Freescale Semiconductor, Ltd. (FSL)

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Freescale Semiconductor Ltd (FSL)

Q2 2013 Earnings Call

July 25, 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

John W. Pitzer - Crédit Suisse AG, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Gabriel Ho

Gabriela Borges - Goldman Sachs Group Inc., Research Division

Sujeeva De Silva - Topeka Capital Markets Inc., Research Division

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

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Glen Yeung - Citigroup Inc, Research Division

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

Doug Freedman - RBC Capital Markets, LLC, Research Division

Auguste P. Richard - Piper Jaffray Companies, Research Division

Jeffrey A. Harlib - Barclays Capital, Research Division

Tony Venturino

Presentation

Operator

Welcome to Freescale's Second Quarter Results Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the meeting over to Mr. Mitch Haws. Go ahead, sir. You may begin.

Mitch Haws

Thank you, Sharon, and welcome to each of you to our Second Quarter 2013 Earnings Conference Call. With me today are Gregg Lowe, our President and Chief Executive Officer; and Alan Campbell, our Chief Financial Officer. Before we begin the prepared remarks, please note that today's discussion contains forward-looking statements that are based on our current outlook. Therefore, they 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 risk factors that can cause our results to differ materially. The company does not assume an obligation to update any forward looking statements to reflect subsequent events or circumstances. In addition today, we will refer to certain non-GAAP financial measures. The reconciliations are on our website at freescale.com.

With that, let me turn the call to Gregg.

Gregg A. Lowe

Thanks, Mitch, and good afternoon, everyone. I'll spend a couple of minutes highlighting our Q2 results, and Alan will then provide additional commentary and insight into the financials and our outlook.

Now looking at the results. Revenues were $1.04 billion, coming in at the upper end of our guidance and up 6% from Q1. The improvement in revenue was broad-based, with 4 of the 5 product groups growing sequentially and 4 of the 5 year-over-year. We also continue to make progress in increasing gross margins and operating margins. Gross margins were 42.5%, 190 basis points ahead of Q1.

Adjusted net earnings per share were $0.09 per share, an improvement of $0.12 from Q1.

Overall, we made good progress in Q2 on both financials and on executing the strategic initiatives that are a foundation for our future growth.

I'll give some additional commentary on those initiatives after Alan reviews our Q2 results and our Q3 guidance.

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

Alan Campbell

Thanks, Gregg, and good afternoon, and thank you again for joining today's call. As I review the Q2 financial results in more detail, please note that I will be focusing on these results, excluding the impact of certain onetime items and adjustments. We believe this to be a more meaningful representation of our ongoing financial performance. As Gregg mentioned, revenues in the second quarter were $1.04 billion, representing a sequential increase of 6%. Sales grew 1% compared to Q2 of last year.

Looking at the product groups in more detail. Our microcontroller sales were $199 million in the second quarter, compared to $177 million in the first quarter of 2013, a growth of 12%. Compared to last year, Microcontroller sales were up 18%. Sequentially and year-over-year, sales benefited from increased sales in the distribution in Asia, as well as higher sales of application processors into the general embedded and automotive markets.

Digital Networking sales were $229 million. This compares to $202 million in the first quarter of 2013, representing a growth of 13%. Compared to last year, sales grew 4%. Networking sales benefit both sequentially and year-over-year from higher spending on current and next-generation wireless networks and higher sales of product used in enterprise solutions.

Automotive Microcontroller sales were $272 million, compared to $254 million in the first quarter, a growth of 7%. Compared to the second quarter of last year, sales were up 5%. Automotive Microcontroller sales benefited both sequentially and year-over-year from positive vehicle production and sales trends in the U.S. and China.

Analog & Sensor net sales were $188 million, compared to $177 million in the first quarter of 2013 and $190 million in the second quarter of last year. Our Analog & Sensor net sales benefited from a sequential increase from increases in global automotive production. The year-over-year comparison in revenue was impacted by higher shipments in 2012 associated with the closure of our Toulouse facility.

RF net sales were $81 million, compared to $86 million in the first quarter, a decline of 6%. Compared to Q2 of last year, RF sales were up 23%. The RF sales increased last year due to an increased spending on 3G and 4G wireless networks, particularly in China. The modest sequential decline was related to a product transition, which we expect will be completed over the second half of 2013.

Other net sales were $69 million. This compares to $85 million in the first quarter of 2013 and $126 million in the second quarter of last year. Both sequentially and year-over-year, other net sales declined due to lower sales in our wireless handset market and a decline in IP licensing revenue.

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