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ON Semiconductor Corporation (NASDAQ:ON)
Q3 2019 Earnings Call
Oct 28, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the ON Semiconductor Third Quarter 2019 Earnings Conference Call.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Parag Agarwal, VP, Corporate Development and Investor Relations. Please go ahead, sir.

Parag Agarwal -- Vice President of Corporate Development & Investor Relations

Thank you, Sydney. Good morning and thank you for joining ON Semiconductor Corporation Third Quarter 2019 Quarterly Results 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 2019 third quarter earnings release will be available on our website approximately one hour following this conference call and the 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 earnings 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 will make projections or other forward-looking statements regarding future events or the 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 risks 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 earnings release for third quarter of 2019. Our estimates or other forward-looking statements may change, and the Company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other factors, except as required by law. During the fourth quarter, we will attend NASDAQ Technology Conference in London on December 3rd and Deutsche Bank AutoTech Conference in San Francisco on December 10th.

Now, let me turn it over to Bernard Gutmann, who will provide an overview of our third quarter 2019 results. Bernard?

Bernard Gutmann -- Chief Financial Officer

Thank you Parag, and thank you everyone for joining us today. We saw stabilization in business trends in the third quarter. We believe that much of the stabilization was driven by normalizations of inventories in the supply chain as both distributors and OEMs have realigned their inventory in-line with lower end-market demand. While we have seen normalization in supply chain inventories, end-market demand signals remain weak. Geopolitical and macroeconomic factors still weigh on demand and visibility into demand remains poor.

Despite a lukewarm business environment, key secular megatrends driving our business remain intact and we are making long-term investments to improve our competitive position in our strategic end-markets and to improve our industry-leading manufacturing cost structure. We expect that the current downturn will not detract us from our long-term goals and we will continue to invest to position the Company for long-term success.

Current bookings are trending along historical seasonal patterns but as I indicated earlier, we are not seeing any strong evidence of recovery in end-market demand. Macroeconomic data from major economies points toward tepid industrial activity. Global automotive market continues to be soft but we are continuing to see strong content growth for our products in automotive market. We believe that primary driver of stabilization in our business has been the normalization of channel inventories with our distributors and OEMs. Based on anecdotal data, it appears that the supply chain inventories have normalized largely and we don't expect any more inventory digestion in the near-term.

While stabilization in business trends and normalization of supply chain inventory are encouraging, risks from unforeseen geopolitical and macroeconomic events continues to be an overhang. We are managing our business in-line with prevailing risks and business conditions. We are tightly controlling our operating expenses and we have taken measures to lower our capital intensity in-line with current market conditions. We believe that a highly diversified customer base, exposure to the fastest growing semiconductor end-markets, and long life cycles of many of our products should help us better navigate the current slowdown in demand as compared to the broader analog and power semiconductor industry.

Now, let me provide you additional details on the third quarter 2019 results.

Total revenues for the third quarter of 2019 were $1.382 billion, a decrease of 10% as compared to revenues of $1.542 billion in the third quarter of 2018. The year-over-year decline in revenue was primarily driven by well-publicized macroeconomic and geopolitical factors, which have affected the overall semiconductor industry. Also, 2019 third quarter revenue was impacted by a significant one-time adjusted -- adjustment related to a customer issue. GAAP net loss for the third quarter was $0.15 per diluted share as compared to a net income of $0.38 in the third quarter of 2018. Consistent with our expectations and as disclosed in our recent SEC filings, the GAAP net loss in the third quarter of 2019 was driven primarily by a one-time payment to settle all pending intellectual property litigation with Power Integrations, Inc. Non-GAAP net income for the third quarter was $0.33 per diluted share as compared to $0.50 -- $0.57 in third quarter of 2018.

GAAP gross margin for the third quarter was 34.4%. Non-GAAP gross margin for the third quarter was 35.8%. Third quarter gross margin was impacted by a one-time adjustment related to a customer issue and by ASP pressure, primarily on non-differentiated -- on the non-differentiated part of our portfolio. Furthermore, in order to reduce inventory on our balance sheet and in distribution channel, we meaningfully lowered our factory utilization in the third quarter. We intend to keep our factory utilization at current levels until we see a meaningful recovery in demand. Year-over-year, our third quarter 2019 non-GAAP gross margin declined by 290 basis points. Our GAAP operating margin for the third quarter of 2019 was a negative 3.2% as compared to 15.7% in the third quarter of 2018. GAAP operating loss in the third quarter was primarily driven by an expense of approximately $170 million related to the previously mentioned litigation settlement with Power Integrations. Our non-GAAP operating margin for the third quarter of 2019 was 13% as compared to 17.8% in the third quarter of 2018. The year-over-year decline in operating margin was driven largely by lower gross margin. Our third quarter non-GAAP operating margin excludes the impact of the Power Integrations settlement.

GAAP operating expenses for the third quarter were $519 million, as compared to $355 million for the third quarter of 2018. As I indicated earlier, third quarter GAAP operating expense include $170 million related to the settlement with Power Integrations. Non-GAAP operating expenses for the third quarter were $314 million, as compared to $322 million in the third quarter of 2018. The year-over-year decline in third quarter operating expenses was driven by aggressive expense control and zero bonus accrual. Third quarter free cash flow was $131 million and operating cash flow was $242 million. Capital expenditures during the third quarter were $112 million, which equates to a capital intensity of 8%. With the recent acquisition of 300 millimeter fab in East Fishkill and with slowing end-market demand, we expect that in the near to mid-term, capital intensity would continue at current levels.

Going forward, a sizable part of CapEx will be spent on enabling the East Fishkill fab. We exited the third quarter of 2019 with cash and cash equivalents of $929 million, as compared to $885 million at the end of the second quarter of 2019. We used $13 million of cash to repurchase approximately 764,000 shares of our stock during the third quarter. For a big part of the third quarter, we were restricted from buying stock -- buying back our stock for two reasons. First, we were negotiating a settlement with Power Integrations and second, we were refinancing our debt.

At the end of the third quarter, days of inventory on hand were 128 days, down by nine days as compared to 137 days in the second quarter of 2019. Excluding the impact of fair market step-up of inventory related to Quantenna, days of inventory on hand were 128 days, down seven days as compared to 135 days in the second quarter. We intend to further lower the days of inventory on our balance sheet in the fourth quarter.

Distribution resales increased in the third quarter over the second quarter. Distribution inventory in terms of weeks declined quarter-over-quarter in the third quarter. We are very comfortable with the level of inventory in the distribution channel. As we have noted in our previous earnings calls, we are aggressively managing our distribution inventory in an effort to ensure healthy level of inventory in the distribution channel.

Now let me provide you an update on performance of our business units, starting with Power Solutions Group, or PSG. Revenue for PSG for the third quarter was $688 million. Revenue for the Analog Solutions Group for the third quarter of 2019 was $509 million and revenue for the Intelligent Sensing Group was $185 million.

Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?

Keith Jackson -- President & Chief Executive Officer

Thanks, Bernard, while business conditions remain challenging, we continue to execute on our strategy of focusing on our key strategic markets and investing in our operations to enhance our industry leading cost structure. The current slowdown in demand, which is largely driven by macroeconomic and geopolitical factors does not change our view on our long-term growth potential. With ongoing investments in product development and in our 300 millimeter East Fishkill fab, we intend to emerge even stronger out of the current downturn.

Key secular trends driving our business remain intact and our momentum in key strategic markets continues to accelerate. Despite the current slowdown in end market demand. We continue to see meaningful increase in our content in automotive, industrial and cloud power applications. We believe that automotive, industrial and cloud power end markets will be among the fastest growing semiconductor end markets for a long time. In the automotive market, we believe that accelerating adoption of electric vehicles and active safety should drive strong growth in our power semiconductor and sensor businesses. In the industrial market, we are seeing strong traction for our power semiconductor products driven by higher power efficiency requirements in the 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. In the near term, we continue to navigate through an improving, although still challenging business environment. Although revenue has stabilized, end market demand visibility is low as macroeconomic and geopolitical factors continue to weigh on outlook. Customers continue to be cautious. Based on commentary from our distribution partners, it appears that inventory correction in the distribution channel is largely complete.

With normalization of supply chain inventories, we are seeing some degree of normal seasonality in our business. In the third quarter, we substantially reduced our balance sheet and supply chain inventories, and we did an outstanding job of managing our operating expenses. While near term business conditions are soft, long-term outlook for our business with exposure to secular megatrends in automotive, industrial and cloud power end markets remain solid. We are also making strong progress toward ramping our production at our 300 millimeter East Fishkill fab in upstate New York and we are solidly on track to begin production in the fab next year. Our process development is progressing at a solid pace and currently, we are in a final stages of tweaking and freezing our processes.

As we've indicated earlier, we expect that our 300 millimeter East Fishkill fab will accelerate our progress toward our 2022 target model, enable efficiencies in our manufacturing network and further strengthen our industry leading cost structure. We believe that ramping of our 300 millimeter production will be a major inflection point in our manufacturing strategy and in our manufacturing cost structure. Our 300 millimeter East Fishkill fab affords us significant flexibility in optimizing our front-end network and we are taking measures to improve the efficiency of our manufacturing network. We are currently in the process of closing down one of our smaller 6-inch fabs in Rochester, New York and expect that this will -- action will result in nominal cost savings.

Now, I'll provide details of the progress in our various end markets for the third quarter. Revenue for the automotive market in the third quarter was $446 million and represented 32% of our revenue in the third quarter. Third quarter automotive revenue declined 3% year-over-year. Asia, including Greater China remains the primary contributor to this year-over-year decline, but on a quarter-on-quarter basis, we saw a meaningful increase in the automotive revenue from the Greater China region in the third quarter. We continue to see weakness in the EMEA automotive markets which also contributed to the year-over-year decline. Our leadership in ADAS continues to strengthen and our design win pipeline continues to expand at a rapid rate.

We have won 16 of 17 2 megapixel and 8 megapixel platforms awarded year-to-date in 2019 and for level-2 and level-3 vehicles. During the third quarter, we achieved landmark of shipping more than 100 million AR0132 image sensors for ADAS applications. Vehicle electrification is quickly emerging as a key driver of our automotive revenue. During the third quarter, we commenced production of EV PIM modules for customer shipments in the fourth quarter of 2019. During the third quarter, we secured design wins for seven EV traction inverter platforms. Our Silicon Carbide products are continuing to gain momentum, and our global customer engagements are growing. During the third quarter, we launched our 1200 volt low RDSON and 900 volt Silicon Carbide FET product families.

Our momentum in automotive analog power management remains strong. We secured design-wins for our analog power management products for ADAS, Instrument Clusters as well as in-vehicle networking solutions. Growth for our advanced lighting, power management, and LED driver solutions remains healthy. Revenue in the fourth quarter for the automotive end-market is expected to be up quarter-over-quarter. The industrial end-market, which includes military, aerospace, and medical, contributed revenue of $351 million in the third quarter. The industrial end-market represented 25% of our revenue in the third quarter. Year-over-year, our third quarter industrial revenue declined 13%. On year-over-year basis, we saw broad weakness in the industrial end-markets across most geographies. While we're seeing soft market conditions in the industrial market, key secular trends driving our business still remain intact. Customers are continuing to invest in improving power efficiency of industrial systems. Our mid and high voltage power semiconductor products such as FETs and IGBTs and modules continue to see increased momentum within the industrial end-market.

Revenue in the fourth quarter for the industrial end-market is expected to be flat quarter-over- quarter.

The communications end-market, which includes both networking and wireless, contributed revenue of $275 million in the third quarter. The communications end-market represented 20% of our revenue in the third quarter. Third quarter communications revenue declined 8% year-over-year. The year-over-year decline in communications was driven by weakness in the handset-related revenue. We continue to see strong traction for our medium voltage power products for 5G infrastructure.

Revenue in the fourth quarter for the communications end-market is expected to be down quarter-over-quarter. The computing end-market contributed revenue of $154 million in the third quarter. The computing end-market represented 11% of our revenue in the third quarter. Third quarter computing revenue declined 8% year-over-year. We continue to see strong growth in our server related computing revenue. On a sequential basis, easing supply of Intel's processors also contributed to growth in computing revenue

.

Revenue in the fourth quarter for the computing end-market is expected to be up quarter-over-quarter.

The consumer market contributed revenue of $157 million in the third quarter. The consumer end-market represented 11% of our revenue in the third quarter. Third quarter consumer revenue declined by 26% year-over-year. The year-over-year decline was due to continuing broad-based weakness in the consumer electronics and white-goods markets. We continue to be selective in our participation in these markets. Revenue in the fourth quarter for the consumer end-market is expected to be down quarter-over-quarter. In summary, business conditions have stabilized as supply chain inventories have normalized. However, visibility into end-market demand is low as macroeconomic and geopolitical factors continue to weigh on the outlook. Despite current weakness in businesses trends across the industry, secular megatrends driving our business remain intact and we are upbeat about our medium to long-term prospects. We are focused on the fastest growing end-markets of the semiconductor industry and with our design wins, we expect that our content in automotive, industrial, and cloud power applications will continue to grow. To adjust to slowing macroeconomic environment, we are prudently managing our business with sharp focus on controlling expenses. In these challenging times, our operational execution remains strong. We are continuing to invest in our product development efforts and in improving industry cost leading structure. We expect to emerge even stronger out of the current downturn.

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

Bernard Gutmann -- Chief Financial Officer

Thank you, Keith. Based on product booking trends, backlog levels and estimated turns levels. We anticipate that total ON Semiconductor revenue is expected to be in the range of $1.35 billion to $1.4 billion in the fourth quarter of 2019. For the fourth quarter of 2019. We expect GAAP and non-GAAP gross margin between 35.7% to 36.7%. We expect total GAAP operating expenses of $344 million to $364 million.

Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be in the -- to be $32 million to $36 million. We expect total non-GAAP operating expenses of $312 million to $328 million in the fourth quarter.

The anticipated quarter-over-quarter increase in operating expenses for the fourth quarter over those in the third quarter is driven primarily by four extra days in the fourth quarter as compared to those in the third quarter. We anticipate fourth quarter of 2019 net other income and expenses including interest expense will be $38 million to $41 million, which includes non-cash interest expense of $9 million to $10 million. We anticipate non-GAAP -- GAAP net other income and expenses including interest expense will be in the $29 million to $31 million. Net cash paid for income taxes in the fourth quarter of 2019 is expected to be $14 million to $18 million. We expect total capital expenditures of $105 million to $115 million in the fourth quarter of 2019. We also expect share-based compensation of $17 million to $19 million in the fourth 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 GAAP diluted share count for the fourth quarter of 2019 is expected to be 414 million shares and our non-GAAP diluted share count is expected to be 412 million shares based on our 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 respectively. With that, I would like to start the Q&A session. Thank you, and Sydney, please open up the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Ross Seymore with Deutsche Bank. Please proceed with your question.

Ross Seymore -- Deutsche Bank -- Analyst

Good morning, guys. First question is on the revenue side of the equation. It's good to see you guys were in line and then are guiding seasonal, but I wonder about the seasonal guide there, given what we've heard from other broad-based players were largely sub-seasonal and for some of the players significantly sales still persists. So what are you seeing that gives you the comfort to be seasonal in the fourth quarter?

Keith Jackson -- President & Chief Executive Officer

Ross, I think it's mostly the content gains, we continue to have and as we mentioned, the automotive piece of our business should be up. We're seeing some recovery in Asia there and with our exposure in content, we think that may give us a little better lift and then quite frankly, we've done a very good job in getting inventories and the supply chain in place to enable a more normal environment.

Ross Seymore -- Deutsche Bank -- Analyst

All right, thanks for the color on that. And then switching one for you, Bernard over on the gross margin side of things. It was a little bit less than what you guided to. I know you gave three reasons for that. Could you give us a little bit of color on those three reasons? The one-timer, the ASPs and the utilization and as we go into the fourth quarter, it looks like it's up a little bit. I assume that's just the one-timer reversing itself, but any color on what's happening there, if you view all these moving parts to be temporary and do any of these things change your longer-term trend toward a forehandle.

Bernard Gutmann -- Chief Financial Officer

Thank you, Ross. I'll start from the latter part. We don't believe this affects us in the long term. The secular drivers and the reasons for growth are the same. These is no structural changes that prevent us from doing that. Addressing the specifics, we did enumerate three. The first one is -- is really a vendor cost, product specification issue that impacted -- that impacted one customer. I can't give you more detail than that. It is one of the reasons why the fourth quarter is showing us some lift.

The second piece is we did see more pressure on ASPs on primarily on multi-sourced products in the last quarter and that's obviously a reflection of the weaker end demand in the -- in the market. And the third reason is we did purposefully control our disti and internal inventories and as a result, our utilization was in the middle 60s. It was one of the lowest we have had in a long time and obviously that has also ramifications on gross margins.

We expect to -- not to have a lot more inventory reduction in the distis channel, but still a little bit more internally. So our gross margin will still have or our utilization will still be in the lower portion of our normal range. And but if I look at the long run, our 300 millimeter fab, Fishkill acquisition, we believe is really something that will be transformative and will allow us to show significant improvement in gross margin and we are very happy with what we're seeing so far in terms of process strength [Indecipherable] qualification.

Ross Seymore -- Deutsche Bank -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Chris Danely with Citigroup. Please proceed with your question.

Chris Danely -- Citigroup -- Analyst

Hey, thanks guys, just a couple of questions to dig into the gross margins a little bit. So on the one-time customer adjustment if business conditions stay in this sort of sluggish overall environment, is it possible that other customers could come back and ask for something like that? And then on the ASPs, being lower for multi-sourced products, how much of your product portfolio, I guess is at risk from that? And then, when can we expect this to reverse or could this get worse, if business conditions remain kind of sluggish like this.

Bernard Gutmann -- Chief Financial Officer

So let me answer in reverse. The products that are mostly affected by that are those that are in our computing and consumer, which is about 20% of our business. That's kind of, give or take. Obviously, weakened demands are -- making this a factor, so it -- if this -- it will be a factor [Phonetic], a function of -- of how long the weakening demand continues in terms of pricing -- on pricing pressure.

The second one, we believe this -- the adjustment is related to one single customer and we don't -- there is no risk that it will -- that will affect other customers.

Chris Danely -- Citigroup -- Analyst

Okay, great. And for my follow-up. Keith, can you just kind of run us through your major end markets. It sounds like auto is getting a little better, how would you sort of rank them from I guess at least the most impacted?

Keith Jackson -- President & Chief Executive Officer

Yeah. So automotive, we're seeing recovery in Asia. We're seeing a recovery in the server portion of computing, relatively continued benign conditions in industrial and then you have a seasonal weakening in consumer as you would expect. So I'm not sure if that is abnormal from a seasonal perspective. And then the handset market, same story.

Chris Danely -- Citigroup -- Analyst

Okay, great, thanks, guys.

Operator

Thank you. And our next question comes from Vivek Arya with Bank of America Merrill Lynch. Please proceed with your question.

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

Thanks for taking my question. I wanted to also talk about gross margins. First, since you completed the acquisition of Fairchild, gross margins have, they kind of peaked around 39%, right now they are 36%. And I think, Bernard, you mentioned that utilization is in the low 60s or so range. So as you move forward, is the 50% incremental gross margin still a useful construct, as we go forward, do you think that as you get more production on to 300 millimeter, it could be better than that at some point?

Bernard Gutmann -- Chief Financial Officer

Yes, in the short term. The 50% should still be a valid thing. Obviously as you said, East Fishkill doing some transformative changes and that can affect that-that fall through. And also, as we continue with our secular drivers in the areas that are growing faster, those command also better gross margin, so that should also help in terms of the fall through.

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

Got it. And for my follow up, Keith, there is some discussion among investors that perhaps some Chinese hardware makers might be deliberately are under some pressure being asked to move away from US chipmakers. So it's not on specific but applies to all of your diversified peers. Have you seen any evidence of this from your customer discussions then of any share shift right being in place whether to your European or Japanese competitors. Have you seen any evidence of that so far?

Keith Jackson -- President & Chief Executive Officer

So far, there has been some share shift where we are unable to ship products to the European or Japan-based competitors. That's a small amounts for us. But otherwise, nothing detected in our current business patterns. There have been discussions with many of the customers in China about having alternate sources for assured supply. But, no dialog at this stage about losing specific share.

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

Okay, thank you.

Operator

Thank you. And our next question comes from Raji Gill with Needham & Company. Please proceed with your question.

Raji Gill -- Needham & Company -- Analyst

Yes, thank you. A question on the inventory digestion because I think that's important, that's something that at least you can control the end demand is harder to figure out. But in terms of the inventory digestion, I was wondering, if you could kind of characterize where we are in the inventory correction cycle. They started about a year ago. So are we interpreting this is to be at -- we're at the bottom of that correction. And then along those lines, if demand were to snap back from a trade resolution or for whatever factor, how quickly do you think, you'll be able to respond to meet that demand in your supply chain as well as at your own internal levels. Thank you.

Keith Jackson -- President & Chief Executive Officer

Okay. So inventory-wise. As I mentioned last quarter, we felt we were nearing the end of the correction process. We still believe that. We think we're in a stable and reasonable place with the supply chain area. One of the key things, if you look at recovery, those recoveries do generally happen quickly and can change things, but with our inventory levels, where they are in distribution and internally, we think, we're in good shape for a response.

Raji Gill -- Needham & Company -- Analyst

Okay, great. And from my follow-up question related to 5G, you had basically said in the past, you had zero 4G revenue but because of the increased power requirements for these base stations at the radio access head as well at the auxiliary supply, so there's going to be a significant increase in MOSFET content. Wondering if you could kind of characterize the 5G base station infrastructure cycle. There has been some reports that there's might have been a little bit of a pause. How do we think about 5G relative to your position as we go into next year.

Keith Jackson -- President & Chief Executive Officer

Okay. So we are I think well positioned with all of the players in 5G and that deployment will continue to expand. I think we had some pretty rapid early test trials that went on a little bit of a pause, but we expect next year to be a very significant ramp in China.

Ross Seymore -- Deutsche Bank -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Christopher Rolland with Susquehanna. Please proceed with your question.

Christopher Rolland -- Susquehanna -- Analyst

Great, thanks, guys. So given slower macro and this is probably maybe for Keith, I'm not sure, but given the slower macro and your new plans to lower existing utilizations given that macro, does this change the speed at which you're going to equip new projects. Like for example, the Fishkill fab, maybe you can talk about how you would equip that and what utilizations might look like for the next three years or so.

And then -- and then also, I think you have some wafer capacity coming on as well. Does -- does that slower macro effect equipment there as well?

Keith Jackson -- President & Chief Executive Officer

Simple answer, there is a slower macro is not going to deter us enabling our 300 millimeter expansion that is a key part of getting our margin profile, where we like it and being able to satisfy the growth in demand for automotive and industrial power. So that will continue. Other types of things have been curtailed significantly to balance that total capital needs, but those will continue to move forward. We don't -- we don't see any situation in which, in which that would make sense to slow.

And as we mentioned earlier that ramp will enable us to balance our network out better to accelerate gross margin.

Christopher Rolland -- Susquehanna -- Analyst

Great. And then, there have been some moves this last quarter, one company and competitor in particular as they move more toward a direct salesforce versus distribution perhaps to drilling that process and capturing more margin. Just wanted to know your thoughts on distribution versus perhaps a move moving more internal for you guys or do you view -- do view kind of these competitive changes here as an opportunity for you guys even?

Keith Jackson -- President & Chief Executive Officer

Yes, we, we are strongly believers in the distribution network, they can reach a range of customers around the world for the design win commitments that we need and they are also quite efficient at reaching all those small customers. So we continue to support them strongly, see share gains in that distribution network on an annual basis, and we'll be looking for opportunities to -- to grow even faster in distribution.

Christopher Rolland -- Susquehanna -- Analyst

Thanks, Keith.

Operator

Thank you. And our next question comes from Craig Ellis with B. Riley FB. Please proceed with your question.

Craig Ellis -- B Riley, FBR -- Analyst

Yes, thanks for taking the question and congratulations, guys on navigating the trough well. Bernard, I wanted to follow up. First, just with a clarification on operating expense, clearly there is a lot going on to -- to shield operating income from some of the pressures that were on gross margin, but can you clarify for the things that were done in the third quarter, how much of those moves are tactical versus more structural changes that would flow through to next year.

Bernard Gutmann -- Chief Financial Officer

In general terms, most of the actions were tactical. There is sign that we earlier in the year that were more structural. But what we did in the third quarter was more tactical.

Craig Ellis -- B Riley, FBR -- Analyst

Got it. And then on the COGS side there was mentioned made of a 6 inch fab shutdown in Rochester, New York. Can you just summarize for us what some of the cost reduction levers are. As you look out into 2020 and with utilization at 65%. Is there anything else that might be contemplated if the demand environment that we have now persist into next year? Thank you.

Bernard Gutmann -- Chief Financial Officer

Yes. So we, the levers that we have continue being the same, definitely the East Fishkill as well as the Aizu fab give us more degrees of freedom in terms of managing our network and more opportunities for optimization. And at the same time, we will continue working on the regular fall through as we, as we increase our utilization back up to the more normal levels as well as mix.

Operator

Thank you. And our next question comes from Ambrish Srivastava with BMO. Please proceed with your question.

Ambrish Srivastava -- BMO -- Analyst

Hi, thank you. Good morning, guys. I had a question on China, auto. This is the first time in a long while we have heard anybody say China and growth in the same breath. Is this due to some design wins that you have that are ramping or is it reflective of maybe production bottoming out and seeing a pickup from very low level.

So is it specific to you or is it more macro. And then my follow-up, Bernard, you talked about, you mentioned share buybacks and the lack thereof in the quarter that just ended. What does that mean for buyback going forward? I'm assuming, you brought it up, because it means you are going to be back buying stock this quarter onwards? Thank you.

Keith Jackson -- President & Chief Executive Officer

Yeah on the China auto business, those are new wins we've got primarily in electric vehicles and new models are starting to ramp. So there is a content piece there, but our sense also is that generally there is going to be more units made now than there has been in the earlier part of the year.

So a combination of both content and a few more units.

Bernard Gutmann -- Chief Financial Officer

And on the share buyback question, Ambrish. In long run, we are committed to a -- to our share buyback program. We have a $1.5 billion program and intend to -- to continue working on that one. In the short run, we do have the, as we mentioned several times during the call, we do have the settlement of the of the litigation issue we had with Power and that implies a significant cash outlay in the short-term. And that will have to be taken into account as we go through that.

Ambrish Srivastava -- BMO -- Analyst

So that goes through this quarter as well, Bernard?

Bernard Gutmann -- Chief Financial Officer

Yeah it -- it should.

Ambrish Srivastava -- BMO -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Matt Ramsay with Cowen. Please proceed with your question.

Matt Ramsay -- Cowen -- Analyst

Yes, thank you very much. Keith, I have , I guess, two questions on the automotive business, and I'll just -- I guess go ahead and ask about at the same time for expediency. The first one is on the image sensor business. I think you mentioned in the [Technical Issues]

Bernard Gutmann -- Chief Financial Officer

Matt. We have lost you, Matt.

Parag Agarwal -- Vice President of Corporate Development & Investor Relations

Sydney, can we go onto the next caller, please.

Operator

Yes. Our next question comes from Mark Delaney with Goldman Sachs. Please proceed with your question.

Mark Delaney -- Goldman Sachs -- Analyst

Yes, good morning. Thanks for taking the questions. The first is a follow-up on the gross margin topic and underutilization. I was hoping, you could clarify if ON took a period charge in the quarter related to the underutilization becasue I think there's only so much fixed costs you can capitalize into inventory. So did you take a charge, and if so can you quantify that?

Bernard Gutmann -- Chief Financial Officer

So in terms of utilization, we mentioned that we were in the 65% reduced our normal capitalization rules whereby a portion of the unit cost it is below our standard gets -- gets written off. If it's above our standard, gets capitalized. So there was no unusual activity, no period charge.

Mark Delaney -- Goldman Sachs -- Analyst

Okay, that's helpful. And then a follow-up question around the bookings trends. I was hoping you could comment a little bit more on the linearity of bookings that the Company saw that the quarter start off weak and then bookings more recently have been largely seasonal or was it pretty consistent throughout the quarter? Thanks.

Bernard Gutmann -- Chief Financial Officer

We will believe it has been pretty consistent and based -- seasonal.

Operator

Thank you. And our next question comes from Chris Caso with Raymond James. Please proceed with your question.

Chris Caso -- Raymond James -- Analyst

Yes, thank you. First question is on ASPs. And you talked about some pricing pressure that was starting. If you could help to quantify little bit of that. And I know that this is the time of year, when you start to negotiate some of the annual pricing. Could -- if you can give some indication of how that's looking for next year.

I know the past several years, ASPs have been performing better than they normally have, is it kind of getting back to where we're a couple of years ago now.

Bernard Gutmann -- Chief Financial Officer

Yes. So Chris. We don't quantify ASPs in the -- like we did in the past. But I can say that in general terms, it is less than historical, less than in previous cycles. It is still more than what we saw in the first couple of quarters of the year. But less than historical.

Chris Caso -- Raymond James -- Analyst

All right, thank you. As a follow-up on automotive, maybe could you give some indication of where you think your auto growth falls relative to units and I say, it looks like your auto is going to come in somewhere down 4% or so this year on a similar reduction in units this year, how do you look going forward? What would be the spread between ON Semi's auto revenue and units? Obviously, your content is growing. By how much more do you expect to grow versus the market going forward?

Keith Jackson -- President & Chief Executive Officer

Yeah, we are, if you look at kind of performance this year, you think. We believe there was a contraction in the supply chain. So in essence, it wasn't just a reflection of the end units but actual inventory coming down throughout the whole chain. So we still believe you get a significant benefit from the content gain even in a down market. Going forward, we're looking for 7% to 9% kind of growth in the auto market for us. On a unit basis, which I think is forecasted roughly flat up 1%

Chris Caso -- Raymond James -- Analyst

It's helpful. Thank you.

Operator

Thank you. And our next question comes from Vijay Rakesh with Mizuho. Please proceed with your question.

Vijay Rakesh -- Mizuho -- Analyst

Hi there. Just going back on the com handset side, I saw your September quarter grew 11% sequentially. Just wondering, if you had to look at 5G and handsets, what trends you saw versus that growth. And as you look at the December quarter. I know you guided it down, I'm just wondering, which segment was weaker going into December? Thanks.

Keith Jackson -- President & Chief Executive Officer

So we don't think 5G handsets were a big play in the third quarter. There was certainly content there and some phones out but it was not substantial portion of the total. And then as we look into the fourth quarter for handsets, it's a normal seasonal down. So nothing -- nothing significant there other than normality.

Vijay Rakesh -- Mizuho -- Analyst

Got it. And then last question, Quantenna, any thoughts there, how that's progressing? What you guys are seeing there? Thanks.

Keith Jackson -- President & Chief Executive Officer

So that business continues to be soft. Like the rest of the markets, but we're not seeing continued decline there. So it looks like it's stabilized and we are expecting more normality as we get into 2020.

Bernard Gutmann -- Chief Financial Officer

And we have also -- we are also in the -- completing the integration work this quarter and that should result also in some of the synergy delivery.

Vijay Rakesh -- Mizuho -- Analyst

Thanks.

Operator

Thank you. And our next question comes from David Williams [Phonetic] with Loop Capital. Please proceed with your question.

David Williams -- Loop Capital -- Analyst

Thank you. Just wanted to ask on the industrial side, are you -- see anything in terms of the sub-segments that stands out or maybe gives you a bit of optimism for return to growth there?

Keith Jackson -- President & Chief Executive Officer

Right now, pretty much all segments are showing the same type of weakness. Nothing looks like it's breaking out yet. I am expecting the medical piece of that business to break out pretty quickly as a lot of our design wins in the personal medical electronics arena start ramping in 2020.

David Williams -- Loop Capital -- Analyst

And then can you talk a little bit about the content growth you see between the standard 4G handset and maybe go into the 5G handset, what is the opportunity there for content growth? Thank you.

Keith Jackson -- President & Chief Executive Officer

It, it's going to be somewhere around $1 difference in content

Operator

Thank you. And our next question comes from Harlan Sur with JPMorgan. Please proceed with your question.

Harlan Sur -- JPMorgan -- Analyst

Good morning, thanks for taking my question. I mean, consumer specifically white goods, this is a segment that continue to show appreciable year- over- year deceleration into Q3, but it looks like year-over-year compares are starting to actually get better in Q4 and showing signs of normal seasonality on a sequential basis. I know, it's off a low base and it's one of the more trade-in macro sensitive segments. But looking beyond Q4. Do you guys expect that end-demand trends are now looking to be more seasonal going forward for this segment.

Keith Jackson -- President & Chief Executive Officer

Yeah, I would expect more normal seasonality as you enter the first quarter, next year. There was buying that was anticipation of tariffs that had some significant skewing of purchase patterns there. We think that's behind us. And there was also some inventory corrections, which we think are largely behind us. So it should be looking more like a normal seasonal business going into next year.

Harlan Sur -- JPMorgan -- Analyst

Great. Good to hear that. And then on the new product front, you gave us some metrics on your design win traction on auto image sensors for 28 megapixel sensors, but on the high performance, 8 megapixel front for ADAS, I think Sony might have a 7.5 megapixel solution, but do you guys have any competition at the 8 megapixel level?

Keith Jackson -- President & Chief Executive Officer

No, we have superior performance there. And nothing that I would consider competition. We have been winning the platforms at 8 megapixel and not losing any ground or traction

Harlan Sur -- JPMorgan -- Analyst

Thank you.

Operator

Thank you. And our next question comes from David O'Connor with Exane BNP Paribas. Please proceed with your question.

David O'Connor -- Exane BNP Paribas -- Analyst

Great. Good morning, thanks for taking my questions. A question maybe [Phonetic] some design wins on the silicon carbide, you mentioned and EVs, you mentioned seven inverter wins in the transcript, can you give us some more detail on them. Where exactly these are ramping? What kind of geographies and are these silicon -- are these actually silicon carb [Indecipherable] silicon based. And I got a follow-up. Thanks.

Keith Jackson -- President & Chief Executive Officer

Okay. There are mixture of IGBT and silicon carbide. And those wins ramp anywhere from late next year to the following year. So I don't have the specific schedules in front of me, but it will be over the next two years.

David O'Connor -- Exane BNP Paribas -- Analyst

Great. And then maybe one follow for Bernard. So just to clarify, so will Q4 be the peak underutilization charges. Thanks.

Bernard Gutmann -- Chief Financial Officer

The -- we believe the Q4 is probably going to be the lowest utilization, just like Q3. We believe, we're at the bottom in terms of utilization right now.

David O'Connor -- Exane BNP Paribas -- Analyst

Very helpful, thank you.

Operator

Thank you. And our next question comes from Tristan Gerra with Baird. Please proceed with your question.

Tristan Gerra -- Baird -- Analyst

Hi, good morning. As a sort of -- to the prior question, what percentage of manufacturing are you currently outsourcing and is there any leverage there to bring capacity back internally to help your utilization rates?

Bernard Gutmann -- Chief Financial Officer

We have been doing that as a -- as a regular ongoing process. The total outsourced amount is about 30% including everything at about 20%, when you exclude our most recent acquisitions.

Tristan Gerra -- Baird -- Analyst

Okay. And is that a process that can continue or how low can you go in terms of outsourcing as a percentage?

Keith Jackson -- President & Chief Executive Officer

We continue to to balance where we can. We've got obligations to some of our suppliers there, but in general, we think, we can get that down a few percentage points over the next year.

David O'Connor -- Exane BNP Paribas -- Analyst

Great, thank you.

Operator

Thank you. And our next question comes from Harsh Kumar with Piper Jaffray. Please proceed with your question.

Harsh Kumar -- Piper Jaffray -- Analyst

Yeah, hey guys, solid execution. I had -- I had a couple of questions. First on the auto. I think, Keith, you mentioned that second half, you're expecting to see more units in China. I was curious if this is normal or you think this is just sort of recontracted [Phonetic] so much there, we're kind of whipping around and trying to make up a little bit. And then how do you see, when you talk to your kind of customers over in China, how do you see the demand trends for next year?

Keith Jackson -- President & Chief Executive Officer

Okay. So on the first part kind of current conditions, there was some changing regulations and changes in government policies on how they subsidize that marketplace, created some bad situations in the middle part of the year. We see some recovery from that, not a significant in-demand jump, is the way I would describe current conditions. Then next year, though, we do think, there will be continued expansion. Their economy is going to continue to grow. We think, they will have digested the efficiency requirement changes that they're going through right now and we should see some continued growth there in 2020.

Harsh Kumar -- Piper Jaffray -- Analyst

Understood. And my follow up, I know semis have been like all over the place and businesses have been all over the place, trade war, but could you maybe remind us how we might even try to think about seasonality here for your business and maybe even the industry as such or particularly for your business.

Bernard Gutmann -- Chief Financial Officer

Sure. So a normal seasonality. If there is such a thing, is 0% to 2% negative for the fourth quarter. So a small negative. The first quarter is also a negative in the 2% to 3% range. Q3 -- Q2 and Q3 are on the positive something like 4% -- 4%, 5% for both Q3 -- Q2 and Q3.

Harsh Kumar -- Piper Jaffray -- Analyst

Understood. Thanks, guys.

Operator

Thank you. And our next question comes from Shawn Harrison with Longbow Research. Please proceed with your question.

Shawn Harrison -- Longbow Research -- Analyst

Hi, good morning . First question, just on product lead times. Is there any product right now, where you're still seeing extended lead times or is everything pretty much normalized for you?

Keith Jackson -- President & Chief Executive Officer

No. We have few specific more custom-based products that still have extended lead times. But those are where there is unique flows or unique requirements. Most of our general products are in the normal range.

Shawn Harrison -- Longbow Research -- Analyst

In the end markets, those products serve, is it more auto-centric or?

Keith Jackson -- President & Chief Executive Officer

It tends to be industrial and automotive more than any other segment.

Shawn Harrison -- Longbow Research -- Analyst

Okay. And then as a brief follow-up, Bernard, I think there's a convert coming due next year. Do you have any thoughts on refinance that -- pay that off etc.

Bernard Gutmann -- Chief Financial Officer

We -- at this stage, we intend to pay it down. We do have, but we could also explore possibilities of refinancing. We did refinance our debt recently and have about $1.2 billion of undrawn revolver in case, we want to tap into that.

Operator

Thank you. And our next question comes from Craig Hettenbach with Morgan Stanley. Please proceed with your question.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes, thank you. Just going back to Quantenna, any update on just product development in the areas of autos, industrial and how you're thinking about that?

Keith Jackson -- President & Chief Executive Officer

Yes. We continue to invest. We took some ON teams and added them to the Quantenna team, to continue to drive derivations of the high-performance Wi-Fi that they've got into those marketplaces. That development, it looks like it's going to be in good shape to deliver what we set as expectations for the 18 months to two years from now.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it, thanks. And then just a follow-up for Bernard. You mentioned the inventory in the channel came down sequentially. Can you talk about just kind of framing that versus the typical target of 11 weeks to 13 weeks and then where you guys are today?

Bernard Gutmann -- Chief Financial Officer

Sure. We are comfortably within that 11 week to 13 week range.

Craig Hettenbach -- Morgan Stanley -- Analyst

Okay, thanks.

Operator

Thank you. And this concludes our Q&A session. I would now like to turn it back to Parag Agarwal with any further remarks.

Parag Agarwal -- Vice President of Corporate Development & Investor Relations

Thank you, everyone for joining the call today. We look forward to seeing you at various conferences during the quarter. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Parag Agarwal -- Vice President of Corporate Development & Investor Relations

Bernard Gutmann -- Chief Financial Officer

Keith Jackson -- President & Chief Executive Officer

Ross Seymore -- Deutsche Bank -- Analyst

Chris Danely -- Citigroup -- Analyst

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

Raji Gill -- Needham & Company -- Analyst

Christopher Rolland -- Susquehanna -- Analyst

Craig Ellis -- B Riley, FBR -- Analyst

Ambrish Srivastava -- BMO -- Analyst

Matt Ramsay -- Cowen -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

Chris Caso -- Raymond James -- Analyst

Vijay Rakesh -- Mizuho -- Analyst

David Williams -- Loop Capital -- Analyst

Harlan Sur -- JPMorgan -- Analyst

David O'Connor -- Exane BNP Paribas -- Analyst

Tristan Gerra -- Baird -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

Shawn Harrison -- Longbow Research -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

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