200 million, of which approximately $30 million will be for buildings. Now I would like to turn it over to Keith Jackson for additional comments on the business environment.

Keith Jackson

Thanks, Don. Now for an overview of our end markets. During the second quarter of 2010, our end market splits were as follows: The Computing end market represented approximately 26% of second quarter 2010 sales; the Automotive end market represented approximately 20% of second quarter sales; the Industrial, Military and Aerospace end market represented approximately 19% of the sales; the Consumer Electronics end market represented approximately 17% of sales; the Communications end market, which includes wireless and networking, represented approximately 15% of sales; and Medical represented approximately 3% of sales.

On a direct billing basis, no individual ON Semiconductor product OEM customer represented more than 5% of second quarter sales. Our top five product OEM customers during the second quarter were Continental Automotive Systems, Delta, Hella, Motorola and Samsung. On a geographic basis, our contribution from sales in Asia represented approximately 61% of revenue. Our sales in the Americas represented approximately 23% of revenue, and Europe represented approximately 16% of revenue during the quarter.

Looking across the channels, direct sales to OEMs represented approximately 46% of second quarter 2010 revenue. Sales through the distribution channel were approximately 45% of second quarter revenue, and the EMS channel represented approximately 9% of revenue.

During the second quarter, ON Semiconductor revenues broken out by our product groups were as follows: the Standard Products Group represented approximately 33% of sales; the Automotive and Power Group represented approximately 24% of second quarter sales; the Computing and Consumer Group represented approximately 23% of sales; and the Digital and Mixed Signal product group represented approximately 20% of sales. We will publish the quarterly revenue, gross margin and operating breakout of these segments in our Form 10-Q for this period.

We achieved several milestones during the second quarter of 2010, including recording our highest quarterly revenues, gross margin percent and net cash from operating activities in the company's history. We achieved historic revenue highs during the second quarter in three of our key end markets: automotive, computing and industrial.

Now turning to our end market and product line results. In the automotive end market, we had another strong quarter of growth, with revenues growing by approximately 8% sequentially versus the first quarter of 2010. Revenues in this end market have exceeded prior highs driven by more electronic content per vehicle and a normalization of inventory levels throughout the supply chain.

During the quarter, we continued to see growth from our next-generation solutions for our emissions reduction, fuel economy improvement and enhanced lighting, safety, connectivity and infotainment power delivery systems.

One notable success has been the introduction of our first application-specific IC for China's automotive industry. This smart power ASIC was developed for a key automotive customer in the region for use in a lighting application that generates more than 70 components into a single chip. This achievement reinforces the overall success of our Solution Engineering Centers, the newest of which we opened earlier this year in Shanghai to support automotive customers throughout the Asia-Pacific region.

The industrial and military aerospace end market represented the strongest sequential growth of all of our end markets in the second quarter of 2010, growing by approximately 11% sequentially. Similar to the automotive end market, the industrial and military aerospace end market exceeded prior highs. During the quarter, we continue to see growth in our custom analog, mixed signal and ASIC products for this end market.

A convergence of connected building automation systems with energy-efficient initiatives are driving demand for wired indications over IT, embedded control and motor control, and sensors for proximity, ambient light and imaging applications.

In the computing end market, we continue to see strong demand for our energy-efficient power management solutions. Audio amplifiers, protection devices, thermal management and standard products from key customers in both desktops and notebooks. The computing end market experienced 5% sequential growth from the first quarter of 2010, due to a combination of worldwide PC production ramps by key customers, continued adoption of Windows 7, a corporate refresh efforts. In addition, the second quarter represented the strongest computing end market revenue in the company's history at approximately $149 million.

During the quarter, we continued to make inroads with design wins into next generation notebooks, tablet PCs and desktops with key manufacturers driven by our bucket-boost converters, SenseFET and MOSFET products.

Exiting the second quarter, ON Semiconductor is well positioned to capitalize on a number of end market growth factors including increased vehicle demand in Asia, ongoing market acceptance of Android-based handheld products, the increased worldwide shipment of PCs, and strong ramps in both smart phones and LED backlighting in TVs. Within the smart phone market, we have a full suite of products driving sales growth including our own protection devices, audio amplifiers, LED drivers, USB switches and medium-scale IC integration to enable next generation handsets.

On the acquisition front, we successfully completed the acquisition of Sound Design Technologies, Ltd., for approximately $22 million in cash. This solidifies our position as a leading supplier of ultra-low-power DSP technology for hearing aids and consumer audio processing applications.

On July 15, we announced the definitive purchase agreement to acquire SANYO Semiconductor for approximately 33 billion yen. We anticipate this acquisition to close before the end of the year. Annualized revenue of the combined entity would be approximately $3.5 billion.

SANYO Semiconductor is currently operating at approximately breakeven today and based on current revenue run rates, our goal is to deliver in excess of $30 million in quarterly pretax income from SANYO Semiconductor, approximately 18 months post-close.

Given SANYO Semiconductor's similar product profile, our proven abilities as an industry consolidator and our established presence in Japan, we believe over time we can successfully migrate their financial metrics to be more in line with our recent financial performance.

We believe the acquisition of SANYO Semiconductor will move ON Semiconductor closer to our vision of becoming the premier global supplier of high-performance, energy efficient, silicon solutions for green electronics.

The transaction represents a tremendous opportunity for both ON Semiconductor and SANYO Semiconductor, our employees, our customers and our shareholders, and we look forward to reporting on our progress over the coming quarters.

Now I would like to turn it back over to Donald for other comments and our other forward-looking guidance. Donald?

Donald Colvin

Thank you, Keith. Third quarter 2010 outlook. Based upon current product booking levels, backlog levels and estimated turns levels, we anticipate that total revenues will be $585 million to $610 million in the third quarter of 2010. Backlog levels at the beginning of the third quarter were up from backlog levels at the beginning of the second quarter of 2010, and represent over 90% of our anticipated third quarter revenues.

We expect average selling prices for the third quarter will be approximately flat compared to the second quarter of 2010. We expect cash capital expenditures of around $50 million in the third quarter of 2010.

For the third quarter, we expect GAAP gross margin of 42.2% to 42.7%. Our GAAP gross margin in the third quarter will be negatively impacted from, among other things, expensing of appraised inventory fair market value step-up associated with our acquisitions. We expect non-GAAP gross margin of 42.5% to 43%.

For the third quarter of 2010, we also expect total GAAP operating expenses of $141 million to $145 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges which total approximately $10 million. We also expect total non-GAAP operating expenses of $131 million to $135 million, which include approximately $4 million of deal-related expense.

We anticipate GAAP net interest expense and other expenses will be around $18 million for the third quarter of 2010, which includes non-cash interest expense of approximately $8 million. We anticipate our non-GAAP net interest expense and other expenses will be approximately $10 million.

GAAP taxes are expected to be approximately $4 million and cash taxes are expected to be approximately $3 million. We also expect total stock-based compensation expense of approximately $13 million to $14 million in the third quarter of 2010, of which $3 million to $4 million is expected to be in cost of goods sold, and the remainder in operating expenses. This expense is included in our non-GAAP financial measures.

Our current fully-diluted share count is approximately 445 million shares based on the current stock price. Further details on share count and EPS calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K. With that, I would like to start the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Parag Agarwal of UBS.

Parag Agarwal - UBS Investment Bank

The first question is on the third quarter guidance. One would have expected that given the [ph] extent (19:16) the guidance should have been a bit higher. I'm just wondering if there are any capacity constraints that are limiting the upside, and also if you could give some color on the guidance by end markets?

Keith Jackson

I will give you some color on the markets and also talk a little bit about that guidance. We do expect to manufacture and ship more than the high end of the range. The expectation we have, however, is that at this point, the distributors may be starting to build some inventory, and since we're on a sell-through basis, we are discounting any growth in inventories in the distribution channel. So unlike some of the others giving guidance who are on a sell-in basis, the sell-through really does make a difference as the distributors begin to accumulate inventory. From a market perspective, we're expecting very strong performance from the automotive and industrial sectors, and we're expecting strong performance from smart phones. Overall, the rest of the market should be closer to normal, or slightly sub-normal in their sequential patterns.

Parag Agarwal - UBS Investment Bank

As a follow-up, everybody in the industry is adding capacity, and we think that a lot of capacity should come online during the second half of the year. So I just wanted to get your perspective on -- I mean do you think that the end demand to be able to, for the capacity that is coming online right now?

Keith Jackson

Yes, you're asking for a projection that I'm not sure I have enough data to give you a sound answer. We have not seen abnormal or unusual capacity additions from the industry in general. So I haven't seen anything that alarms me overall. But as long as the demand is slightly higher than where we are today over the next year, I certainly think it will be easily absorbed by the marketplace.

Operator

[Operator Instructions] Your next question comes from James Schneider of Goldman Sachs.

James Schneider - Goldman Sachs Group Inc.

Could you maybe, just following up on the last question, give us an update on what your current revenue capacity is, including Gresham and your external network? And what you might have been able to ship if you had no capacity constraints?

Keith Jackson

Both of those are conjectures. Again, a lot of the backlog is distribution, and I am certain that if we shipped everything that was on backlog, it would turn into inventory. So on a sell-through basis, I have no way of really judging that. We do think that some number of 5% to 10% might be rational for supply less than demand during the quarter, of actually being used. But again, we don't have any way of firmly establishing that. As far as the total capacity, you have to balance our line. Gresham still has plenty of capacity left in it. As we've mentioned before, probably close to a theoretical $700 million worth of capacity is out there, getting to it in mix with front-end, back-end and all of the other supply constraints, of course, means you're going to get a yield less than that.

James Schneider - Goldman Sachs Group Inc.

And then maybe can you just describe what distribution inventory dollars did on an absolute basis in the quarter, and where that is relative to a normal or a prior peak level please?

Keith Jackson

So I'll let Donald check on the exact numbers but approximately $10 million to $15 million of increase, and the absolute dollars are still less than our peak of 2008.

Operator

Your next question comes from Ross Seymore of Deutsche Bank.

Ross Seymore - Deutsche Bank AG

Just a question on the end market, Keith. In the computing side of things, when you describe that as one of the other segments that would be at or slightly below normal, were you talking about versus normal seasonality, or I guess maybe the pointed question is, what do you think is going in computing? Because it seems to imply that, that would be well below normal seasonality.

Keith Jackson

Yes. I think we had a slightly better than normal seasonality in the first half of the year. If we look at our numbers, at least, we certainly had that. As I look at Q3 for normal seasonality, we normally would see something that's closer to double-digit growth in computing. And I think we're much closer to mid-single digits in that marketplace this time around.

Ross Seymore - Deutsche Bank AG

And then, as we think forward about the revenue capacity and how you're going to put it in place with the CapEx that you have, how should we think about, again, you gave the theoretical but what should we think for the actual shippable capacity maybe exiting this year and how your going to address next year?

Keith Jackson

We're at a clip right now of adding somewhere around 8% per quarter of usable capacity. And that will continue through the fourth quarter and into the first quarter. But then, that equipment's going to be kind of tapped out and we'll have to see what next year's expenditures will do.

Ross Seymore - Deutsche Bank AG

SANYO will mess up that math anyway, I assume.

Keith Jackson

It'll definitely change the mathematics there.

Operator

The next question comes from Craig Ellis of Caris & Company.

Craig Ellis - Caris & Company

Looks like ASPs are performing very well for a second consecutive quarter and flat sequentially. Keith, is the flat ASP action broadly indicative of what you're seeing out there? Or are there really more gives and takes than that equivalent with pricing?

Keith Jackson

Pricing is always complex, there's always gives and takes. It happened to work out kind of flattish in Q2. Normally, things are not stable, so they're going to head up slightly or down slightly as we go to Q3. Our best guess right now is flattish, but I would give a slightly positive bias to that.

Craig Ellis - Caris & Company

And then, Don, as you think about inventories and where you want to be exiting the third quarter, can you just help us understand how we should think about channel activity, and then what you'd target front-end?

Donald Colvin

I think Keith mentioned, Craig, that our revenue is a little bit -- guidance is a bit negatively impacted by the fact that we have a sell-through company. So we are still simulating that, as in the second quarter, the distribution inventories will increase in the third quarter by something like equivalent of 2% of revenues, something in that region, $12 million to $15 million region is what we're looking at today. So we would have had additional revenue if we were a sell-in rather than a sell-through company. And as far as internal inventories, I think similar percentage increases we saw in the second quarter is what we're tracking to currently.

Operator

The next question comes from Craig Berger of FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co.

You touched on lead times a little bit but can you just talk about where some of the different pieces of the business are, and kind of how you expect those to fall over the next couple of quarters? And also, maybe what customer reaction might be as they do fall?

Keith Jackson

We're not expecting significant changes in the third quarter, Craig. They remain extended but again, just a brief reminder that the majority of our sales are in special service programs and not subject to lead times. So we're talking about [ph] jet (27:40) warehouses and vendor-managed inventory, et cetera. So the bulk of what we sell and the bulk of our customers don't see those lead times.

Craig Berger - FBR Capital Markets & Co.

And then as a follow-up, can you just refresh us on when you expect that SANYO deal to close? And how some of those first cost savings begin to roll in over time?

Donald Colvin

We announced about two weeks ago that we were shooting for SANYO to close beginning of November, so that's still on target. And we haven't any update to the integration benefits that we expect to yield. But again, I would just repeat what Keith said, is that within six quarters of closing, within 18 months, we expect that the business will be generating something like a $30 million per quarter contribution. And also, draw your attention to somewhat also increased comments in the formal portion, that our analysis of the business suggests that we will be able, eventually, to run pretty close to the kind of margins we are currently enjoying. And just on a quick personal note, I think I spent quite a lot of time when Keith was in Japan visiting customers, I would spend some time talking to investors, and I really got a lot of information from previous people who had looked to buying this asset. And I think it's fair to say that there was quite a unanimous view that this was a very attractive asset that was very complementary to things that we already do and that we got it for a reasonable price.

Craig Berger - FBR Capital Markets & Co.

What's the preference on cash versus stock with that transaction?

Donald Colvin

I've got a very clear indication from shareholders that they would prefer that we do not issue stock at the $6.77, whatever it was level that's worked into the agreement. We have heard that message loud and clear, and we are taking the appropriate actions to keep our shareholders happy.

Operator

Your next question comes from Christopher Danely of JP Morgan.

Unidentified Analyst

Sean [ph] Burke (29:59) here calling in for Chris. Just a quick one, quick follow-up there on the lead time question that Craig asked earlier. Can you reiterate where they are today and kind of where they rank with respect to your competitors? I mean some of the guys have talked about lead times coming in recently? And how much longer do you think it'll take to get them back to normal?

Keith Jackson

Again, I'll just point out that we don't have a standardized lead time reporting system amongst semiconductor companies, so I'm not sure how valuable specific numbers are. We still remain in the teens. It's longer than we normally would expect, which is kind of the eight to 12 range. I don't expect them to come in during the third quarter, possibly in the fourth quarter start seeing them come in. And again, this impacts approximately 30% of our customer base.

Operator

Your next question comes from Ramesh Misra of Brigantine Advisors.

Ramesh Misra - Brigantine Advisors

In regards to your gross margin guidance for Q3, I would've thought that it would actually trend down a little bit especially since you've hit your peak numbers and perhaps a little bit of a mix shift. But you're also pointing to greater strength in the Industrial and Automotive segment. Is that a key driver for gross margins continuing to improve? And how long do you anticipate this unseasonal trend in Auto and Industrial to continue?

Keith Jackson

So the gross margin sequential numbers there, the factory utilization should be approximately the same. It didn't change dramatically from Q1 to Q2 and it won't change dramatically from Q2 to Q3. So it's really not a covering fixed assets play here. There is mix involved and certainly we've seen the stronger mix from the markets you mentioned, which should help on the aggregate ASP side. But we also have some increases in our salary base. We do our annual global salary increases in July. So basically, you're getting positive ASP shifts from a market perspective, offset by some increased salaries and the net of that is the improvements that we forecasted.

Ramesh Misra - Brigantine Advisors

And then just briefly, can you talk about what costs are doing right now?

Keith Jackson

We still see metal costs under pressure. Gold, particularly, continues to be quite high. There's a bit of a fluctuation in the copper and nickel front but, nonetheless, they continue to be some pretty strong pressures on raw material costs.

Operator

Your next question comes from Terence Whalen of Citigroup.

Terence Whalen - Citigroup Inc

This one relates to distribution. You made the comment that distribution would take on inventory again in the September quarter. This question though relates to sell-through. Is your expectation that distribution sell-through grow or decline in the September quarter?

Keith Jackson

I expect it to grow in the September quarter but not as fast as the ability to supply them product. So in essence, we would expect growth that is near or slightly below our total guidance and growth in inventory beyond that.

Terence Whalen - Citigroup Inc

And then the second question relates to SANYO. I think you're being purposely vague when you say that you think the SANYO margins can come more in line with recent performance. When you say more in line, are you talking within a point or two on the operating margin line, or more of three, four?

Donald Colvin

What we stated on the call is that if you look at our EBITDA margin, we are in the mid-20s, and we believe that this business can eventually get to within four or five points of that over some period of time. That's certainly more years than months, but that's the kind of rough approximation we have. There's obviously a higher cost of servicing Japanese customers with a big infrastructure in Japan, which we will be retaining so that's why there's a bit of a haircut.

Operator

Your next question comes from John Vinh of Collins Stewart.

John Vinh - Collins Stewart LLC

You mentioned that your Q3 guidance had been slightly impacted by distribution inventory build. If the channel stops building inventory in Q4, is it possible that your Q4 revenues could be slightly up as a result of that?

Keith Jackson

If demand remains robust -- and it is fairly robust, albeit some of the markets growing a little less than seasonal, it's still a fairly robust market -- and there's no question that the distributors are not shipping all that their customers are asking for right now, having the additional material could help the distribution portion of the sales in the fourth quarter.

John Vinh - Collins Stewart LLC

And then my follow-up for Donald. On gross margins, Donald, can you remind us again on your Fab closure schedule and I think the Phoenix Fab is the next up for consolidation and is that obviously when we would expect to see the next meaningful uptick in gross margins at this point?

Donald Colvin

We have previously stated that and I can confirm it, that the Phoenix Fab closure was delayed and that would result in between 1% and 1.5% of gross margin improvement. We haven't finalized that. We are in the process of looking at the demand for the second half, and we'll make that determination. But I think we will certainly make the decision within the next six months or so and that we should benefit from that sometime next year.

Operator

[Operator Instructions] Your next question comes from Patrick Wang of Wedbush Securities.

Patrick Wang - Wedbush Securities Inc.

First question here is just with the utilization starting to stabilize and I guess the Phoenix Fab closure on hold, is the primary driver on gross margins mix? Or are there any other moving parts we should think about?

Keith Jackson

Mix is probably going to have the biggest impact, as I mentioned earlier, over the next two quarters. And then when we close the Phoenix Fab, as Donald mentioned, you'll get another 1.5% or so, which is pretty substantial. But at least over the next couple quarters, mix is probably the largest element.

Patrick Wang - Wedbush Securities Inc.

And then I wanted to ask a little bit -- I wanted to ask about the disty side of things again. Is there any particular reason why you think that the disty's are building some inventories here in the third quarter?

Keith Jackson

Other than the data that I get in the comments that I've had from them saying that they are starting to see more material flow, and the pressure is easing, are words that they use. And those are both euphemisms for they've got more inventory.

Patrick Wang - Wedbush Securities Inc.

So it seems like they're maybe starting to get back to more normalized inventory levels.

Keith Jackson

I don't know that I would've gone that far. Our levels out there are still eight weeks, which is not normal. So I do think even with some slight build, it'll be a while before they're "normal" again.

Operator

Your next question comes from Kevin Cassidy of Stifel, Nicolaus.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

With the PC demand being slightly below seasonal, is it a mix of notebook versus desktops? Or maybe could you give a little more details on that?

Keith Jackson

I do expect the desktop sector to be weaker than the notebook sector on a sequential basis. But it's tough for us to read that completely because we have products that go cross-platform. But my best guess right now would be that desktop's slightly weaker than the notebooks.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

Maybe, if that relates to the ASPs also, but ASPs being flat, can you break that down some more, too. Is that with a higher exposure to proprietary products. Is that part of the reason, or I guess if you could give a little more detail on the ASPs remaining flat.

Keith Jackson

No, the ASPs is a broad-based comment. So the more commodity products certainly drive more impact than the proprietary. Our proprietary products, we tend to lock in longer-term deals with our customers on, and so that's pretty stable pricing to start with. It's really the commodities that move more in any given period than the proprietary devices.

Operator

Your next question comes from Tristan Gerra of Robert W. Baird.

Scott Herlin

This is Scott Herlin calling in for Tristan. I believe you mentioned earlier that Gresham was able to support $700 million of revenue. But I think before you guys have been talking about it at, maybe $450 million a couple of years ago. Can you walk us through how that's changed, is that mix? What's kind of caused that? And then I've got a follow-up.

Keith Jackson

The comment was actually not Gresham would do $700 million but that Gresham would enable us to build $700 million total. So there's really nothing changed from the Gresham perspective. We still have some capacity left in there to get to that $450 million to $500 million. But the total is what's going up, not Gresham itself.

Scott Herlin

Okay. That's still around $450 million?

Keith Jackson

Yes.

Scott Herlin

Okay. And then, you've been talking about where lead times are and how that's not as relevant because of the vendor-managed inventory. Can talk about your on-time delivery rate and has that changed at all for those vendor-managed inventory programs? And kind of, also, what those bookings look like into Q4, do you have any visibility right now into what that looks like as well?

Keith Jackson

We have good visibility into Q4. Most of our OEMs and distributors have placed orders through the end of the year, and that's pretty normal for when supplies are tight. But again, I'll remind you that, that backlog is pretty much all cancelable at any moment. So again, I wouldn't read anything into that one way or the other. But the answer is yes, we have lots of visibility into Q4 and it continues strong.

Scott Herlin

Any comment on the on-time delivery rate, because the 70% of revenues, that's not …

Keith Jackson

Yes, on-time delivery rate has suffered a bit in some of those programs but it's not dramatic.

Scott Herlin

And the on-time delivery rate hasn't increased over the last couple of weeks, or anything?

Keith Jackson

No, I mean it's not changing dramatically in either direction over the last two months.

Operator

The next question comes from Steve Smigie of Raymond James.

Andrew Connor

This is Andrew Connor for Steve. Could talk a little bit about some of the segments within Consumer there. Have you guys seen any inventory-building in TDs at all, and has gaming rebounded here out of the holiday back-to-school season?

Keith Jackson

Gaming is rebounding. We're seeing good builds for the gaming side. We did see a slowdown in television orders after we exited the World Cup. There's some signs now that in Q4, it may be coming back again. But certainly, in the last month or so, there's been some weakness there based on perceived in-TV inventories.

Andrew Connor

And can you talk to the impact of the euro to your business in the quarter?

Donald Colvin

I think the euro was very volatile. One minute it was down, now it's back up again; it's basically back to where it started. I think the only thing we have is the rapid deterioration of the euro cost some realized foreign exchange losses. But we have a national hedge. Of course, we have a reasonable revenue in euros and a reasonable amount of expense. So I'd say that the main impact was probably we lost a bit of revenue and -- something in the $4 million, or $5 million range of revenue -- because of the weakness. But that looks like it's now back to a stronger position than it was at the bottom. So it's not a big movement for us.

Operator

At this time, there are no further questions. This concludes today's conference. Thank you for your participation. You may now disconnect.

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Source: ON Semiconductor Q2 2010 Earnings Call Transcript
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