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Freescale Semiconductor(NYSE:FSL)

Q3 2007 Earnings Call

October 23, 2007 5:00 pm ET

Executives

Mitch Haws - VP of IR

Michel Mayer - Chairman & CEO

Alan Campbell - CFO

Analysts

Lenny Zeltser - Merrill Lynch

Jeff Harlib - Lehman Brothers

Sundar Varadarajan - Deutsche Bank

Guy Baron - Credit Suisse

Patrick Wang - FCM Advisor

J. Montgomery - Morgan Stanley

Heather Campbell - from Barclays

Eric Rubel - MTR Securities

Robert Hopper - UBS

Operator

Good afternoon. Welcome to the Freescale Semiconductor ThirdQuarter 2007 Earnings Call. All lines will be on a listen-only mode and thecall is being recorded. If you have any objections you may disconnect at thistime.

I would now like to turn the call over to Mitch Haws,Investor Relations.

Mitch Haws

Thank you everyone and welcome to our Third Quarter 2007Conference Call. With me as always today are Michel Mayer, our Chairman andChief Executive Officer, and Alan Campbell, our Chief Financial Officer. Theearnings release and financial statements discussed today are available at theInvestor Relation section of our website at www.Freescale.com. This call isbeing webcast live at our site as well.

Today, we will make certain forward-looking statements andthese statements, as always, are based on our current expectations andassumptions. Because of the inherent risks and uncertainties, our actualresults could differ materially from these statements.

Please review our filings with the Securities and ExchangeCommission for a more detailed discussion of the factors that could cause ouractual results to differ materially from the statements made today, as well as,other factors that could affect our results.

This presentation is being made on October 23, 2007. It includestime-sensitive information and the Company undertakes no obligation to corrector update any information presented on this call.

During this call we will also reference certain non-GAAPfinancial measures that we believe provide useful information about our ongoingoperating performance. You will find on our website the requiredreconciliations to the most directly comparable GAAP number.

With that, I will turn the call over to Michel.

Michel Mayer

Thank you, Mitch. Good afternoon. Welcome to today’s call.As you have seen from the press release that we distributed to the audience,our third quarter results improved over the first half of this year mainly dueto higher wireless revenues and I’ll discuss that.

Revenue earnings and cash flow were stronger sequentially,and we ended the quarter with over $770 million in cash. Like many of ourcompetitors, and many have already announced their results ahead of us, ourresults are below the prior year. However, the semiconductor market continuesto be somewhat challenging, and despite those challenging market conditions, wecontinue to perform well operationally with solid margins and cash flow.

We continue to make progress this quarter in strengtheningour organization with the appointment of Henri Richard as our Head of Sales andMarketing.

Henri is respected in (inaudible) veteran. I am pleased, hejoined the Freescale team. His expertise in developing customer solutions willaccelerate our growth initiative and build on Freescale’s strong marketposition.

Now, let’s look at the quarter in more detail starting withTSPG Transportation and Standard Products. The TSPG revenue was $653 milliondown from last quarter and down from the prior year.

Now, the segment's revenue were impacted by lower overall IPrevenues the planning of which can vary as you understand somewhat fromquarter-to-quarter during the year. So if you look at TSPG’s revenue on aproduct basis, it was essentially flat year-on-year.

Now, if you look at the product revenue, the sales werenegatively impacted on a sequential basis by the seasonal weakness in NorthAmerican automotive production. That production, I remind you, declined 15%sequentially, North American production, as well as, had some softness indistribution. And this offset was consistent with either quarter by the growththat we experienced in Asia-Pac.

And our revenue in Asia-Pacific, automotive grew 27% from ayear ago. So we continue to grow in Asia-Pacific. We continue also to see goodperformance in our 16-bit MCU's, up 18% year-on-year and sensors continuedyear-on-year growth of the [automobile] segment.

We are also starting to see traction in design winsincluding analog power management with both U.S. and Korean based companies andautomotive microcontroller with some of the world’s largest Tier 1 suppliers.Overall our design win base is 15% above last year, 2006.

We continue to make investments in products and partnershipsin TSPG to support future growth. For the consumer market, the RF entertainmentcontrol platform that we announced in Q2 has begun to gain traction. 13 ofSony's latest Bravia TV model, which you know are leaders in their segment, andare using these RF platform for their wireless remote control. The technologylab at our Freescale Technology Forum in Tokyolast month featured a Bravia TV with this technology and it generatedsignificant interest from other consumer electronics companies.

We recently introduced the Flexis series of compatiblemicrocontroller that serve as the 8-bit to 32-bit connection point on theFreescale Controller Continuum. The first product of that series which wereceived accolades in China.Readers of Portable Design Chinaselected Flexis as the best MCU and the devices also received ElectronicEngineering and Product award for 2007, plus the influential China Embedded SystemNew Technology award.

In Q3, another 22 new ColdFire devices from the low end tothe high end of the 32-bit performance spectrum lines were introduced. We haveexpanded our ColdFire MCU portfolio by 25% with this launch, which includes 12high performance microprocessors for Linux application and 10 additionalColdFire MCUs with connectivity and ultra-low-power options for entry levelapplications.

We unveiled the industry's first tire pressure monitoringsystem, containing capacitive pressure sensors for ultra-low power consumptionand precise sensing. The device combines an advanced pressure sensor with an8-bit microcontroller, 2-axis accelerometer and radio frequency. This single-packagesolution is designed to address global safety requirements for accurate, timelytire pressure monitoring.

Finally, we recently announced that we are working withContinental Automotive Systems to design a high performance, multi-core MCU,optimized for electronic breaking systems. This device called: “SPACE”, is the industry'sfirst triple-core automotive MCU. This is the most powerful, sophisticatedautomotive MCU in its class. It will be used to enable the next generation of electronicbraking systems and chassis control systems.

So we are starting to see the result in TSPG of ourincreased focus on reducing cycle time coming out with more products. We arecontinuing to focus on that segment and on 8-bit to 32-bit we have moreproducts coming out in distribution in 8-bit, for years this has been our focusto come back and rebound and as we look at our competitor's results we believethey are starting to have an impact.

Switching to networking, the business generated revenue of$315 million in the third quarter, down from last year and from the secondquarter. This revenue softness is driven by the ongoing weakness in thecommunications infrastructure market applications, both wireline and wireless,and you’ve all seen the results of our main customers in the communications andinfrastructure space.

If you remember when we entered the year, we thought that wewere going to have a weak first half of the year followed by goals in thesecond half, and what we are observing, I think together with the rest of theindustry, is ongoing weakness into the second half of the year, pushing some ofthe “recovery” to early next year. Those of you who follow the industry knowthat broadband subscriber growth in established regions have significantlyslowed in ’07.

Net subscriber additions being 6% lower in the first half of’07 compared for the same period in ’06. The mobility of infrastructure marketgoals has also being flat year-on-year. GSM, GPRS and EDGE will likely continueto source (inaudible) in developing regions, Chinaand India in particular, butit is mitigated by the clients in Western Europe, North America and Latin America.

And finally, together with the other players in the industrywe are still seeing the affect of the restructuring of portfolio andinvestments among our consumers and our customer or customers as well asplatform consolidation in this space.

Despite some of the market pressures here, we are startingto see higher backlog, and we expect some improvement in our networking businessgoing forward, simply a little later and little bit slower pace, then ourassessment was earlier in the year.

We continue to invest in new technologies in our networkingbusiness to support long-term growth, in support of new technologies forwireless infrastructure, Freescale introduced three new devices for WiMAXapplications this quarter. The devices extend our portfolio of RFIC to the twoprimary band utilized by WiMAX throughout the world. These devices also utilizea packaging strategy that reduces growth, size and complexity.

We joined ArrayComm's to offer multi-antenna signalprocessing reference design for WiMAX based station, based on our quad-core DSP.We continue to introduce new RF product in markets outside cellularinfrastructure such as VHF, UHF, broadcast, avionics, industrial, medical and general-purposeRF.

The introduction of our PowerQUICC tool product families ofstorage enables great performance, integration, security and power managementfor the storage and printing market.

Jiangsu Yin He Electronics, which is, as you know well, oneof China's leading digital television set-top box manufacturer’s, announcedselection of Freescale silicon tuner for their digital television set-top boxmodel. This inclusion is significant in digital set-top boxes are being widelydeployed over Chinaas the nation migrates from analog to digital television.

While I am talking about China,we opened this quarter a design center in Chengduin September, in fact. The design center will be sent for the development ofour solutions for Chinese local centers, such TD-SCDMA and infrastructuretechnologies and technical applications support for our growing base ofcustomer in this region.

Finally let’s take a look at wireless and mobile solutions.The Wireless revenues for the third quarter were of $468 million an increase ofover a $100 from the second quarter of this year. Our performance still trailswith last year given the challenges at our second customer, but we also aremaking progress in some key indicators.

Profitability continues to improve based on the acceleratedoperational discipline that the wireless team is implementing under Sandeep'sleadership. We continue to be a key supplier to Motorola. At their recentanalyst day, they discussed our position as one of their two 3G suppliers goingforward.

Freescale content continues to power their new line-up ofphones that we are all out to enter in the remainder of 2007 and through 2008.On the multimedia side of that business, we recently returned the WiMAXapplication processor that powers the new Ford SYNC multimedia platform.

Just recently Popular Mechanics awarded Ford SYNC with abreakthrough award to synchronize product that sets the new benchmarks indesign, creativity and engineering. Ford SYNC is one of the only ten productshonored in '07.

SYNC which is being developed in association with Microsoft,as you can see on TV these days, is a fully integrated voice activated in-carcommunications and entertainment system that works with most digital mediaplayers and Bluetooth enabled mobile phones.

Our WiMAX processors are also designed [in to soon], theother portable music device, the next generation of which starts shipping thisfall. We expect additional design win activity with these devices in other IPs.WiMAX is also gaining traction in Voice-over-IP applications with the other IPpoint of sale and distribution.

So, in summary, our third quarter performance drove solidEBITDA and cash flow in a average top line environment, I would say and we arevery focused as a management team in continuing to improve our overallperformance.

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

Alan Campbell

Thanks Michel and good afternoon and thank you for joiningtoday's call. Backing Michel's comments our third quarter financial resultsrepresented solid improvement over the prior quarter. Revenues were up $70million, EBITDA was up over $40 million and we had cash balance which increasedby $231 million.

Looking at the results in more detail, revenues for thethird quarter were $1.45 billion. This represent a 5% increase on asequentially basis and an 11% decline over the prior year. I'll go into this inmore detail, but, as Michel indicated, our wireless business represented asequential increase whereas all three business segments were down on ayear-on-year basis. Our book-to-bill ratio was 0.95 which was essentially flatwith the second quarter.

As I review the financials please note that I will befocusing the results excluding the impact of purchase price accounting. Webelieve, as we've said before, this is a more meaningful representation of ourongoing financial performance.

Our gross margins in the third quarter were 43%. This isdown from the same period last year of 46%, as well as from the second quarter.Our internal factory utilization continued to be in the mid 70s. Again, thiscompares to approximately 90% in the same period last year. And Michel touchedon that also -- we also had some head wins with our IP revenues coupled with ahigher mix of wireless business resulting in the overall decline.

Despite these head wins, we continue to execute on a varietyof the operational efficiencies, including tight cost controls, procurementsavings and product yields. We also successfully executed on reducing ouroperating expenditures.

SG&A in the second quarter was $163 million or 11% ofsales. Continued cost control in this area resulted in an expense reduction ona year-on-year, as well as, on a sequential basis.

R&D in the second quarter was $270 million or 19% ofsales. This also represents a decline from last year, as well as from thesecond quarter. As you’ll recall, we implemented a number of cost actions inthe second quarter, including announcing a reduction in headcount by about 700people worldwide. These are approximately two-thirds complete. Now, goingforward, we expect these actions to generate additional cost savings of $55million to $65 million. These savings are spread among the cost of salesG&A and R&D and other income statements.

Adjusted operating income, excluding again the impact ofpurchase pricing and merger expenses, was $195 million or 15.5% of sales.Again, this was down from last year, but as an improvement from the secondquarter of 11.6%.

Overall, the EBITDA for the third quarter was $353 millionor 24% of sales; a 42 million increase from the second quarter. Adjusted EBITDAwas $396 million or 27% of sales for the quarter. And then on a trailing12-month basis it was $1.6 billion or 27% of sales. Finally, we managed capitalexpenditures during the quarter to $73 million or 5% of sales, which isessentially flat with the second quarter. This level of expenditure covers ourbase maintenance requirements, and we'll address additional expenditures as businessconditions warrant.

Now looking at the segment revenues and profitability,Michel has touched on this, transportation and standard products in the thirdquarter was $653 million, a decrease from the prior quarter and down slightlyfrom last year. Revenues were negatively impacted by seasonal weakness inautomotive and a slowing trend in revenues of our distribution business. Thissegment, however, continues to generate solid profitability with EBITDA of $177million or 27% of sales.

Our networking business reported sales of $315 million, alsodown from the prior quarter and below last year due to lower levels ofexpenditures amongst the major wireless infrastructure providers. NCSG's EBITDAfor the quarter will also continues to be very strong at $103 million or 33% ofsales.

Finally, our wireless business reported sales of $468million in the third quarter, up over $100 million from the prior quarter, butstill down from the same period last year when it was $540 million.

EBITDA for the quarter also improved significantly in thisbusiness to $71million or 15% of sales; actually the highest return on sales inthis segment as generated income type. This improvement was driven partly byhigher revenues, however, we are continuing to make solid progress in improvingthe segment's profitability with good execution costs and other operatingefficiencies.

Let me now turn to working capital, inventory days declinedas we expected from 103 days in Q2 to 92 at the end of Q3. This decline wasdriven by the improvement in the wireless revenues during the quarter. Ourdistribution inventory continues to be well managed with units at the end ofthe second quarter at 9.8 weeks, in line with the first quarter of 9.9 weeksand this continues to be within the range of historical averages.

DSOs were 31 days in the third quarter, down from the firstquarter of 35 days. Payables were at 46 compared to 53 in the second quarter.Overall our working capital as a percentage of sales was 16% for the quarter,consistent with the second.

With respect to cash, we executed well. We ended the quarterat $772 million compared to the $540 million at the end of the second quarter.Free cash flow generated in the quarter was strong also. Going forward webelieve we have adequate cash and operating cash flow to fund our business forCapEx and our ongoing debt payments.

In summary, a very solid performance and a good progressover the first half of the year and as Michel touched also on the continuedopportunity for improvement.

That concludes our remarks and now we will be happy toentertain your questions and I will pass it back to the operator.

Question-and-AnswerSession

Operator

(Operator Instructions) Our first question comes from LennyZeltser from Merrill Lynch

Lenny Zeltser -Merrill Lynch

Hey guys, couple of questions. First off, I was surprised atthe instruments in your wireless business. I know you touched on a little bitin your comments but if can expand on the revenue side whether there is someincreased customer wins or were other programs are ramped up so you can expandon that a little bit? And then the margins also were very strong if you can getinto greater specifics about what drove the improvement in wireless there?

Michel Mayer

Okay, Thanks Lee, I'll take the question on revenue and thenI'll let Alan, talk about the margin. First of all this industry is -- this isone of the first times where we are reporting significantly ahead of Motorola,they are reporting a quarter in two days and so we are going to be a frontdisclaimer. So we are going to be extremely cautious on in this call on what wesay or don't say, so I'd just say if you think which is one, we've said severaltimes that our own revenue because of inventory management and lead times andas a component supplier is not necessarily linked quarter within the quarter tothe business of our customers. Well that's first comment there is not a directcorrelation for every given quarter.

The second thing is all that you can probably make theassumption that our business went down really low in the beginning of the yearas our customer put the foot on the brake and that we are probably getting backtowards more a normal inventory management situation. But that does not say anythingon what their business is doing or not doing.

And the third thing is yes, we are hunting some otherbusinesses, but again I apologize, I'm being a really -- I am not giving toomuch visibility, again, because I am worried given the size of my business, Ican't go into about the overlying in that space, but if I give too much color Iwould be guiding quite indirectly.

Lenny Zeltser -Merrill Lynch

Okay and then on the --

Michel Mayer

The second thing is to Alan on the margin and you will getadditional information within that space.

Alan Campbell

Yes. Thanks. Let me -- I think the equation was specific toour wireless business on margins with our significant improvement on EBITDA atover 15%. Despite the head wins, I talked about of utilization and lower IP, wecontinue to see some very solid execution within our wireless business underthe leadership of Sandeep. So really, its one off execution with operationalefficiency, product costs, procurement and higher revenues obviously had animpact also.

Michel Mayer

So when Sandeep came on board, he embarked into a wholesaleoperational, sort of an operational improvements, increased discipline,tightening a lot of things, in particular, yields, sourcing and procurement ofsome packaging, I mean, things like that and so those things have started tokick in at the beginning of now. Last quarter, our revenue was the -- theimpact of revenue was so important that, although there was some beginning ofimprovements, we couldn’t really see it in the P&L. Now, that the revenueis going back to enhance your level and then we are also have three monthslater in, and some of those improvements are accelerating, it is much morevisible. Had we been, if we have to had a more regular almost pretty straightlevel of revenue, you probably would have observed those improvements on amarginal basis because of the unusual pattern that we've followed,. I think,it's more visible here in this quarter, and quality comes as a little bit of asurprise, I agree.

Lenny Zeltser -Merrill Lynch

Okay, just one other question, real quick, I think youmentioned the book-to-bill was 0.95, we are probably two-thirds away throughthe quarter, as this was mentioned, so that lesser than two-thirds of the waythrough the quarter, what's been the tone of business in your different endmarkets, and would you expect more churns business in this quarter versus Q3?

Michel Mayer

Well, first of all the 0.95 is a little bit misleadingbecause wireless book-to-bill is lower than the two others, and you have to doagain -- it has to do with the credibility of one large customer or agency thanand the timing of when in our agreements they finalized their orders. And so ithas everything to do with the actual health of that business going forward, butthe point it is default stability, so if you look at consultation andnetworking Alan --

Alan Campbell

Yeah, transportation was 0.97, but networking was 1.08.

Michel Mayer

Yes, very positive. So that's the first element of answerwhich is that we see -- we are cautiously optimistic of the tone in thewireless end market. Wireless, again, let me not comment, but I think you haveenough points of reference on the overall market to know that it continues tobe good volume pressure on ASPs and more growth at the low end then in 3G, Imean, that's the net. In automotive, we continue to see a year-on-year declinein the U.S. automotiveproduction level, but we see, I would say, a cautious environment in Europe andgood environment in Asia. And then in transportationwe are, we feel it's a combination of design wins that we've had and theconsumer industry that we see which again have been lower in Q3 although infact we moved a little bit slightly in Q4 over Q3.

But in general I think we see a good recovery in fourth. Wecannot reach that recovery because again the rate is going to a bit down onthis, but improvement in the second half being more muted and slower growththan was, this occasion was one or two quarters ago and looking at '08 earlypart of '08 we will try to have some visibility. We again see single-digitgrowth and depending on the segment more or less ASP pressure.

The volume they are usually, it's really more a question ofASP pressure. Okay, thanks Lee. Next question please?

Operator

Thank you. Jeff Harlib from Lehman Brothers, your line isopen.

Jeff Harlib - LehmanBrothers

Hi Michel. Can you talk to me about progress with otherhandset customers besides Motorola. You talked about one ramp this year. I'mjust wondering how your platform based products are being sampled andpotentially [separate]?

Michel Mayer

We continue to work at a slower pace than I would like, butwe're making progress, we are ramping up with one customer. And we are in finalplatform innovation with another one both for our 3G platform and we continuerelentlessly to push our platforms.

Jeff Harlib - LehmanBrothers

Okay, and on your capacity utilization side, operating inthe high 70's are you looking at your manufacturing facilities for potentialrationalization and, also, if you can comment on your equipment from a CrollesJV, whether that gets monetized?

Alan Campbell

Yes, Jeff, obviously I think we've shown from our experiencein past that we continue to be proactive in looking at our structure. We have communicatedour intent with one of our sections, facilities in Europeand we have also communicated intent as you said with Crolles. But we continueto look at our footprint or factory footprint obviously to optimize ourfinancial performance. And again they didn't come over despite the fact ourutilization, we are on the mid 70's and despite the fact our IP's were verylow. We really are continuing to execute on voice control operation withefficiency front.

Jeff Harlib - LehmanBrothers

Okay, and last question just the, can you talk about yourinitiatives to grow sales and distribution, I know I was wondering about growthinitiatives. Just can you comment on that?

Alan Campbell

Yes distribution we have said actually speaking in spite towhen we took the company public, distribution was the key area of focus andcontinues to be a key area. We did not see distribution growing and in fact itwas basically flat specifically during the third quarter as they managed theirend markets as well as the elementary. Within the organization, I think, thevery part Michel’s thoughts were honorary who has got tremendous expertise andfocus specifically in that channel. So we have a very high expectation ofcontinuing to execute on a distribution business, and you know the growth in2006 was very poised with ’05. So again both are common distribution, but thereis certainly opportunity there.

Michel Mayer

It remains a key goal initiative for us. We have “plateaued”a little bit here. It’s in a combination of the market, but also the fact thatwe have benefited from lot of the initiatives we took in the spaces while weintroduced new products. We need to introduce a new wave of the solution timelyproducts which -- that’s what I was alluding to when I said in 1 we are continuingto introduce more and more products. We took the initiative a year and halfago, two years ago to refocus on some segments where more of the solutionfinally on lower hand. More integration of IT on our cost reserves, as we hadnot been focusing on those segments, and we had to let some of our competitionget ahead of us over the prior years.

We did start to introduce new products. We have beenfocusing on a solution. We have been growing. In order to get to the next levelof growth to start to grow, if we are to continue to grow faster than themarket, like we intend to, we need to get into new set of initiatives. So itsgoing to be a combination of new products coming in at an accelerated pace, aswe are continuing to improve our efficiencies in R&D and reduce our cycletime for products in production, and then the next level of sophistication inhiring the eco system and hiring the solution, and again they are to repeatwhat Alan said, I have lot of expectations on the side Henri is going to get usto now be world class. I am convinced in the side of marketing.

Jeff Harlib - LehmanBrothers

Great. Thanks very much.

Michel Mayer

Thank you. Operator, next question?

Operator

Thank you. Sundar Varadarajan from Deutsche Bank, your lineis open.

Sundar Varadarajan -Deutsche Bank

Okay, thanks. I have a few questions, first on the IP sideyou said partially the costs were somewhat softer sales on the TSPG business,is that something that you'll recapture in the coming quarter or is that like aone-time thing, that was miss, how do we kind of read into that IP revenue thatwas kind of little lighter in the third quarter?

Alan Campbell

Yeah, I think we have said that the IP revenue which isembedded in each of the businesses can’t be somewhat lumpy. Last year our IPrevenue for Q3 was close to 5% of revenues, but this year it’s less than 1%,but I have given specific guidance for Q4, there is an option of possibility wecould see some IP coming back again in the fourth quarter.

Michel Mayer

The IP revenue is not a steady revenue and there is aportion of it that’s steady, and this is in middle of the quarter and then thebulk of it is really "dealer related." And so, it's a function ofwhen we close a new licensing agreement, something like that and we don’treally -- So it just happened one year that it is, some of this is commuted andmore even and in some years it's aneven, that is it just is. So at a high level, yes, you can expect that we will"capture" or to use your words, some of these fervently. If you sitback and look at our overall IP from thenew over the year it's very steady. But this one is a little bit uneven.

Now, we usually don't talk about it and we don't point toit. The reason this time where we are using it, because it really is impactingTSPG objects and so we didn’t want you guys to think that our TSPG revenue wasgoing down, but it is not, it is flat year-over-year which is in today’s marketis not great, but is honorable. And so we wanted to convey that and not misleadyou in a sense in what was happening.

That being said, we are expecting volatility in our ITrevenue and when it is not leading to a [probable] income of the object weusually don’t talk about it.

Sundar Varadarajan -Deutsche Bank

Okay. And help us understand the book-to-bill ratio becauseyou have mentioned in the past that it’s not much of a predictive. But you kindof spoke about book-to-bill ratios being above one in the NCSG business, kindof close to one in the TSPG, but last quarter we entered the quarter withbook-to-bill being kind of above one for both these segments, yet revenue wasdown sequentially. So what exactly do we take away from these book-to-billratios?

Alan Campbell

You have to use the book-to-bill ratio in conjunction with anumber of other metrics that we look out. For example [myblog] is on the book,funds business, lead times. So that’s no misleading in itself, but one has tolook at it in a range over which the industry tends to use book to bill as anindicator and general management team here continues to look at a number ofmetrics as a predictive for following quarters.

Michel Mayer

And it’s a timed indicator and if business in particular fornetworking this quarter, clearly we didn't see the usual terms that we see in thequarter and that's something that the book-to-bill is not going to show you andso -- I mean, I don't need to explain to you guys what's happening in thatspace and you can see what Crolles and competitors than in other Nokia, Siemensare announcing and doing, so it is a really slow -- the infrastructure marketis really slow at this point, so we didn't see the terms but -- go ahead.

Sundar Varadarajan -Deutsche Bank

And on the wireless side clearly you guys in the first half,whatever inventory collections at your big customer, so you are performanceseemed a lot worse than what they were kind of projecting in this quarter. Wedon't know what they are going to say, but seems like there is some lumpinesshere. But if you were to look at your performance for the first nine months asa whole, do you think it's captured, what's going on at your big customernumber one. And when we look at year-over-year performance at least do we thinkthings get better from here or how do we kind of look at it from a year-over-yearperformance going forward?

Michel Mayer

That was an elegant attempt to make me not respect mypledge. Do not guide, but I'll take a joker on this one, okay, thank you.Operator, next question.

Operator

Thank you, Guy Baron, from Credit Suisse, your line is open.

Guy Baron - CreditSuisse

Hi, there. All right, let me actually ask another Motorolaquestion, I'll try my luck Michel. I would have sort of anticipated that yourshipments into Motorola, rather into Motorola’s new handset line would haveramped this quarter. If for no other reason it simply for them to sort of fillshelves and be in the markets that they’ve already talked about being in now,was that really the largest driver of growth in this segment, and then, Iguess, the part two of that is can you may be reconcile some of that potentialvolume ramp with the fact that utilization was relatively flat in the quarter?

Michel Mayer

Yeah, I am not sure I understood the second part of yourquestion. Remember we had -- if I do remember we had a lot of inventoriessipping on the ship, but remember, we were, if you followed the previousepisodes, we were kind of surprised a little bit on the down term like a lot ofpeople in Q1, and a little bit in Q2 by the down turn of our customer and sothat created an inventory position. So you can’t necessarily correlateutilization with our valid shipments. If anything, if you had it correctly, ourshipment is increasing in each country. But it came mostly out of inventorywhich we had created before, so that’s -- if you look at the high level we’veplayed the role of keeping a higher level of inventory that usual for ourcustomers and so on during that. I mean if we could look at it that way in afront. On the first question, again, I understand I am not giving you thereadability you want, but I have to, I really have to be ultra sensitive and Iam willing to have a discussion with you guys, also they recall and give youmuch color, but here I don't want to. Have another question?

Guy Baron - CreditSuisse

Yeah, just to clarify then to make sure I understood theanswer, so in essence until existing inventories are depleted only 3G productramp would actually drive significant increase in volume?

Alan Campbell

Hi, this is Alan. I don't think that’s what we said, we arebeing somewhat cautious about making any comments on Motorola or our wirelessbusiness, specific to Motorola. Michel's comment was very clear, although thatwe did have a significant inventory reduction and position when we entered thethird quarter, and we did then reduced our inventories from 102 days to 93.Again, I think it's appropriate that we take more or give more granularityafter Motorola’s analysis.

Guy Baron - CreditSuisse

Okay, and then Alan, let me -- a quick question here, you'vetalked in the past about using a number of 20% of the drop in utilization tosort of gauge the negative impact on your gross margins, and that could happenwith 3% drop in gross margins, would that be the same measure to use on the wayup?

Alan Campbell

Yes, absolutely. I think actually if you look at, as I said,to emphasize once again that the utilization rates coupled with the IP, that’sa significant pressure on our margins, but we will able to counter off withsome very strong operational efficiency and focus.

Michel Mayer

I want to add one element of complexity; I want to have forthe discussion here, so that you guys get a little bit careful in theconclusion that should help. As we are in a exiting call, we are positioningsome of those products which we were running in Crolles into other surface andfor most of those products it's foundry, which you don't see in our internalutilization. And so that is that’s when I said, because in particular in Q4 --I mean we are not going to take product out of Crolles after the end of theyear, which means that we've pretty much stopped running wafers, new wafersinto the quarter as of now. We are just now going to get in Q4 wafer that wehad started in Q3.

And so I don't want to get in more details, but and then trya little hawking of some foundry, so if you have and things like that can giveyou three or four more that will de-correlate if you want our internalutilization, particularly in the wireless phase with what's happening to us interm of the product. So you need to wait for Q1 when we are really more steadystate of not having the call capacity, it being unused here in essence “to seewhat our new steady utilization” is going forward.

Guy Baron - CreditSuisse

Okay. And then just finally a quick one on cost saves. Howmuch of the cost saves have you talked about were actually realized thisquarter in the number and then going forward I see you've only got a 6 millionadd back there. Does that represent just a balance of what you've done alreadyand over what timeframes do you really execute on the rest of that 35 to 65 insavings?

Alan Campbell

Yeah, we are executing the remainder of the as I'd say thisquarter we have executed on our 60% of the actions already. The other 40% are drivenby specific issues in specific countries, but that will take us into Q1 and Q2,where we'll continue to see cost savings.

Michel Mayer

Okay, thanks Guy. Operator next question please.

Operator

Thank you. Patrick Wang, from FCM Advisor. Your line isopen.

Patrick Wang - FCMAdvisor

Yeah, thank you. A couple of questions, the cash increase of$240 million, your free cash flow from operation is only $120, so where doesthe other $100 million come from, is that from tax refund of somethingone-time?

Alan Campbell

No, Patrick, the cash really was driven by three elements,one was the working capital. We talked about working capital in terms of theinventories, the receivables as well the payables and that was a benefit. Twowas, improvement in our operating performance that was driven by EBITDA of $40million and three was, some interest payments with the flow of interestpayments that we have. These are the three elements that drove the improvementthat worked out in cash of $240 million.

Patrick Wang - FCMAdvisor

Right. So, the working capital was 16% of sales and what wasthat last year same period?

Alan Campbell

Last quarter that was 16% of sales I don't have the number,I think it was actually at 14% of sales last year, but again we have to becareful there because when you look our receivable balance, a lot of itdepends, it is a function of the timing of taking that cash from revenues forthat specific quarter.

Patrick Wang - FCMAdvisor

And how much of that cash flow is actually from the workingcapital reduction this quarter, can you just magnitude close to 100 or close to40?

Alan Campbell

Yeah, that was approx, it was just over $30 million ofworking capital improvement.

Patrick Wang - FCMAdvisor

Okay, great. And a question is for modeling purpose yourCapEx as a percentage of sales had dropped quite a bit from last year, 11% to5% this year. Is that all because Crolles or is there a nature of CapEx willcome down, and how do we model that going forward, is 5% a pretty realistic number?

Michel Mayer

Well it has a lot to do with being at 90% position in ‘07 atthe right time. We are -- as we’ve observed our utilization going down, clearlywe are not adding capacity here at this point and so we have moved down to amaintenance level of CapEx as Alan indicated, so modeling forward I think a 6%--

Alan Campbell

Yeah, 6% - 7% is pretty reasonable for modeling, a lotdepends on obviously the market conditions, the revenue, you know, -- as aresponsible when it comes to taking actions on what can capital or expenses, soin order to the capital at 5% and this quarter was low, but for our modelingpurposes we have just said before Patrick, I think 6% plus is reasonable.

Patrick Wang - FCMAdvisor

Okay. Great. Thank you.

Michel Mayer

Thank you. Thank you, Patrick. Operator, next question?

Thank you. J. Montgomery from Morgan Stanley, your line isopen.

J. Montgomery -Morgan Stanley

Hey, gentlemen. The revenue sequentially, I think, was upabout 5.1%? Was there any positive impact in there from the weak US dollars?

Michel Mayer

So, let me just, throw a little bit of color on thecurrencies for the company. We are probably over 90% naturally hedged andbasically what I mean: as the expense in sales comes with a natural hedge, wasthere any impact? On the sales line, there is slight positive impact, on theexpense line there is a slight negative impact. Overall, though it’s minimum,again 90% is a natural hedge.

J. Montgomery -Morgan Stanley

Okay, so could you just tell us what sequential revenuewould have been without currency?

Alan Campbell

I don’t have the number; Jan, I need to get back to it. It'snot significant; I can tell you that you while I need get back to on thisspecific number.

J. Montgomery -Morgan Stanley

Okay. And did you guys publish a cash flow from operationsnumber?

Alan Campbell

We will publish a cash flow from operations, we will belisting, now be issued on our Q in the coming days. So, you don’t see thedetailed financial statement.

J. Montgomery - MorganStanley

Okay, can you just tell what's their number is?

Alan Campbell

The free cash flow from operations will be $337 million inthat range.

J. Montgomery -Morgan Stanley

$337 of cash from operations?

Alan Campbell

That's operation cash flow, yeah and that excludes anyinterest, any CapEx.

J. Montgomery -Morgan Stanley

Right. Okay. And in terms of seasonality from the thirdquarter to the fourth quarter, looking back at the historical trends, it’s kindof difficult to get a pattern, would you mind walking us through what you wouldconsider a normal seasonality for each of the business segment from the thirdquarter to the fourth quarter?

Alan Campbell

Yeah, I think historically we have seen that, and again itvaries by business with that conduit and it varies with the market conditions.Historically, transportation business is channel sales, slightly increasinggoing into the fourth quarter. The third quarter is ordinarily a low point forthat. In our networking business, the seasonality historically has been flat toslightly up.

And as Michel touched, we have seen very seasonal patternswhere the first half is weak, second half was strong. We didn’t see that in thethird quarter, but the general statement, I think, it’s fair to say that networkingwill be flat, and up in the wireless business, it'd also be slightly up goinginto the fourth quarter.

J. Montgomery -Morgan Stanley

Okay. And I am going to try one on Motorola -- the revenuethat Motorola usually contribute to this roughly 20% to 25% of the Crollebusiness, and usually about two-thirds of the wireless business. Any reason tobelieve that would be materially different in the third quarter?

Alan Campbell

Again, I don’t think it’s appropriate that we have anyspecificity at this point Jay on Motorola and again, yeah, sure we'd be happyto take follow-up questions and give further details on granularity, one isMotorola that I mentioned.

J. Montgomery -Morgan Stanley

Okay, thank you.

Alan Campbell

Thanks, Jay. Can we go the next question.

Operator

Thank you [Heather Campbell] from Barclays, your line is open.

Heather Campbell -from Barclays

Yeah, thanks. Most of my questions have been asked already.But just two other quick last ones, could you give us a breakdown roughly ofwhether your business that was in-house versus outsourced for the front end andbackend in the quarter. Do you have that available?

Alan Campbell

Yeah, actually those two elements of this is what we callthe, on Silicon stage of the front end, our outsourcing actually increased inthird quarter and increased with 17% of sales. So, up from the 13% range in thesecond quarter, and that's driven again primarily by the technology needs ofour wireless businesses and the growth there. On the assembling test forbackend state of the equation; that's been pretty consistent with 50% insideand 50% out.

Heather Campbell -from Barclays

Okay, thanks. And then secondly, could you give us an updateif there is one on the progress of the East Kilbrideand then some of the facilities there, just maybe if you could give us somecolor on what you are seeing in terms of level of interest, anything alongthose lines?

Alan Campbell

We have a level of interest. We have engaged with an outsidecompany called Colliers and we are going through some diligence at the momentwith those interested parties. So, I think for confidentiality that's probablyall I can see at this point.

Heather Campbell -from Barclays

Okay. That's it thanks.

Alan Campbell

Okay thank you. Operator next question.

Operator

Eric Rubel, from MTR Securities, your line is open.

Eric Rubel - MTR Securities

Hi, good afternoon gentlemen, thanks for taking my call, andAlan a couple of questions for you quickly. The IT revenue is this, shall wethink, this is sort of a royalty that has the 100% gross margin?

Alan Campbell

The royalty revenue was probably 70% plus gross margin are100%. There are costs associated with that.

Eric Rubel - MTR Securities

Okay.

Alan Campbell

Growing our business is still a very positive gross margin.

Eric Rubel - MTR Securities

Great and then another one for you Alan, if is it possibleto kind of refrain expectations around what the possible size of the assetssales could be if you had the factor in [Celbridge] and the 300 millimetershell and the Crolles equipment, is there can you give us a sense of or rangeas to what those assets could bring in and then with one side and then if you [Celbridge]were to be closed what that would do on the operating side?

Alan Campbell

It's actually my hometown so if I can correct you, itscalled Kilbride, you see that, I know it is wrong to see that, but thenthe intent there is it will take sometime, that's not intended for short turn at this point but we can turnourselves more so just for clarification there.

Eric Rubel - MTR Securities

Okay.

Alan Campbell

And that will help with overall utilization as well as ourmargin structure. In terms of significant improvements on our margins as aresult of that however you will not see and we will not see significantimprovement until the end of '08 going forward.

Eric Rubel - MTR Securities

Okay.

Alan Campbell

In terms of the cash realization for some of the items,again that we are looking are including Crolles, we are currently indiscussions and working with our partners in, I think it’s appropriate not tobe, for confidentiality and respect, develop two partners that we wait until wehave finalized the agreement which should be in the first quarter.

Eric Rubel - MTRSecurities

Okay.

Alan Campbell

Of next year.

Eric Rubel - MTRSecurities

And if I could from Michel or Sandeep, if he is available,you know, away from sort of the Motorola impact to the wireless segment, couldyou guys talk about the non Motorola components and in terms of day spend andon the other side of the business, any color sequentially or year-over-yearwill be helpful?

Michel Mayer

Eric, I am not sure I have that level of detail availablewith me here. At a high level, what we have year-over-year, you mean, revenuecomparison for the non-Motorola?

Eric Rubel - MTRSecurities

Right.

Michel Mayer

Well, it’s up year-over-year. I -- we announced this as weare hoping us win and their volumes are going up. We are seeing a positiveeffect of that, but again I am -- I have said earlier to an earlier questionthat I was not going to guide on non-Motorola piece who specifically becausethen you would know what the Motorola piece is, then would lead you to be ableto A minus B equals C. So, I respectfully take a second joker.

Eric Rubel - MTRSecurities

Okay.

Michel Mayer

Okay. Thank you operator. Next question?

Operator

Thank you, Robert Hopper from UBS. Your line is open.

Robert Hopper - UBS

Thank you. Two things on my end, one if you go back to thelast quarter on networking business you guys definitely were pretty positive,and we all know what’s happened since then, just from a infrastructureperspective, what gives you guys more confidence, even though you have a prettydecent book right now, that it is actually going to transfer into revenue inthe near term? Or is it something that we should be expecting to develop intorevenue, sort of in later in first half of '08 or beyond, that's just firstly?

Alan Campbell

Hey, Robert let me take that one. The revenue on networking-- the book-to-bill is positive for what we said earlier, well, I said earlierit’s not just book-to-bill, it's also backlog in our metric. We are seeing abacklog today, relatively stronger than it was in the past. So these are twoindicators that we see some kind of -- some strength there. Again, I think it'simportant to say that particularly in light of some of the other announcementsworth some of the customers, we are cautious on it with them.

Robert Hopper - UBS

Okay. And then, all my other questions were taken up, butjust one request, given all the questions have been revolving around yourwireless business and you are one large customer, any chance to request thatyou can hold your call next quarter after they report, that's a question?

Alan Campbell

That's a good point and we are thinking about that, but wedon't necessarily control the scheduling here.

Michel Mayer

Okay. Thank you. This has been a good set of questions.Thank you very much for your time. Operator, we've done. Thank you. Bye-bye.

Operator: Thankyou. That concludes today’s conference. You may now disconnect from the audioport.

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Source: Freescale Semiconductor Q3 2007 Earnings Call Transcript

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