Freescale Semiconductor, Ltd. (FSL)

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Freescale Semiconductor (FSL)

Q1 2013 Earnings Call

April 25, 2013 5:00 pm ET

Executives

Mitchell Haws

Gregg A. Lowe - Chief Executive Officer, President and Director

Alan Campbell - Chief Financial Officer and Senior Vice President

Analysts

James Covello - Goldman Sachs Group Inc., Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Jeffrey A. Harlib - Barclays Capital, Research Division

Glen Yeung - Citigroup Inc, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Joseph Zachariah

Mark Kelley - Barclays Capital, Research Division

Presentation

Operator

Welcome to Freescale's First Quarter Results Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the meeting over to Mitch Haws. Sir, you may begin.

Mitchell Haws

Thank you, and thanks to all of you, and welcome to our First Quarter 2013 Conference Call. With me today are Gregg Lowe, our President and Chief Executive Officer, and Alan Campbell, our CFO.

Before we begin today's prepared remarks, I would like to remind everyone on the call that today's discussion does contain forward-looking statements that are based on our current outlook, and as such, do include certain risks and uncertainties. Please refer to the cautionary statement in today's press release and review our 10-K and other SEC filings for more information on the specific risk factors that could cause actual results to differ materially. The company does not assume an obligation to update any of these forward-looking statements to reflect subsequent events or circumstances.

Finally, we will reference today certain non-GAAP financial measures, and we have posted the appropriate GAAP financial reconciliations to our website at freescale.com.

With that, let me turn the call over to Gregg.

Gregg A. Lowe

Well, thanks, Mitch, and good afternoon, everyone. I'll spend a few minutes highlighting our Q1 results and give you an update on the progress we're making on our strategic initiatives. Alan will then provide additional commentary and insight into the financials.

Now looking at the Q1 results. Revenues were $981 million, coming in nicely at the upper end of our guidance, and up 2.5% from Q4. Revenues improved sequentially based primarily on growth in our auto and networking businesses, along with sequential growth in IP revenue. Gross margins were 40.6%, 140 basis points ahead of Q4. The adjusted loss per share was $0.03 per share, an improvement of $0.12 from Q4.

The sequential improvement we generated in both revenues and gross margin is a positive step, but we still have more ahead of us to reach the level of improvement we believe we can achieve. We continue to make progress on the key strategic initiatives we outlined to you last quarter. Recall, we had an objective of having 90% of our R&D spend allocated to our focused product groups by 2015. We're already at 85% and expect to reach 90% well ahead of our target date, so the team is making good progress in reallocating our resources into the right areas.

Customer-facing headcount is up 18% in the Asia-Pac region, and we have directly called on more than 200 potential new customers in the region already. We're on track to open up 10 new sales offices in China by the end of 2013.

So while there is clearly a lot of work left, we're starting to make some solid progress.

With that, let me turn the call over to Alan.

Alan Campbell

Yes, good afternoon, and thank you again for joining today's call. As I review the Q1 financial results in more detail, please note I will be focusing on the results excluding the impact of certain onetime items and adjustments. We believe this is a more meaningful representation of our ongoing financial performance.

Revenues in the first quarter, as Gregg mentioned, were $981 million, representing a sequential increase of 2.5%. Sales grew 3% compared to Q1 of last year.

Looking at the product groups in more detail. Our Microcontroller sales were $177 million in the first quarter compared to the $197 million in the fourth quarter of 2012, a decline of 10%. Compared to last year, Microcontroller sales were up 19%. Sequentially, sales were negatively impacted by the normal seasonality associated with our consumer portfolio. On a year-over-year basis, Microcontroller revenues benefited from increased sales in the distribution in Asia, as well as higher sales of application processors into the general embedded and automotive markets.

Our Digital Networking sales were $202 million compared to $195 million in the fourth quarter of 2012, representing a growth of 4%. Compared to last year, sales declined 4%. Sequentially, networking sales benefited from higher spending on next-generation networks, primarily 4G and LTE investments in the Chinese and U.S. markets, and higher sales of products used in certain enterprise solutions. Sales did decline on an annual basis, primarily due to decline in the general embedded products.

Automotive Microcontroller sales were $254 million. This compares to $236 million in the fourth quarter, a growth of 8%. Compared to Q1 of last year, automotive sales were up 6%. Sales benefited both sequentially and a year-over-year basis from the positive vehicle market trends in the U.S. and in China.

Analog & Sensor net sales were $177 million compared to the $175 million in the fourth quarter of 2012 and $177 million in the first quarter of last year. Our Analog & Sensor sales benefited on a sequential and a year-over-year basis from higher sales into the automotive market, offset by declines in the consumer end market.

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