Freescale Semiconductor's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Freescale Semiconductor, Inc. (FSL)

Q2 2012 Earnings Call

July 19, 2012 5:00 p.m. EDT


Mitch Haws – VP of IR

Gregg Lowe – President and CEO

Alan Campbell – SVP and CFO


John Pitzer – Credit Suisse

Glen Yeung – Citi

Jim Covello – Goldman Sachs

Earl Hege – RBC Capital Markets

Franklin Jarman – Goldman Sachs

Ross Seymore – Deutsche Bank

C.J. Muse – Barclays

Ambrish Srivastava – BMO Capital Markets

Jeff Harlib – Barclays

Arun Seshadri – Credit Suisse

Jake Kemeny – Morgan Stanley



Welcome to Freescale’s second quarter 2012 results conference call. (Operator Instructions). This call is being recorded. If anyone has any objections, you may disconnect at this time.

I will now turn the meeting over to Mitch Haws. Sir, you may begin.

Mitch Haws

Thank you and welcome to all of you to our second quarter 2012 earnings conference call. With me today are Gregg Lowe, our President and Chief Executive Officer, and Alan Campbell, our Chief Financial Officer.

Before we begin the prepared remarks today, let me remind everyone that today’s discussion contains forward-looking statements that are based on our current outlook, and as such, do include risks and uncertainties. Please refer to our press release, Form 10-K, and other filings with the SEC for more information on the specific risk factors that could cause actual results to differ.

Also today we will reference non-GAAP financial measures, and we will post the appropriate GAAP financial reconciliations to our website at Today’s call is being webcast live on our website at

With that, I’ll turn the call to Gregg Lowe.

Gregg Lowe

Good afternoon and welcome to our second quarter earnings call. As most of you know, this is my first earnings call with Freescale. I'm excited to be here and very upbeat about the opportunities ahead of us. I’ll spend a couple of minutes highlighting our Q2 results, after which Alan will provide some additional commentary and insight into the financials. Following Alan’s comments, I’ll share some initial observations about Freescale, and then we’ll entertain questions.

As expected coming into the quarter, our results improved on a sequential basis. Revenues grew 8% to $1.029 billion, gross margins increased 50 basis points to 42.8%, adjusted net earnings were $17 million and adjusted EPS was $0.07.

Also during the quarter, Freescale hosted another very successful Technology Forum in San Antonio. We hosted more than 2,200 attendees over 10 days, including over a thousand customers, 400 partners and distributors, hundred university educators, and a hundred suppliers. During the event, more than 360 hours of in-depth and hands-on technical training sessions were completed. Many of you attended the event and saw first hand a number of innovative new products will be rolling out to customers in the coming months.

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

Alan Campbell

Well, good afternoon and thank you again for joining today’s call. As I review the Q2 financial results in more detail, please note that I will be focusing on the results excluding the impact of certain one-time items and adjustments. We believe this to be a more meaningful representation of our ongoing financial performance. Please also note that the majority of the purchase price accounting adjustments are no longer material.

Now looking in Q2 in more detail, revenues were $1.029 billion, representing a sequential increase of 8%. Sales declined by 16% compared to Q2 of last year. AISG product sales in Q2 were $568 million, 8% above the first quarter and 10% below Q2 of last year. Sales to both of our automotive and industrial markets grew sequentially. Year over year, revenues declined in both automotive and industrial given the strong demand following the earthquake in Japan in early 2011.

And MSG revenues were $335 million in the quarter, up 6% from Q1 but down 21% from Q2 last year. Sequentially, sales benefited from growth in both wireless and infrastructure and enterprise. Sales of our application processes to the consumer market increased sequentially as well. And year over year, net working revenues were negatively impacted by lower demand, primarily in the wireless and infrastructure market.

Our cellular product sales were $50 million compared to $66 million in Q1 and $122 million in Q2 of last year. Other products, which again primarily consist of IP revenue and patent sale, resulted in quarterly net sales of $76 million compared to $40 million in the first quarter and $44 million last year. The increase in sales was driven by multiple IP licensing and patent sale transactions completed in the quarter. And I will provide additional detail on the transactions later in the call.

Finally, sales to distribution were flat sequentially and were down 20% compared to last year. Recall that the first half of 2011 was quite strong in the distribution channel. Looking at our distribution [inventory] was essentially flat compared to Q1, and weeks [inventory] decreased from 10.7 in Q1 to 9.6 in Q2. Our book-to-bill ratio in the second quarter was 0.98 compared to 1.05 in the first quarter.

Now looking to gross margins and operating expenses, our gross margins were 42.8% compared to 42.3% in the first quarter. The gross margins benefited from higher IP licensing revenue and overall operating efficiency. Offsetting this benefit was the impact of a lower margin product mix and lower overall front-end utilization as we began the process of eliminating production in our Toulouse, France facility. We expect to complete final outs from this facility during the third quarter.

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