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Freescale Semiconductor (FSL)

Q2 2007 Earnings Call

July 19, 2007 5:00 pm ET

Executives

Mitch Haws - VP of IR

Michel Mayer - Chairman & CEO

Alan Campbell - CFO

Analysts

Lee Zeltser - Needham & Co.

Sundar Varadarajan - Deutsche Bank

Jeff Harlib - Lehman Brothers

Guy Baron - Credit Suisse

William Matthews - Canyon Capital Advisors

Edison Wang

Robert Hopper - UBS

Operator

At this time we would like to thank all participants for holding. Let you know, you'll be in the listen-only mode until the question-and-answer session of today's program. Also the call is being recorded. If you have any objections you may disconnect.

I would now like to turn the call over to Mr. Mitch Haws. Thank you, sir.

Mitch Haws

Thank you, Mike, and thanks to all of you, and welcome to our Second Quarter 2007 Conference Call. With me as always is Michel Mayer, our Chairman and Chief Executive Officer, and Alan Campbell, our CFO.

The earnings release and financial statements discussed today are available at the Investors Relation section of our website at Freescale.com. This call is being webcast live at the site as well.

Today, we will make certain forward-looking statements and these statements are based on our current expectations and assumptions. Because of the inherent risks and uncertainties in our business our actual results could differ materially from these statements.

Please review our filings with the Securities and Exchange Commission for a detailed discussion of the factors that could cause our actual results to differ materially from the statements made today as well as other factors that could affect our future results.

The presentation is being made on July 19th, 2007 and includes time sensitive information and the Company undertakes no obligation to correct or update any information presented on the call.

Also we will reference certain non-GAAP financial measures today. We believe this helps provide useful information about our ongoing operational performance. You will find at our web site the required reconciliations to the most directly comparable GAAP number.

With that I will turn the call over to Michel.

Thank you. Mitch. Good afternoon. Welcome to the call. Before I start reviewing the quarter, I would like to thank those of you who attended our third annual FTF Freescale Technology Forum at our analyst meeting in Orlando. Some of you were among the 2300 attendees that are top of our support ecosystem; we had 70 partner companies, 200 reps from our key suppliers and global distribution partners, very successfully done.

It is gaining recognition as a premier industry event. We meet our customers, exchange ideas on common design challenges; and we believe we are building strong relationships that will be productive for years to come.

Now let's turn to the quarter. Consistent with the outlook that we discussed during our last earnings call, we continue to generate consistent sales and corporate performance in our consultation, consumer, industrial and networking segment. Both those segments generated strong EBITDA margin.

However, revenues in our wireless business were once again impacted by the challenges at our largest customer. As in Q1, we were surprised by the change in volume and business activity within the quarter; and we responded by optimizing further internal loadings and managing capital expenditures. This allowed us to moderate the impact on our gross margins, EBITDA, and cash.

In addition, we initiated a number of cost reductions that will begin to generate additional savings in Q3. Alan will provide additional details on these actions later in the call. Going forward, we expect consistent performance in our consultation and networking segments. The lack of demand, creditability and visibility in our wireless business will likely continue for a while.

Let's start the review of the businesses with consultation and standout products. TSPG revenue was $684 million, slightly down from last year's $697 million. But you may recall last year we benefited in the second quarter from a spike as we made up for some production challenges at an external foundry early in 2006.

Adjusting for that volume which was really a catch-up from Q1 in '06 revenues were relatively flat year on year. Consistent with prior quarters at a high level what we are seeing is growth in Asia-Pacific, which is helping to offset the impact of the production decline among the North American OEMs.

In the second quarter, Asia-Pac Automotive was up 21% compared to last year. Our sensor products also grew in all segments, as well, with 26% growth over last year. TSPG continues to generate consistent and profitable results and we expect the performance to continue in the coming quarter. We continue to make investments in products and partnerships in TSPG to support that growth.

In consumer and industrial we launched a new Flexis microcontroller series. These devices are the industry's first pin for pin compatible 8, 16 and 32-bit MCU's. Flexis MCUs enables developers to make easily between low-end and high-performance embedded design.

Momentum for the Freescale and STMicroelectronics joint automotive design initiative continued also to accelerate and gain traction with customers. The Company's recently announced the delivery of a common microcontroller architectural platform based on power architecture technology and optimized beta outsets for speed automotive applications.

We continued to expand our Telematics Solutions with the introduction of a low-power system-on-a-chip device that combines power architecture technology with integrated 3-D graphics and mixed media acceleration core. To help meet demands for engine, performance fuel efficiency and environmental expectations, we introduced six standard Smart-MOS analog products for engine management applications.

TSPG product also continued to get awards for innovation and excellence. At telematics update our MPC 5200 won the best telematics component solution award in Japan. Our MRAM technology added the LSI of the Year Award of Excellence to its long list of recognitions. Netro Electronics (ph) which is a leader in high-end building and lighting control equipment and an earlier doctor of our industrial products award Freescale its Innovation Award for 2006.

Switching to networking. The business generated revenue of $328 million in the second quarter on a continuing operations basis, meaning excluding Apple which was still there in Q2, Q2 '06. Revenue was up 3% sequentially and down 12% from the prior year. Consistent I think with the overall industry, we did see some continued softness in both wireless and wireline infrastructure market in that second quarter.

The cyclical upswing that we saw in the first half of the last three years continues to not seem to happen this year impacted by a lower rate of capital investment by the major carriers. While visibility is still somewhat limited in this market, we do expect that CapEx investments starting to increase gradually in the second half of 2007.

We continue to make investments in the business to expand our market presence in key RF growth segments such as industrial, scientific and medical, as well as broadband microwave. For example we announced the world's highest power LDMOS RF power transistor that can be leveraged in MRI systems, CO2 lasers, plasma generators and other systems.

We also continued to focus on enablement, helping our customers build their end systems more effectively and efficiently. During the quarter we announced the first COM Express single board computer based on our PowerQUICC processors enabling faster development for deterministic industrial network.

Again for those of you who were at our recent technology forum in Orlando you saw that Freescale announced a new multi-core architecture derived from our industry-leading PowerQUICC processors families. This platform is significant for the networking business as it represents the next generation of our leading PowerQUICC communications processors and the foundation for the next decade of our development effort.

This new multi-core communications platform leverages new SOC inventions such as CoreNet fabric and will be designed for 45 nanometer SOI technology, skipping a whole generation of process technology and delivering power reduction and integration advantages.

Finally, let's take a look at wireless and mobile. Wireless revenues for the second quarter were $353 million for the reasons I think I highlighted earlier. The sales decline was attributable to the known challenges of our largest customer which impacted several 2G and 3G handset models in which we have contents. The entire new lineup of Motorola Edge and 3G phones going forward contain our platform and silica.

We continued to improve execution and broaden our portfolio in 3G while driving costs down with high integration. Our portfolio expands our offerings for open resolutions to operate on a single base on ASIC using our MX architecture and add New World lower-cost platforms or simpler forms.

Last quarter we announced we had sampled a single chip 2G, 3G RF CMOS 90 on sensor products and have since made WCDM and GSM calls with the ASIC. The Freescale low-cost 3G platform ASIC are available and capitalizing imported our products.

Our LT program and RF transceiver single PA solutions are starting to be viewed as being one of the most advanced in the industry. Those of you that attended FTF heard plenty of comments about our RFP portfolio and the view that it is ahead or in line with the industry. We have gained our first set of design wins for our new generation of i.MX 35 application processor in the automotive space. The application processors combine the rich multimedia processing capability derived from our consumer business with the auto quality manufacturing and reliability standards.

We also introduced our first platform development kit right on designed from Microsoft Windows and Linux for electronic processors. We expect those kits to allow rapid development of products. Also there is the quarter we continued to make progress with production of our RCP Chip Packaging technology. RCP is a new chip package re applicable to 3G mobile phone and a broad range of consumer industrial and networking devices that can benefit from the consolidations of electronic components in a single miniature system.

So you look at our overall performance in that second quarter of 2007, we clearly operated in the very challenging environment and particularly in one of our three businesses and I think that the Freescale team executed pretty well in that challenging environment as you can tell from our EBITDA and cash results.

Thank you for your attention. I would now like to turn the call over to our CFO, Alan Campbell.

Alan Campbell

Good afternoon and thank you again for joining today's call. To reinforce Michel's comments, the second quarter represented an example of our ability to take aggressive cost action to manage the impact of a challenging market.

Let me start with revenues which were for the second quarter $1.38 billion. As Michel indicated, this does represent an increase, a slight increase on a sequential basis and a decline on an annual basis. Revenues in our wireless presence were negatively impacted by a significant sales decline due to the weaker demand of a larger customer.

However, this was offset by sequential growth in both our transportation and networking business, which I will discuss later. Our book to bill ratio improved from the first quarter and was 0.96 but our transportation and networking business is both above 1 and our wireless slightly below 1.

As I review the financials please note that I will be focusing the results excluding the impact of purchase price accounting and severance charges outlined in the press release. We believe that this is a more meaningful representation of our ongoing financial performance.

Gross margins for the quarter were 44%. This is slightly down from the same period last year of 46%, but slightly ahead of the first quarter. As we continue to execute and optimize both cash and working capital, our internal front end factory utilization dropped to the mid 70s. This compares to the low 80s in the first quarter and the 90s in the same period last year.

We successfully offset a negative margin impact of the strong execution and operational efficiencies including tight cost controls, procurement savings and product yields. We also successfully executed on reducing operating expenditures. SG&A in the second quarter was over $165 million or 12% of sales. This represents a solid decline of 11% over last year and is evidence of our focus in reducing overall G&A expense.

We took additional course action to the second quarter which will reduce headcount by about 700 worldwide. The charge associated with these actions of $36 million was booked during the second quarter and the timing of the cash outlay will occur over the next few quarters.

Going forward we expect these actions to generate approximately $55 million to $65 million in annualized savings when fully implemented. These savings are spread among cost of sales, SG&A and R&D. We expect the savings to start phasing into results beginning in the third quarter.

R&D in the second quarter was $286 million or 21% of sales. This represents a slight decline from last year and is in line with the first quarter. Adjusted operating income excluding purchase accounting and management expenses was $159 million or 12% of sales. This is down again slightly from last year but did improve over the first quarter.

EBITDA for the second quarter was 23% of sales; of adjusted EBITDA, $367 million or 27% of sales for the quarter. On a trailing 12-month basis EBITDA was 1.7 or 28% of sales. Finally we managed our capital expenditures during the quarter to $72 million or about 5% sales compared to $92 million early in the first quarter. This level of expenditure covers our base maintenance requirement. We will address additional expenditures as business conditions want.

Now looking at the segment and revenue profitability, Michel has covered some of this but transportation and standard product second quarter revenues was 684, an increase from the prior quarter and down slightly from last year. EBITDA for this business was solid at $185 million or 27% of sales.

The networking and computing systems segment reported sales of $328 million, also an increase from the prior quarter and below last year due to lower levels of expenditures amongst our major wireless infrastructure providers. In NCSG, EBITDA for the quarter was also strong at $104 million or 32% of sales.

Finally our wireless and mobile solutions segment reported sales of $353 million in second quarter. This represented a slight decline from the prior quarter and then down significantly compared to the $514 million last year, again reflecting the challenges at our largest customer. EBITDA for the quarter was $29 million or 8% of sales.

Let me turn to working capital. Inventory days remain constant at about 100, followed by a decline in our wireless revenues for the first quarter. We expect inventories to decline as wireless revenues begin to improve into the second half of the year. Our distribution inventory continues to be well-managed with units at the end of the second quarter at 9.9 weeks, in line with the first quarter of 9.6.

Again this is well within the range of our historical averages. DSOs were 35 days in the second quarter, consistent with the first and payables were at 53 compared to 60 in the first quarter. Overall our working capital as a percentage of sales was 16% for the quarter. With respect to cash we ended the quarter at $541 million compared to the $637 million at the end of the first quarter. The primary use of cash in the quarter was a semiannual interest payment which totaled $349 million offset by cash from operations and the lower rate of capital expenditure.

Going forward we believe we have adequate cash and operating cash flow to fund our business of CapEx and our ongoing debt payments. In summary, our second quarter was challenging from a revenue standpoint, we continue to execute and be proactive in taking appropriate financial measures.

That concludes our remarks. And we will be happy to turn it over to the operator and we’ll take your questions. Operator?

Question-and-Answer session

Operator

(Operator Instructions) Our first question comes from Lee Zeltser.

Lee Zeltser - Needham & Co.

Yes, it’s Lee Zeltser. Couple of questions. First off, you talked about the wireless business showing some improvement, hopefully, in the second half. Can you talk about linearity in the second quarter perhaps month-to-month trends in the wireless business? Did it seem to pick up towards back half of the quarter?

Alan Campbell

I will take that one. The linearity actually was fairly consistent as we have said before throughout the quarter. We do see the consistent linearity in revenues. It does tend to pick up and spike a little bit towards the quarter end but not significant.

Lee Zeltser - Needham & Co.

Okay. And then on the cost reduction front, you talked about a number of measures that you took. In terms of end sourcing production can you talk about what you may have done on the front end? Or where you kind of ended up on the front end and then on the back end versus Q1 and where you expect to be perhaps by the end of the year?

Alan Campbell

Yeah, we were able to again show that we are able to react to the business conditions. Historically the amount of silicon that we run outside or to the foundries is roughly 20%. In the first quarter because of the business conditions that dropped to 14%. And in the second quarter we were able to follow reduce that to 13%. And we continue to reduce that.

On the backend, our expectation our run rates, we are running at 55% external to 45%, and then the second quarter it was closer to 50-50

Lee Zeltser - Needham & Co.

Okay. And then the last question. CapEx is about 5% of sales. Is that the fairly good run rate going forward over the near term?

Alan Campbell

In the short-term it's going to be in that range. It will be a function of our business conditions and our visibility of the business conditions. In the short-term it will be below the 10% that we have historically disclosed that we would be running at.

Lee Zeltser - Needham & Co.

All right. But five I think is the lowest I've seen in a long time.

Alan Campbell

Yeah. Five, is low. It's probably somewhere between the five and 10.

Lee Zeltser - Needham & Co.

Okay. So we may see it kind of possibly tick up a little bit as sales pick up as a percentage of sales?

Alan Campbell

I think that's reasonable, Lee, yes.

Lee Zeltser - Needham & Co.

Okay. Thank you very much.

Alan Campbell

Thank you. Operator.

Operator

Our next question comes from Sundar Varadarajan.

Sundar Varadarajan - Deutsche Bank

Yeah, one clarification question. Could you quantify how much Apple revenue you had last year second quarter? I thought it was all pretty much washed out by Q1, so in Q2 did you still have any Apple revenues?

Michel Mayer

I think it was, I'm trying to remember. I think it was below 10. It was I think, I remember it was single digit.

Sundar Varadarajan - Deutsche Bank

Okay. Bigger picture question, Michel. When we talked about kind of scaling the wireless business and margins you had said for margins to improve, clearly, you need to build scale. Clearly with what’s happening at your biggest customer it makes it that much more difficult for you guys to build scale. I'm sure you’re going to have your Flexis outside Motorola, but clearly from all indications since this year looks like a 160, 170 million unit year for Motorola, the next year still seems a little kind of unclear.

Does it increase the urgency for you to kind of now seek some inorganic way of increasing scale in that business? Or are you guys still going to kind of focus on organic growth?

Michel Mayer

It's a very good question. We clearly cannot stay forever with a significantly reduced Motorola and not get in some additional scale. But we believe that we can stay the course and we have, I think, more staying power than maybe some people realize. I mean a lot of our wireless business is using the outside foundries and so that's one of the reasons where, although we have been again as I said surprised in the quarter, again, within the quarter pretty significantly. Because we, as you remember, I told you that Q2 was going to open Q1 and ready to run down.

Sundar Varadarajan - Deutsche Bank

Right.

Michel Mayer

Although we had that surprise, I mean, we were able to manage pretty well in the production. So the question is mainly an R&D question and there we believe we can sustain.

So what I'm trying to communicate to you is that we are constantly looking at the landscape and I have made it very clear that we are looking at smart opportunity but on the other hand we are not going to jump to do something because we feel that we absolutely have to do it.

More, I mean as important at this point is for us to make sure that we continue to be focused on Motorola and that we help them to recover and that there's a lot of discussions obviously with them in trying to help and participating in improving the competitiveness of their 3G portfolio in particular.

Sundar Varadarajan - Deutsche Bank

Conversely kind of asking the question from the other side how committed are you guys to the wireless business or it is there a point at which you might consider the wireless business kind of better in somebody else's hands and a better way of kind of realizing value for you guys?

Michel Mayer

Yeah, I think it’s a good question but I believe that you don't expect me to give you an answer here at all. You expect me to give you a standard answer, which is that we constantly look at every one of our businesses and we evaluate the potential for value creation so I don't want to comment further.

Sundar Varadarajan - Deutsche Bank

I wasn't expecting anything better, but just another question. On the internal versus external especially as it relates to the front end how low can you go as far as external is concerned? I mean, Can you make it all 0% if you have to or are there some kind of capacity constraints that once you hit some kind of level, then you still are forced to use some level of external battery capacity?

Michel Mayer

We cannot go to down to zero, because we have a few things, but…

Alan Campbell

I would say complexity of our business we could probably get into the high single-digit. But that really is a function of products mix, market segment. The high single-digit is probably…

Michel Mayer

Well because even if you directly you can go and move things then you bump into qualification problems for customers and things that don't make it practical when you inspect the details to move as quickly as you would like. So, I mean it’s probably high to single digit for what would be reasonable.

That being said I mean we, let's be clear here. We now, I mean I have been burned in Q2 so I'm a little bit more cautious, but we do expect wireless to pick up in the second half and I do believe that Motorola's guidance now is probably more in line I hope with what they are going to really do.

Sundar Varadarajan - Deutsche Bank

Just one more question on that outsourcing in, which business do use outsourcing more. Is it more on the wireless side, or do you kind equally use outsourced fabs across all our key business line?

Michel Mayer

On the content is more, wireless. On the backend it is more balanced.

Sundar Varadarajan - Deutsche Bank

Okay.

Michel Mayer

Okay. Thank you.

Sundar Varadarajan - Deutsche Bank

Thank you.

Michel Mayer

Next question.

Operator

Our next question comes from Jeff Harlib.

Jeff Harlib - Lehman Brothers

Hi, could you just talk about with your utilization in the 70s and I think you said you expect to reduce inventory in the second half. What does this mean for potential facility or fab closings? And maybe you could just update me on that?

Alan Campbell

The utilization in the mid '70s first of all before I talk about the factor rationalization really was testament to the team and how they were able to react to that significantly reduced utilization from the first quarter as well as last year. And I wouldn't underestimate the impact of the operational efficiency and improvement.

With respect to the factory rationalization we continue on ongoing basis to evaluate all of our sites and we are doing that as we speak. So we will continue to do an evaluation of what is the right thing from value creation, but at this point we don't have any plans to take any actions on specific factories.

Michel Mayer

The one thing I want to point on the operational improvements is that, those of you who have been following us for a while will remember that I pointed repeatedly at the need for us to improve our yields, and explained that we were throughout 2006, we were investing in in-line measurement equipment in the fabs, where we were behind the industry and investing a lot in improving the yields. Well this is one of the major driver of our operational improvements and its going to accelerate, if anything, in the second half of the year as we start to bridge the gap between where we were and benchmark yield level.

And so we are starting to benefit from a real operational improvement in our content fabs with better yields. Right? I thought I would and the reason I say that is because it is a small but also one of the reasons that our loadings are going down because as you understand well as yields improves you need less wafers to produce the same number of chips and so it’s a small part of that authorization but not negligible.

Jeff Harlib - Lehman Brothers

Okay. And just in wireless, Michel, the new single-chip products you're talking about that they are supposed to launch in early '08, can you just talk about where you stand with other handset vendors? In other words, are those products mean samples and tested at other handset vendors beyond Motorola?

Michel Mayer

Yes they are.

Jeff Harlib - Lehman Brothers

Okay.

Michel Mayer

Yes they are and we already know that we will ship 3G in non-Motorola handsets in 2008.

Jeff Harlib - Lehman Brothers

Okay. How will that be communicated?

Michel Mayer

It is usually, frankly, as you know, it is usually mainly up to the handset manufacturer on whether they want to be public about who they use or I mean people want the phone shipped usually tear them down and make up their minds. And so it is either communicated upfront or it's communicated by the fact that we will point you to web sites and appropriate sites.

Jeff Harlib - Lehman Brothers

Right, okay. So do you have design wins at this point?

Michel Mayer

Yes.

Jeff Harlib - Lehman Brothers

Okay.

Michel Mayer

No, I don't want to, at this point I am not yet satisfied by the volume that those will potentially generate, okay. But it is validating our technology. As we all know it’s one thing to have a design win that is another thing to have a design win in a larger volume.

Jeff Harlib - Lehman Brothers

Sure.

Michel Mayer

Enough that it creates a whole new flow but yes we do have design wins.

Jeff Harlib - Lehman Brothers

Sure. And last question just on the cost savings action over what period do you expect to have the full run rate of those actions?

Alan Campbell

It’s going to be over the next three quarters, don’t know, if '08.

Jeff Harlib - Lehman Brothers

Okay. And the charge is all-cash ISO?

Alan Campbell

Yes.

Michel Mayer

Okay. Jeff. Thank you.

Jeff Harlib - Lehman Brothers

Thank you.

Michel Mayer

Operator?

Operator

Our next question comes from Guy Baron.

Guy Baron - Credit Suisse

Hi, there. I have a few quick questions here. Can you talk to the magnitude of difference in the content as you have it on the Motorola, Edge and 3G phones that you are on? And what impact you would expect to see on improved mix in the latter half of the year?

Alan Campbell

Can you give me that question again? I missed the first part.

Guy Baron - Credit Suisse

Sure. As it relates to the content you have on Motorola handsets can you talk to just from a magnitude perspective what the differential is on Edge and 3G phones versus older 2 and 2.5G phones?

Alan Campbell

It's actually, that really is a function of the phone. If you listen to the Motorola calls today with some of the new products coming on, most of these were 3G and the content has got mostly Freescale content in there. Relative to EDGE it depends at what point you hit the market, but still it's slightly more content.

Again it really is phone dependent, but I think it is fair to say that we have at least the ones that have been announced, we are very comfortable with the content of that Freescale.

Michel Mayer

We gain share in power management, we didn’t want to repeat to answer that question, depending on which holding depended it to be phone by phone specific on which one we will replay the previous supplier or not. And based on the 3 and 330 and on 3G, we have already had also content so.

Guy Baron - Credit Suisse

Okay. But is there a sense for how much larger the magnitude is of your content dollars on these new generation phones versus the older ones?

Michel Mayer

The silicon content carries a higher price of 3G phones than for 2G phone. For EDGE and 2.5G tends to be cost reductions. So I'm not sure, I understand your question.

So for newer Edge in general the silicon is following the ASP reduction of what would be consistent with the industry. And then 3G is higher than 2G and it is all a question of what is the mix.

Guy Baron - Credit Suisse

Okay. And on the cost side, and assuming that Motorola volumes remain at the Q2 run rate level of around, let's say 35 or 36 million units, is your current cost structure the way you see it aligned with that kind of revenue level? And under that same kind of assumption for unit volume would you expect to generate free cash this year?

Alan Campbell

Well, as you well know, we are always looking at cost structure, irrespective of what the business conditions are. And we feel very comparable with the outlook on better come cost structure even at 36 million. Although, I don’t know what the numbers are for the second half. I'm not trying to give guidance here.

But also, as you have seen in the second quarter, we continue to make good progress on both our cost of goods and G&A reductions. And we’ll continue to do that. The actions we announced, the headcount reduction however, unfortunate, is a play to get further costs out as we go forward.

Michel Mayer

And Guy, as you understand, I mean R&D is the one line in the P&L that is mostly suffering from a run rate of 35 million. All the other elements of the cost structure that Alan said, it was fundament restructuring given that. Yes we are comfortable that we can scale down. And in fact if you look carefully at our results, you can see that.

Alan Campbell

To your second question cash, again, as I said in the script we do feel comparable that we do lot of the cut cash. And operating cash flow to find our business and our CapEx and debt. Our three-year operating cash flow excluding interest in the second quarter was over 25% of sales. So yes Guy, we do feel comfortable.

Guy Baron - Credit Suisse

Okay.

Michel Mayer

Thank you. Operator? Next question.

Operator

The next question comes from William Matthews.

William Matthews - Canyon Capital Advisors

Hi guys. Could we talk a little bit about transportation and networking, both of which were a little weaker year-over-year? And kind of what the trajectory is there if we have seen stabilization or if we can expect to maybe see continued softness?

Michel Mayer

That's a good question. On consultation first, the year ago year as I said is a little bit distorted by a fact that we have, if you remember we had a pretty large incident at CSNC last year in Q4 and Q1 which resulted in quite a lot of sales being pushed into a recovery mode in Q2 '06.

And so that’s impacting a little bit the year-over-year comparison. It was a little bit unnatural. And so, if you take that into account, it's probably flattish and as I said, I mean its two things that are going in different directions. Our business outside of the U.S. is growing and our business in the U.S. continues to decline in line with the Big Three where we have a lot of position.

So, at some point and than we've called that our rest of the world business is going to be bigger and then those dynamics are going to start changing and we are there. So that’s what is happening with the consultation and our growth initiative are working.

They really are kicking in. But out of a small base at this point and so it’s also going to take time. I mean, our sensor business is an incredible success story, but it is in the hundreds of -- I mean it's low single-digit hundreds of millions. And so it's not, you don't see it on the topline yet.

But if it was, if you take the P&L of our sensor what we’ve been doing for the last three years and if you were making that into a stock up it would have trust me, it would have a pretty good market cap by now and when you look at a trajectory. So, that’s what is happening with consultation on a high level.

On the networking side, clearly we see, and I think it is consistent with what the other networking players see. We see weakness in the infrastructure. Both wireless and wireline.

And when you inspect carefully the reserves of the people who are networking those who are growing or depending better do it with more access products the Wi-Fi, cable modem, connectivity and this and that. The people who are more in the infrastructure like we are have -- so we see that weakness. It is clear.

Going forward was your question. No, I think we are starting to see strengthening in networking a little bit. Book-to-bill is about 1. I don't know, so I already kind of know it is going to be stronger. I just don't know by how much. I don't know if it is going to accelerate into Q4 or if it is going to remain mutual increase and then on the -- yes. I think that's all I want to say on it.

William Matthews - Canyon Capital Advisors

And in terms of North America what is your exposure to the transits for North America in the transportation group? What’s your exposure to the transplants and how much of an opportunity is that for you? To the Japanese transplants?

Alan Campbell

Well, we had the numbers specifically for -- we are obviously a major player with the Big Three and how this impacts and Michel said there has been offset. I can give you a call separately and give you some more specificity.

Michel Mayer

Yes; we don't necessarily see disappointment. We interact more with the parents if you want directly in Japan. I would like to say rather than through the transplant in the U.S. So our business with Denso and people like that continues to grow at a good pace and that indirectly is coming into the transplants.

Also the continuity, I mean the Tier 1 providers of the automotive are all trying to diversify and gain market share with the non-defree and as they do that some of them bring our products. So it’s a little bit -- you have to go to the next level of detail to understand what’s going on. But we had a pretty good feel and so we know what we end up selling to values.

And as you understand it is a complex picture because somebody like Denso does sell to the Big Three. And so Denso is a not going to the Big Three, that bring in the IBI channel (ph) right, while what they are selling to the (indiscernible) is not going to the other direction.

So by the time you rationalize all of that clearly the business with the Big Three is steadily declining. There is no way around it and the business with the rest of the world in Europe, in Europe we continue to do very well. And in Asia, one of my pet projects and I don't know if to maintain (ph)project is to really be ready when the Chinese automotive industry starts to develop, to really be to leverage our presence in China which is important with Shanjin. When we do a lot of final assembly and tests and we have thousands of employees there.

We are the oldest semiconductor company in China because Motorola was one of the first companies at the time to get in there. And as all of you who know China know that time and seniority mean something in that market. And so, that's why you should remember from time to time I talked to you about the partnership we have with the University in China.

The things that develop with the automotive solutions agreements that we have with the local. Its small but I expect that over the next year you are going to start still ahead (ph). And I intend to be a significant supplier into the Chinese markets. Operator, let's have one more question, Operator, please.

Operator

Our next question comes from Edison Wang.

Edison Wang

Hi guys, I know you guys aren't going to give guidance but just wanted to the check on sort of how numbers sort of panned out for Q2? I know that you had said in Q1 the numbers would be weaker but sort of how you guys are kind of tracking to your budget and how that kind of looks for '07?

Alan Campbell

I think without sounding too egotistical, we do have a good track record of doing what we said we were going to do and certainly in the first quarter we gave guidance that the second quarter would be flat to slightly up.

We gave guidance that the margins would be flat to slightly up. So I think we are tracking fairly well to what we see. Obviously the market conditions from what was said at the end of last year typically have deteriorated.

Most of the industry were expecting a double-digit growth, I think the best indications on there that the industry will be a under low single-digit. Well that’s obviously had an impact on what we said from six to eight months ago but in general I think we do have some quite…

Michel Mayer

To add some color maybe to expand upon your question, clearly, if you look at the budget that we had for the year entering the year, we are below. And it's a combination of as Alan said two things. Which I think everybody can see.

One is the industry, overall, we can debate what is a single-digit really low or mid single-digit depending on the analyst. But it is clearly not going to be the 9% to 10% that people thought was going to be there.

And its reflected for us by a little bit more weakness in the infrastructure, for instance, than we were expecting. A little bit less 3G shipments. But of course we have the specific case of Motorola which I was going to say is our second problem.

But for the industry overall it's a little bit less for the shipments, and not by a lot. Not wide swings but it's a little bit less. It's automotive. It's a little bit less and so we have that and our second thing obviously is that Motorola has significant challenges in terms of number of phones.

And so as we entered the year we clearly had not forecasted for Motorola volumes to be that low. So, the combination of those two things, we were really surprised in Q1 as you could tell. We really had only a few weeks to react. We were better prepared in Q2 although still surprised but then we were better prepared.

And by the time we get in to Q3 and Q4 if things were to continue like that, which I don't expect, because I expect the industry to time spend a little bit and I expect Motorola to sign in. And then we would be in a situation to deal with it. I don't like it, but it is what it is.

And so the team is focused. I mean, we need to execute and we don't need to execute. We have key initiatives like yields, like on cost reductions that we are doing. And we have a few trends that have been weighing on our growth for file like decline of the Big Three. Something like that. I mean as time goes by and I mean they are going to be less and less of a handicap for us. So we continue to move forward. Last question, please. Operator?

Operator

Yes. Our last question will come from Robert Hopper.

Robert Hopper - UBS

Hi guys thanks for taking the call. Couple of quick questions for you. Just from a data points here, what was your cash flow from Ops for the quarter as well as what percent of your wireless revenue is now coming from Motorola? I guess if in 1Q, 2Q if you can give me that?

Alan Campbell

Well, I didn't get the first part of the question. The second part coming from Motorola it's of that total business it's in the 20% range. But it's dropped from a total business of 5%, 20% 30% down to 20%.

Michel Mayer

The first question was on cash but it was difficult to hear you Robert. What was it?

Robert Hopper - UBS

The cash flow from operations.

Alan Campbell

Yes, what we had said and I said earlier the cash flow from operations, excluding our interest is $350 million. Including interest it was close to break even.

Robert Hopper - UBS

I guess just two other questions or follow-ups two, other was your talk about before and I am not sure if you went through it, but I guess you mentioned that there is going to be at least one carrier that you are going to be working with in non-Motorola or 3G phones. Are there additional carriers or is there just one single carrier that you are currently sampling and expect to ship in 2008?

Michel Mayer

One.

Robert Hopper - UBS

One carrier. Okay.

Michel Mayer

I shouldn't say that. There's one handset manufacturer there which is totally going to be worldwide. So, but so there's one carrier, or there is one specific carrier, let's put it that way and then there's a generic thing.

Robert Hopper - UBS

Okay. And then back to the networking group for a second. You sound a little bit more confident in saying a bit of a ramp. I just wanted to see if you could help us explain what's making you a little bit more confident? Are you starting to see lead times lengthen or maybe you could give us some detail on that a little bit more?

Michel Mayer

I talking is lengthening. It's the other book. The other book and the demand singles from our customers. One of the good and bad thing to be in the infrastructure business. The good thing is one of the good things that you have a few key customers that make the who we are in such a business. I don't want to say easy but I mean if you have enough understanding of where they're going and because of the long lead time of sales in that market. I mean this is not the consumer electronic business. You don't deploy a 3G network just like that on a short notice. And so we have a little bit of visibility. So those are some of the things that we look at. Okay. Thank you very much. It’s been a privilege to have this call with you. And thank you for your time. Bye-bye.

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Source: Freescale Semiconductor Q2 2007 Earnings Call Transcript
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