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Fairchild Semiconductor (NASDAQ:FCS)

Q1 2012 Earnings Conference Call

April 19, 2012 9:00 AM ET

Executives

Dan Janson – VP, IR

Mark Frey – EVP and CFO

Mark Thompson – President and CEO

Analysts

Ross Seymore – Deutsche Bank

Terence Whalen – Citi

Parag Agarwal – UBS

Craig Berger – FBR Capital Markets

Tristan Gerra – Robert W. Baird

Suji de Silva – ThinkEquity

John Pitzer – Credit Suisse

Steve Smigie – Raymond James

Brendan Furlong – Miller Tabak

Kevin Cassidy – Stifel Nicolaus

Shawn Harrison – Longbow Research

Mike McConnell – Pacific Crest Securities

Operator

Good day and welcome to the Fairchild Semiconductor First Quarter 2012 Earnings Conference Call.

Just a reminder, today’s conference is being recorded.

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

Dan Janson

Thanks. Good morning and thank you for dialing into Fairchild Semiconductor’s first quarter 2012 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 will be attending the Robert W. Baird’s Growth Stock Conference on May 8th in Chicago; the Deutsche Bank One-on-One Semiconductor Conference in San Francisco on May 9th; and the JPMorgan Global Technology Conference in Boston on May 16th.

We will start today’s call with Mark Frey, who will review our first quarter financial results and discuss the current status of second quarter business. Mark Thompson will then discuss our product line results, end markets, and operational performance in more detail. 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 on 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 GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures at the Investor Relations section of our website at fairchildsemi.com. The website also contains a variety of useful information for investors, including an extensive financial section to facilitate your investment analysis.

And, I’ll turn the call over to Mark Frey.

Mark Frey

Thanks Dan. Good morning and thank you for joining us. I’m sure most of you had a chance to review our earnings press release, so I will focus on just the key points in my comments.

Overall sales were in line with expectations, while bookings rebounded strongly in the first quarter. Our inventory position improved again during the quarter and we are well positioned to accelerate out of this current cycle. So let’s review some of the details starting with the income statement.

For the first quarter of 2011, Fairchild reported sales of $352 million, up 4% sequentially and down 15% from the first quarter of 2011. Recall that there are 14 weeks in our 2012 fiscal first quarter. Adjusted gross margin which excludes the charge change in retirement plans, accelerated depreciation, inventory reserve releases and write-offs related to fab closures was 29.8%, down 60 basis points from the prior quarter.

Gross margin was impacted by lower factory loadings from the holiday shutdowns at the end of Q4 and the start of Q1, roughly a negative 150 basis points impact from 8-inch fab startup costs, price reductions and higher excess inventory write-downs. Effective day one of 2012, we adjusted the expected asset lives and amortization schedule for certain factory equipment to better reflect the actual performance of the tools. The net effect of these changes was roughly a one point favorable impact to gross margin in the first quarter.

R&D and SG&A expenses were $94.8 million in the first quarter, roughly flat sequentially on the 13-week basis, due primarily to higher payroll tax withholding and equity compensation expenses, offset by lower discretionary spending. First quarter adjusted net income was $8 million and adjusted EPS was $0.06. Our adjusted tax expense was $300,000.

Now, I’d like to review the first quarter highlights of our sales and gross margin performance for our two major product groups. Sales were up 3% from the prior quarter for our MCCC business in what is typically the weakest demand quarter in the year. MCCC’s gross margin was up 2 points from the prior quarter to 37%, due primarily to better product mix.

In our PCIA business, sales were up 7% sequentially, driven primarily by solid recovery in our optoelectronics business and 11% sequential growth in the power conversion product line, offset by continued weakness in our high-voltage business.

Gross margin decreased 2 points to 27%, due primarily to lower factory loadings in our Korean fab and startup costs for the transition to 8-inch wafers. Factory utilization is below the company average for PCIA and we expect margins to recover quickly once demand improves. I also want to note that we shifted some product lines between the divisions to better align our actual customer and application management. We adjusted the historic data we report will reflect the change. In the first quarter, the shift resulted in a net reduction of about $8 million in sales for MCCC and an increase of $3 million for PCIA and $5 million for FBG.

Turning to our balance sheet, we decreased internal inventory dollars by about 2% or about 10 days sequentially to 85 days, which is a very comfortable level for us as we head into the seasonally stronger demand quarters. Days of sales outstanding or DSOs increased to 46 days and days of payable decreased to 50 days. Free cash flow was a negative $33 million and was impacted by the payment of $50 million in capital expenses as well as annual bonuses paid in the first quarter. We ended the first quarter with total cash and securities exceeding our debt by a $111 million.

Turning now to forward guidance, we expect sales to be in the range of $360 million to $380 million for the second quarter. Our current scheduled backlog is sufficient to achieve the low end of this range. We expect adjusted gross margin to be 32.5% to 34%, due primarily to higher factory utilizations and better product mix. We anticipate R&D and SG&A spending to be approximately $96 million to $99 million in the second quarter. The adjusted tax rate is forecast at 15%, plus or minus 3%. As the last quarter, we are not assuming any obligation to update this information, although we may chose to do so before we announce second quarter results.

Now, I will turn the call over to Mark Thompson.

Mark Thompson

Thanks Mark. I want to begin by sharing with you my perspective on the rebound in demand we saw during the first quarter and how we believe this will translate to strong sales growth in 2012. I will wrap up with a brief review of Q1 results.

We saw a solid improvement in bookings across all major end markets during the first quarter. Customers reduced inventories to very low levels over the last few quarters and it appears they are now reordering again. Fairchild is also launching a number of new products and ramping into production, key design wins that are contributing to the increase in orders.

Let’s review the data for each of our businesses. In our mobile business, Q1 sales were up 3% sequentially and we posted record bookings. We have numerous design wins ramping into production at the top smartphone and tablet makers, and we expect to significantly increase sales into this market during 2012. Fairchild is now shipping a wide range of analog switch, audio, application specific solutions, as well as an extensive portfolio of power solutions from virtually every subsystem in a smartphone. Another way to think of our opportunity in this area is that we now address $3 to $4 of content in smartphones and tablets and at another $1 in chargers and accessories.

Our primary size regulatory or PSR power conversion products are quickly becoming the preferred solution for the most advanced battery charges. These products provide standby power consumption as low as 10 millivolts, while integrating a number of passes and protective functions in a single package. Our advanced power conversion solutions also operate efficiently at higher frequencies, so customers are able to reduce the size of transformer lining and ultimately create smaller, lighter chargers. And we’re seeing strong demand from smartphone, tablet, and notebooks into customers for our innovative power conversion products.

Order rates increased for our high-voltage products serving the industrial and appliance sector during the first quarter. These markets saw significant corrections in the second half of 2011 and customers now appear to have adjusted their inventories and are ready to reorder. We are also benefiting from a number of design wins for power conversion solutions in the LED lighting market and new highly efficient integrated IGBT and diode solutions for inductive heating solutions.

As we indicated a quarter-ago, we resolved our optoelectronics supply issues related to the Thailand flood at the end of January and then shipped at fairly normal levels in February and March. We expect industrial and appliance demands will improve gradually through 2012.

Bookings were up strongly during the quarter for our low and mid-voltage power solutions that support the computing end market. We are seeing solid demand, especially for the new ultrabook designs for our advanced technology enables smaller die and ultimately smaller package footprints as we move towards chip scale packaging. Demand is also increasing for our power stage dual MOSFETs that provide industry-leading performance in a very small 3 millimeter by 3 millimeter footprint.

In the mid power market, we continued to see strong demand for driver MOS solutions that integrate the MOSFET and driver. These innovative power management solutions are being designed in the latest servers supporting the build-out of the cloud computing environment. We expect solid sales growth in this market during 2012.

In our automotive business, we posted record sales in Q1 and expect continued strong growth across 2012. Our powertrain solutions enable greater fuel efficiency and lower cost of ownership that are key concerns for customers dealing with higher gas prices and stricter efficiency regulations.

We recorded record sales for our electronic power steering modules as major car manufacturers make the transition to more efficient DC stepper motors. We also saw a strong demand for our ignition IGBT products, which enable more efficient engine combustion through better ignition controls.

We reported increased bookings for our power management solutions supporting the consumer segment. We won a number of new designs for our latest power conversion solutions at leading Asian TV maker. We expect the ramp of shipments of these products over the next few quarters. We also see stronger demand for products supporting DVD and set-top boxes. The consumer segment saw a significant correction in 2011 and it appears customers have concluded their inventory reductions and are starting to reorder.

Looking at Q1 results for our sales channel in more detail, direct sales to large OEMs and EMS customers were up 9% from the prior quarter, due primarily to solid sales growth in opto and power conversion. The distribution sell-through increased 4% sequentially, which was slightly lower than expected and resulted in a modest reduction in channel inventory dollars.

Factory utilization increased to the low 80% as we began ramping production to lowest to support higher Q2 sales. Lead times remained at normal levels for virtually all our businesses, except some mobile products that are in particularly high demand. Overall product pricing in Q1 was down about 3% from the prior quarter, due to annual contract negotiations and some short-term price actions for certain commodity low and high-voltage MOSFETs. And we expect pricing to return to a normal range in Q2.

In closing, I believe we’ve turned the corner on demand and we expect solid sales growth during 2012. Our bookings inflicted positively in the first quarter in part due to normal customer reordering after the cycle correction and also as a result of numerous new products and design wins that are now ramping. Our inventory levels on the whole are in good shape and we’re well positioned to support higher demand. We expect margins to recover nicely over the next few quarters and look forward to making good progress toward our target business model as we accelerate this cycle.

Thank you and I’ll turn the call back to Dan.

Dan Janson

Thanks Mark. We’ll now open the call to questions. I would ask that in order to allow more of you to ask questions, we limit each person to one question and one follow-up. Thanks. And let’s take the first question, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll go first to Ross Seymore at Deutsche Bank.

Ross Seymore – Deutsche Bank

Hi guys, congrats on the solid quarter and guide. Just a question on the revenue side of things. It looks like you’ve burned a little less channel inventory and the disti side was a little weaker than you expected. For your second quarter guidance, what’s your assumption on disti inventory levels, channel sale, et cetera?

Mark Frey

Ross, we look at two things. First, our starting scheduled inventory, which is consistent with our guide, both within our direct and our distribution channel. But as you know we ultimately will shift to our sell-through. And the sell-through scenario that underlies our guidance is really just the continuation of the POS sell-through that we’ve seen in the last six weeks of late February through March. And we’ve incorporated a slight channel decrease into the guidance on top of the POS trends that we’re seeing.

Ross Seymore – Deutsche Bank

I guess, as my one follow-up switching over to the OpEx side, I’m a little surprised this is up as much as it is sequentially. And especially if you’re comparing on a year-over-year basis, looks like it’s pretty much flat despite revenues down. Can you talk about what’s going on, on OpEx, and how we should think about that not only for what’s driving 2Q, but also for the rest of the year?

Mark Frey

So there is two step functions that usually happen in OpEx. In Q1, we get a step-up from taxes that need to be – continued particularly in the US payroll and our equity jet grant goes out, at least to a portion of the quarter. We were able to offset that with lower discretionary spending in Q1 to be roughly flat on a 13-week basis. For Q2 you get the bigger step, which incorporates the portion of our equity grant that actually fully vests in Q2 and creates bit of a spike. And – but more importantly our merit goes in place at April 1st. So that should be sort of the platform level going forward. So as we see additional growth in revenue for the remainder of the year, which we do expect, we will not have to grow the OpEx in line with that.

Ross Seymore – Deutsche Bank

Okay, thank you.

Operator

Next, we’ll move to Terence Whalen of Citi.

Terence Whalen – Citi

Hi, great. Thank you for taking the question. I think twice in your prepared comments, you referred to – it seems like surprising strength in opto couplers I believe. Can you just provide us a little bit more color behind where that strength develops, maybe in terms of customer segment or region? Thank you.

Mark Thompson

So the strength in opto coupler is really a recovery from having a pretty constrained ability to shift not just for Fairchild, but the industry in general. Big applications for those are typically isolation for power supplies of all stripes. And so the strength that is sort of pent-up demand from an under served market for the fourth quarter and a portion of the first quarter. But in general we also are taking an increasingly strong position in advanced power supplies and battery chargers, et cetera, which also deploy those. So it’s a – there is a two-part effect there. One is the recovery of supply to fulfilling demand and the other is continued expansion of those applications.

Terence Whalen – Citi

Okay, terrific. And then you also mentioned in terms of the 8-inch fab startup costs that weight on gross margin, but you would receive a favorable impact going forward. Can you just recount for us where you stand with regard to this conversion and what are the puts and takes for gross margin relative to that over the next couple of quarters? Thanks.

Mark Frey

Sure Terence. We saw as we said in our disclosure about a 150 basis points this quarter. That will go down a bit in Q2 and Q3 and then spike up a bit in Q4 as we get ready to commission the plants in some point in Q1 in 2013.

Mark Thompson

But we expect that those expenditures to be essentially complete by the end of the current calendar year.

Terence Whalen – Citi

Okay that’s helpful. Thank you.

Operator

Next we’ll go to Parag Agarwal at UBS.

Parag Agarwal – UBS

Hi guys, thanks for taking my question. Just a follow-up from the prior question. So if we are seeing some headwinds on 8-inch conversion, what are the other levers for gross margin that we have that could reach – that could drive you higher gross margin as we go through the year?

Mark Thompson

Sure Parag. The two big ones are mix and utilization. So as I commented, we got a long way to go before we’re utilized at a level that we would expect to be with a full market recovery. And so you can do the math from a point, a number that’s just north of 80 presently to something that would be more typically in the mid 90s. But equally significant is the largest asset growing part of our business is in mobile and the tablet, and that is the highest margin in the company, consistently north of 50 points. So that’s also quite a favorable mix as we move across the year. And so we expect to see a significant future contributions from both of those pieces across 2012.

Parag Agarwal – UBS

Perfect. As a follow-up coming to your mobile business, yesterday, a large company made some commentary about shortages in certain product segment. Just wondering if you are getting impacted by any such target in the near term or any commentary from your vantage point you are seeing in this market?

Mark Thompson

So it’s a little hard to quantify that. So certainly there have been some constraints, some chipset constraints in the migration to the 28-nanometer node. Those – how those impact the overall demand, I think it’s more of the next – the next generation chipsets may not ramping as fast as they could be, but I don’t think it’s really depressing significantly overall demand, although it’s always the case when you have a space that’s growing as rapidly as smartphones are. Inevitably there is going to be periodic constraints of one stripe or another that occur. So it’s always the case that they are limiting or probably currently limited in part by the ability of the supply rather than pure demand. So that’s kind of how that nets out. But my assessment is that it’s not a huge impact on the overall growth rates for the market.

Parag Agarwal – UBS

Thank you very much.

Operator

We’ll go next to Craig Berger at FBR Capital Markets.

Craig Berger – FBR Capital Markets

Hi guys, thanks for taking my question. Nice job on the results and guidance. Just wanted to understand two things. Can you just recap – you said mobile and tablets were your highest margin products, which is counter-intuitive for most companies. So can you explain why that is for you? But my real question was on 10% customers, how many do you have, and is there the possibility that you could be getting anymore in which parts of the business? Thanks.

Mark Frey

Well, Craig, on your first question, they are our highest profit businesses, because they are by in large analog ICs which is a good thing to be in as opposed to many of other businesses which have mixtures of discreet and ICs and modules. And we tend to have very high value-added solutions in that space. The – well, what was your second question?

Craig Berger – FBR Capital Markets

What’s your status of your 10% customers?

Mark Frey

We don’t have that.

Craig Berger – FBR Capital Markets

Might that change?

Mark Frey

But we are on the cusp of a couple local customers. One of them is actually a combo mobile, plus power supply, plus industrial.

Mark Thompson

But we do – on the current trajectory we expect to have to talk about some north of 10% customers within the next 12 months.

Craig Berger – FBR Capital Markets

Great. And then my follow-up question was can you just update us on what you see in those sort of China home appliance [inaudible] markets?

Mark Thompson

Sure. We are seeing the beginnings of a recovery there. The – on several fronts the overall consumption is slightly tilting up, inventory is going down, and there is sort of a heating up of general interest, although it’s overall not fully recovered yet. So if you look at the spectrum of recovery that’s the one right now that’s lagging the others which on the surface will appear to be nearly fully recovered at least in terms of incoming order rates.

Craig Berger – FBR Capital Markets

Great, thanks so much.

Operator

We’ll go next to Tristan Gerra, Robert W. Baird.

Tristan Gerra – Robert W. Baird

Hi good morning. You talked about slight channel decrease embedded in the Q2 guidance. Could you quantify first in Q1, how much in dollar you have shipped at this seat [ph] and also quantify that for Q2 it’s possible and also with the point of sale sequential growth assumption at the seat for Q2 embedded in your guidance?

Mark Frey

The reduction in Q1 was a small single digit and which we are modeling Q2 at about the same level. We – in dollars we’re very comfortable with where our channel is, it’s a little elevated in weeks, but that’s because of the current shipment levels. And as we see the growth play out in the remainder of the year, we are comfortable that those channels will get us back to our seven-and-a-half to eight-and-a-half week target.

Tristan Gerra – Robert W. Baird

Okay. And then could you talk about your expectation for utilization rates in Q2? And also do you feel that in Q1 or in Q2 you are going to exceed [inaudible] particular profit share gain and maybe any type of quantification about that?

Mark Frey

In terms of utilization it is ramping higher into the upper 80s, down for Q2 and obviously we’ve embedded a portion of that impact into our gross margin guidance, but another portion of that impact will probably flow into Q3. And obviously that’s a function that will keep impacting gross margins and as we get it back to where we started. And Mark do you want to take –

Mark Thompson

Yes. So first on in terms of share gains, the – couple of places where I think it’s easy to highlight a few of them. So for example in the electronic power steering portion, there it’s a share gain in the sense that we are taking BAM [ph] dollars that used to go to hydraulic pumps, and so that’s a dollar conversion. But we are principal and in many cases whole source across a very large swamp of the automotive space. And so that’s one that’s pure – that’s effectively pure share gain. It’s – I think what you will be able to see across 2012 is that while the smartphone segment is growing quite significant in dollar terms, our growth will be several what the market will be. And so clearly embedded in that are some significant share gains that are occurring in that space and they will become easier to quantify as the year goes along.

Tristan Gerra – Robert W. Baird

Very useful, thank you.

Operator

We’ll next go to Suji de Silva of ThinkEquity.

Suji de Silva – ThinkEquity

Hi guys. In the appliance market, you said it’s recovering, particularly in China. Can you talk about any government subsidies that have been starting or you think are going to start to help that market? And also how are the lead times in that – in PCIA versus MCCC? Thanks.

Mark Thompson

So in terms of the recovery, the recovery appears to be what I will call natural markets at work. Again, I’m not purview to all the conversations that go on in the Chinese government circles, but as yet we have not heard that there is going to be a restoration of incentives for efficient appliances in China, and so – and we don’t – you don’t make an assumption that they will return into our expectations. If it does, our experience with that is affects timing not total demand. And especially when they get turned on, people tend to buy, and people know their incentives are going to turned off, it tends to pull some future purchases into that window. But overall, there is not a lot of evidence that it actually shifted the total demand. So I – we certainly expect the Chinese appliance market to roughly follow housing starts and those kinds of things which are experiencing a significant rebound.

In terms of utilization rates – the utilization rates or lead times?

Suji de Silva – ThinkEquity

Lead times, there were lead times [Multiple Speakers].

Mark Thompson

So lead times are consistently single digits everywhere, except for some of the mobile products, where those are extended. And so that’s pretty. So if you weight that to PCIA and MCCC, then that will show lead times for MCCC being on average higher than they are for PCIA, but again split between the ICPs which is having longer lead times right now and the MOSFET and integrated solutions there which will typically can be in the well into the single-digit range.

Suji de Silva – ThinkEquity

Okay, thanks guys.

Operator

We’ll go next to John Pitzer at Credit Suisse.

John Pitzer – Credit Suisse

Good morning, guys. Congratulations. A couple of questions. First, just relative to the extra week dynamic in March going away in June and the Thailand impact, can you just help us understand if we just do the normal linearity math, is that the right way to think about the benefits that you received in the March quarter as we try to do an apples-to-apples compare for the sequential growth in June?

Mark Frey

It’s not exact, but it’s the best we’ve got, obviously, in a week versus 13 is about 7%, so that’s what you could factor in. Although, as we said in our disclosure was about another 1% of sales that we thought was impacted as a headwind in Q1 and we think that will be relieved in Q2. It was actually embedded in our guidance as well.

John Pitzer – Credit Suisse

Thanks Mark. And as my follow-up, I kind of a two-part question on the auto space, kind of both longer term and near term. On the longer-term side, it’s been a kind of a big role to success for you guys if you go back a couple of years ago, I think as a percent of revenue was almost half of where it is today. I’m just kind of curious Mark, as you think about kind of the longer-term opportunity in autos, where do you think that could longer term. And then more on the near-term side, some incremental concerns around the supply chain within the auto industry relative to some resin issues on a plant, it’s higher over in Germany. Kind of curious if you guys have heard anything from that – from your customer base and whether or not your forward guidance incorporates kind of any conservatism around autos because of that issue?

Mark Thompson

Sure. So let me – let’s talk first about the medium and longer-term demand picture in automotive. So yes, clearly we’ve done a lot of work on a focused automotive strategy over the last couple of years that’s really bearing fruit. And really what we have done is taken the approach in some ways similar to what we have done in other spaces, which is to focus intensely on efficiency problems, which have real dollar value in cars. And so rather than seeing automotive as a broad market and they’ve hit into body controllers and a bunch of other things like entertainment, we’ve been quite focused really on applications where car management solutions like we can provide directly give the OEM the ability to make cars have better fuel economy, which has tremendous economic value to them. And so if you look at that, that’s really been the big drivers of growth in really two categories.

The ignition and injection side, where you got single coil for cylinder and how you activate those coils efficiently is actually a significant part of squeezing all the – all the works that you can out of a drop of fuel. And similarly the migration to direct injection requires very high-precision IGBT drivers to make those work. If you then look another side the electric motor expectation at fuels – I apologize for the English – really replacing mechanically or parasitic mechanical loads on the engine starting first with power steering now moving to water pumps and ultimately probably air-conditioning compressors as well will all come off the engine as parasitic mechanical drives and go to a DC motor kind of solution, which will or and will be opportunities for our module solutions. And so we see that trend is really just beginning. And if you look at all the parasitic loads across the in any tens of millions of cars built each year and the opportunity to replace those is enormous. That’s the sort of the now and the mid-term future.

Longer-term, I’m not a bull on electric vehicles at all. I don’t see the prospect for a significant advancements in battery technology that would be required to make them be useful. However, but the hybrid construct where you eliminate high-volt circuit in city driving so forth is going to become a standard. And so if you look at a lot of the work that’s being done, again as you think of it as the bigger power modules to drive tidal circuit elimination with a small electric motor to provide robust start-off the line at very low speeds and then conversion to drive from an internal combustion engine will become the standard. If you look at those that are natural fits for the things like the silicon carbides transistor technology in modules that we got developing. And so we are having conversations and very good receptiveness to those kinds of solution.

Longer-term we think that will be a huge deal and will go from – take use from tens – multiple tens of dollars of opportunity on the motor side for a car into hundreds of dollars for cars with that technology. So it’s nice because it’s an extension on the application that we know how you drive the motor and the multichip packaging with the addition of high efficiency power solutions.

So apologies for the long response, but it’s hard to – it’s hard to give color with less.

John Pitzer – Credit Suisse

No, that was helpful, Mark. And then just on the near-term environment, how at all you guys are just seeing the central supply disruptions resulted in relative to –

Mark Thompson

It’s awfully hard to comment on at this time. So we’re only a few days in and so as we know more we can comment. What I would say is, we’ve seen an unusually large number of the events disrupt a supply chain in the industry over the last couple of years, earthquakes and tsunamis and floods and so forth. And what it’s proven is that the supply chains are remarkably resilient and people’s ability to ramp other sources provides acceptable alternatives as proven actually to be quite strong. So obviously we’re – we and others are analyzing this, but it will surprise me if this turns out to be a very big deal.

John Pitzer – Credit Suisse

Appreciate it, thanks.

Operator

Next, we’ll go to Steve Smigie of Raymond James.

Steve Smigie – Raymond James

Great, thanks. I was wondering if I could follow-up on the operating expense question. You are talking about dollars sort of flattening out for the rest of the year. It still looks like percentages for operating expenses that are quite a bit higher than historical levels, and I know you had like the MEMS acquisition in there, or the MEMS product. Is that why the percentages are higher going forward? I was hoping you could help me understand this.

Mark Frey

Yes, we’ve maintained. We updated our target for OpEx as we got our margins in the upper 30s in that and the target of being in the low 40s to an R&D of north of 10%, and we’ve maintained that commitment. Obviously we’ve tried to exercise spending control during the cycle, but we still maintain those key projects and that’s sort of the new platform. And we’re very comfortable that by the end of the year we’ll be back pretty close to our new target, which is that kind of the 22% range.

Steve Smigie – Raymond James

Okay. And then with regard to the change in amortization schedule on equipment, just talk a little bit about what the changes were there in the lifecycle function?

Mark Thompson

It was the certain fab equipment that we’ve moved from on in general and there is ranges of years here, eight years to 10 years, and that was based on an analysis of what we’re actually experiencing in the fabs.

Steve Smigie – Raymond James

Okay. And then I apologize if I missed it. Just quickly, what were the – what are we looking at now in terms of weeks of inventory in the channel?

Mark Frey

We’re rearward 12 weeks.

Mark Thompson

Yes, rearward-looking it’s under 12 and forward-looking it’s 10 or slightly less.

Steve Smigie – Raymond James

I apologize. Along those lines, you’re now talking like 7.5 weeks to 8.5 weeks. I mean several years ago you it was usually 13 weeks and then you sort of went to 10 weeks and 9 weeks, now 7.5 weeks to 8.5 weeks, so it’s sort of steadily being going down. Is there a point where it comes through even in terms of what you have off that?

Mark Thompson

So we set the targets based on what we think will be required for service levels based on the tools that we have to use to manage that. So we will basically run it as low as we can by always paying close attention to the service levels. And so that’s the way we think about it and it’s – we start to have service levels as we approach those the low-end of that and then we’ll top. So the purpose of the inventory is the service pickup and that’s the way we think about it.

Steve Smigie – Raymond James

Okay, thank you.

Mark Frey

Steve, the other point I would make is that, as we said earlier, our channel inventory is pretty much where we want it to be for all product lines with the exception of some of the high-voltage products that we support appliance and industrial market with. So we’re actually in quite a good shape in the channel. And as Mark said, we are going to work at that high-voltage inventory down a bit in Q2 and that’s included in our guidance.

Steve Smigie – Raymond James

Okay.

Operator

The next question comes from Kevin Cassidy at Stifel Nicolaus. And, Kevin, your line is open, please check your mute button. Hearing no response, we’ll move on to Brendan Furlong with Miller Tabak.

Brendan Furlong – Miller Tabak

Good morning, everybody, thank you. I just wanted to go – I guess go back to the OpEx issue again. Just to clarify, I think it was Ross Seymore’s question at the beginning of the call, you said that OpEx will be – did you say it will be flat in dollars going forward or would not grow as much as many going forward?

Mark Frey

I said it was a step function in Q2 and it will not be dead flat as we progress through the year, but we are talking about $1 million or $2 million. So we expect to keep it hovering in the $100 million range as long as our growth scenario continues to unfold.

Brendan Furlong – Miller Tabak

Okay, understood.

Dan Janson

Brendon, let me just add a little quick color to that too. If you recall, our growth in OpEx has been almost exclusively in R&D and a little bit in sales to support obviously in the higher sales level that were getting to especially in the areas like mobile. And that’s what you should expect going forward. So some of this requires a little bit of frontload on the R&D side. But as Mark said, as sales catch-up and we see the recovery that where certainly our bookings level indicated that we’re facing in the future then that OpEx as a percentage of sales will come down nicely we believe especially to the back half of the year.

Brendan Furlong – Miller Tabak

Understood, thank you. The other question I have for you if you could just add I mean if you can – obviously it’s customer sensitive – but if you can add any more color on the design wins in the mobile and what have you in that space. Thanks.

Mark Thompson

So I can’t provide any customer-specific commentary, but if you look at the kinds of solutions that we are offering, they continue to expand in the interface power management, LED driver, battery charge management, smart load switches, and the latest place we are seeing tremendous acceptance is from our ultralow sleep mode controllers for small sub 10 watt adapters. And so it’s really a broad set of those things which drives content from to be a purity – theoretical content of what’s been below $1 up until to the several dollar range, but also accessing that content through the work that we’re doing with the specific customers that we’re seeing – first we’ll get a solution design in one place and then it will become a standard.

So one of the things that we see for example is that the mobile players pay a lot of attention to what each other make, they do a lot of competitor teardowns. And so when you get well placed in one, you will tend to get populated across the others. It’s kind of a two-step process. So we’re seeing all of those factors at work in large part, because we have very – some very compelling solutions to provide and also quite pleased with the overall execution on the product developments, the timing of those supply chain, conceptualization. All that is really clicking in a way that’s really giving us some nice advantage.

Brendan Furlong – Miller Tabak

Can I just have a quick follow-up? I know two customers of yours are growing pretty strongly, but you also have a large customer like Nokia that have been struggling for a while. Do you think end-market customers that have been struggling for the last year have bottomed in, in terms of your business, and then the growth guys that we’re actually seeing real growth in your handset business as a growth guys accelerating to the back half of the year?

Mark Thompson

So this market is one that is very prone to large shared chips. We’ve seen them – often we’ve seen them down. The current leader in smartphones wasn’t in the business five years ago, alright? So I’ve – what I’ll predict is that it will remain a space where we see volatile shifts. And so you’ll – you may recall one of our first strategy shifts way back when we began intensely focused on mobile solutions in the 2006 timeframe was to make sure that we had active conversations with all the key players and the future key players. So we will keep that. And so we as an integral part of the strategy remain positioned so that we can shift our focus depending on who is really doing the leading designs in the space and concentrate our energies there. I think it’s hard to call the exact fortunes of various players. I think once your – once your relevant has fallen a lot, it’s hard to recover.

If I look at one very significant European cellphone maker, I won’t count them out in a sense that they have a lot of – lot of capabilities and in fact some of their hardwares was very nice and I think is getting some good acceptance. So I think it’s reasonable to think that they may be nearing the bottom. There are some other sort of specialized North American players who is hard to hold out much hope that they will be relevant again or frankly even exist in a couple of years and our tactics are adjusted according to that.

Brendan Furlong – Miller Tabak

Okay. I’m going to sneak in one last modeling question. What should we think tax rate to be for the full year? Thanks and that’s it.

Mark Frey

15%, plus or minus 3%. And to be honest there is a bias on the low-end of that, so it’s a very conservative guidance on my part. Obviously we’ve been coming in below that rate for the last few quarters.

Brendan Furlong – Miller Tabak

Excellent, thank you.

Operator

And we’ll go back to Kevin Cassidy at Stifel Nicolaus.

Kevin Cassidy – Stifel Nicolaus

Thanks. I apologize for the mistake last time. Just on ultrabooks, can you just say what your content of difference is in an ultrabook versus the standard notebook?

Mark Thompson

So the theoretical content is actually, probably lower in the sense if there are a fewer rails, but the value is much higher. So it’s – they are typically – they typically look more or like tablets and smartphones in terms of – real concern for power efficiency, small footprint integration, which has a lot of value and we have real leadership position. And so, I guess, the other way of looking at it is, traditional notebook DC:DC kind of stuff is pretty commoditized and we basically use that to keep the factories full, but it’s an opportunistic business for us, whereas this looks more like sort of core strategic business. So less content, but more desirable content is the way to think about it.

Kevin Cassidy – Stifel Nicolaus

Just maybe a higher percentage of the content. And you’ve mentioned that pricing was down 3% and you expect it to be normal next quarter. And can you say how – what’s changing and do you expect it to be normal through the rest of the year?

Dan Janson

Sure. Hi Kevin, this is Dan. So two things – I’ll answer your first question, I want to make a comment on the prior. So on pricing – so we were down a little less than 3% last quarter, that is a little worse than what we have seen in probably the last couple of years and it was really driven by two things. One is that we had our normal annual negotiations. And recall that our analog business especially in – when we’re dealing with large OEMs as we are in the mobile space in particular, we’re like everybody else. We have big negotiations with those customers and we have to agree to a price curve. And so there is always some amount of price erosion that happens in that market. And, of course, we work hard to come up with new features and integrations that help us to offset that and hold margins, in fact grow them. So that was part of it.

The other part was as we said with some of the lower utilization that we saw at the end of last quarter, end of fourth quarter I should say and going into first quarter, we did take some specific price actions in some markets, in some of the large stats where there’s a purely elastic market, the more kind of commoditized target of that business to drive higher factory loads, not a long-term issue, these were kind of a short-term deals. So we believe that we will be returning to a more normal pricing pattern from this point going forward.

And the other point I was going to make on the ultrabooks, the other interesting area of opportunity for us is in power conversion. When you look at an ultrabook, the – of course the style on that is it’s much smaller and lighter PC, well it not only works as long as you have a brick doesn’t weigh two pounds two. So when – if you’re going for a small, light notebook, you want a small, light battery charger. If you want a small, light battery charger, Fairchild makes the parts that can get you to the smallest and lightest battery charger you can make. So we also see demand coming from that end too.

Kevin Cassidy – Stifel Nicolaus

Okay, great. Thanks.

Operator

And next we’ll go to Shawn Harrison at Longbow Research.

Shawn Harrison – Longbow Research

Hi, good morning. Just wanted to focus in on capital spending for the year. I guess what is the updated forecast for 2012?

Mark Frey

We see the spending slightly less than last year, though it’s still elevated to our strategic model as we complete the Boshan [ph] 8-inch upgrade and we complete the kind of the full 8-inch integration in Maine. And we’re also adding some backend capacity for some leading edge packages that are necessary in our – both our mobile and our low-voltage MOSFET business. And then we see after that obviously depending on what’s going on in the marketplace, getting back to the 60% to 80% revenue model.

Shawn Harrison – Longbow Research

Okay. Is the capital deployment this year going to be kind of linear off this first quarter and maybe in terms of a decline and maybe the first quarter –

Mark Frey

I’m sorry, I didn’t mean to interrupt. The decline from Q1, that was sort of a bubble payment for our Boshan equipment and it will go down from there quarter-by-quarter.

Shawn Harrison – Longbow Research

Okay. And then just the cash cycle, and it declined a little bit quarter-over-quarter, how would you expect it to trend as the rest of the year progresses?

Mark Frey

It’s fairly rare for us to have a negative free cash flow. If it occurs, it occurs in Q1, because DSO tends to spike up in our typical Q1, which it did. CapEx will also tend to be a little spiky. And we pay our bonus, which is a fairly – it can be a sizeable amount, and all that happens in the same quarter, and then we’ll get back to solid and positive numbers thereafter.

Shawn Harrison – Longbow Research

Would it be to, I guess, too far of a reach to say a $100 million of free cash flow in the year is reachable?

Mark Frey

Yes, reachable.

Shawn Harrison – Longbow Research

Okay. Thanks so much.

Operator

Next, we’ll move to Mike McConnell at Pacific Crest Securities.

Mike McConnell – Pacific Crest Securities

Thanks guys, just two quick ones from me. Just wanted to clarify the disti POS assumption for Q2, is that just pretty much in line through revenue guidance up 5%?

Mark Frey

Yes.

Mike McConnell – Pacific Crest Securities

And what is to see as a percentage of revenue again?

Mark Frey

It was up 60% in Q1. It’s trended more or like two-thirds.

Mike McConnell – Pacific Crest Securities

Two-thirds, okay. Great, thank you very much.

Operator

And we’ll take a follow-up from Craig Berger at FBR Capital Markets.

Craig Berger – FBR Capital Markets

Hi guys, thanks for the follow-up. Can you just to recap why the mobile business was so much better than seasonal in the Q1? And then you guys kind of touched on it, but with the helpful recap of your mobile business, but can you just help us understand which products have the extended lead times?

Mark Thompson

So in terms of the favorability in Q1 versus typical seasonal, it’s – I think there is two parts for that. One, is from share gains. The other is that the high-end smartphones didn’t look like they dipped in Q1 versus the typical bit of a bulge in Q4 and then a bit of a pullback in Q1 and then return to growth. So I think it was the combination of those two things that tipped that from kind of typical, seasonal, down a few percent to up a few in terms of shipments and in turn of orders even stronger than that. So that’s kind of the moving parts there.

So if you look at the – at how lead times are partitioning, it’s basically – it’s all in the IC space, in mobile IC, but it partitions between in-source and outsource. So we have essentially booked out the Portland fab, but we are in the middle of an aggressive edition of foundry to that business. And so the foundry has the shorter lead times and in fact we will see the foundry is where the growth is going to come primarily in that space this year. And we think the lead times for that will be pretty normal. So that’s the way to think about that right now is the constrained internal source and a less constrained external source.

Craig Berger – FBR Capital Markets

Okay, great. One last question, it’s kind of on OpEx and CapEx for both, fairly high. Just on the OpEx, I think your OpEx percentage of revenue target is something like 20%, 21%. So in a $100 million, 20% is roughly $500 million of revenues that you would need to be asked to scale into your target of a $100 million. Is that the right way to think about the math?

Mark Frey

Well, I was using 22% and – in a general, so we are not – we are not guiding revenue in the second half. We have a lot of confidence that we will be showing some good growth later in the year and we’ll be able to manage that number to – to be down within our range – within another year or so.

Craig Berger – FBR Capital Markets

And the capacity you guys are installing, how much business can you support with the current capacity plant? Thanks so much.

Mark Thompson

Yes, sure. So right now if we fill the factories and sold it all, you would see a number something in the 460 range, but that does not include Boshan, because it’s not qualified yet. So getting to 500 with the inclusion of Boshan at the end of the year is not a problem at all. And essentially as I have commented earlier, a 100% of our mobile growth is going to come from a key foundry partnership.

And so – then that will – and that’s one where – I don’t want to say I’m not worried about capacity or what we can support, but there is a big migration in the chipset universe out of the sort of 0.18-inch notes down to 65. And so there is going to be a lot of point 0.18 capacity that is available at foundry over the next couple of years. And so that’s really where we are going to be taking that. So we are not going to be trying to capitalize that ourselves. And so what that number can be is, it can be a very large number that it will be – it will be target.

Craig Berger – FBR Capital Markets

Thank you so much.

Dan Janson

All right. Well, thank you, Craig, and thanks to all of you for your interest in Fairchild. That’s all the time we have. Thank you very much.

Operator

And that does conclude today’s conference. Thank you for your participation.

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