ON Semiconductor Corp (ON) Q4 2018 Earnings Conference Call Transcript

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ON Semiconductor Corp (ON -2.39%)
Q4 2018 Earnings Conference Call
Feb. 04, 2019, 9:00 a.m. ET

Prepared Remarks:

Operator

Good day, ladies and gentlemen and 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.

Parag Agarwal -- Vice President-Investor Relations and Corporate Development

Thank you, Hailey. 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 website 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 website approximately one hour following this conference call, and 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 website. Our earning release and this presentation includes 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 website in the Investor Relations section.

During the course of this conference call, we'll make projections or other forward-looking statements regarding future events or 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 risk 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 Securities and Exchange Commission.

Additional factors are described in our earning 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, change 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?

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

Thank you Parag and thank you everyone for joining us today. We delivered yet another strong quarter of -- 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 evident by margin performance in several quarters.

Our design win pipeline in our strategic markets, which include automotive, industrial and cloud-power continue to grow and we continue to strengthen our competitive position in those markets. We'll remain upbeat about the future. Since our last earnings call in November of last year, we noticed -- 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 pickup.

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 the 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 the 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 margins 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 quarter of -- 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 the contribution of $19 million from ON Semiconductor Aizu, also known as OSA. As we announced in our third quarter of 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 a $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 a negative impact of 50 basis points in our fourth quarter of 2018 gross margin.

On GAAP and non-GAAP -- 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 the rise 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, the revenue increase of 9% in the fourth quarter of 2018 and our non-GAAP operating income increased by 20%. This strong operating performance demonstrate 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 rise in 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 billion, as compared to $951 million at the end of 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 to 116 days in the third quarter. Distribution inventory in terms of weeks increased quarter-over-quarter in the fourth quarter, but is within our target range of 11 weeks to 13 weeks. We expect distribution inventories to remain within our normal range of 11 weeks 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't carry more inventory that -- than what is needed to support the 11 weeks to 13 weeks of resales.

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?

Keith Jackson -- President and Chief Executive Officer

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 macroeconomic 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 the details of the fourth quarter, let me highlight the business performance for 2018 and lay our 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 the 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 a solid all-around performance in 2019.

Now let me comment on the business environment. Since our last earnings announcement in November of last year, we were seeing continued softening in demand from the 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 the 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 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 noticed 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 power management applications. Despite a 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 inverters with our power semiconductors in near-term. To capitalize on steep expected growth in 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 a 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 a 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. On analog power management front, we continue to make progress on our power management programs for automotive processors. We are engaged will 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. The 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. The 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. For the 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 continues to be strong, and our customer engagements continue to expand.

Within industrial, medical was an area of solid strength in the fourth quarter. We are 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 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 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 the start of 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 the 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. The 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 in 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 the 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 a 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 the 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 the 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 the 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 and cloud-power end-markets, as opposed to underlying unit growth in these end-markets.

We've 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've continued to expand our margins and generate strong free cash flow.

Now, I'd like to turn it back over to Bernard for forward-looking guidance. Bernard?

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

Thank you, Keith. Based on product booking trends, backlog levels and estimated turn levels, we estimate the core ON Semiconductor revenue is expected to be in range of $1.365 billion to $1.415 billion in 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 the 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 Hailey, please open up the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Chris Danely of Citigroup. Your line is now open.

Christopher Danely -- Citigroup -- Analyst

Hey, thanks guys. Can you just talk about the pickup in order rates recently? And then if you've talked to the customers or the DCs what's the reasoning they're giving for the recovery in orders?

Keith Jackson -- President and Chief Executive Officer

So again, I don't know if there is a lot to talk about. We saw -- in early January, we normally would see a pickup in orders, after a decline at the end of December and it didn't happen. And then here in the last week, it did start to pick up again and really have no more color beyond that.

Christopher Danely -- Citigroup -- Analyst

Okay, thanks. 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 like 40%?

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

So the utilization rates in the short-term are about flattish to slightly down compared to Q4 and it's fallen (ph) to 80 -- low 80%. The elements to grow gross margin continue being the same that we have talked about, the 50% fall through on incremental revenue, nice and significant help from the mix in our products and probably the moderation of the increases in headwinds that we had from cost increases in 2018 that we do not expect will continue in 2019.

Christopher Danely -- Citigroup -- Analyst

Okay, thanks guys.

Operator

Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is now open.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Thanks for letting me ask a question. 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 in 2Q and 2019 as a whole?

Keith Jackson -- President and Chief Executive Officer

Well, certainly backlog indicates that at this stage in our design wins as reported from the customers and their ramp dates as reported to us, support ramp Q2 and onward this year.

Ross Seymore -- Deutsche Bank -- Analyst

Great 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 kind of the run rate you guys can hold until you get the revenue growth actually coming back?

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

We do have some permanent cuts at the same time, our fourth -- our first quarter is also shorter on dates. So in that sense, you can call that a little bit of a one-time, but in the long run we expect to continue driving to our 21% target and expect to be gradually getting there.

Ross Seymore -- Deutsche Bank -- Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Vivek Arya of Bank of America Merrill Lynch. Your line is now open.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question. Keith, it's interesting that overall sales grew 9% 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 will 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 wins you outlined?

Keith Jackson -- President and Chief Executive Officer

Yeah, so the automotive piece continues to grow very significantly. As we have said, 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.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

I see. And then in communications, could you also give us a breakdown of handsets versus infrastructure? And on the 5G side, what kind of content rates are you seeing? And is there a way to quantify how much your 5G exposure can be in 2019?

Keith Jackson -- President and Chief Executive Officer

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 as it starts to ramp, can be very significant for us depending on the type of 5G installation, it can be anywhere from $10 to $150 or so.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Shawn Harrison of Longbow Research. Your line is now open.

Shawn Harrison -- Longbow Research -- Analyst

Good morning, everybody. Two questions, if I may. Keith, if you look at 2019 just (inaudible) I guess of maybe which end-markets would you expect to be able to grow year-over-year versus maybe ones that would shrink?

Keith Jackson -- President and Chief Executive Officer

So I would expect automotive and industrial and the cloud-power 5G server piece of 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.

Shawn Harrison -- Longbow Research -- Analyst

Okay. And then as my follow-up, Bernard, I think you mentioned looking to kind of work through that 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?

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

So we -- as we have historically talked about, we do have some seasonality patterns in free cash flow. First half is typically lower than the second half, but we expect to grow year-over-year.

Shawn Harrison -- Longbow Research -- Analyst

Grow free cash flow?

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

Yes.

Shawn Harrison -- Longbow Research -- Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Vijay Rakesh of Mizuho. Your line is open.

Vijay Rakesh -- Mizuho Securities -- Analyst

Yeah. Hi, thanks guys. Just looking at those compute side, it 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 and exiting '19? And is your share actually going up on the Cascade Lake?

Keith Jackson -- President and Chief Executive Officer

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 remaining roughly flat, where we had significant share before.

Vijay Rakesh -- Mizuho Securities -- Analyst

Got it. And on the 5G side, I know you talked about it briefly here, but how do you see growth in 2019 year-on-year? And what do you think your market shares there on the 5G side?

Keith Jackson -- President and Chief Executive Officer

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.

Vijay Rakesh -- Mizuho Securities -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Kevin Cassidy with Stifel. Your line is now open.

Kevin Cassidy -- Stifel Nicolaus -- Analyst

Thanks for taking my question. The pickup 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 Years?

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

Actually, normally we see bookings infill come in January, because basically December declining and so we would normally expect that. We didn't see it a couple of weeks there early January and is now returning to something looks like a more normal pattern.

Kevin Cassidy -- Stifel Nicolaus -- Analyst

Okay, great. 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's -- what changes with the power control on that?

Keith Jackson -- President and Chief Executive Officer

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.

Kevin Cassidy -- Stifel Nicolaus -- Analyst

Okay, thank you. Congratulations.

Operator

Thank you. Our next question comes from Anthony Stoss of Craig-Hallum. Your line is now open.

Anthony Stoss -- Craig-Hallum Capital -- Analyst

Hey, guys. 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 kind of year-over-year? Thanks.

Keith Jackson -- President and Chief Executive Officer

Okay. 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 quarters 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 is certainly going to be very high double-digit numbers.

Anthony Stoss -- Craig-Hallum Capital -- Analyst

Thanks, Keith.

Operator

Thank you. Our next question comes from Craig Ellis of B.Riley FBR. Your line is now open.

Craig Ellis -- B. Riley FBR -- Analyst

Yeah, thanks for taking the question and congratulations on the strong margin execution. Keith, this time of the year is typically one 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 fared in the fourth quarter?

Keith Jackson -- President and Chief Executive Officer

Yeah. So our annual contracts are usually completed and they 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.

Craig Ellis -- B. Riley FBR -- Analyst

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 debt paydown were about equally split. As we look to 2019, how should we think about your redeployment of free cash flow across those two parameters? Thank you.

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

So we'll continue having a balanced approach and definitely we'll take advantage of dislocations in the market as it relates to share buybacks.

Operator

Thank you. Our next question comes from Harlan Sur of JPMorgan. Your line is now open.

Harlan Sur -- JPMorgan -- Analyst

Good morning, guys. Thanks for taking my question. On the recent pickup in bookings, the Greater China bookings, is this more a distribution inventory replenishment or you also have seen a pickup in resales out of disti as well? Just want to get a sense if this is more replenishment or you guys have actually seen that the demand pull through as well?

Keith Jackson -- President and Chief Executive Officer

I mean, we don't have exact data from distribution as you might guess. But the pattern will suggest they've run low on certain items and just need them for consumption.

Harlan Sur -- JPMorgan -- Analyst

Got it. And then we just got the SI -- SIA data for the month of December. The power transistors segment of the market was down only 3.5% sequentially, it was up I think 11% year-over-year. This is significantly better than the overall semiconductor industry. And I think even within that power MOSFETs did even better. So you guys have a pretty strong portfolio here. Is this all content gain-driven or also a function of just end-market exposure?

Keith Jackson -- President and Chief Executive Officer

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.

Harlan Sur -- JPMorgan -- Analyst

Thanks for the insights.

Operator

Thank you. Our next question comes from Tristan Gerra of Baird. Your line is now open.

Tristan Gerra -- Robert W. Baird -- Analyst

Hi, good morning. 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 under-utilization charges? And also given these trends, is it fair to assume that lead times could come down this first half?

Keith Jackson -- President and Chief Executive Officer

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's -- it is a 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 the 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.

Tristan Gerra -- Robert W. Baird -- Analyst

Okay, great. And then as my follow up. How long do you think the Chinese distis are going to be inventory deleveraging mode? You mentioned some stabilization recently. I'm 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 order market sequentially in Q1, is it fair to assume that this is going to be down double-digits?

Keith Jackson -- President and Chief Executive Officer

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's 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.

Tristan Gerra -- Robert W. Baird -- Analyst

Great. Thank you very much.

Operator

Thank you. Our next question comes from Rajvindra Gill of Needham & Company. Your line is now open.

Rajvindra Gill -- Needham & Company -- Analyst

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 US? And also with respect to Europe, are you seeing kind of 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?

Keith Jackson -- President and Chief Executive Officer

So our market is basically ranked, Europe is our largest market, US second and China, third. And we're not seeing anything significant in Europe, they are still kind of flattish at this stage and China is slightly down.

Rajvindra Gill -- Needham & Company -- Analyst

Great. So my follow-up on the sensors side. The sensor segment was kind of flat last year, mainly because of the non-automotive. You mentioned automotive being about half of the sensor business. Wondering if you could give us a sense of how the auto sensor business grew last year if you have those details? And what is the -- what are the other segments that make up that image sensor business, outside of auto?

Keith Jackson -- President and Chief Executive Officer

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 and machine vision, etcetera, but has some security portions that were not quite as strong.

Rajvindra Gill -- Needham & Company -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is now open.

John Pitzer -- Credit Suisse -- Analyst

Yeah, good morning guys. Thanks for letting me ask the question. Congratulations for the strong results. Keith, it sounds like the pricing environment for you is still holding up fairly well. I'm just kind of 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's a little bit weaker and supply is kind of slowing 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?

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

So it's a -- we don't have a precise number, but we think it was a fairly meaningful number that affected us in 2018, maybe somewhere around 50 basis points and we should recover some of that in 2019, with the combination of the pricing and the -- and less headwinds on this front.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. And then, Keith relative to your commentary for Q2 sequential growth and the full-year growth, I'm just kind of curious, you have to go above seasonal every quarter this year to get to sort of 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 you know to put another question, what bottoms up markets do you feel like your most best position to see outsized growth?

Keith Jackson -- President and Chief Executive Officer

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 pickup 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 yet, more or not? It's a little too early for me to tell, but certainly backlog indicates some good growth in Q2.

John Pitzer -- Credit Suisse -- Analyst

Helpful. Thank you, guys.

Operator

Thank you. Our next question comes from Ambrish Srivastava of BMO. Your line is now open.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Hi, good morning. Thank you. And I apologize if I missed it, you didn't comment on what are your lead times currently?

Keith Jackson -- President and Chief Executive Officer

Yeah, they remain extended in the teens. They have not changed significantly.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Okay. All right. Thank you. 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 have signed, which I think is different than the past several cycles, where you now have a lot -- should have a lot more visibility?

Keith Jackson -- President and Chief Executive Officer

Yeah the LTA is definitely providing stability. The net change that we talked about pickup in order rates here toward the end of January reflect, I guess, the absence of cancellations and we saw some of the cancellations early in the month. So, they seem to be largely behind us.

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Mark Delaney of Goldman Sachs. Your line is now open.

Mark Delaney -- Goldman Sachs -- Analyst

Yes, good morning and thanks for taking the question. I had a question on the smartphone market. Do you guys have a sense about how much inventory maybe 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, if there is any increasing preference for your smartphone customers that start to focus more on lower cost type models and maybe the content opportunities may not be as much as we had expected say, six months to 12 months ago?

Keith Jackson -- President and Chief Executive Officer

Okay. Lot of questions there. From a content perspective going forward, we are expecting increases in -- 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, that will continue beyond the first quarter.

Mark Delaney -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Chris Rolland of Susquehanna. Your line is now open.

Christopher Rolland -- Susquehanna International Group -- Analyst

Thanks for the question. Perhaps one for you, Keith. So I know content gains are a 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 has changed this down cycle? Is it from consolidation or lack of capacity adds across the industry or perhaps just not that severe of a downturn this far? What do you think the kind of puts and takes are there?

Keith Jackson -- President and Chief Executive Officer

Yeah, 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, will continue to have some very significant momentum and much faster than the end 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.

Christopher Rolland -- Susquehanna International Group -- Analyst

Great. And you guys pointed to take control on Aizu by 2020 I believe. But if we move into a pretty good upcycle here, what are your plans or preferences for capacity adds? Are you -- would you guys rather do internal, external or more JVs, do you have a preference?

Keith Jackson -- President and Chief Executive Officer

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 and JVs. So whatever the best deal we can find is where we'll be headed.

Christopher Rolland -- Susquehanna International Group -- Analyst

Thanks so much, Keith.

Operator

Thank you. Our next question comes from Chris Caso of Raymond James. Your line is now open.

Chris Caso -- Raymond James -- Analyst

Yes, thank you. Good morning. Just wondered 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 on and a lot of folks have been talked about weakness in China, I presume it's there. Was it broader geographically? And also anything to say about particular end-markets, for example, some of the handsets space we've seen some weakness or perhaps on your side, the difference between some of the power components that have longer lead times and some of the other components, whatever sort of color you can provide?

Keith Jackson -- President and Chief Executive Officer

Yeah, the -- 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, anyway you want to slice it. So the rest of the markets seem relatively stable and their order patterns appear more secure.

Chris Caso -- Raymond James -- Analyst

So, basically those cancellations were isolated to the smartphone side, more or less?

Keith Jackson -- President and Chief Executive Officer

Well, mostly smartphone, but also some of the consumer markets in China as well.

Chris Caso -- Raymond James -- Analyst

All right, great. Just as a follow-up then. With regard to distribution, you talked about distribution inventory increasing in Q4. Just talk about how much and it sounds like you expect that to be cleaned up during the first quarter?

Keith Jackson -- President and Chief Executive Officer

I expect it to be relatively stable in the first quarter. It expanded by a few days in Q4, but nothing significant.

Chris Caso -- Raymond James -- Analyst

All right. Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Craig Hettenbach of Morgan Stanley. Your line is now open.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes, thank you. Keith, just a question around lead times in the context of kind 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 times. So anything you're doing in terms of scrubbing the lead times and kind of matching up versus what you're seeing from a demand perspective?

Keith Jackson -- President and Chief Executive Officer

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 sometime out. We do that by looking at their lead times and our lead times and trying to get a pipeline. So part of the 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's certainly company specific there, but we do expect that. And so our understanding is the consumption that you are having in Q1 is really consumption, not a reflection of major inventory changes other than the ones we talked about in China.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. And then just as a follow-up since China you have seen the weakness first end of last year particularly in kind of appliances and industrial. Any thoughts there in terms of how far along they are and if those markets kind of got hit first, would you expect them to kind of recover out of this first as well?

Keith Jackson -- President and Chief Executive Officer

We are seeing increased orders in the white good piece. But that's the only piece so far that has shown any pickup.

Craig Hettenbach -- Morgan Stanley -- Analyst

Okay.

Operator

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.

Parag Agarwal -- Vice President-Investor Relations and Corporate Development

Thank you everyone for joining the call today. We look forward to seeing you at our Analyst Day on March 8 in Scottsdale. Goodbye.

Operator

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.

Duration: 56 minutes

Call participants:

Parag Agarwal -- Vice President-Investor Relations and Corporate Development

Bernard Gutmann -- Executive Vice President and Chief Financial Officer

Keith Jackson -- President and Chief Executive Officer

Christopher Danely -- Citigroup -- Analyst

Ross Seymore -- Deutsche Bank -- Analyst

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Shawn Harrison -- Longbow Research -- Analyst

Vijay Rakesh -- Mizuho Securities -- Analyst

Kevin Cassidy -- Stifel Nicolaus -- Analyst

Anthony Stoss -- Craig-Hallum Capital -- Analyst

Craig Ellis -- B. Riley FBR -- Analyst

Harlan Sur -- JPMorgan -- Analyst

Tristan Gerra -- Robert W. Baird -- Analyst

Rajvindra Gill -- Needham & Company -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Ambrish Srivastava -- BMO Capital Markets -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

Christopher Rolland -- Susquehanna International Group -- Analyst

Chris Caso -- Raymond James -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

ON Semiconductor Corp (ON) Q4 2018 Earnings Conference Call Transcript

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