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Good day, ladies and gentlemen. Welcome to the ON Semiconductor Fourth Quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question and answer session and instructions will be given at that time. [Operator Instructions]
It is now my pleasure to turn the conference over to your host, Parag Agarwal, VP of Investor Relations and Corporate Development. Please go ahead.
Thank you, Hade. Good morning. And thank you for joining ON Semiconductor Corporation's fourth quarter 2018 quarterly conference call. I'm joined today by Keith Jackson, our President and CEO, and Bernard Gutmann, our CFO.
This call is being webcast on the Investor Relations section of our Web site at www.onsemi.com. A replay of this broadcast along with our earnings release for the fourth quarter of 2018 will be available on our Web site approximately one hour following this conference call, and the recorded broadcast will be available for approximately 30 days following this conference call. The script for today's call and additional information related to our end markets, business segments, geographies, channels and share count are also posted on our Web site.
Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release, which is posted separately on our Web site in the Investor Relations section.
During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-Ks, Form 10-Qs and other filings with the Securities and Exchange Commission.
Additional factors are described in our earnings release for fourth quarter of 2018. Our estimates may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors except as required by law. As announced earlier, we will host our 2019 Analyst Day on March 8th in Scottsdale, Arizona. If you would like to attend the event and haven’t received an invitation, please let us know.
Now, let me turn it over to Bernard Gutmann, who will provide an overview of fourth quarter 2018 results. Bernard?
Thank you, Parag. And thank you everyone for joining us today. We delivered yet another quarter of strong financial results despite challenging macroeconomic conditions. Key secular drivers powering our business remain intact, and our execution on operations remains solid as evidenced by margin performance in several quarters. Our design win pipeline in our strategic markets, which include automotive, industrial, and cloud-power, continues to grow and we continue to strengthen our competitive position in those markets. We remain upbeat about our future.
Since our last earnings call in November of last year, we have noticed a significant slowdown in demand from Greater China region. This slowdown further accelerated early this year, when we noticed a sharp slowdown in bookings, especially from the distribution channel. This steep decline in bookings has reversed course over the last couple of weeks, and we have seen a modest pick-up. Demand from other geographies appears to be in line with seasonality.
Although, weakening macroeconomic conditions could pose challenges based on current macroeconomic outlook, we expect to continue to grow our revenue and expand our margins in the current year. Based on our current outlook, we believe that after greater than seasonal decline in first quarter of 2019, we should grow sequentially in second quarter of 2019. Key megatrends driving growth in our content in automotive, industrial, and cloud power applications remain intact, and we expect to continue to benefit from these trends in foreseeable future.
Although, we remain confident in our outlook, we are managing our business prudently to rapidly adjust to slowing macroeconomic growth. We are taking measures to control our expenses and we intend to adjust our working capital in line with our expected revenue. We plan to continue to expand our margin and grow our free cash flow, despite current macroeconomic slowdown. We believe that a highly diversified customer base, exposure to the fastest growing semiconductor end markets, and long life cycle of many of our products, should help us navigate the current slowdown in demand. Our largest customer in 2018 was approximately 5% of our revenue.
Now, let me provide you additional details on our fourth quarter 2018 results. Total revenue for the fourth quarter of 2018 was $1.503 billion, an increase of 9% as compared to revenue of $1.378 billion in the fourth quarter of 2017. Fourth quarter of 2018 revenue included a contribution of $19 million from ON Semiconductor Aizu, also known as OSA. As we announced in our third quarter 2018 earnings call, OSA is our manufacturing joint venture for an 8-inch wafer fab located in Aizu-Wakamatsu, Japan.
GAAP net income in our fourth quarter was $0.39 per diluted share as compared to $1.22 in the fourth quarter of 2017. Non-GAAP net income for the fourth quarter was $0.53 per diluted share as compared to $0.39 in the fourth quarter of 2017. GAAP and non-GAAP gross margin for the fourth quarter was 37.9. OSA had negative impact of 50 basis points on our fourth quarter of 2018 gross margin. On a GAAP and non-GAAP basis, our fourth quarter gross margin improved by 40 basis points year-over-year. Again, this year-over-year increase was negatively impacted by 50 basis points by OSA.
Another factor negatively impacted our fourth quarter 2018 gross margin on a year-over-year basis has been derived in certain input costs. Our strong year-over-year gross margin performance was driven by solid operational execution and by improving mix. Our GAAP operating margin for the fourth quarter of 2018 was 14.8% as compared to 12.2% in the fourth quarter of 2017. Our GAAP operating margin for the fourth quarter of 2018 was 16.8% as compared to 15.3% in the fourth quarter of 2017. Our fourth quarter 2018 non-GAAP operating margin was impacted negatively by 20 basis points by OSA. On a year-over-year revenue increase of 9% in the fourth quarter of 2018 and our non-GAAP operating income increased by 20%. This strong operating performance demonstrated the leverage and strength of our operating model.
GAAP operating expenses for the fourth quarter were $347 million as compared to $349 million in the fourth quarter of 2017. Non-GAAP operating expenses for the fourth quarter were $317 million as compared to $305 million in the fourth quarter of 2017. Fourth quarter free cash flow was $289 million and operating cash flow was $421 million. For the full year 2018, we generated free cash flow of $759 million as compared to $707 million in 2017.
Capital expenditures during the fourth quarter were $132 million, which equates to capital intensity of 9%. Recall that to meet increasing demands for our products and to mitigate the impact of steep rising price of raw wafers, we expect a higher level of capital intensity for the current year. We exited the fourth quarter of 2018 with cash and cash equivalents of $1,070 million as compared to $951 million at the end of the third quarter of 2018. We used $200 million of cash to repurchase 11.5 million shares of our stock in the fourth quarter.
At the end of the fourth quarter, days of inventory on hand were 120 days, up by four days as compared to116 days in the third quarter. Distribution inventory in terms of weeks increased quarter over quarter in the fourth quarter, but it is within our range of 11 to 13 weeks. We expect distribution inventories to remain within our normal range of 11 to 13 weeks in the near term. As we indicated earlier, to mitigate the risk of excessive inventory in the channel, we are proactively managing inventory in the distribution channel. We have implemented systems to ensure that distributors can carry more inventory than what is needed to support the 11 to 13 weeks of retail.
Now, let me provide you an update on the performance of our business units, starting with Power Solutions Group or PSG. Revenue for PSG for the fourth quarter was $787 million. Revenue for the Analog Solutions Group for the fourth quarter of 2018 was $530 million and revenue for the Intelligent Sensing Group was $186 million.
Now, I would like to turn the call over to Keith Jackson, for additional comments on the business environment. Keith?
Thanks, Bernard. The fourth quarter of 2018 was yet another strong quarter for ON Semiconductor. Despite a meaningful slowdown in demand from the Greater China region, we delivered strong revenue and margin performance. Though the current macro economic outlook has impacted our near-term outlook, we remain upbeat about our mid to long term prospects. We believe that secular trends in our key markets driving our revenue will continue to strengthen and we expect to outgrow the broader Analog and Power Semiconductor Group in a meaningful manner. Our design win pipeline in our strategic markets is growing at a strong pace. Our customer engagements are strengthening and our competitive positioning is improving significantly.
As I mentioned earlier, key megatrends driving our business continue to strengthen. In the automotive market, accelerating adoption of electric vehicles and active safety is driving strong growth in our power semiconductor and sensor businesses. In the industrial markets, we are seeing steep growth in our power semiconductor content, driven by higher power efficiency requirements for industrial systems. In the cloud-power market, we are seeing robust growth for our analog power management products for servers and power semiconductors for 5G infrastructure markets.
Before I get into details of the fourth quarter, let me highlight the business performance for 2018 and lay out priorities for 2019. 2018 was a strong year for ON Semiconductor and we delivered solid results on all fronts. Our 2018 revenue, excluding OSA, grew by 9% year-over-year. Our 2018 non-GAAP gross margin expanded by 120 basis points year-over-year. We achieved this strong gross margin expansion despite significant year-over-year increases in raw material costs in 2018. Our non-GAAP operating margin expanded by 170 basis points year-over-year. On year-over-year non-GAAP revenue increase of 9%, our non-GAAP operating income increased by 22% in 2018. Our 2018 free cash flow was $759 million as compared to $707 million in 2017.
We expect to continue to grow in 2019, although headwinds from slowing macroeconomic environment will likely impact our growth rate. Customers are increasingly relying on us as a key provider of leading-edge power semiconductor, analog and sensing technologies. And we are working diligently to ensure success of our customers. We intend to grow faster than our analog and power semiconductor peer group, driven by our strong momentum in automotive, industrial and cloud power markets.
On the margin front, we expect continued expansion in our gross margins in 2019, driven by ongoing operational improvements and improving mix of automotive, industrial and cloud-power related products. Furthermore, we do not expect incremental headwinds from increases in raw-material costs in 2019. On the operating expense front, we intend to tightly manage our expenses in light of changing macroeconomic conditions. Our above industry revenue growth coupled with strong margin performance should result in strong free cash flow generation in 2019. In summary, we intend to deliver solid all-around performance in 2019.
Now, let me now comment on the business environment. Since our last earnings announcement in November of last year, we have seen continued softening in demand from Greater China region, with steep decline in order rates across all end-markets. Industrial and consumer end-markets have been especially weak in Greater China region.
Decline in demand there is further corroborated by weakening macroeconomic indicators, such as GDP, PMI and export-import data. As Bernard noted in his remarks, in recent days, we have seen stabilization, followed by a modest pickup in bookings from Greater China Region. Demand from other geographies is along historic seasonal trends. We are also experiencing much publicized weakness in global smartphone market. Although, our fourth quarter smartphone related revenue was in-line with expectations.
On the supply side, channel inventories are generally healthy. But based on order patterns, it appears that distributors in Greater China Region are aggressively reducing their inventory. We expect that softening macroeconomic conditions will have an impact on our near-term growth outlook. However, based on current macroeconomic outlook and our momentum in industrial, automotive and cloud-power markets, we expect to grow at a reasonable pace in 2019.
Now, I'll provide details of the progress in our various end-markets for the fourth quarter of 2018. Revenue for the automotive market in the fourth quarter was $475 million and represented 32% of our revenue in the fourth quarter. Fourth quarter automotive revenue grew by 9% year-over-year. Excluding contribution of $14 million from OSA, our fourth quarter automotive revenue grew by 5% year-over-year. We noted significant weakness in the automotive market in China in the fourth quarter.
Our design win pipeline in automotive market continues to grow at a solid pace. We are seeing strong adoption of our products, in vehicle, electrification, active safety and in various analog and power management applications. Despite the slowdown in economic growth outlook, we expect to see continuing meaningful increase in our content in automotive applications. We were seeing strong momentum for our power products, especially MOSFETs, traction IGBTs, high power modules and gate drivers in vehicle electrification. We are seeing strong momentum in China EV market with our Silicon Carbide and FET products. And we expect many customers to ramp traction invertors with our power semiconductors in the near term. To capitalize on steep expected growth in the China EV market, we continue to invest in that market.
In other markets, we are seeing significant excitement from customers related to our expanding Silicon Carbide and IGBT product portfolio. Momentum for our sensor products for ADAS and viewing applications is accelerating, and we are meaningfully extending our competitive lead in that market by huge margin. According to the latest report by TSR, a leading independent market research firm, our overall market share in the automotive image sensor market is now 62%, and our share in ADAS segment of automotive imaging market is 81%. Customers are increasingly relying on us to provide them with leading edge technologies and complete product portfolio for automotive imaging applications.
As I've indicated before, we are the only provider of automotive image sensors with a complete portfolio of 1 megapixel, 2 megapixel and 8 megapixel image sensors. The breadth of our portfolio enabled us to secure the major design win with a German automotive OEM for our 2 megapixel and 8 megapixel image sensors for level 2 and level 3 ADAS systems in the fourth quarter. Our analog power management front, we continue to make progress on our power management programs for automotive processors. We are engaged with all leading processor providers for automotive applications. We are also seeing strong traction for our LED drivers and for lighting applications.
Revenue in the first quarter for the automotive end market is expected to be flat to slightly down quarter-over-quarter as opposed to seasonally higher sequential revenue. Weaker than seasonal growth in our automotive business is driven primarily by softness in the Greater China market. Industrial end market, which includes military, aerospace and medical, contributed revenue of $390 million in the fourth quarter. Contribution from OSA to the fourth quarter industrial revenue was not meaningful. Industrial end market represented 26% of our revenue in the fourth quarter and grew by 8% year-over-year.
We continue to see strong traction for our power semiconductor products and modules in the industrial end market. With a broad range of medium and high-voltage power semiconductors and modules, we are well positioned to capitalize on the secular trend of increased power efficiency requirements for industrial systems. Despite slowing macroeconomic conditions, demand for our power semiconductors and modules continued to strong and our customer engagements continue to expand. Within industrial, medical was an area of solid strength in the fourth quarter. We're seeing strong tractions for our products in personal diagnostics and hearing health market.
Revenue in the first quarter for the industrial end market is expected to be flat to slightly down quarter-over- quarter as opposed to seasonally higher sequential revenue. Weaker than seasonal growth in our industrial business is driven primarily by softness in the Greater China market. Communications end market, which includes both networking and wireless contributed revenue of $300 million for the fourth quarter. There was no contribution from OSA toward fourth quarter of 2018 communications revenue.
The communications end market represented 20% of our revenue in the fourth quarter. Fourth quarter communications revenue increased by 20% year-over-year. We are beginning to see strong ramp in our medium voltage MOSFETs in 5G infrastructure market. We expect this ramp to accelerate in 2019 as with start up early 5G deployments in a few parts of the world. Current indications from our customers point to a better than expected rate of deployment for 5G systems in near-term.
As we indicated earlier, our power content in the 5G infrastructure systems is many times that in the 4G systems. Furthermore, our participation in 5G systems is expected to be significantly higher than our participation in 4G systems. On the smartphone front, our revenue in the fourth quarter declined only slightly quarter-over-quarter as content increases helped offset decline in units.
Revenue in the first quarter for the communications end market is expected to be down quarter-over-quarter. Revenue decline in the first quarter will be significantly greater than normal seasonality due to weakness in the global smartphone market. The computing end market contributed revenue of $167 million in the fourth quarter. There was no contribution from OSA toward the fourth quarter 2018 computing revenue. Computing end market represented 11% of our revenue in the fourth quarter, and the fourth quarter computing revenue grew by 22% year-over-year. The year-over-year growth was driven primarily by strength in our server business. We expect strength in computing to continue into 2019. Although, we expect moderation in capital expenditures by leading cloud service providers.
In future generations of server platforms, we expect meaningful increase in our content. Revenue in the first quarter for computing end market is expected to be down quarter-over-quarter due to normal seasonality and softening macroeconomic conditions. The consumer end market contributed revenue of $171 million in the fourth quarter. The consumer end market represented 11% of our revenue in the fourth quarter. Excluding contribution of $4.2 million from OSA, fourth quarter 2018 consumer revenue was down 13% as compared to consumer revenue in fourth quarter of 2017. The decline was due to weakness in Greater China region and our selective participation in certain areas of consumer electronic market. Revenue in the first quarter for the consumer end market is expected to be down quarter-over-quarter, primarily due to continuing weakness in the Greater China region and normal seasonality.
In summary, we have seen weakness in demand from Greater China region. However, despite current weakness in macroeconomic environment, secular megatrends driving our business remain intact, and we are upbeat about our medium to long-term prospects. The key driver of our business is significant content increase in many applications in automotive, industrial, cloud power end markets as opposed to underlying unit growth in these end markets.
We have established leadership in highly differentiated power, analog and sensor semiconductor solutions, and we believe that customers are increasingly relying on us as a key provider of enabling technologies for newly emerging and disruptive applications in automotive, industrial and cloud-power end-markets.
To adjust to slowing macro environment, we are prudently managing our business with sharp focus on expenses and working capital. Our operational execution remains solid. We have continued to expand our margins and generate strong free cash flow.
Now, I would like to turn it back over to Bernard for forward-looking guidance. Bernard?
Thank you, Keith. Based on product booking trends, backlog levels and estimated turn levels, we estimate that total ON Semiconductor revenue is expected to be in the range of $1,365 million to $1,415 million in the first quarter of 2019. Included in our first quarter revenue guidance is approximately $20 million revenue from manufacturing services provided by OSA.
As I indicated earlier, the greater than seasonal decline in the first quarter is primarily driven by weakness in Greater China region. Based on our current outlook, assuming no further decline in macroeconomic conditions, we expect to grow sequentially in the second quarter of 2019.
For the first quarter of 2019, we expect gross margin to be in the range of 36.4% to 37.4%. Our first quarter gross margin guidance includes the negative impact of 50 basis points from the manufacturing services provided by OSA. We expect total GAAP operating expenses of $330 million to $348 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments and other charges, which are expected to be $30 million to $34 million. We expect total non-GAAP operating expenses of $300 million to $314 million in the first quarter.
We anticipate first quarter 2019 GAAP net other income and expense, including interest expense, will be $31 million to $34 million, which includes non-cash interest expense of $9 million to $10 million. We anticipate our non-GAAP net other income and expense, including interest expense, will be $22 million to $24 million.
Cash paid for income taxes for the first quarter of 2019 is expected to be $16 million to $20 million. We expect total capital expenditures of $170 million to $180 million in the first quarter of 2019. We expect capital intensity for 2019 to be approximately 9%.We also expect share based compensation of $19 million to $21 million in the first quarter of 2019. Of which approximately $2 million is expected to be in cost of goods sold, and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial measures.
Our diluted share count for first quarter of 2019 is expected to be 420 million shares, based on the current stock price. Further details on share count and earnings per share calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K.
With that, I would like to start the Q&A session. Thank you and Hade please open up the line for questions.
[Operator instructions] Our first question comes from Chris Danley of Citigroup. Your line is now open.
Can you just talk about the pickup in order rates recently and then if you've talked to the customers and the disties, what's the reasoning they are giving for the recovery in orders?
Again, I don't know there's a lot to talk about. We saw in early January, we normally would see a pickup in orders after decline at the end of December and it didn't happen. And then here in the last week, it did start to pick up against and really have no more color beyond that.
And for my follow-up, can you just give us your take on what the plans are for utilization rates and then how do we get the gross margins up to 40%?
So the utilization rates in the in the short-term are flattish to slightly down compared to Q4 it's about in the low 80%. The elements to grow gross margin continue being the same that we have talked about. A 50% fall through on incremental revenue, nice and significant help from the mix in our products. And probably the moderation of the increase in headwinds that we had from cost increases in 2018 that we do not expect will continue in 2019.
Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is now open.
Keith, first one for you, given the volatility of the bookings, as you described it week-to-week and month-to-month. What gives you the confidence to believe you can grow into 2Q and 2019 as a whole?
Well, certainly, backlog indicates that at this stage and our design wins, as reported from the customers and their ramp dates is reported to us, support ramp Q2 and onwards this year.
And I guess for my follow on one for you on your side Bernard. The OpEx you mentioned about controlling that tightly. In the amount you guided to for the first quarter, is there any one time benefits in that or is that the run rate you guys can hold until you get the revenue growth actually coming back?
We do have some permanent cuts. At the same time, our first quarter is also shorter on date, so in that sense you can call that a little bit of one time. But in the long run, we expect to continue driving to our 21% target and expect to be gradually getting there.
Thank you. Our next question comes from Vivek Arya of Bank of America Merrill Lynch. Your line is now open.
Keith, it's interesting that overall sales grew 9% on last year, but your Intelligent Sensing Group sales were kind of flat. I'm curious, what is the autos versus non-autos exposure in that segment? And what's going to be needed to make that business grow more in-line with other segments? And when will you see some of the benefits of the ADAS that you outlined?
So the automotive piece continues to grow very significantly. As we have set expectations for, it's about half of the total number in intelligent sensors group. The flatness that you see there is really us not participating in some of the low end security market, which declined year-over-year.
And then in communications, could you also give us a breakdown of handsets versus infrastructure? And on the 5G side, what content rates are you seeing? And is there a way to quantify how much your 5G exposure can be in 2019?
So kind of try and take those as best I can do. About 16% is handsets of sales, 4% is infrastructure of the 20% total. So, it's mostly handsets. From a 5G infrastructure perspective, obviously, that's small now. It just starts to ramp. It can be very significant for us. Depending on the type of 5G installation, it can be anywhere from $10, $150 or so.
Thank you. Our next question comes from Shawn Harrison of Longbow Research. Your line is now open.
Keith, if you look at 2019, just hazarding a guess or maybe which end markets would you expect to be able to grow year-over-year versus maybe one that we're trying?
So, I would expect automotive and industrial, in the cloud-power, 5G, server business grow very nicely. I would expect that consumer probably will not be growing as nicely. And the handset business will not grow very much.
And then as my follow up. Bernard, I think you mentioned looking to net working capital down a little bit. Do you have a target either for the entire year in terms of days to come out or just progress you want to make in the first half of 2019?
So as we have historically talked about, we do have some seasonality pattern, which is free cash flow. First half is typically lower than the second half but we expect to grow year-over-year.
Grow free cash flow?
Yes.
Thank you. Our next question comes from Vijay Rakesh of Mizuho. Your line is open.
Just looking at the compute site, looks like it grew pretty nicely at 22% year-on-year. Just wondering as you look into 2019, how do you look at your market share in that segment exiting '18 or exiting '19? And is your share actually going up on a cash basis?
So we expect to increase share on the server side, because we're very low and growing quite rapidly. But on the notebook and desktop side, we're remaining roughly flat where we had significant share before.
And on the 5G side, I know you've talked about it briefly here. But how do you see growth in 2019 year-on-year? And what do you think your market share is there on the 5G side?
So 5G will grow significantly in the second half. There was very little revenues in 2018, so you should see double digit growth. And our presence in 4G was quite low. So for us, the 5G switch should be very significant.
Thank you. Our next question comes from Kevin Cassidy of Stifel. Your line is now open.
The pick-up you've seen, especially when you pointed to China. Could that be just some ordering ahead of Chinese New Year? Or how does that compare to past years in front of Chinese New Year?
Actually, normally we see bookings and fill come in January, because basically December is declining. And so we would normally expect that. We didn't see it couple of weeks there early January is now returning to something of a more normal pattern.
And on the content increases you're seeing in servers, both AMD and Intel has talked about going to a chiplet or a multi-chip package devices. What changes with the power control on that?
That's been out. The control piece doesn't change dramatically nor does the power content, because it really is a total power determination for the dollars in there.
Thank you. Our next question comes from Anthony Stoss with Craig Hallum. Your line is now open.
Keith, can you talk about the Silicon Carbide contribution in Q4 and also how you expect that to ramp throughout 2019, and a similar follow-up on EVs in terms of what you expect year-over-year? Thanks.
So Silicon Carbide itself is still young and ramping for us. We're talking as I mentioned in the last call tens of millions last year, ramping to hundreds of millions in the next couple of years. So, it's still pretty early in that. We did see our first usage in EV automobiles for Silicon Carbide in both third and fourth quarters. I'm expecting EV to ramp quite nicely with all of our related products this year. I don't have an exact growth number but it's certainly going to be very high-double-digit numbers.
Thank you. Our next question comes from Craig Ellis of B. Riley FBR. Your line is now open.
Keith, this time of the year is typically when where the company would do pricing negotiations and updates with its long-term customers. Can you give us an update on how that is playing out and how pricing faired in the fourth quarter?
So our annual contracts are usually completed in the show-up in our books in the first quarter here, as you mentioned. Those numbers were better than we've had quite benign, and should not be declining or should not provide a decline in ASP for the first quarter.
And the follow-up is for Bernard. Bernard, very strong share buyback quarter in the fourth quarter 200 million. On a full year basis, share buyback and get paid on were about equally split. As we look to how should we think about your redeployment of free cash flow across those two parameters? Thank you.
So we'll continue having a balanced approach. And definitely, we'll take advantage of these locations in the market as it relates to share buybacks.
Our next question comes from Harlan Sur of JP Morgan. Your line is now open.
On the recent pick-up in bookings, the Greater China bookings. Is this more distribution inventory replenishment or are you also seen a pick-up in re-sales out of this year as well? Just want to get a sentence if this is more replenishment or you guys are actually seeing the demand pull through as well?
I mean, we don't have exact data from distribution, as you might guess. But the pattern would suggest they've grown low on certain items and just need them for consumption.
And then we just got the SIA data for the month of December and the power transistor segment of the market was down only 3.5%, sequentially it was up I think 11% year-to-year. This is significantly better than the overall semiconductor industry. And I think even within that power MOSFETs stood even better. So you guys have a pretty strong portfolio here. Is just all content gain driven or also a function of just end market exposure?
Clearly, the end markets are valuing higher power efficiency. We've talked about those relative to cloud and the communications infrastructure, but also automotive. And so those are really key factors for electric vehicles. The mileage that you get on the charge is a key parameter. And so they're using not just more MOSFETs, but they're using very high performance MOSFETs, which drives, from a dollar perspective, good content gain.
Thank you. Our next question comes from Tristan Gerra of Baird. Your line is now open.
Given the slowdown in end markets like auto. What are the plans to shift external capacity to your internal fabs? And could you help us quantify how much reduction in demand can you weather without incurring any underutilization charges? And also even these trends, is it fair to assume that lead times could come down this first half?
So we do have significant flexibility in bringing things inside. We won't bring everything back inside. But you could see a point or three change in the amount of outsourcing that we do. So it is significant amount. Relative to lead times, we do expect as we go through the first half of the year, to be able to help somewhat in lead times, perhaps not as much in the power area. But in the non-power area, our capacity, equipment deliveries are now coming in and hopefully, we'll see some improvements by mid-year.
And then my follow up, how long do you think the Chinese industries are going to be in inventory deleveraging mode? You mentioned some stabilization recently. I am assuming it doesn't really address the high inventory levels across the board. And also if you could help us quantify the slowdown in the China auto market sequentially in Q1. Is it fair to assume that this is going to be down double digit?
Okay, lot of questions there. So, on the distribution side, I can't imagine them being in a decline mode much longer than the first quarter, because they still have to service their customers. There is lots of reasons they might be doing it, but their demand is not off that far. Relative to autos, they are weak in China as all of us know. I don't expect double digits in the first quarter though. Our backlog again is a little weaker than normally seasonal for Q1, but not much.
Thank you. Our next question comes from Rajvindra Gill of Needham and Company. Your line is now open.
Yes, thank you, and congrats on solid results in light of this volatility. A question on the automotive as well. I was wondering if you could maybe break out your exposure of auto across China, Europe and the U.S.? And also with respect to Europe, are you seeing a rebuilding by the Europe, automotive OEMs after they have transitioned to the new emission standard and how does that affect that part of the business?
So our market is basically ranked, Europe is our largest market, U.S. second and China third. And we're not seeing anything significant in Europe. They're still kind of flattish at this stage. In China, it is slightly down.
And my follow-up on the sensor side, the sensor segment was flat last year, mainly because of the nonautomotive. You mentioned automotive being about half of the sensor business. When will you give us a sense for how the auto sensor business grew last year if you have those details? And what are the other segments that make up that in the sensor business outside of auto?
So auto grew nearly 20% year-on-year, the other segments are consumer things like drone usage and home camera usage. And then the other piece is industrial, which had a very strong segment in machine vision, et cetera, but has some security portions that were not quite as strong.
Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is now open.
It sounds like the pricing environment for you is still holding up fairly well? I'm just curious, Bernard, can you help quantify the headwinds you guys saw on the cost side in calendar year '18? And as we go throughout calendar year '19, either because demand is a little bit weaker and supplies freeing up a little bit and/or because you guys are spending on CapEx to try to offset some of these headwinds. What kind of tailwinds on the cost side could you see this year?
So we don't have a precise number, but we think it was a fairly meaningful number that I think we lost in 2018. Maybe somewhere around 50 basis points and we should recover some of that in 2019 with a combination of the pricing and less headwinds on this one.
And then, Keith, relative to your comments for Q2 sequential growth and full year growth, I'm just curious. You have to grow above seasonal every quarter this year to get to some top-line growth for the full year. Do you see that mostly as a second half phenomenon? Or do you think we'll start to see evidence of that in Q2? And I think as to an earlier question. What bottoms up markets do you feel like you're most best positioned to see outsized growth?
I think outsized growth in 5G infrastructure starting in Q3 would be above seasonal, above normal. We think that the slowdown in some of the server purchases will also pick up about that time. So those two markets should be significant. The new automobile models start ramping in Q3, and we think that content goes up quite significantly. So simple answer to your question is, I do think Q3 will be more outsized from a content perspective, significantly outsized. Q2 will it be outsized or yet more or not, it's a little too early for me to tell. But certainly, backlog indicates some good growth in Q2.
Thank you. Our next question comes from Ambrish Srivastava of BMO. Your line is now open.
You commented on what are your lead times currently?
They remained extended in the teens. They have not changed significantly.
And my follow up is just trying to tie up all your comments about order trends your guidance and then second quarter. Can you just throw in or enlighten us what are cancellations doing that gives you confidence that Q2 should recover? And also are the LTAs helping on that front that you signed, which I think is different than the past several cycles where you now have a lot, should have a lot more visibility?
The LTA is definitely providing stability. The net change we talk about pickup in order rates here toward the end of January reflect the absence of cancellations. And we saw some of the cancellations early in the month. So they seem to be largely behind us.
Thank you. Our next question comes from Mark Delaney of Goldman Sachs. Your line is now open.
I had a question on the smartphone market. Do you guys have a sense about how much inventory there may be at your customers that you need to work through in the near term? And then as you think about that business over the intermediate to longer term based on your discussions with your customers. Is there any increasing preference for your smartphone customers that start to focus more on lower cost side models and maybe the content opportunities may not be as much as we had expected six to 12 months ago?
Okay, lot of questions there. From a content perspective, going forward, we're expecting increases as they put 5G in the handsets. So that is a nice pickup. And from the 4G systems, the actual mix of what they plan on making, they don't share with us in advance. So, I can't really comment on their strategies. And then from an inventory perspective, we're seeing a little greater than normal downturn here in Q1, which we assume is to address those inventories. But no indication that we'll continue be on the first quarter.
Thank you. Our next question comes from Chris Rolland of Susquehanna. Your line is now open.
Perhaps one for your, Keith. I know content games are great driver for you guys, but more broadly for the power management industry. We've seen probably some relatively better results here. Do you think something's changed this down cycle? Or is it from consolidation or lack of capacity adds across the industry, or perhaps just not that severe of a downturn this fall? What do you think the puts and takes are there?
I mean I think capital has come on relatively slowly compared to the content gains for the last few years. So clearly, the industry is very tight on capacity, in general. I think that the content gains, however, as I mentioned earlier, we'll continue to have some very significant momentum and much faster than in the unit markets that we support just based on the power efficiency requirements and the continued increase in electric vehicles in 5G infrastructure. So, I think you've got a rapidly growing market and you've got relatively constrained supply.
And you guys planning to be control on Aizu by 2020, but if we move into a pretty good upcycle here. What are your plans or preferences for capacity after you -- would you guys rather do internal, external or more JVs, do you have a preference?
I don't know, we have a strong preference for JV versus internal. We look for the most cost effective capacity adding that we can get. And we use a combination of outside inside in JVs. So whatever the best deal we can find is where we'll be heading.
Thank you. Our next question comes from Chris Caso of Raymond James. Your line is now open.
Just wonder if you could give a little more color on some of the cancellations that you spoke about at the start of the month. Was that geographically based and then a lot of folks have been talked about weakness in China, I presume it's there. Was it broader geographically? And also anything say about particular end markets? For example, some of the handset space we've seen some weakness or perhaps, and your side the difference between some of the power components that have longer lead times and some of the other components whatever color you can provide?
Most of the weakness is in the smartphone side, which is also mostly in China. From a build perspective as you would guess. And so it does still look mostly like China on that weakness side, any way you want to slice it. So, the rest of the market seemed relatively stable and their order patterns appear more secure.
So basically those cancellations were isolated to the smartphone side more or less?
Well, mostly smartphone. But also some of the consumer markets in China as well.
Just as a follow-up then, with regard to distribution. You talked about distribution inventory increasing in Q4 and you talked about how much, and it sounds like you expect that to be cleaned up during the first quarter?
I expect it to be relatively stable in the first quarter. It expanded by a few days in Q4, but nothing significant.
[Operator Instructions] Our next question comes from Craig Hettenbach of Morgan Stanley. Your line is now open.
Keith, just a question around lead times in the context of some of the trends you're seeing. So even though the business has weakened a bit, you're still looking up about 1% year-over-year for guidance. If I look at some other analog companies, they're down as much as high-single-digits to mid-teens and they have shorter lead time. So anything you're doing in terms of scrubbing the lead times and matching up versus what you're seeing from a demand perspective?
So we've been working with our distributors for some time to make sure that we are not basically getting an order pattern for immediate delivery for things they don’t need for some time out. We do that by looking at their lead times and our lead times, and trying to get a pipeline. So part of our extended lead times is really just a good management of our pipeline of products. And so folks have ordered on us basically within the lead times we've given them and they just -- that just keeps rolling forward. So I mean that certainly company specific there, but we do expect that. And so our understanding is the consumption that you're having in Q1 is really consumption, not a reflection of major inventory changes other than the ones we talked about in China.
And then just as a follow up since China you had seen the weakness first and the last year, particularly in appliances and industrial. Any thoughts there in terms of how far along they are and if those markets got hit first, would you expect them to recover right at this first as well?
We are seeing increased orders in the light good piece, but that's the only piece so far that has shown any pick up.
Thank you. And at this time, ladies and gentlemen, this does conclude our question-and-answer session for today. I would like to turn the call back over to Parag for any closing remarks.
Thank you everyone for joining the call today. We look forward to seeing you at our Analyst Day on March 8th in Scottsdale. Good-bye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.