Freescale Semiconductor, Ltd. (FSL)

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Freescale Semiconductor Inc. (FSL)

Q1 2014 Earnings Conference Call

April 24, 2014 05:00 pm ET

Executives

Gregg Lowe – President & Chief Executive Officer

Alan Campbell – Senior Vice President & Chief Financial Officer

Mitch Haws – Investor Relations

Analysts

John Pitzer – Credit Suisse

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Presentation

Operator

Welcome to Freescale’s Q1 2014 Results Conference Call. (Operator instructions.) Today’s call is being recorded. If anyone has any objections you may disconnect at this time. I will now turn the meeting over to Mitch Haws. Sir, you may begin.

Mitch Haws

Thanks, Kim, and welcome all of you to our Q1 2014 earnings call. With me today are Gregg Lowe, our President and Chief Executive Officer, and Alan Campbell, our CFO.

Before we begin the prepared remarks today I’d like to remind everyone that today’s discussion will contain forward-looking statements that are based on our current outlook. As such 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 specific risk factors that could cause actual results to differ materially.

The company does not assume an obligation to update any forward-looking statements to reflect subsequent events or circumstances. Finally, during the course of the discussion today we will reference non-GAAP financial measures and on our website at www.freescale.com you’ll find the appropriate GAAP financial reconciliations.

With that I’ll turn the call over to Gregg.

Gregg Lowe

Thanks, Mitch, and good afternoon everybody. I’ll spend a couple of minutes highlighting our Q1 results after which Alan will provide some additional insight into the financials and provide our Q2 guidance. Following Alan’s comments we’ll take your questions.

Now, looking at the results, the performance in Q1 demonstrates that we’re continuing to make good progress on our goals of growing revenue to gain share and increasing gross margins. Looking at the quarter, revenues were $1.13 billion, ahead of the upper end of our guidance and 4% higher than Q4. This represents a 15% growth over Q1 of last year. All five product groups grew sequentially and all five showed double-digit growth compared to last year.

Gross margins were 44.8%, up 90 basis points from Q4, and adjusted earnings per share for Q1 were $0.27. So overall some good progress but there’s still plenty left for us to accomplish, and our entire team is focused on continuing improvements in market share and margins. And with that let me turn it over to Alan.

Alan Campbell

Yes, good afternoon again and thanks for joining today’s call. Looking at Q1, our revenues were $1.13 billion, 4% ahead of Q4 and 15% above Q1 of last year. As Gregg mentioned, revenues for our five core product groups grew 7% sequentially and 21% compared to Q1 last year. I’m going to go into some of the details for each product group.

Our microcontroller sales were up 1% from the last quarter above seasonality, and grew 26% compared to Q1 of last year. We continued to see strong growth in our 32-bit MCUs sold to both OEMs and distributors worldwide. In addition, sales of our application processors into the automotive and distribution channel grew year-over-year.

Digital Networking revenues grew 1% from prior quarter and grew 23% from the same period last year. Year-over-year Networking sales growth was broad based across service provider, enterprise, and general [and varied] segments. Sequentially the Networking business did benefit from higher sales of service provider equipment including wireless base stations in China. Our multi core revenues in Digital Networking doubled when compared to the same period last year.

Automotive microcontroller sales grew 14% sequentially and were up 20% compared to the same period last year. The business saw strong growth in all regions and in distributions due to growth in semi content and higher production levels.

Analog and Sensor sales were 4% ahead of the last quarter and 12% above Q1 of last year. The sequential and year-over-year growth was primarily due to increased semiconductor content in autos driven by fuel efficiency and safety feature requirements coupled with an increase in worldwide auto production.

RF sales grew 18% from Q4 and were up 31% ahead of Q1 last year. The increase in RF sales was due to growth in wireless infrastructure investment, particularly in China where demands for both [TBI CDME] and TDLTE were strong.

Other products, again which consist primarily of IP and the remaining cellular handset revenues declined 37% from Q4. Both IP and cellular revenues declined sequentially and year-over-year.

Finally, sales to our distribution grew 7% sequentially and were up 21% compared to the same period last year. During Q1 distribution inventory significantly reduced from a 9.1 weeks to 7.1 weeks. Recall that in early January we initiated the consolidation of our major distributors from three to two. We believe this will result in more resources dedicated to our products and greater field support as we continue to grow our business through the channel. Our book to bill for the company in Q1 was 1.07 and this compared to 1.04 in the last quarter.

Let me now turn to gross margins and operating expenses. Our gross margins were 44.8% as compared to the 43.9% in Q4. The 98 basis point sequential improvement resulted from ongoing operational efficiencies, utilization, and procurement savings. These improvements offset the impact of lower IP revenues and ASP adoptions associated with our annual pricing agreements with customers.

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