Freescale Semiconductor, Ltd. (FSL)

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Freescale Semiconductor (FSL)

Q3 2013 Earnings Call

October 24, 2013 5:00 pm ET

Executives

Mitch Haws

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

Alan Campbell - Chief Financial Officer and Senior Vice President

Analysts

Blayne Curtis - Barclays Capital, Research Division

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

Craig Hettenbach - Morgan Stanley, Research Division

Glen Yeung - Citigroup Inc, Research Division

Ryan Carver - Crédit Suisse AG, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Gabriel Ho

Doug Freedman - RBC Capital Markets, LLC, Research Division

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

Joseph Zachariah

Presentation

Operator

Welcome to Freescale's third quarter results conference call. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. [Operator Instructions]

I would now like to turn the meeting over to Mr. Mitch Haws. Sir, you may begin.

Mitch Haws

Thank you. Good afternoon, and welcome to our third quarter 2013 earnings conference call. With me today are Gregg Lowe, our President and Chief Executive Officer; and Alan Campbell, Freescale's Chief Financial Officer.

Before we begin today's prepared remarks, I'd like to remind everyone that today's discussion contains forward-looking statements based in our current outlook, and as such, does include certain risks and uncertainties. Please refer to the cautionary statement in today's earnings announcements 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 any obligation to update forward-looking statements to reflect either subsequent events or circumstances.

Finally, in the course of today's discussion, we will reference certain non-GAAP financial measures and we have posted the appropriate GAAP financial reconciliations at our website at freescale.com.

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

Gregg A. Lowe

Thanks, Mitch, and good afternoon, everybody. I'll spend a couple of minutes highlighting our Q3 results, Alan will then provide additional commentary and insight into the financials and our outlook.

Now looking at the results, revenues were $1.09 billion, coming in at the upper range of our guidance and up 5% from Q2. Sequentially, sales benefited from growth in MCUs, Digital Networking and RF. On a year-on-year basis, all 5 product groups reported higher sales and total company sales were up 8%.

We also continue to make progress on increasing gross margins and operating margins. Gross margins were 43.6%, 110 basis points ahead of Q2. Adjusted net earnings per share were $0.20, representing solid improvement from the $0.09 we reported in Q2 and the $0.04 per share we reported in Q3 of last year.

Overall, we made good progress in Q3 on both financials and on executing our strategic initiatives that are building the foundation for future growth. I'll give some additional commentary in those initiatives after Alan reviews our Q3 results and our Q4 guidance.

And with that, let me turn the call over to Alan.

Alan Campbell

Well, thanks, Gregg, and good afternoon again and thank you for joining today's call. As I review the Q3 financial results in more detail, please note that I will be focusing on the results excluding the impact of certain one-time items and adjustments. We believe this to be more meaningful -- to be a more meaningful representation of our ongoing financial performance.

As Gregg mentioned, revenues in Q3 were $1.09 billion, representing a sequential increase of 5%. Sales grew 8% compared to the same period last year.

Looking at the product groups in more detail. Our microcontroller sales were $230 million in the third quarter, compared to $199 million in the second quarter of 2013, a growth of 16%. Compared to last year, microcontroller sales were up 20%. Sequentially, sales benefited from growth, both in microcontrollers and application processors sold into the consumer markets.

On a year-over-year basis, sales increased primarily due to growth in microcontrollers and application processors sold into the Automotive and General embedded market.

Our Digital Networking sales were $238 million. This compares to the $229 million in the second quarter of '13, and represents a growth of 4%. Compared to last year, our sales were up 5%. This sales growth was driven by higher sales, both in the next-generation enterprise systems and service provider equipment, and was slightly offset by declines in certain industrial applications.

Automotive microcontroller sales were $270 million. This compares to $272 million in the second quarter. When compared to Q3 of last year, sales were up 7%. Sales improved due to increased vehicle production, primarily in the U.S. and China markets.

Analog & Sensor net sales were $181 million compared to $188 million in the second quarter of 2013 and $180 million in the third quarter of last year. Analog & Sensor net sales declined sequentially, primarily due to seasonal lower vehicle production. On a year-over-year basis, growth in Automotive end markets was offset by declines in some of the consumer markets.

RF net sales were $89 million compared to the $81 million in the second quarter, representing a growth of 10%. Compared to the same period last year, our RF sales were up 22%. The sales both improved both sequentially and year-over-year due to increased spending on next-generation wireless networks, primarily in China.

Finally, net sales were -- other net sales were $77 million. This compares to the $69 million in the second quarter and $86 million in the same period last year. On a sequential basis, sales grew due to higher IP revenues. On a year-over-year basis, net sales declined primarily due to lower net sales in our wireless handset market.

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