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Executives

Dan Janson - VP, IR

Mark S. Thompson - President and CEO

Mark S. Frey - EVP and CFO

Analysts

Ross Seymore - Deutsche Bank

Craig Ellis - Citigroup

Romit Shah - Lehman Brothers

Shawn Webster - JP Morgan

Steve Smigie - Raymond James

Tristan Gerra - Robert W. Baird

Quinn Bolton - Needham

Fairchild Semiconductor International, Inc. (FCS) Q3 2007 Earnings Call October 18, 2007 9:00 AM ET

Operator

Good day and welcome to the Fairchild Semiconductor Third Quarter Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Dan Janson. Please go ahead sir.

Dan Janson

Good morning and thank you for dialing into Fairchild Semiconductor's third quarter 2007 financial results conference call. With me today is Mark Thompson, Fairchild's President and CEO, and Mark Frey, our Executive Vice President and CFO.

Let me begin by mentioning that we are attending a few investor conferences this quarter including the Thomas Weisel Power Conference in New York, the Credit Suisse Tech Conference in Scottsdale, Lehman Brothers' Tech Conference in San Francisco as well as the Raymond James Conference in New York.

Mark Frey will start today's call with a review of our third quarter financial results and discuss our forward guidance for the fourth quarter of 2007. Mark Thompson will then address in more detail our product line results, end markets and operational performance. Finally, we will reserve time for questions and answers.

This call is scheduled to last approximately 60 minutes and is being simultaneously webcast from the Investor Relations section of our website at fairchildsemi.com.

The replay for this call will be publicly available for approximately 30 days.

Fairchild management will be making forward-looking statements in this conference call. These statements, including all statements about future results and performance are made based on assumptions and estimates that involve risk and uncertainty. Many factors could cause actual results to differ materially from those expressed in forward-looking statements. A discussion of these risk factors is provided in the quarterly and annual reports we file with the SEC.

In addition, during this call we may refer to adjusted or other financial measures that are not prepared according to Generally Accepted Accounting Principles. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses that should be considered by investors in conjunction with out GAAP measures that we also provide.

You can find a reconciliation of non-GAAP to comparable GAAP measures at the Investor Relation’s section of our website at investor.fairchildsemi.com. The website also contains 2007 Q3 fact sheet and updated financial section with updated, unaudited financial highlights including detailed breakouts of segment in regional revenues, gross margins, EBIT and EBITDA.

Now, I'll turn the discussion over to Mark Frey.

Mark Frey

Thanks Dan. Good morning and thanks for joining us. I am sure most of you have had a chance to review our earnings press release that we issued earlier this morning. So I'll focus on just the key points in my comments.

We recorded a healthy 4% sequential increase in sales in the third quarter which was at the high end of our guidance range. This solid sales growth coupled with better product mix and lower bonus accruals contributed to 190 basis points sequential improvement in adjusted gross margin, which was also at the high end of our guidance range.

We reduced adjusted operating expenses to $84.2 million, which is $4.9 million less than the prior quarter and favorable to our guidance range of $88 million and $90 million. We benefited from a continued focus on spending control, lower bonus accruals, as well as the sale of our RF business in early September. Our net interest and other expenses improved slightly to $5 million in the third quarter due to a higher amount of invested cash and better interest rates on our investments.

Altogether, higher sales and gross margin coupled with tight OpEx control drove a 400 basis point increase in adjusted operating margin and more than 90% sequential increase in adjusted net income compared to the third quarter. Our adjusted operating margin, up 10.6% in Q3 is already a 110 basis points above the peak of the last cycle.

I'd like to take a minute and explain the $7.8 million net charge we booked for potential litigation outcomes. This item consists of a charge related Power Integrations’ lawsuit as well as adjustments to reserves related to other litigation matters. We recorded the Power Integrations’ litigation charge for the purposes of SFAS-5 accounting requirements which in no way reflect any conclusion or belief by us that we are liable for patent infringement or that we've concluded that the asserted Power Integrations patents are valid.

To the extent we do not prevail the inequitable conduct phase of the current proceedings, or in post trial motions before final judgment is rendered. We expect to continue to litigate this matter through appeals based on issues affecting infringement, validity of the patents and damages.

Now I would like to review third quarter highlights of our sales and gross margin performance for each of each of our product groups. The Analog Products Group recorded a 9% sequential increase in sales to $92 million, even as they significantly reduced inventory in the distribution channel. This revenue performance was driven primarily by strong demand for analog switches in voltage regulators.

APG adjusted gross margin improved to 170 basis points from the prior quarter even as we drained 10 days of analog internal inventory. Higher factory loadings and a richer mix of high margin analog products as well as lower bonus accrual drove the third quarter gross margin improvement.

In our Functional Power Group, sales totaled $235 million, a sequential increase of 4% driven by strong computing and handset end market demand for low voltage MOSFETs.

Adjusted gross margin was 220 basis points higher than the prior quarter due primarily to improved factory utilization and operational efficiency, better product mix and lower bonus accrual.

Standard Products Group sales were up slightly and adjusted gross margin improved 90 basis points sequentially due largely to better factory utilization and operating efficiencies.

Reviewing our balance sheet, internal inventories decreased about 1 day to 74 days driven by higher sales and a slight increase in inventory dollars. DSOs were essentially flat with the prior quarter at about 39 days. Cash and marketable securities increased $3 million to $451 million in the third quarter, which reflected cash flow from operations of $58 million and capital spending of $48 million.

Our capital spending was focused on backend in-sourcing and capacity increases, which we expect will drive cost decreases in 2008.

Turning now to our forward guidance. We expect fourth quarter revenues to be up 1% to 3% and gross margin to be approximately 50 to 150 basis points higher sequentially.

At the start of the fourth quarter, we had about 90% of this sales guidance booked and scheduled to ship. We expect R&D and SG&A spending to be approximately $86 million to $88 million in the fourth quarter, as we continue to exercise strict control over spending.

Net interest and other expenses are expected to be $5 million to $5.5 million for the fourth quarter.

Now, I'll turn the call over to Mark Thomson

Mark Thompson

Thank you, Mark. Fairchild delivered strong third quarter results for both sales and gross margin at the high end of our guidance range which drove excellent earnings. These results were even more impressive given that we also improved our inventories and reduced our lead times during the quarter.

We continue to show greater traction for our new products in analog which helped APG grow to revenue more than twice as fast as the company average.

In fact, APG accounted for 22% of the total company’s sales in Q3, our highest analog ratio in company history.

There are many positive developments to review. So let's go into some of the details, starting with product lines, end market dynamics and new products.

As expected our Analog Product Group led the company with 9% sequential sales growth in the third quarter. Sales of our analog switches for handsets and ultra-portable applications grew 21% while bookings increased more than 60% from the prior quarter.

We recorded strong sales for our voltage regulators that support the computing market with sales up 13% sequentially and a very positive book-to-bill during the quarter.

We also shipped our first high frequency voltage regulators into the handset market and expect this business to grow rapidly in the fourth quarter and 2008.

As expected, our micro-SerDes sales were basically flat with the prior quarter, but bookings increased significantly as additional customers qualify these solutions and our lead customer for this product adjusted their order rates higher. We expect significant growth for these products in Q4 and 2008.

Power conversion sales were up slightly and distributor resales were strong which enabled us to further reduce channel inventory.

Overall, these results are particularly impressive when we consider that the strong distributor resale and good channel management enabled APG to reduced channel inventory by 16 days in the quarter bringing them in line with the company target. We expect our new product momentum to build in Q4 and 2008 as we drive greater penetration of our analog switch solutions in the handset and ultra-portable markets. We see significant opportunities to extend our leadership position in this market as customers standardized their interfaces. The opportunities we see in China are incredible and our business is growing rapidly in this market.

We won a number of important new designs for our micro-SerDes and we expect to increase sales in 2008. We are very excited about the potential for our high frequency voltage regulators as our relationship with our lead customer continues to expand. This is a classic example of how increasing our focus on solving more important problems for our customers, phased off with deeper technical and business relationships.

In the power conversion business we released a new line of highly efficient multichip power switches for the merchant power supply market and are already shipping volume into our larger customer. The investment we made in analog over the last two, three years is paying off, as we see the impact of these new products starting to ship in volume.

Turning now to the functional power group, sales were up 4% sequentially due primarily to strong high voltage MOSFET demand in the computing and handset markets. We also expect normal seasonal growth in the consumer markets driven by appliances and panel TVs which should drive solid high voltage sales in Q4.

Our IntelliMAX load switches route to portable applications posted record sales in Q3 and double their bookings from the prior quarter. We won a number of new designs in Japan and Europe for a highly efficient Smart Power Module and a variety of air-conditioning, washing machine and fan loaded control application.

We are particularly excited with our penetration of certain key European account and expect this trend to continue in Q4 in 2008. We also posted significant sales gains in our new ultra-small CSP and MLP low voltage MOSFET packages for the ultra portable and notebook computing markets. These packages give us further performance and cost advantage over current solutions.

SPG sales were essentially flat with the prior quarter as solid sales growth of Logic and Opto products was offset by our selective approach to the bipolar transistor business. Our new family of logic translators posted 25% sequential increase in sales and had a positive book-to-bill in Q3.

Let me now review end market demand and some key operational metrics. Sales of our products and service to computing and handset market were robust in the third quarter while the other end markets were generally in line with seasonal expectations.

Order rates remain quite healthy as we enter the fourth quarter, providing us with an excellent starting backlog position. Distributor sell-through was up 8% sequentially in Q3, setting a new record for the company. Our sale into our distributors was well below this level which resulted in about a 1 week decrease in channel inventory. At less than 11 weeks of channel inventory we are now on the low end of our range but still at a comfortable level to support Q4 demand.

Sales to the OEM channel were up more than 15% sequentially as the number of our handset and computing customers increase demand during the quarter. We expect our OEM channel to lead the company in growth again in the fourth quarter.

We reduced lead times in the quarter through enhancements to our order management system and effective inventory management. This is an ongoing focus for us as we transition the company to be a more important supplier to our customers. We improved our lead times to 9 to 10 weeks in the third quarter, and we believe we can maintain this level even as we increase sales and factory loadings in the fourth quarter.

In summary, I believe our third quarter results are further proof of the progress that we are making to develop a more the valuable analog and card solutions for our industry leading customers. Our strong OEM sales growth reflects our greater focus on these key customers. The APG business is at the heart of this effort with exciting new products developed in close cooperation with leading customers and shipping in greater volume each quarter.

On the operational front our strong supply chain and inventory management are helping us to achieve some of the best inventory levels in the industry, while improving both lead times and service levels.

Finally, effective cost controls enable us to show significant earnings leverage as we grow our business as evidenced by our 400 basis points, sequential improvement and adjusted operating margin in Q3.

I believe this is just the preview of what Fairchild is capable of delivering and we look forward to building on this momentum in Q4 in 2008.

Thank you. And I'll turn the call back to Dan.

Dan Janson

Thanks Mark. We'll now open the call to questions and I would ask that in order to allow more questions that we limit each person to one question and one follow-up. Go ahead and take the first question please.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from Ross Seymore, Deutsche Bank.

Ross Seymore - Deutsche Bank

Thanks guys and congrats on the strong earnings power. A couple of questions, on the OpEx side of things. How should we think about OpEx longer term in the growth rate in that line versus revenues?

Mark Frey

Ross, as you know our target for OpEx is about 20% of revenue and we expect to get pretty close to that next year.

Mark Thompson

Let me also embellish a little bit on Mark's comment. I think pretty consistently stated in and have shown progress toward also shifting the mix, so we've both been targeting a 20% OpEx level but also steadily reducing G&A and increasing R&D and we expect to increase that trend in 2008.

Ross Seymore - Deutsche Bank

Great. Then the follow-up on that, the mix on the revenue side went favorable as well, the inventory that you guys burned on the APG side both internally and it sound like in the channel are you in both cases down to where you want to be or is there still some of the analog accesses in the channel or again on your books.

Mark Thompson

We are close to where we want to be, but we have probably another quarter or two trimming to do their but the majority of the realignment is complete, Ross.

Ross Seymore - Deutsche Bank

Great and one quick follow-up. You have talked about inventory management, you did a very good job on it across the board. How would we think about the seasonality of revenues as we go into the first quarter given the fact that you don't seem to be following the kind of traditional trend of stuff in the channel a little bit the back half of the year and having to burn it in the first half?

Mark Thompson

Well certainly we are trying to learn from past experience and to the extent in the past inventories went off, it was misalignment rather than deliberate placement of inventory. So we recognized that particularly in the very end of December point of sale is quite hard to predict, because often people do shut down, sometimes not planned between Christmas and New Year. And so we deliberately positioned ourselves so even in the event that's on the high side of expectation we should be comfortably in the middle or even on the low end of our channel inventories which of course will position us well going into 2008.

Ross Seymore - Deutsche Bank

Great thank you.

Operator

We will go next to Craig Ellis, Citigroup.

Craig Ellis - Citigroup

Thanks guys. Mark it looks like in the business so far this year we've had functional power gross margin that have been increasing at a faster rate than analog product group, it looks like the new product introduction activity is happening. Should we expect as we move into the fourth quarter and into next year that our sequential changes in gross margins in analog will start to outstrip functional power?

Mark Frey

I don’t know which Mark you meant Craig, but I will handle that. I think that's true, we are seeing the positive mix impact of the analog programs but as we've said we've have done more inventory corrections for those products lines as well. So at the operating level, we had to burn through that.

Craig Ellis - Citigroup

Okay. And then is it possible to help quantity the degree of improvement that we might expect as we look out over the next three to four quarters relative to what we have seen in the past?

Mark Thompson

So, if we look at immediately into the fourth quarter and Craig I believe you are asking an analog specifically?

Craig Ellis - Citigroup

Yeah, I am focused just on the analog.

Mark Thompson

Okay. Good. I just want to make sure I understand that correct. So if we look to the fourth quarter, we expect progress to be at a minimum what we saw in the third quarter and most likely accelerate. If we look at our mix plans across 2008, we have a number of programs that we have talked about. We expect particularly voltage regulators, micro-SerDes and higher margin power conversion products, all to be really driving the growth for the company and for APG across 2008. Those are all positioned at the very high end of our margin distribution and so we feel very optimistic that you'll see very strong margin progression across 2008 as those products grow.

Craig Ellis - Citigroup

Alright, guys. Thank you very much.

Mark Frey

Craig, just a follow-up on that. Just another way to think of that is that if you look at where our targets are relative to where we are today.

Craig Ellis - Citigroup

Right.

Mark Frey

Analog has obviously the biggest improvement to show. As you've seen we've been draining a lot of inventory which has been a bit of a headwind for that group and yet they've still been able to expand margins at almost the company average. As that inventory drain headwinds sized a little bit and these new products kick-in, I think it's reasonable to expect that analog is going to have the best gross margin performance of the company. So, we will see how that plays out over in 2008, but that certainly the way it looks in Q4.

Craig Ellis - Citigroup

Can you give us the utilization for third and fourth quarter again?

Mark Frey

Well, I won't give you the specific numbers, because as we started getting closer to the 90% level and we try to give too much detail here, but I would say that utilization rates were generally up in most of the factories with the exception of the main fab where we actually brought on our first 8-inch capacity. So that actually gave us a little more room and brought utilization rates down a little bit which we think will help us going forward as we fill up that factory with new analog products.

Craig Ellis - Citigroup

Okay. Thank you.

Operator

We will go next to Romit Shah, Lehman Brothers.

Romit Shah - Lehman Brothers

Thanks. Nice job on the quarter. I noticed in your monologue you mentioned several instances where bookings for certain product lines were up 50% to 100%.

Are you guys taking a closer look at your backlog or scrubbing your backlog a little bit more closely than you have in the past and is that part of the reason why you are guiding to slightly slower growth in Q4, and what I think generally is a pretty quarter for Fairchild.

Mark Thompson

So, Romit two things, first is that the mid point of our guidance range is actually equal to the average progression from third to fourth quarter over a couple of year period of time. So it's actually in the middle of the pack. We think that as I commented to a previous question that its wise to be a little bit cautious about the fourth quarter because the -- recall last year for the industry it was a dramatic slowdown in the last two weeks of December. December is always the hardest month to call and so fourth quarter is all about the last two weeks of December and none of us know what that looks like when we get to it. So, we felt it's wise to accommodate the potential for a soft -- last two weeks of that quarter in our expectations. Clearly if it doesn’t come than that will be a good thing.

In term of scrubbing backlog we've put enormous effort into backlog integrity and so we make sure on an ongoing basis and it’s a daily process that we run, that we really understand what the demand requirements are and that when we look across all of our customers that we sum all the demand for a certain segment what our expectation for a market share are and make sure that those don't add up to more than what we believe the market is, and when let us go to a number that's above what we think they are to be then we re-double our effort to validate and correct and so every single week we go back and we take our orders off the books.

So, we feel very comfortable that we have a process that's probably as good as anything in the industry to make sure that in the advance that double order does creep into the system that it has taken out very quickly prior to putting it into the factory and building it and putting on shop simply.

Romit Shah - Lehman Brothers

Yes, I would have thought that the last two weeks of December would be a non-event for you guys and everyone else, because most people go on holiday. Your visibility in the Q4 would be better or front-end loaded because most of what you book and check happens in October and November.

Mark Thompson

Actually typically it stays quite strong into the first half of December and if you look at the pattern, it's actually alternate years, so in the up inflection December is typically had stayed strong and in the down inflection years it usually go pretty quite. So every year December or usually the back half is soft and odd year is strong, but I wouldn’t place too large a bet on that to predict the value, but that's actually been the pattern over the last six years.

Romit Shah - Lehman Brothers

Okay. And if I could as a follow-up…

Mark Thompson

Excuse me, one second, Romit, I left an important part. I am talking here about point-of-sale now, so the point-of-sale is the part that we obviously don’t control, we only control to the extent of the right stuff is on the channel. So, what I am really addressing here is what happens to the point-of-sale, actually you are correct that our OEM business is very easy to predict. However, remember that that's a only third-ish of the company, so the two-thirds of the company, the uncertainty that I am talking about is how accurate the point-of-sale forecast that we receive from our distribution partners are and we have learned to be cautious about those for the back half of December.

Romit Shah - Lehman Brothers

But you recognize revenue when you sale in not when on POS or when you sell-through, correct?

Mark Thompson

Correct, that is correct. However, so if we use Q3 as an example we plan to reduce our channel inventories, but not by as much as we did because point of sale in the last month of the quarter were unusually strong. So remember we get our forecast, so we scrub our forecast, and we ship into the channel roughly speaking to our forecast. If our distribution customers ship more than they forecast out than there are weeks of inventories in the channel windup go down when we consolidate the inventory reports.

So, remember it's a trailing indicator. So, we try to anticipate some of those things and then apply corrections to the forecast that we receive from our distribution partners. So you are correct we can recognize revenue as sell-in, but we try to align that with expected sell-out and that's why there is inevitably a little bit of a phase delay in the way those numbers get reconciled.

Mark Frey

Hey Romit.

Romit Shah - Lehman Brothers

Yes.

Mark Frey

Romit, I guess what you just heard is that we manage the business on sell-through. I mean, that's kind of the subtext here, Right? Your comment about recognizing on sell-in is correct, but we watch POS like a hawk, that's how we manage our business and that's why we are concerned about it and we are going to watch it. So we try to match that consumption rate at POS and that's how we manage everything here.

Romit Shah - Lehman Brothers

I guess Mark, what I am trying to get out is, have you seen anything in October in the last 30 days that in terms of retails or bookings that are causing you to maybe guide a little bit more conservatively?

Mark Thompson

No.

Romit Shah - Lehman Brothers

Okay. Just as a follow-up. Mark, prior you mentioned there was a lower bonus accrual and that positively impacted gross margin. Can you quantify that in impact and tell us when you'll actually accrue a higher amount for bonuses.

Mark Frey

Well I am not going to quantify in dollars, but in general last year we were accruing bonus a bit above our average, this year we were below the average. We tend to plan in future year's to be around average, and that's incorporated in our 20% OpEx goals.

Romit Shah - Lehman Brothers

Okay. Alright thank you.

Mark Frey

Thanks Romit.

Operator

And we'll go next to Shawn Webster, JP Morgan.

Shawn Webster - JP Morgan

Yes, thanks for taking my questions. Can you characterize the pricing environment for us in Q3 and what you expect for Q4?

Mark Thompson

Yeah, pricing actually was fairly muted. I mean we were still down 1% to 2% same power pricing decrease which is a very comfortable range for us and given the fact that we've got 90% of our guided revenues on the books, we kind of already know what the pricing is in Q4 and its in that same range.

Shawn Webster - JP Morgan

Okay. So pretty stable than.

Mark Thompson

Yes.

Shawn Webster - JP Morgan

And can you quantify at all how much of your backlog grew and what your total company book-to-bill is?

Mark Thompson

We don't give specific book-to-bill, we did say that our 13 week backlog was up which we were pretty pleased with, I mean the overall we took our lead times down a couple of weeks which we are very excited about because we think that helps to stabilize our business and provide better service levels to our customers and yet we were still able to grow our 13 week backlog at a pretty healthy rate.

Shawn Webster - JP Morgan

And can you help connect some of the dots on the lead time is pulling back and does the inventories at the low end of your normal range and your backlog growth parts of that was dots that I can't quite connect with each other.

Mark Thompson

I will try to view that and we don’t have a -- we did a quite a bit of work on our planning systems which is what allowed us to reduce our lead time. So the thing to remember is that there was a bit of a system discontinuity there. So, clearly when your factories get heavily loaded then inevitably your lead times will go out as they get completely loaded but we did some work on how we stage orders and how we basically put gaps in the line that have allowed us to reduce our lead times to our key customers.

And so that certainly help our turns business in the third quarter we believe and so we expect that to continue to help our turns business. So an escalating 13 week backlog entering the quarter, I believe is probably the clearest metric for escalating demand. The reduction in lead times should also put us in the position to respond favorably to turns business opportunities as they appear, which should also be a favorable one. So, the thing to I guess to do and I think at the route of your question is don’t put the reduction lead times in the category of reduction of demand. It's in the category of a fundamental system and processing improvement in our management tools that's allowed us to do that for our key account.

Shawn Webster - JP Morgan

I see. And then I guess maybe one last question for you Mark Thompson is on the broader economic environment, clearly the PC handsets have been doing well for you guys. Can you give any color on consumer and if you or maybe just characterize where you seen relative weakness in your businesses and specifically in consumer if you have seen any impact from housing markets, so I think you have some exposure in the white goods area there?

Mark Thompson

Well, so the white goods have been very strong for us, but that's not that much of a US business. So, if you look at a lot in China, Japan and Europe. And so the issues in housing haven't extended beyond the boundaries of the US. So, we've not seen that and don't necessarily expect, I couldn't rationalize why we would see it. It's always difficult to predict the future, but I don't see that as a particularly big issue.

So, the overall demand environment right now really across the board is one that's quite good.

Shawn Webster - JP Morgan

Okay. Thank you very much.

Operator

(Operator Instruction). And we will go next to Steve Smigie, Raymond James.

Steve Smigie - Raymond James

Great. Thanks. I was wondering if you could talk a little bit more about the success of the analog switch product. What have you done there that's allowed you to have such successful results and are you transferring that to other product sets?

Mark Thompson

So, if I were to try to characterize our success there. It's really been one where we have a number of different building blocks. We put into the switch depending on whether people are focused on analog, whether they are focused on video. There is, a switch superficially is a simple thing but there is usually some dynamic characteristic of the signals that people are putting through the switch that create some specific requirements.

Our team has really done two things that will allow them to be successful. First, is from an engineering point of view they've got all the right building blocks in order to respond to customer request and we've done a very good job of penetrating all the key customers engineering programs, understanding early what it is that they need, and getting those things turned out in time, in the right IC, in the right package, in the right volume and we've been rewarded with share growth as a result of doing that successfully.

So, the second half of your question Steve is that absolutely the model for success in the analog space. So, we are in every place in the company where we have a success formula we're making sure that we study it and replicate it and embed those methodologies into the other product lines.

Steve Smigie - Raymond James

Great. And later question is if you could talk little bit about the manufacturing side of business, anything particularly you intent to do with your footprint dreams of optimizing that on the front end and looking at the past it has been some indication that you already have discussed stays somewhat in sourcing and so what's the outlook for the back-half as well?

Mark Thompson

So as Mark mentioned we have been we think that our average level of outsourcing balance for the backend has been we would benefit by shifting it toward some more in sourcing. And so we've been capitalizing little bit more aggressively on that. So, that's definitely happening, we have the space in our backend plans to accommodate that. Recall that the number of years ago the company built a large facility in Suzhou in China that has not only some space left but we have large lot next to it, so it’s a very expandable site. And Penang is also not completely utilized from a footprint point of view, so we certainly don’t expect that our in-sourcing efforts will require us to expand our manufacturing footprint. We can accommodate everything and recall that we are also steadily squeezing out the lower end and particularly some of the high volume businesses like small signal and so forth. So that we don’t expect to drive any change in our manufacturing footprint.

We are always looking at opportunities to streamline our manufacturing footprint if we can find sort of favorable mechanisms to do that, but we don’t have any eminent plans to do that, although we are constantly examining opportunities to simplify and have fewer overall manufacturing sites.

Steve Smigie - Raymond James

And just as a follow-up on the back-end stuff, is there a percentage of product manufactured that you have in-sourced and is there a percentage goal target that you have or…?

Mark Thompson

Yes, we are less than 50% in-sourced today and we would like to take that to approximately 60% in-source.

Steve Smigie - Raymond James

Okay, great. Thank you.

Operator

We will take our next question from Tristan Gerra, Robert W. Baird

Tristan Gerra - Robert W. Baird

Hi, guys. It sounds like your discrete sell-through couldn't be a little bit higher than you are selling guidance for Q4. If that's correct is it safe to assume that distinct inventory days are going to pick up a little bit in the first half of '08 and that Q3-Q4 at less than 11 weeks is basically a 12.

Mark Thompson

So Tristan, we have not changed our range of distribution inventories. So, we try to put control limits on of 11 plus or minus one week. And so when we get into the high end of the range we watch carefully to make sure it doesn't go too high. When we get in the low end of the range, we watch carefully to make sure it doesn't get too low.

So, we are well into the bottom half of the range at closer to 10 and 11. So, we are watching very closely to where we want to make sure that we don't under ship the channel any further and make sure that we have enough inventory to meet demand.

As I did comment to an earlier question, the average forecast that we get from our distributors is overstated for December, so we've deliberately led a little bit out of that and so we want to make sure that we are positioned, so that we don't grow at channel inventory excessively in the event at point of sale is soft in the back-half of December.

We are well positioned for that. So, even at the sort of two sigma outcome for point-of-sale in December, we will still be inside of our range. And we don't expect to have to correct anything meaningfully in 2008 as a result.

Tristan Gerra - Robert W. Baird

Great. And also, could you give us a sense of what [total] communication revenues in the quarter?

Mark Frey

Tristan, is that a handset question?

Tristan Gerra - Robert W. Baird

Well, you have talked a little bit about the handset, but anything else basically that could have been affect there?

Mark Thompson

Yes. It's mostly handsets.

Tristan Gerra - Robert W. Baird

Okay.

Mark Thompson

Most of our communications number is handsets and as we talked about in some of the prepared comments, we had a very strong handset quarter. And then we've got good starting backlog position for Q4 as well.

Hey, just one point to you to clarify on our channel inventory, we are below the mid point but I would just characterize is as that we are not and we wouldn't say that we are necessarily right on the bottom end of that range but we are definitely below the mid point in our channel inventory, Tristan.

Tristan Gerra - Robert W. Baird

Okay. And just the final quick one. What is the percentage or a rough estimate of your distribution where you have computer systems in place to track sell-through. I know that you've taken a lot of steps in that regard of the past year, year and a half but do you feel that you have covered pretty much of all the main [disties] or how is your visibility in that regard.

Mark Thompson

Sure Tristan, you're correct. We put lot of energy into our point-of-sale information. We get from our largest multinational distribution partners, we can get daily point-of-sale information from our smaller private ones, they have more customized reports but we get let's just say better than 90% reconciliation every week. So, that's actuals and forecast updates is the way that works. And so again we can't from a -- we're never more than a week out of phase with what's going on in the marketplace and that's really why we have a lot of confidence that we really can manage the business very accurately to a point-of-sale basis.

Tristan Gerra - Robert W. Baird

Great, thank you.

Operator

(Operator Instructions). We will go next to Quinn Bolton, Needham.

Quinn Bolton - Needham

I wanted to ask a capacity question, Dan I think you had said that the capacity utilization was up at least the front-end capacity near 90%. It looks like your inventories are pretty lean in the channel, demand seems pretty good, so it sounds like capacity could become tighter as you get into the calendar 2008. So just wondering if you have any preliminary thoughts on CapEx looking into next year? And then also if you are around 90% on a CapEx, do you have additional clean room space where you can just add additional equipment to increase capacity or do you have to start looking at new -- building out new clean rooms to expand capacity?

Mark Frey

Kevin, this is Mark. Our CapEx for next year is till more focused on back-end and front-end. We upgraded the main plant to 8-inches this year and that's coming on board now. So that's a highly leveraged operation and we'll continue to build out that 8-inch tooling next year. We made some investments in [Boshang] at the mid point of this year and that's about to come online too. So, we are very comfortable with the leverage point in our front-end in order to expand capacity. No, we don’t see needing to build out like a clean room environment for another couple years at least.

Quinn Bolton - Needham

Okay, looking at your additional tools on the front-end and then focus on increase in the backend production and trying to in-source a greater percent of your requirements through those backend facilities.

Mark Frey

That’s pretty good summary.

Quinn Bolton - Needham

Okay, great. Thank you.

Operator

And this does conclude today's question-and-answer session. Mr. Janson, I would like to turn the call back over to you for any additional or closing remarks.

Dan Janson

Great, well, thank you all for joining us. We appreciate your attention.

Operator

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Source: Fairchild Semiconductor International Q3 2007 Earnings Call Transcript
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