Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Horizon Logo

Freescale Semiconductor, Inc. (NYSE:FSL)

Q1 2007 Earnings Call

April 25, 2007 5:00 pm ET

Executives

Mitch Haws - VP of IR

Michel Mayer - Chairman & CEO

Alan Campbell - CFO

Analysts

Lee Zeltser - Needham & Co

Patrick Wang

Eric Reubel

Leo Mathew

Presentation

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode (Operator Instructions). Today’s conference is being recorded, if you have an objection you may disconnect at this time.

I will now turn the call over to Mr. Mitch Haws. Thank you, sir you may begin.

Mitch Haws

Thank you, Susie. And thanks all of you and welcome to our first quarter 2007 conference call. Today with me are Michel Mayer, our Chairman and Chief Executive Officer, and Alan Campbell, our CFO. The earnings release and financial statements discuss today are available at the Investor Relations section on our website at freescale.com. This call is being webcast live at our site as well.

Today, we will make certain forward-looking statements. These statements are based on our current expectations and assumptions, because of the inherent risks and uncertainties our actual results could differ materially from these statements. Please review our Securities file with the SEC for more detailed discussion of the factors that could cause our results to differ materially from the statements made today.

Presentation is being made on April 25, 2007. It does include time sensitive information and the company undertakes no obligation to correct or update the information presented.

During the call we may also reference certain non-GAAP financial measures that we believe provide useful information about our operating performance. You will find on our website the required reconciliation’s, the most directly comparable GAAP number.

With that, I’ll turn the call over to Michel.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

Michel Mayer

Thank you, Mitch and good afternoon. And welcome to today’s call. Let me start today by reviewing the quarter and some of the unique challenges that we face over the past few weeks, after which Alan will provide a more detail review of our financials.

During the first quarter we continued to generate solid sales and profit performance in our comps operating, consumer industrial and networking segments, which historically represent approximately 70% of our revenue and of course, the vast majority of our EBITDA.

However, revenue in our wireless business were negatively impacted by a sales decline due to weak demand in our largest customer Motorola. To give you a picture of what happened to us, so the first quarter was progressing at pace that would have resulted in our performance being inline, if not slightly better with the industry, much like our Q4 performance during the last several weeks of the quarter. Our main wireless customer began to reduce their orders, the significant change in activity from the order rate and demand provided earlier in the quarter.

We quickly adjusted to the slowdown in wireless revenue by optimizing internal loading, taking cost action and reducing our capital expenditures. Those are the actions that have helped to moderate the impact on our gross margin EBITDA and cash.

Going forward, we expect the solid performance of our Transportation and Networking segments to continue, as Motorola faces challenges the lack of demand, creditability and visibility does create some uncertainty for that business and we expect the pressure on the segments revenue took at least next quarter might, I mean, if things improve as Motorola announced in the second half we should see return to more normal revenue level, but we don’t have full visibility of this part. Now starting the review of the quarter, with Transportation & Standard Products. CSPG revenue was $665 million up 2% compared to Q1, 2006.

We continue to make good progress with design wins at Asian and Japanese suppliers. Compare to last year, first quarter automatic revenue benefited more 20% growth in Japan and modern 31% growth in Asia. In consumer and industrial, we continue to strengthen our presence in distribution, those of you who follow us know this has been a initiative provides since the beginning, which is important because we typically get the better margin for this channel.

We have broadened the portfolio that we sell through distribution and added resources in applications engineering and steel supports during the past several quarters. As a result of these ongoing efforts CSPG distribution revenue was at 17% again in the first quarter, with solid performance in our 8, 16 and 32 bit microcontrollers and our censor product line. Censors for example were up 28% year-over-year. A new censor design win in a well known game controller is expected to begin ramping this quarter, which will continue to help our growth in that segment.

Our S12, 16 bit automotive MCUs, which incorporates flash memory and FlexRayâ technology are now shipping at a rate of more than a 100 million unit per year. During the quarter CSPG launched several new innovative product for our consumer and industrial controller continue. Highlight included our MC68 bit microcontroller family, with an integrated LCD driver for display on variety on hand held consume and medical devices.

We also introduced our new, JR12 8bit MCU family that features an integrated RF transmitter for gaming consol applications. We continued our leadership in Inertial Sensor by producing three new low profile very small package devices for the possible consumer applications. And we introduced two new digital signal controllers to expand our solutions around mother control, digital power conversion and advance lighting control applications. The TSPG segment continues to generate revenue and profitability and we expect the performance to continue in the coming quarters.

Switching to networking, that business generated revenue of $320 million in the first quarter. Adjusting for the discontinued avenues associated with our apple business, revenues, revenues we flat to the prior year. Consistent with the overall industry with these see some continued softness in both wireless and wireline infrastructure market in the quarter. The cyclical ups that we saw in the first quarter of the last 3 years. It doesn’t show up this year and it is impacted by a lower rate of capital investment by the major carriers.

This decline is due in part to broad industries consolidation at both, our customers as well as their own customers. The consolidation is both the combination of many of the industrial leader including Alcatel, Lucent, Nokia, Siemens along with the restitute such as Nortel on WCDMA business.

While visibility is still somewhat limited in these markets, we do expect CapEx investment spending to increase gradually over the course of 2007, and expect revenue to strengthen somewhat in the second half of this year.

Looking beyond the numbers, the networking group demonstrated an end-to-end WiMAX solution at 3GSM consisting of a complete base station development platform and ACP solution.

Freescale solution are also being utilized in TD-SCDMA, the Chinese 3G protocol and 3G LTE, where the quad-core DSPs processing performance combined with the industry highest performance 4-Port, Serial I/O -- RapidIO, I am sorry, implementation continued to gain new design wins.

Through our ongoing collaboration with Alcatel-Lucent, we are facilitating the industry wide adoption of fiber to the home technology’s by making available jointly developed G burn technology and inter operability specification to vendors of terminal equipments worldwide. We also announced the industries first RFIC to deliver the 100 watt RS output power for 900 megahertz and 1800 Megahertz GSM and EDGE base stations.

These devices are the highest power of two stage RFIC to be offered commercially. The advantages are significant for GSM and Edge market. Finally, lets take a look at wireless and mobile solutions. Our wireless revenues for the quarter we are $364 million, below our plan as I explained earlier

The sales decline was largely attributable to changes in demand at Motorola, which impacted several 2G and 3G-handset model in which we have competed. Revenue were also impacted by the seasonality of our consumer business, which is typically stronger in the second half of the year.

We continue to have a strong presence in Motorola’s internally developed phones and we expect that trend to continue. Outside of Motorola, we’re making progress in component wins with our RS transceiver baseband and applications processors.

Our i.MX 31, multimedia up processor was chosen to power the Ford Sync in-car communications for the Sync in-car communications and entertainment. Based on Microsoft Auto software, Sync is fully integrated communications and media system that is designed to occupancy car occupants to operate both Bluetooth enabled phones and most portable media players with simple voice command or hand control on the steering wheel.

We continue to win, forget into possible media player market including recent wins that we launched in the second half of 2007. We are also generating increasing revenue on volume shipments in a number of devices at RIM, with our RF and PA products, the pair of the 8700 and 800 all have a component.

Finally we continue to make important technological advances in future wireless applications such as --. At the recent 3GSM conference in Barcelona, we demonstrated with Motorola, HSDPA and HSUPA at 7.2 and 1.4 megabit.

HSDPA technology and Similar Advantage allow for greater bandwith and see this up on functionality and feature. We have samples of single chip 2G, 3G, RS CMOS 90 nanometer product and made WCDMA, GSM calls with A6.

This product will have integration, reduce cost significantly and simplify software programming and reduce set time. These and other advantage in our 3G offerings position Freescale to be competitive because of spectrum of low need and clarity of 3G phones.

Our low cost 3G platform basics are available and software has been coded for platforms. We continue drive innovation in other important areas. During the quarter, we started pilot production of our RCP Chip Packaging Technology.

RCP is a revolutionary chip package that is applicable to 3G mobile phones and a broader range of consumer industrial networking devices, that can benefit from the consolidation of the electronic component into a single miniaturize system.

And be clear it's smaller and cheaper than existing packaging technology. Our Symphony Class D amplifier, which enables OEMs to deliver rich, high fidelity audio in compelling form factors with highest power efficiency was awarded innovation of the year in analog ICs by EDN magazine.

So in summary as you look at our overall performance in the first quarter of 2007 we believer our flexible model allowed us to moderate the impact of a very challenging market in the wireless segment. With many of the challenges of the first quarter behind us, we look forward to all the improving trends during the course of 2007.

I would like now to turn the call to our CFO Alan Campbell to give you more detail on our financial. Alan.

Alan Campbell

Good afternoon and thank you for joining today's call. To reinforce Michel’s comments, the first quarter was challenging, and we did take aggressive actions, and we are able to mitigate the financial impact.

Let me start with revenues, which were for the first quarter $1.36 billion, this compares to the $1.62 in the fourth quarter and $1.53 for the same period last year. As Michel’s discussed revenue and our wireless business were negatively impacted by the significant sales decline, due to weaker demand on our largest customer.

Revenues and our transportation networking markets continue to be solid, relative to the market. As I review the financial status, please note that although we are focusing on the results excluding the impact of purchase price accounting.

We believe that this is a more meaningful representation of our ongoing financial performance. Gross margins for the first quarter were 43.6%, this is slightly down from the same period last year of 45.3% and slightly down from last quarter of 44.1%.

Our factory utilization was in the low 80s, that's coupled with the decline in our IP revenue negatively impacted our progress on gross margin. However, we continue to successfully executive on operational efficiency, including cost controls, procurement savings, yields as well as improvement due to product mix. We also successfully executed on reducing on OPEX, our SG&A in the first quarter was $160 million or 12% of sales. This represents a 14% reduction from the same period last year and a 9% reduction from the fourth quarter. Our R&D expenditure was 21% of sales of $290 million, again representing a slight decline from last year and a 9% reduction from the last quarter.

Adjusted operating income excluding purchase price and merger expenses was $149 million or 11% of sale. Overall our EBITDA for the first quarter was $300 million and our adjusted EBITDA was $335 million or 25% of sales. On a trailing 12 months basis EBITDA was $1.75 million or 28% of sales.

Finally, we minimize our capital expenditures during the quarter to $92 million or 7% of sale this compares to the 149 or 9% in the fourth quarter of 2006. Its important to say this level of expenditure is adequate to cover our base maintenance requirements and we will address additional expenditures as business conditions improve.

Now, let me take a brief lookout at segment revenues as well as profitability. Our transportation and standard products for the first quarter was $665 million up 2% from a year-ago. This segment continues to generate solid profitability with EBITDA exclusive of purchase accounting adjustments of a $178 million or 27% of sales. The networking and computing system segment reported net sales of $320 million in line of last year exclusive of the discontinued Apple business. And the EBITDA for this quarter was $90 million of 28% of sales.

Finally, our wireless and mobile solutions segment reported net sales of 364 with an EBITDA for the first quarter of $28 million or 8% of sales.

Let me turn from briefly to working capital. Our inventory or days of inventory did increase. Driven by the sharp decline in our wireless revenues late in the quarter. We do expect inventories to decline into the second quarter. Our distribution inventories to continued to be real managed, with units at the end of the first quarter at 9.6 weeks in line with the fourth quarter of 9.8 weeks. This is also within the range of our historical averages. Our DSOs were 36 days in the quarter again consistent with the fourth quarter. And our payables days were at 6 in a quarter compared to 56 in the fourth quarter.

Overall our working capital as a percentage of sales was at 15% for the quarter. With respect to cash we ended the quarter at $637 million compared to the $710 million at the end of the fourth quarter. Uses of cash in quarter did include the impact of lower sales, inventory growth and annual bonuses offset by lower rate of capital expenditure.

Going forward we have adequate cash and operating cash flow it’s on the bad debt of CapEx and an ongoing debt payments.

In summary although the first quarter was challenging from our revenue standpoint we continued to execute the proactive and taking the appropriate financial measures. This concludes our remarks and I will be happy to entertain your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question is from (inaudible). Your line is open.

Unidentified Analyst

Hi, good afternoon.

Michel Mayer

Good afternoon.

Unidentified Analyst

Motorola how much visibility do you typically have into Motorola orders and more specifically sort of what needs to happen in terms of Motorola areas in terms of volumes in specific Motorola areas to recover for you to get back on track and if anything give you the confidence at this stage if that is going to happen?

Michel Mayer

I don’t want to go too much in the detail of the relationship between the two companies. But let me just give you a little bit of insight. We don’t really have orders we have a forecast, a holding forecast and then Motorola is pulling on the hub on an ongoing basis. Then of course we have there is financial measurability, which would equate to all that if you want.

But, as you would expect Motorola has sometimes to take for that one product. With that situation what happens towards surprise really I think that a lot of people in the marketplace in terms that with four weeks left into the quarter we essentially got fooled for the rest of the quarter from the hub.

While we have had a forecast to produce so again coming all the rest point of view and financial ability that simple issue is going to making the comment cross results, we deal significant inventory and daily so an impact in our revenue.

Now part of what Motorola have been doing clearly is readjusting, at least as we see, is readjusting their plan for the year and, therefore, the and in particular in the first and second quarter and, therefore, the corrected much more in the first quarter they are all inventory, and so we know that even at a reduced revenue level going forward.

How revenues going to go back that much closer to the normal levels once we absorbed the inventory collection if you want the whole. So we know that, because we are able to we know how much inventory they have in hand and how much inventory we have and all those things.

Now that were the normally short-term picture. Longer term, of course, well, we like all the supplier depend on their success in the marketplace, and I don’t really want to comment on that. I mean I can just tell you that I know of several exciting new products that have coming but when I clearly cannot guide for Motorola participation in the market place.

Unidentified Analyst

Okay. So then I guess looking further out and lets just see into '08, does Motorola strategy as they’ve articulated it necessarily until diversifying away dramatically from you?

And how do you plan to sort of deal with what appear to be increasing competitive pressures and is in fact breaking Nokia. Really do you have any viable way to really grow profitability in the wireless segment?

Michel Mayer

Yeah, so I haven’t changed my view on what's happening at Motorola and I want to make sure that you understand I haven’t changed it. I mean we have said repeatedly that our 3G becomes more and more of Motorola portfolio going forward. They are going to diversify.

We were not expecting, we have never expecting to gradually become a 100% of Motorola silicon. We have been 50%, 45 to 65% historically over a year of their silicon and in 2G 2.5G. In 3G because they started with us, we were at 100%, we still today I have 100% of their opportunity.

And we’ve said repeatedly when given on one design win with QUALCOMM at some point and when TI came out and we said, yes we expect that going forward on 3G they are going to have multi vendor strategy, which for company of their size they have had it in 2 and 2.5G and there is no reason that all of a sudden they should change in 3G.

So, what you observed is just happening. And I think Motorola has also made some comment that they were a little bit behind in diversifying. And a lot of people are taking those comments that they had since they are moving away from Freescale, of course you can expect all of our competition to claim that they are now getting into Motorola.

Again frankly, it has not been a surprise for us. We know it is going to be a competitive landscape going forward at Motorola like it has been. I repeat that, want to make sure you understand that, even when Freescale was internal division of Motorola it never had 100% of the silicon opportunity.

So, we also have announced with Motorola, I remind everybody a couple of months ago, in February, if I remember it correctly. A long-term strategic agreement, which was pointing a design win in '08 and I mean, a lot of things. So, we are very confident that we are going to be part of Motorola strategic roadmaps.

We know we are getting into competition and we welcome the competition. And I think its important to understand that because a lot of people are running around and I understand why because I had to say, we are going to talk about Nokia in a second.

For the same reason that it is important for us to break in through other customers and it is very important for some of our competitors to (inaudible) their opportunity at Motorola is huge because in particular for one of them, its their only opportunity to enroll because they’re never going to look at Nokia’s. So we don’t understand that, we don’t understand what that take and we welcome that again welcome that competition.

We believe it is a high thing for Motorola to move through all those time, which just shows we are confident that we are competitive for that, coming out. We are with Sandeep Chennakeshu who was the head of the EMP joining our wireless business and now at the beginning of mid last year.

We have been accelerating the competitiveness of a platform and we continue to believe that we are going to make all that now.

Now, let’s talk about breaking into Nokia. We certainly would welcome that. We believe that again all those time Nokia is probably going to move to a multi-vendor strategy at some point.

But consistently what we view happening at Motorola, we do not think that they are going through all the night, leave their -- targeting supplier is going to be probably a strategy which will give some the opportunity to the new entrance and certainly we are working like a competition to be competitive to participate in that expansion even when it happens. Next question please, operator.

Unidentified Analyst

Let me just does squeeze one more Michel and I’ll jump back in.

Operator

Lee Zeltser, your line is open.

Lee Zeltser - Needham & Co

Hi guys, couple of questions. I was first trying to understand, Motorola sales in the quarter as a percentage your overall, what was that like relative to Q4?

And then as a follow-up, my sense is that the wireless business carried below corporate average margins is surprise that it has such a strong impact on the profitability in the quarter. If you can clarify that a little bit?

Michel Mayer

Hi. That’s a CFO question, Alan.

Alan Campbell

Yeah, the Motorola, the revenues of Motorola historically have been in the 25 to 30% range and then in first quarter they fell to, just below to 25.

Lee Zeltser - Needham & Co

Just below 25%?

Alan Campbell

The issues on the profitability that, we actually believe that despite the significant sequential fall on revenues, we did a significant amount of work to mitigate that financial impact. And as we are a significant fixed cost company, but with the actions we were able to take, we still contributed just, under $150 million of operating earnings.

Lee Zeltser - Needham & Co

Al right, but it seems like you had some pretty significant EBITDA erosion or just EBITDA erosion, which I won’t have expected given the lower margins that of wireless. So, were there some other factors that work there?

Michel Mayer

Well, again it’s part of a powerful business is on those factories which is -- and now they can fix cost or EBITDA on a sequential basis despite the fact of dropping significant in revenues eroded about 2 percentage points.

So to me, the significant -- I significant to this, but once again I do think we did take a significant amount of actions to mitigate that. In fact, I mean probably disconnect between the questions and answer is, we don’t view the EBITDA impact to be inline with the revenue. We believe it is lower than what it should have been.

Lee Zeltser - Needham & Co

Okay. And then just one last question, you know, I realized you have some limited visibility, but if you can talk about your outlook for the overall business in the near-term.

Certainly, the wireless handset business is going to be challenging but maybe you can talk about your overall outlook, some of your competitors have talked about sequential growth in Q2?

Michel Mayer

Yes. We clearly expect, I think we know that we are willing to go into Q2 because the inventory collection of -- except total inventory collection of Motorola is going to be over. So we know that for sure.

We, on our known valid businesses we view goal in networking as I have indicated we expect the CapEx to slowly increase going into the year, and so our current view is that those involved have some goals in our networking business and TSPG also will depend on what happens in some geographies but we expect some goal. So we are -- if you take the side for second thing “abnormal” situation with Motorola because of our consultation with them in our wireless business.

We very much believe we are behaving like or slightly better than the rest of the industry. Remember we had a better Q4 than most of our competitors. We didn’t go down cost sequentially Q3 into Q4 like most of our competitors we said flat/up and again we were on the path if we normalized through fairs with “normal Motorola.” Revenue was on the path. Well, again, maybe 1% or 2% better from quarter-over-quarter and we are worried about our competitors now.

So, long answer but we see, yes we believe that we are going into Q2. We are a little bit more cautious forbidden some of what I have heard from some of the comments on the second half of the year.

I didn’t say negative, I said precautious in a sense that I think it’s a little bit too early to know how much we are going to go into the second half as an industry.

Again we’re going to go, the scenario over the thoughts in first half and mostly second half isn’t the right one. It’s unclear at this point from the order the way that we have how strong that goal is going to be. Next question.

Operator

The next question is from (inaudible). Your line is open.

Unidentified Analyst

Thank you. Michel, one thing before I go on to my questions I was a little confused with your answer to the growth question. Did you say that you expect to grow sequentially in the second quarter or you going to grow sequentially in the second quarter, excluding the wireless business? It was a little confusing the way you answer that question.

Michel Mayer

No, we are going to grow sequentially, including the wireless business.

Unidentified Analyst

So on a total basis you will be up sequentially is what you are saying?

Michel Mayer

Yes. I wasn’t clear so let me repeat to the popularity. We’re going to grow we know already because our wireless business is going to roll, I mean, something really, so we know already that we are going to in our wireless business. All my comments were on non-wireless business because the growth from Q1 to Q2 of our wireless business is frankly more coming under abnormal weakness in Q1.

Unidentified Analyst

Okay.

Michel Mayer

And that’s what I was trying to explain, as idea wasn’t clear.

Unidentified Analyst

Okay. Could you tell us what your book-to-bill loss at the end of the quarter?

Michel Mayer

Yes. Book-to-bill, first of all is still what misleading but it wasn’t 0.81.

Unidentified Analyst

Okay. And was this higher than at the end of the fourth quarter or lower than the end of fourth quarter?

Michel Mayer

Yes. Slightly lower than the end of the fourth quarter.

Unidentified Analyst

Okay. And one more housekeeping question and then I have some more long questions. What was your cash flow from operations? Hello.

Michel Mayer

Yes. Our cash flow from operations was $28 million.

Unidentified Analyst

$28 million. Thank you.

Michel Mayer

Remember that in Q1, we paid our bonuses.

Unidentified Analyst

Okay.

Michel Mayer

When we paid nearly $100 million bonuses in Q1. Yeah we did mentioned also the bonus as well as the working capital, but again I think it is important to see how we look to stretch the whole operating cash flow as I said my commentary and I’m feel very comfortable as we go forward.

I believe, I mean, I can tell you that the team worked very, very hard in the last four weeks of the quarter when we understood what was going to happen to our wireless revenue to contain cost expenses and we’ve have done a very, very good job.

Now we only had four weeks to impact the quarter. We are now going into -- I mean we’ve been now in Q2 with much more visibility and understanding on what’s happening and so much more “comfortable”.

Unidentified Analyst

Does it seems to be an increasing kind of trend towards the lot of handset vendors adopting Single-Chip Solutions, and at least at this point seems like some of your competitors like Texas Instruments, Qualcomm and Broadcom may perhaps have somewhat of lead versus you guys.

Could you talk about your competitive positioning in those areas, would you need to do some acquisitions there to kind of round up your portfolio and how well do you think you are placed in that area?

Alan Campbell

We think we are well positioned. One of the reason we are so interested by the RCP Packaging that I mentioned is because it is a packaging that allows to have the same footprint as a Single-Chip Solution with multi-die solution, which we believe is very appealing because it allows you have both the benefit of the size and cost.

But maintain at the same time the flexibility to mix and match in particular wireless technologies between our RF. And I don’t want to get into too much details but I believe it’s very good.

Now, that means that we also have the Single-Chip roadmap and so we believe that we are competitive, what you haven’t seen is a low cost solution in 2 and 2.5G and we'd explained very clearly that there was not top priority but if you sit with Sandeep and ask for him on that you'd see that, we believe we are very, very competitive on that going forward.

Unidentified Analyst

All right. And in terms of, I know you've said, as far as Motorola is concerned, you had about 45% to 50% of the silicon content of the 2G side, now was there any change in that in Q1? In other words, was Q1 the weakness in wireless predominantly all related to the final weakness at Motorola or was there any market share shift that also added to that the negative impact?

Alan Campbell

No, no it was, it was all -- when if you think about it, Motorola did not introduce new model. And for market share changes to occur, that would need to be significant new models coming in right? So, no, its all linked to our unit volume change.

Unidentified Analyst

And is it your view that the inventory correction at Motorola is over and are you already seeing order momentum pickup from the kind of trough levels that hit in the last month of the quarter. Like right now into April are you already seen a change of that trend, or do you expect to see a change before the end of the quarter.

Alan Campbell

Good question. Nice try, but I would not guide on Motorola. I can't. I am to give our supply of then to do that. But thank you very much. Operator, please next question.

Operator

The next question is from the Patrick Wang (ph). Your line is open.

Patrick Wang

Yes, Could you clarify the IP ownership? You know there is a little bit of confusion to, upon the separation of entity, who owns the IP portfolio? Is it Motorola or Freescale?

Alan Campbell

You are talking about a specific IP portfolio, or you are talking about IP overall?

Patrick Wang

IP overall, and specifically the 3G portfolio.

Alan Campbell

Okay. So we own all of our IP. We were separated from Motorola with sole ownership of 4800 button family at a time that we separated and we have complete ownership of all of our IP. What you may be referring so all of our chips everything, complete ownership complete IP. I suspect what you maybe referring to is a fact that we have been using for cost of our software offering on top of our chips. We've been licensing some Motorola software. And we have licensed it, so full license but clearly that is IP, that is owned by Motorola but was not part of the separation and it was not part of Freescale, it is not part of Freescale activity. Do I clarified?

Patrick Wang

Yes, yes. Great. And other questions that you’ve mentioned an internal fab utilization was below 80s, how much of the capacity have you shifted from outsourced, let's say have a semi back to internal this quarter.

Alan Campbell

Yes we are aware of those and our successful year of execution and although the utilization in the factories was significantly down, so also was not utilization in external also, on external like 20 for 14% of our wafer fabrication silicon stocks, which is down significantly again from past.

Patrick Wang

That's wafer stocks.

Alan Campbell

Yes. So that’s going forward shipment. Okay. Thank you. Next question operator please

Operator

The next question is from Eric Reubel. Your line is open.

Eric Reubel

Gentlemen, good afternoon, thanks for taking my call. If I can circle back to the single chip 2G and 3G solutions, 90-nanometer that you've sample to customers. Transforming, my expectations are, how many vendors are sampling the silicon and when did they come out of the fab? Is this targeted for design to shift this year or are we talking about 2008?

Michel Mayer

It came out of the fab this year. We have three major customers that I can think of, while looking at it and various stages of working with and I would not expect shipments this year.

Eric Reubel

Okay. You've also talked about within your portfolio, the product you talked about new RF transceivers, basebands in application processors. What kind of traction are you getting with handset OEMs outside of the core base of customers and outside of Motorola who are your chief baseband customers and already you see the opportunities to grow share?

Michel Mayer

Yes. Fastest growing customer has been RIM. We are in all of their looking RF transceivers and PA specifically here. So we are in all of their new products related and unrelated and so that has been in the recent quarters, our fastest growing customer as they have hoped that. Now it also happened to be one that I can name because they have allowed me to name them. There are others that I can't name. So you will need to go on website that open phones, do your own homework to find out that's, I don’t know how that information.

Eric Reubel

How are you generally thinking about, the baseband marketplace? It’s seem like there are a lot of a competitors out there, or a lot products out there, recently there are some the OSI that gear transaction, and OSI certainly moved away from baseband, how do you, what your view towards other baseband consolidation and are you interested in pursuing consolidation?

Michel Mayer

Yes. In general, I do believe that there are going to be consolidation per segment in this industry meaning that if you look at a given segment and clearly based on and wireless net phone is ones that I call segment of technology. Under each segment there poorly are too many suppliers so I expect consolidation.

I cannot tell you how its going to happen winners and losers, some level of MNA maybe, but certainly I think that if you count well I think last time I counted this 15 providers in a market that is clearly consolidating under customer side as Nokia, Motorola and Samsung and future hung up with Sony Ericsson now have something like 87%, I think I am sorry 77%, 78% market share and continue to go. It’s probably not going to lapse. But the right in place of the consolidation is one of the thing that we are going to make.

Seriously in testing going forward and we intent fully to participate next question.

Unidentified Analyst

Thank you.

Operator

Next question is from Jeff (inaudible) your line is open.

Unidentified Analyst

Hi, can you just comment on the margin EBITDA margin decline in the transportation and networking business and if there is reason to think that it should recover absent revenue growth and if there is some unusual factors in Q1?

Alan Campbell

Yeah, Jeff a couple of points I would make. First of all the margins in both businesses is well impacted again by the overall factory utilization, which we said it was in the low eighties that compared to the nineties of last year. We did see in the first quarter our IP revenue also slightly down.

Both those factors had a negative impact on the margin, as well as the EBITDA for those businesses and going forward we would expect as we always expect for our margins to improve. I think underneath if you look at some of the actions again it is communicated diverse significant actions taken and continued improvement on the operational efficiency side.

Michel Mayer

I want to make sure I put some color behind what Alan is trying to say, which is you understand what happened to us which is we love the big churn of revenue and frankly a lot of visibility and therefore, stopped wafer start for a lot of our valid path until we understood what was going on and what was going to be the new profile of the year with only four weeks left in the quarter. And so not a lot of time to take fixed costs out of the factories and infrastructure, which then floated back on to all of our businesses.

Unidentified Analyst

I see. Okay that makes sense.

Michel Mayer

Okay. And so what you can expect to see of course is as we now have much more, so first of all we’re now and it also takes a little bit of time for us to reallocate between internal and external. We’ve done a lot and in the first weeks but as time passes by we are able to be much more thoughtful on how we balance the load and of course we have already started and you are going to start the tier results of high pricing the cost structure to the new situation and then what you are going to see is our EBITDA going back to the quarter-to-quarter normal levels. So again that’s the reason I started by saying we were really surprised. I mean its one thing to go into the quarter where you know you are going to have a revenue reduction because you can prepare for it and you can adjust and its another one to learn early March that you are loosing half of your modest revenue for the quarter.

Unidentified Analyst

Sure. Okay, good. And then just you mentioned the wireless inventories are high so you will, were your utilization rates be negatively impacted significantly to bring down your inventories in the wireless business in the second quarter?

Michel Mayer

We had continued to look, Jeff we continue to look at the utilization at this point based on that. We don’t think in the overall business that will be negatively impacted, but we will be leaving off some of the inventories in the past. They’ve done a very effective job in managing our working capital.

And the inventory increase Q1 was somewhat full of surprisingly change. We actually waved it off but no significant impact on the utilization of our internal proprieties.

Unidentified Analyst

Okay. Last question Alan, just CapEx rose seven as you look at your business now, was obviously weak first half in wireless and I know your normal model 10% of revenues but how is that looking now?

Alan Campbell

We have significantly reduced that. And as you know we’re on the road show Michelle and I were very clear on the actions that we would take on one of the actions was by punching back on CapEx.

CapEx in the first quarter was 7% of sales and I think it’s fair to say that will continue in that type of range until we have much stronger visibility. As far sure we are not going to add capacity and we don’t need it and its part of managing the overall business so expect at the same level in the first quarter a moment.

Unidentified Analyst

Okay. Thank you.

Michel Mayer

Thanks Jeff.

Alan Campbell

Okay. Lets take one last question operator.

Operator

Thank you. The next question is from Leo Mathew. Your line is open.

Leo Mathew

Great. Just two questions. If you could give us a sense in terms of we talked a lot about the wireless mobile solutions, there was revenue weakness in networking and computing, if you talk to us about that? And also in addition to cutting back on the CapEx, what are some of the levers that you can pull below the EBITDA line to kind of conserve cash so you can help reducing that leverage.

Michel Mayer

Okay. I’ll take the first part and then I’ll turn to Alan. So you need to first of all I said that, but let me show you, you remember I said, I you need to normalize our networking results for apple because still had a quite a lot of apple revenue in Q1 last year.

And so if you look at our year-over-year we were really flat in our networking business. That being said, we do see a weak environment in the networking infrastructure both wireless and wire. I mean, we did see that in Q1, a lot of continued push from the our customers as they consolidate and rationalize their product line.

And clearly Caryer has been slow, I mean you look at the CapEx of Caryer as in Q1 and probably going into Q2, it is low historically and it’s a mix of two things. I think that they first, they are also slowing down a little bit decisions waiting to see what happens with the consolidation of the suppliers.

And we have to see their options those who had competitive situation for instance between Nokia and Siemens, I mean they are reassessing because they did, some of them really like to go to a single vendor situation, you understand what’s going on?

Leo Mathew

So and in the infrastructure on the web side also we see some weakness. Enterprise is okay, Enterprise networking is okay as you can tell consist numbers and Access of course is okay, so that what we seen in networking.

Alan Campbell

The question really was what we can do to leverage, what other actions are we taking on the EBITDA there is basically five actions of I apologize for saying five, but we have a very clear wood mark as we have articulate on the road show also.

The first one was asset utilization of an internal factory. We will keep and continue modulate that as much we can, again we are running at 90% last year going to low 80s mode.

The second point is the operational efficiency, which we continue to execute well there all will it be on procurement savings, will it be on yields, some of the back to basics.

Without this capital what we are doing in reducing capital and you will see what we have done in the first quarter. We continue to do that.

The fourth is SG&A and we talked about the fact that we executed on reductions in SG&A in the first quarter and we will continue focus our efforts on these. Plus five, very relative thing, the actions that we continue to put in place and execute on to leverage that EBITDA.

Leo Mathew

And the third one capital is that working capital?

Alan Campbell

No, I just meant, that is capital expenditure associated with….

Leo Mathew

CapEx. Okay how about below the EBITDA line in terms CapEx or they're reduced. I don’t know the pension funding cost or what are some cash uses below the EBITDA line that we should watch or potentially look out for opportunities?

Alan Campbell

No, there is not much to speak off. We are very clean as we separated from Motorola below the line. So I think its fair to say those actions that we are taking mobile or cash cost as we go forward.

Michel Mayer

Yeah. Let me close by saying one thing here, which is that we are very decisively started to implement lot of those actions here in order to maintain EBITDA. Our goal is to maintain an EBITDA close or at our plan before Motorola weakness we might at the rate for sure.

So we are working very diligently to get back to that and I have taken lot of actions already. You should start to see in our Q2 result as I had indicated further reductions in our operational expense as well as CapEx.

And as I mentioned we have now been able into Q2 to take some of the fixed cost out and therefore we’ll be able mitigate some of the impact. Thank you very much for your time. Good-bye.

Operator

Thank you, guys. At this time the call is over. You may disconnect. Thank you.

TRANSCRIPT SPONSOR

Wall Street Horizon Logo

Do you get frustrated during earnings season?

Have you had trades go south because of bad earnings dates?

We know what it's like. We’ve been there. We’re Wall Street Horizon and we work with some of the largest firms on Wall Street.

Founded by former Fidelity Investments executives, we understand the power of trading on good information and the pain and suffering of trading otherwise. We obsess about earnings and economic events calendars so you don’t have to. Accurate. On time. Guaranteed.

Let us help.

Get Smart

Get Wall Street Horizon.

View our Free 30-day trial for investment professionals

To sponsor a Seeking Alpha transcript click here.

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

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

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

Source: Freescale Semiconductor Q1 2007 Earnings Call Transcript
This Transcript
All Transcripts