Q1 2021 ON Semiconductor Corp Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the on semiconductor first quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Good question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I'd now like this on the call over to Parag Agarwal, Vice President of Investor Relations and corporate development. Thank you. Please go ahead.
Thank you Denise good morning, and thank you for joining on semiconductor Corporation's first part of our contract under one part of it is his last conference call.
I'm joined today by our President and CEO and character of our CFO.
This call is being webcast on the Investor Relations section of our website at www dot on semi dot.
Dot com.
A replay of this webcast along with our 2021 first part of the earnings release will be available on our website approximately one hour. Following this conference call and the reported gross cost would be of a levered approximately 30 of the following this conference call and eastern information on the nature to our end markets business segments Geography's Genesis the share count.
And concrete on day, one for Scott Fernando on the also posted on our revenue.
Our earnings release kind of this presentation includes certain non-GAAP financial measures the.
Cancellation of this non-GAAP financial measures with the most directly comparable measure under GAAP are included in our earnings release, which is posted separately on number of website in the Investor Relations section.
During the call of course of this conference call, we will make projections or other forward looking statements regarding future events or future financial performance of the company the.
I believe estimate project anticipate intend may expect with low.
One should assume net expressions are intended to identify forward looking statements the ratio.
Cautioned that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially from projections.
Partner of 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-K form 10, Qs and the other filings with Securities and Exchange Commission.
Additional factors are described in our earnings release for the first part of 'twenty one.
Our estimates or other forward looking statements may change and the company assumes no obligation to update forward looking statements to reflect actual the dose genes the Jefferson I think.
Except as required by law.
Our analyst day is scheduled for August.
We plan to host that you wanted to in New York City, and we look forward to seeing you on in person on in the summer.
We will send out further details regarding the event in a few weeks now let me turn it on with the Hasan.
Thank you parag and thank you everyone for joining us today.
For the first quarter of 2021, we posted strong results driven by solid execution and broad based strength across our strategic end markets.
We reported revenue of $1 48 billion up 16% year over year more importantly, our focus on gross margin expansion is beginning to show results with first quarter gross margin, increasing by 370 basis points year over year, and by 80 basis points quarter over quarter.
We have taken steps to optimize our product portfolio and channel strategy to ensure that we capture the right value for our products and the steps will continue to drive favorable and sustainable results.
At the same time, we continue to drive cost improvements throughout our supply chain, improving efficiency of our operations and shifting our product mix towards higher margins.
We are seeing increased demand across most end markets and while the strength in the automotive market as well publicized we also see strength in the industrial market as global industrial activity is gaining momentum.
The steep acceleration in demand has impacted our ability to supply certain products, especially those manufactured by our foundry partners and in certain pockets products manufactured internally.
We are working diligently with our manufacturing partners to ensure timely supply of our products to our customers and have taken steps to ensure continuous supply to our strategic customers by building inventory on our balance sheet and reducing inventory and distribution channel.
By having better control over inventory, we are able to quickly respond to the needs of our strategic customers.
The steep acceleration in demand that we have seen in the last few quarters will likely begin to subside in the second half of the year, but will remain at a very healthy level.
We expect supply and demand to get back in balance as of the demand stabilizes later this year.
On our transformation initiatives I had indicated in the previous call our goal to realign our investment and resources to accelerate our growth in high margin businesses at.
At the same time, we are looking at our pricing practices to identify and address price the value discrepancy and are realigning our cost structure across the whole supply chain given the recent increases in material cost.
We are productively engaging with our customers to ensure we recover these costs, but more importantly, working with our strategic customers to secure long term agreements to provide better supply and price visibility over the next few years.
Over the last few months, we have made several changes to streamline the organization and improve efficiency.
We have brought in leaders with strong execution track record of promoted new leaders from within all of the focus on accelerating our strategic transformation and capitalizing on the current market strength to set our path for growth and margin expansion over the next five years.
The goal is to have an organization that is able to react quickly to changing business condition and is able to make decisions efficiently and objectively in the best interest of shareholders.
I remain bullish on the potential of our company and believe we are uniquely positioned to benefit from the key mega trends in the automotive and industrial markets.
These are the fastest growing semiconductor end markets was solid margin potential.
We have outstanding assets, and a highly talented and motivated workforce with a disciplined investment strategy and consistent and strong execution, we can maximize the value for our shareholders customers and employees. We will provide you with greater insight into our strategy and targets at our analyst day on August 5th let me.
Now discuss a few highlights of our key strategic end markets starting with automotive.
We set a new record for automotive revenue in Q1 with revenue of $515 million.
This revenue represents 35% of our Q1 revenue and an increase of 17% from Q1 2020.
This increase was broad based and we continued to maintain strong momentum in our vehicle electrification automotive MOSFET Cmos image sensors lighting and ultrasonic products.
We continued to see strong momentum in our silicon carbide and <unk> products for electric vehicles and during the first quarter, we secured significant design wins with leading tier one and global electric vehicle Oems.
Few of whom have recently launched marquee platforms.
These wins are expected to ramp starting in late 'twenty, one and will contribute to the growth we will see over the next few years.
It takes more than technology to win these platforms. Among the most important source of differentiation is our expertise in packaging, which is critical for improving heat dissipation and reducing the footprint of the module. In addition, we have been serving automotive and industrial customers for a few decades and during this time, we have built a vast distribution network.
The strong customer relationships solid domain knowledge and our reputation for quality.
Customer feedback on our silicon carbide traction modules has been very strong the efficiency of our modules is meaningfully higher than that of our competitors, which enables our customers to make favorable tradeoffs between the cost of battery and the range of the vehicle.
From the sensing solutions and automotive during the first quarter, we secured a platform win for up to 11 image sensors on a single vehicle, which is expected to ramp in 2022.
The industrial end market, which includes military aerospace and medical contributed revenue of $371 million in the first quarter of 2021 at 25% of our revenue.
Excluding the impact from geopolitical factors related to a specific customer or first quarter of industrial revenue increased by 22% driven by a broad based demand.
In the industrial end market, we continue to see strong momentum for our power modules in various applications with alternative energy being a key area of growth.
We are expanding our customer engagement into the EV infrastructure and we secured our first design win for our Silicon carbide power modules for a charging application with an emerging electric vehicle OEM.
Now I will turn the call over to Thad to provide additional details on our financials and guidance.
Thanks Hassan.
Let me start by saying that I'm energized to join on the semiconductor at a very exciting time for our company.
We have tremendous opportunities to create value for our shareholders customers and employees as we execute our strategic transformation.
We of the building blocks of of robust product portfolio excellent teams and operational scale to drive sustainable financial results. During this transition.
Now, let me comment on the current of the business environment.
During the first quarter of 2021, we saw a continuing recovery in business conditions, driven by further acceleration of global economic activity.
We are seeing broad based strength across most end markets of semiconductor content continues to increase and the products we encounter in our daily lives.
The solid mentioned, we continue to benefit from the secular megatrends in automotive and industrial end markets, which now account for 60% of our total revenue.
Although the industry is faced with severe supply constraints globally, we have supported our customers through a proactive inventory management by taking channel inventory down while holding more on our balance sheet, we believe supply and demand will start the balance later of the year.
Now, let me turn the results for the quarter.
Revenue for the first quarter of 2021 was $1 48 billion, an increase of 16% of the first quarter of 2020, and two 4% quarter over quarter versus normal seasonality of a sequential decline of 2% to 3%.
The year over year increase in revenue was driven by broad based strength with automotive and industrial growing by 16% and 17% respectively.
Gross margin for the first quarter of 2021 was 35, 2% of 370 basis point improvement year over year.
And an 80 basis point improvement sequentially the.
The gross margin improvements are being driven by improved mix of higher margin products improved utilization and our laser focus on cost structures across the company. Our factory utilization was 84% as we ramp production to align with the strong in demand as we move forward our fab of lighter strategy.
<unk> will allow us to continue to reduce our manufacturing footprint and optimize the mix of products within our fabs to reduce our overall cost structure.
GAAP earnings per share for the first quarter was <unk> 20 per diluted share as compared to a net loss of <unk> <unk> per share in the first quarter of 2020 non-GAAP net income for the first quarter of 2021 was 35 per diluted share as compared to <unk> 10 per share in the first quarter of 2020.
Next let me provide additional color on the performance of our business units, starting with the power solutions group or PSG.
Revenue for PSG for the first quarter was $747 million.
<unk> revenue increased by 20% year over year due to strength in automotive industrial and computing end markets.
Revenue for the advanced solutions group or ESG for the first quarter was $535 $531 5 million, an increase of 14% year over year. In addition to strength in industrial and automotive AFG benefited from strength in computing, especially in high end graphic cards.
Revenue for the intelligent sensing group or ISG was $203 million, an increase of 9% year over year strength in ISG was primarily driven by automotive and by computing with the work from home trend the remaining strong.
Now let me give you some additional numbers for your models.
GAAP operating expenses for the first quarter of 2021 was $395 3 million as compared to $384 1 million on the first quarter of 2020.
Non-GAAP operating expenses for the first quarter of 'twenty 2021 was $324 7 million, an increase of 6 million year over year, and $32 $3 million of quarter over quarter as expected.
This increase is primarily due an increase in variable on stock based compensation and the normal reset of fringe rates going into the year.
Our GAAP operating margin for the first quarter of 2021 was eight 5% as compared to one 5% in the first quarter of 2020.
Our non-GAAP operating margin was 13, 3% as compared to six 6% in the first quarter of 2020, driven largely by higher revenue and gross margin performance.
Our GAAP diluted share count was $445 4 million shares.
And included $12 8 million shares for the in the money portion of our convertible notes are non-GAAP diluted share count was $432 6 million.
Please note we have an updated reference table on our Investor Relations website to assist you with calculating our diluted share count at various share prices.
So turning to the balance sheet cash and cash equivalents was 1.0 of $4 billion and we had 142 billion undrawn on our revolver.
Cash from operations was $218 5 million or 15% of revenue.
Capital expenditures during the first quarter of 2021 were $77 million, which equates to capital intensity of five 2%.
As we indicated previously we are directing the significant portion of our capital expenditures towards enabling our 300 millimeter capabilities at the east Fishkill fab.
Accounts receivable was $684 million, resulting in DSO of 42 days inventory.
Inventory increased $44 million sequentially to $1 $3 billion and days of inventory increased three days to 123 days.
Distribution weeks of inventory decreased.
$113 million to $8 four weeks from 11 weeks in Q4, and currently is significantly below our target of 11% to 13 weeks.
As I mentioned earlier, we proactively reduced the distribution inventory to hold more inventory on our balance sheet to support our customer needs rather than building inventory on the supply chain.
Total debt was $334 billion, and we paid down 150 $154 million in the quarter.
So turning to guidance for the second quarter.
Table detailing our GAAP and non-GAAP guidance is provided in our press release related to our first quarter results let.
Let me now provides the key elements of our non-GAAP guidance for the second quarter.
As mentioned demand remains strong driven by improving global global macroeconomic environment and the steep recovery in our markets. Following the COVID-19 downturn.
Based on current booking trends and backlog levels, we anticipate that revenue will be in the range of one $5 7 billion to $1 67 billion. We expect gross margins between 35, 8% and 37, 8%. This includes share based compensation of $3 5 billion.
We expect total non-GAAP operating expenses of 323 million to $337 million in the second quarter. This includes share based compensation of approximately $20 million.
Capital expenditures are expected to be of $110 million to $120 million for the quarter.
We anticipate our non-GAAP or E, including interest expense to be $28 million to $30 million.
Our non-GAAP diluted share count for the second quarter of 2021 is expected to be 435 million shares.
So this results in non-GAAP earnings per share in the range of 44 to 54.
So to wrap up im optimistic about the opportunities ahead of us and I'm happy with the execution of our teams across the globe as we embark on our transformation journey.
I look forward to seeing you all in August of our Analyst day on New York with that I'll now turn the call back over to Denise to open up for Q&A.
Okay. Thank you, ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
The first question comes from Ross Seymore with Deutsche Bank. Your line is open.
Hi, guys. Thanks for letting me ask the question Congrats on the strong results and guide I guess the first question I had is on the supply side, obviously demand strong across the board, but on the supply side Hassan I wondered if there's any impact of eliminating your revenues from supply limitations, either internally or elsewhere on the supply chain, it and probably more importantly, any impact of your product.
And efforts on your total revenues and just how that process is going currently.
Yes, Thanks Raj so look the.
The obvious answers is yes, it is impacting our ability to ship to the rest of the demand that we have so revenue could have been higher if we did not have any constraint on a perfect world. However, we are where we are as an industry, but that's not really impacting what we are doing moving forward on the portfolio rationalization task of your second question.
Because it's actually helping us we kind of know already based on the strategic reviews that we've done where we're going to be landing and were putting priority on these products, especially when it comes to internal utilization like Thad mentioned, we have good utilization this quarter now, it's really maintaining the optimization and running the growth and the high margin.
<unk> within our Fabs and that fits very well with the rationalization, creating more capacity for the products that we want to maintain.
That's the perfect segue to my follow up question Hassan or if that either one of you guys of the utilization I think that you said is at 85% already it's good to see that back to normal levels can you talk about some of the drivers of gross margin going forward on the product optimization. You. Just mentioned this on is an obvious one but I assume that's going to take a little bit of time to bear fruit. So.
The second quarter gross margins showing a nice pop is that simply of the utilization rising again and kind of what are the steps to get that gross margin from the 36, 5% to 37 up to your target range of the four handle.
Yes look we have launched a gross margin initiative corporate wide, so theres not a single Ken.
On our call pop that caused the margin in Q2 debt that we guided to.
It's really across the board of course, some of it is using the utilization, but we have a laser focus on on cost optimization within the supply chain.
We have been talking strategically with the with our customers about some of the cost increases that we have seen how we pass some of those on.
There is the operational efficiencies that we have.
Been doing we've seen some of that start in the first quarter and Thats why I called it the favorable and sustainable moving forward, that's kind of where you're going to see us clicking up utilization will get better over time, but more importantly, where the lift for gross margins going to be as what I mentioned in the prior answers.
As we start shifting more of our internal capacity to higher gross margin products and offloading the call of the legacy or the harvest product lines and thats going to create a mix shift to the higher gross margin that will come of course with better utilization.
Great. Thanks, guys.
Your next question comes from Chris Danley with Citi. Your line is open.
Hey, Thanks, guys and I'll add my congrats on the strong quarter on outlook.
Would you say that the.
The shortages are getting better in Q2 are getting a little worse and then how do you expect this on.
Of this easing of demand you talked about in the second half of the year could we have like of sub seasonal quarter do you expect to go from about seasonal back to normal seasonal.
Yes, so look the the expectation is really what we are talking with with our customers on how I would call. It the velocity of how fast the demand is coming.
<unk> talked last call that the problem has not been really on the capacity per se. It has been on how quickly that demand came and layered on.
Very strong quarter, so thats the velocity, so when I talk about demand and supply and demand subsiding in the second half of the year or towards the end of the year I am not talking about really demand going.
Call it week or backwards I am talking about the momentum, but it will remain at a very healthy and not and better than seasonal.
The outlook, so that's where we see the demand, but the balancing of us being able to catch up to the demand.
It's going to happen I would say towards the second half of the year.
Yes, Chris this is that I would just add if you take the midpoint of our guidance for Q2, that's a record for the company right, it's up 9% sequentially.
As you look into Q3, I think coming off of that high Mark we will be sub seasonal in Q3, and then probably returned to seasonal in Q4.
Okay. Thanks, guys. That's helpful and then for my follow up I guess between.
Your own input costs, and raw material going up and then any any chance for.
I guess from a pricing on your products.
How do you expect the total impact of that to be towards margins do you think of kind of negates everything out or do you think that that could be a little bit of lift to the margins as far as like youre on pricing goes versus the input costs.
Pricing is a small portion of our gross margin trajectory because obviously right now we're on a favorable environment, but what we are looking for is sustainable.
<unk> structures on sustainable cost structures debt will remain favorable and the up or down and Thats. You always hear me talk about structural gross margin improvements, that's how we're going to get there.
So to answer the question more directly there is not a one size fits all it's not a one to one it's really talking to our.
The strategic customers in order to reset one is the cost basis, but more importantly in some scare in some cases, there is a value to price discrepancy and we're even covering that with some strategic customers and commitment to a longer term supply because today, that's really the most important thing.
Is how do we prevent this where we are today from happening to our customers over the next three to five years, that's really where the focus is getting those agreements getting those long term views for us and the customers both on supply and on pricing.
Okay, great. Thanks, guys.
Our next question comes from Vivek Arya with Bank of America. Your line is open.
Thanks for taking my question.
Sam You mentioned, Todd mentioned Q2 up 9% sequentially I was hoping if you could give us some color on which end markets could be above or below that number. But then also importantly, you are guiding to record sales in Q2.
The gross margins and still be 200 basis points below.
Prior peaks and I'm curious, what's causing that debt.
So the the demand is pretty broad.
There's not a single end market, obviously all of our focus on our.
The strategic end markets are going to see strength on that really is.
Mirrored across the industry, when you talk about auto and industrial and so on.
So I wouldn't I wouldn't say there is a one specific end market desk on drive the majority of it.
On <unk>.
On the gross margin compared to the historical if you go back to 2018, which was the peak I believe it was Q3 of 2018.
Our the midpoint of our guidance for Q2 would be about 5% higher than that peak.
But youre right the margins are lower and that's primarily because of the investments. The company has been making in the capital. So our depreciation has been going up as we've been ramping up the the Fabs in East East Fishkill.
Obviously as we go forward when we rationalize that footprint because that will give us some opportunities to improve those margins as we've talked about as well, but thats. The primary driver in the difference between the two.
Got it thank you.
For my follow up.
Im curious this on.
How does.
What we have seen in the last few months is companies that had better internal capacity.
Are you able to withstand the chip shortage issue of better than the competitors.
Competitors. So as you think about on for the next few years.
How does kind of reducing lead time on being responsive to customers align with the goal of having a lighter footprint over time do you think you can achieve both the it'll be very responsive.
Customers, but still have a lighter fab footprint. Thank you yeah, yeah, absolutely I am highly confident that we are able to do both and from obviously, we've been working on on the rationalization of our portfolio and the manufacturing footprints and since I joined the company and I see a path for achieving both and Thats going.
To be really with the rationalization when you have.
A pretty broad footprint it could be as easy as streamlining technologies within of Fab Youll get better utilization youll get better cost, while still running a very different set of products. It doesn't change really the overall products you run it will change the volumes at which you can run per fab by just streamlining on the techs.
Knowledge basis or even in the backend on of package basis by removing all of these inefficiencies we are able to even get more out of our existing fab footprint or backend footprint and then as we restructure and consolidate youre going to get that volume upside to maintain our growth.
We're going to be able to get both.
The confidently, yes, vivek, just just to clarify right as we've talked about the fab lighter, it's not necessarily going outside will still run the same volume in our fab. It will be just as the funds that higher throughput in those Fabs and then also looking at subscale, fabs and doing something with those to reduce debt footprint, but it doesn't necessarily shifting from insight.
Of the outside.
Thank you.
Your next question comes from Brian <unk> Gill with Needham <unk> Company. Your line is open.
Yeah. Thank you and congrats on the on the good momentum on besides just the question on the decision to kind of build inventory on the balance sheet, while simultaneously reducing inventory on the distribution channel.
Maybe you could walk us through kind of the right now of that decision and when you were talking about kind of demand supply rebalancing later this year.
Can you give us some thoughts in terms of kind of where we are right now.
And what are the steps that you're taking in order to kind of get the supply.
In balance relative to demand as it is it more of demands just decelerating.
And then or is the combination where demand is decelerating in supply.
Starting to increase to meet that level of demand. Thank you.
Sure.
I think I lost track of the first question is on the first question is on the back.
One of putting inventory on the balance sheet, yes, yes, okay. So let me address that sorry.
So we made the decision obviously, we were running at about 11 weeks of inventory last quarter, our target range of 11% to 13 weeks of inventory in the channel we dropped at the $8 four of the logic. There is it doesn't make sense to have the inventory sitting on the shelves of the distributors versus supporting customers. So by holding on our balance sheet, we can support the customers.
Through the channel or directly but it allows us to ensure that we're allocating the products to the right customers at the right time versus just having it sit in the channel for.
For the extended weeks. So it was the proactive decision basically for customer support.
Okay great.
No I mean that was going to tackle your second question about the demand.
Yes.
So from the demand perspective, it's really there are a few things going on one is a lot of the work that we have done that I mentioned earlier about changing the mix of streamlining our footprint, we have more supply coming on line not through capital expenditure, but literally through streamlining our operations part of the initiatives that we.
Have a floor for our strategy, so thats going to help increase our supply but also the the velocity that the demand came in or start to subside, which means that we are able to get more visibility on what the steady state demand is in order for us to build for that.
Whats been happening as we get the demand signal, we started the wafers than the demand gets stronger we start wafers, but those wafers have of latency before they get out and Thats why were on the supply constraint, but as we're getting more stable outlook of demand, which remains by the way at a very healthy level I'm not talking about demand going backward.
I'm talking about the velocity of the demand kind of stabilizing we are able to start material for that demand and that will get us towards the end of the year on a balanced supply and demand picture.
And for my follow up in terms of the automotive market you had record automotive revenue in the stated.
Can you talk about kind of what youre seeing in that industry as we progressed throughout the year on terms of Saar production are we.
Are we done with the kind of the the component shortages impacting production do we still have more low.
To go.
And if so how do we think about the overall industry and then how do we think about kind of your momentum in silicon carbide.
Electric vehicles.
Yes, I think of it as an industry automotive is going to remain strong in others low inventory across the board.
I don't know when anybody try to buy a car lately, but theres not no inventory.
Anywhere.
Whether it's rental cars or new cars or used cars.
So that's going to fuel the strength that we are seeing now obviously, we do have pockets, where some of the Oems have reduced production because of the supply.
And we do have some AD hoc issues in the industry.
Unfortunately, the Renaissance.
<unk>.
Fire that happened and the fact that also has an impact on where the demand is going to be but that doesn't change. The overall picture for for automotive being one of the strongest years of scene.
Our momentum remains very strong obviously, we keep talking about our content of stories. So as those of vehicles are.
Back on line, we're going to see our content grow with that and Thats part of our growth trajectory not just for this year, but moving forward and that includes the our silicon carbide.
I'm very close to our.
Silicon carbide initiatives here in the company and more importantly.
I'm watching very closely and I am personally engaged with customers on <unk>.
Platform design wins that are going to fuel our growth from the revenue and the margin.
But what I like about our silicon carbide stories, we're not just on the electrification of the vehicle itself. Although that's a great area. We are also engaged on the infrastructure, whether it's the onboard charging or infrastructure charging and thats going to also fuel because as you get more and more evs on the road, we need to have an infrastructure to charge them.
And we're engaged with that and Thats also going to be part of the industrial strategy for us.
I appreciate it thank you.
Your next question comes from Tuesday of Hari with Goldman Sachs. Your line is open.
Good morning, Thanks for taking the question.
I wanted to come back to your comment about Q3 revenue potentially being sub seasonal.
You talked about very strong demand across your key markets.
The inventory up and down the supply chain seems pretty low, including your Disney channel and you've got idiosyncratic drivers of growth.
And in power and image sensors, and so on and so forth. So I'm just trying to better understand why Q3 would be sub seasonal given the backdrop and then I've got a quick follow up.
Yes.
You talk about swaps you know Q3 is usually up 3% to 4%.
But you have to remember, we're coming off of a 9% up quarter in Q2, which is typically 3% to 4% down. So when we talk about seasonality for this year you can throw of that a little bit out of the window. What we are looking is just maximizing our supply in order to meet.
The maximum demand we can so the men remains strong so even if we talk about sub seasonal Q3, thats still a very healthy Q3 coming off of a second quarter with a 9% percent sequential growth.
Okay. So from your standpoint as supply of bigger issue in Q3 than it is in Q2 is that a fair.
Statement or no.
No no.
I wouldn't I wouldn't say, it's bigger I think we're still going to be navigating the same supply constraint that we've seen.
Okay got it and then as a quick follow up I was hoping you could give us an update on Belgium in Uganda, I know you're in conversations with with the potential.
The counterparties, but any update there and I think on prior calls you've mentioned.
Each fab potential sale would give you tens twenties of millions of dollars in cost savings to the does that continue to be the case. Thank you yeah. Yeah. I mean, we have nothing new to report obviously as soon as we conclude anything we'll make sure that it becomes public but where the status of the state.
That is exactly where we are.
Thank you.
Okay.
Next question comes from Vijay Rakesh with Mizuho. Your line is open.
Yeah, Hi, guys, great quarter on guide, yes out of the box.
Just a question on the automotive side, you mentioned the silicon carbide.
Obviously on the eve of say that can be used to grow can you touch on how you see that.
Most of the states.
Do you see that growing in 'twenty, one 'twenty, two and what goes where does it disappoints Adobe on auto revenues.
<unk>.
I think I think it's kind of Ta we don't break it up specifically, we look at our electrification, both silicon carbide and IGT.
Been growing it's kind of continue to grow and as more silicon carbide sees its way on the penetration as far as technology.
From the IGT as customers crossover over the next call.
The call it two to three years, we're just going to be growing our content with that but right now our focus is layering in all of the design wins in order for us to be able to do that and we're on track.
Got it and on the day.
One of the millimeter site can you give us some idea of how you're ramping that where do you expect utilizations as you look out.
This year of next year.
As you move some product into the new music.
Well, yes, I mean, we are on track moving this but just to remind everybody. We don't take ownership of the fab of until 2023.
So until then remains on the outside fab, but our focus is to make sure all of our products that we want to be running there isn't they're not just qualified internally, but qualified with our customers. So when we take ownership of that fab, we are able to ramp it that's planned.
Got it thanks.
Your next question comes from Craig Ellis with B Riley Securities. Your line is open.
Yes, thanks for taking the question on guys congratulations on the strategic progress so far.
Wanted to start with the longer term question, just saying you mentioned that youre working on some long term agreements with some of your customers. The the question is what percent of sales could those be in 2021 and and as we look out over the next three to four years, how much larger.
Could those long term agreements be as you have a couple of years to work on it and to use auto was one example would that mean for example that in auto you could actually accelerate.
The premium the industry growth I think the company has talked about 10 percentage points or or what those long term agreements really leave relative growth unchanged versus what the company's been looking for.
Yeah, I wouldn't I wouldn't say it will change our growth target because our growth targets are pretty aggressive when you compare them to the Saar numbers over the next few years so.
So I'm very comfortable with those now of course from.
From the prior question, if silicon carbide accelerates faster than what we think.
That's going to be.
Higher growth for us than than we expected. So there's puts and takes on on the growth trajectory and that's why what the growth. We have provided is a pretty well balanced the growth as far as the long term agreements I look at them as more outlook confidence.
If you look out over the next few years.
We want to be able to.
Spare capacity, we want to be able to potentially build or shift capacity into the strategic products. We want and we are engaged with customers to make sure that their demands over the next few years are met and that comes with the two way where we make sure to investments are made in the areas, where we see the growth and from the customer side the <unk>.
<unk> has made in order to give us the visibility and the long term agreement for us to make sure that we are building for the right demand.
So it's a win win for our strategic customers, we've been working with a lot of them in order to make sure that what we experienced in 2021 does not occur again and that only comes with a steady and outward looking.
The signal that they will commit to.
That makes a lot of sense and then the follow up is for you at that so.
There are times in the commentary prepared in Q&A the cause.
Company mentioned strategic mix out.
The question is are we starting to see that in the business for example, I noted.
Communications was down 10% year on year on the first quarter when will we when will we see that impact peak in the business.
Later in 2021 or would that be.
Sometime we're just didn't in 2022, thank you.
Yes, as we go through our strategic review process, it's too early to really to see those results coming through our financials at this point.
I think youll see that shifting much further out in 2022, probably hitting the revenue numbers. So I wouldn't look at this quarter as being indicative of of.
The strategic markets that we're focused on obviously auto and industrial will be strategic to us, but I wouldn't read more into that on a short term basis.
Thank you good luck.
Sure.
Your next question comes from Christopher Rolland with Susquehanna. Your line is open.
Hi, guys. Thanks for the question.
There've been some rumors about some Cmos image sensor tightness out there.
Can you guys talk about that market specifically.
And are there any supply constraints there that you guys are seeing.
Whether you specifically or anywhere in the supply chain for those modules.
The short answer is yes.
We see it because some of them most of it as well.
Well all of it is foundry for us and we all know the foundry situation.
Part of the our allocation strategy that I've been disc.
Discussing our hinting at during the call applies to the image sensing, but for sure there's tightness in the market.
Great.
And then perhaps tying into that as well just the discussion about east of scale. So 2023, that's when you guys get get the Fabs.
But are you able to ramp meaningfully before that is there some additional capacity.
Can kind of pop star.
And then.
The supply chain tightness of what we've seen out there is that accelerated qualifications of re qualifications from other fabs to the spa.
You've talked about 2 billion plus of revenue so I guess.
Putting all of the pieces together.
Where are you guys kind of being in 2023, when you get this Bob in terms of Utilizations in terms of.
Ramping to about $2 billion plus revenue.
Is this does this put you guys on a better position.
Where do you see that position.
Yeah look we still have a few years on we have looked at the products that we are moving we have re prioritized in order to make sure. The products. We are moving with higher priority are the strategic products the growth products that I've been talking about part of the portfolio rationalization. So those of course, we can.
To try to accelerate but as you know with a lot of product quality. It is not how hard or how fast you work. It takes time to qualify the ex number of hours you have to test in those hours have passed.
We can do apparel quality, we can do customer quality and we're doing all of the above to make sure that when we take ownership of the.
The fab in 2023 and has the maximum utilization we can get to at that time, given all of the the demand that we have.
As far as the short term of of course, we maintain a close relationship with Globalfoundries that operates the fab and we navigate the supply constrained just like we do with any outside foundry.
Thanks to the hub.
Your next question comes from Chris case of with Raymond James Your line is open.
Yes. Thank you. Good morning. The first question is about the production plan as we go through the year and it sounds like you'd be ramping production pretty significantly now to catch up on on supply and that's obviously, having a margin benefit now what does that look like as we go into the second half with.
The revenue potentially flattening out as you go into Q3 does that mean.
Utilization comes down a bit or and I guess, what does that imply for gross margins as we go into the second half of the year.
Yes, as I mentioned utilization is currently at 84% it was.
Seven years last quarter as we look through the remainder of the year and we think it is kind of stay right in that level dependent based on the the projections were seeing on the backlog. So when we when we talk about the second half coming back into balance.
All of its really at this level right. So we don't expect the.
The utilizations to drop much through the remainder of the year.
Alright, so just as a follow on to that.
Given the given whats.
Some of your peers of set about expecting tight supplies of the year.
Do you expect Youll still have the opportunity to improve the mix as you go through the year of prioritize some of the higher profile.
Higher margin products and therefore, it still get the mixed benefit as you go through the second half.
Yes, absolutely I mean, that's we've already started doing that and we hope to get more favorable mix and optimize those fabs.
We go through the rest of the year and that will give us some tailwind on the on the gross margin additional tailwind.
So that's what we talked about right is that the next phase of the gross margin isn't all about utilization, it's really about optimizing the footprint and optimizing what's going through those fab two to increase the throughput.
Got it very helpful. Thank you.
Yes.
Your next question comes from Matt Ramsey with Cowen Your line is open.
Good morning, Thank you.
Hassan.
As you think back to when you were thinking about joining the company and when you came into the company.
But it seems to me like the as you think about modernizing or rationalizing the footprint of the manufacturing I don't know if you guys sort of thought about the extreme six and eight inch tightness across the industry. When you started putting the plan together. So I wonder if you might reflect on that a little bit are there anything new variables or is the aperture sort of.
Broadened for strategic options as you think about it given the tightness and the likelihood of six to eight inch tightness persisting across the industry for a longer period of time.
No from where we look at it obviously, we had to re look and revisit our baseline assumptions and I'll tell you it hasn't changed because of the fact of the matter is not the six or eight inch tightness that is driving it is how effective can we run those fabs at the scale that they are in vs Consol.
All of dating or moving.
Front for example of six to eight as an example.
So it doesn't change what we need to do which is we need to streamline our manufacturing footprint.
We need to consolidate and we need to have all of our Fabs b at a scale that we can drive lower cost and as we keep those fabs fully utilized the that cost will basically spread across all products that we run in so it doesn't change.
On the valuation of these fabs as far as the market is concerned, but when we decide to potentially divest any of those assets. They will just bring in more than they did when I first started.
Fair enough of that makes sense.
As my follow up you guys mentioned in the prepared script.
Strength from computing and also strengths from from Gpus.
Maybe you could talk about how big are those markets for you guys, specifically that you called out driving some upside in.
Are those particular products.
At the richer end of the mix and are you planning on those sustaining through the through the balance of the year. It seems like those would be fairly high margin products into those markets. Thanks.
Yeah.
Product focused on in the segments first of all of those segments are not a big percentage of our revenue. However, they are very out.
Column of adjacent to our power product offering that we have in the auto and industrial where we bring a lot of value in these GPU cards, and so on which have seen some some growth. So we're able to support that growth, but I will just reiterate we're able to support that growth once we have fully.
Supported our automotive and industrial customers, which are part of our strategic markets.
Yeah.
Okay and your next question comes from Kevin Cassidy with Rosenblatt Securities. Your line is open.
Thank you and congratulations on the great results.
Your capex spending at $77 million came in lower than I guess the guidance guidance was 92 of $100 million was that just due to timing of the.
Equipment delivery or is there some other change that's happening.
No thats just the timing of the cash payments right. So you can think about it still being in that 7% range long term.
This quarter, just happened to be lower on a cash basis, but no no change in strategy at this point.
Okay.
Say what percentage of that goes towards the 300 millimeter and how much maybe for eight inch.
I don't have the breakout, but I would say the majority of that is going towards the 300 millimeter today.
Okay, and so is there I guess, but what is the lead times for eight inch of equipment or can you still find use the equipment.
Yes, because of well, yes, because our investment of our Capex in the eight inch.
Is really maintenance or upgrade investment back to what I mentioned streamlining and removing some bottlenecks in the fab. So we're not looking at purchasing heavy equipment and as you streamline and consolidate some of the the lines within a physical location.
Of the flexibility to move some equipment from our own interest from one spot to the next in order to remove any bottlenecks that are specific to of fast. So we havent hit any any roadblocks and what we aim to achieve in the six or eight inch fab trajectory we have.
Okay, great. Thanks for clarifying.
Your next question comes from John Pitzer with Credit Suisse. Your line is open.
Yeah, Hi, guys. Thanks for let me ask the questions congratulations on the strong results.
The little curious on this inventory strategy and to what extent is taking on more inventory tactical to try to kind of make sure your customers arent building much inventory and if you can comment on what you think end customer inventory.
It would be great and to what extent might just be a little bit more structural and as we think about use of cash how should we think about your use of cash relative to your inventory strategy.
Yes, I would say Jon it's Sam.
Technical.
When we have strong demand and strong signals from our customers coming to us directly.
<unk> of how we.
We fulfill either direct or through distribution the customer engagement is direct with the with us.
And being able to have those conversations and move inventory, where we need to move it in order to support our strategic direction on our back to our portfolio rationalization. It is better for us to hold that inventory then put it at the distributor and have them shipped.
At their discretion I would say based on their backlog on the order so from that perspective it is it.
It is purely a tactical approach.
How we believe we are able to support it and that worked very well of course, we had a great.
A great quarter debt.
We just talked about we have a great outlook.
That's all part of it is a tactic now as far as longer term, obviously, we're going to be talking about rationalizing our inventory management, both in the channel and internally because that has to match the velocity at which we are able to get our products from start to finish goods, how do you stage.
Product and Die Bank and how do you stage products on finished goods is going to depend on the rationalization and really the efficiency of our manufacturing footprint and that's going to drive a change in our capital allocation for inventory management and again it's.
Either internal or external for me. It's the same it is inventory that needs to be monetize by getting on a customer board.
And John on the cash I wouldn't expect the inventory to increase the balance sheet inventory to increase.
Over the longer term it will come back into balance, but we're not looking to increase it further we think this is about the right level for this tactical as you call the tactical.
Move in managing the inventory on the short term basis.
That's helpful on that for my follow up sort of I was a little bit surprised about two things one.
The pricing is not a big part of what's going on right now and to not neither is portfolio rationalization and the reason why is if I go back and think about what you historically did in the nor market. If my memory serves me correct you use periods of strength to kind of price customers out of the market and move that portfolio of more.
Simply I guess why arent you doing that now or are these just different markets in the sense that they're more sole socket and it's hard to do that without kind of not supporting your customers or why isn't the portfolio rationalization happening more quickly.
Well, let me put it this way we are doing that it is happening quickly, but theres a lot of pieces to it. If you think about it it's not going to have an impact in Q1 is starting to have an impact in Q2 on and have more impact you know talk about Q3 and Q4.
Because there is backlog that we have accepted before that we're going to support.
There is pricing actions that we are doing like you set the price some opportunities out of the market because we're not going to be supporting them.
But that all is going to help towards the end of the year as we get through the forefront of the rationalization, but as far as happening quickly. We are because one thing you have to also remember the difference with it is when you have the tightness in supply if I'm not shipping and the customer because of strategic reasons.
On the portfolio and the customer can get that product from somewhere else, they're not going to build on board that I'm also on with products that I do want so we have to make sure. There are some production thats still going.
And that's the tradeoff, we're able to make.
That's helpful. Thank you.
Okay.
On your next question comes from harsh Kumar with Piper Sandler Your line is open.
Yes, Hey, guys. The first of all congratulations on on a very strong guide I had two questions. So on first one for you I know silicon carbide and powerful cars and automotive is a focus area. If I had to ask you. What is your view on <unk> position in that market today with your products.
I know, it's Australia, one of the huge number one but I'm curious where you are today and I'm curious what you think needs to be done to get to that the top tier of slot.
Sure.
We are in a very good place and it's only getting better.
Today, it's better than it was when I first started so thats kind of of the focus that we have how is it going to get better to use your term for us to become number one which of course.
We play to win and we don't dabble.
That's going to be with a focus in the investment strategy and Thats. The work that we have been looking at.
But that's the work we're looking at for Silicon carbide, and a lot of our other segments debt and the technology in order to make sure that when we pick a vector.
Be it silicon carbide or anything else that we're able to sustain it over the next four of five years and investments in products in order to get to that leadership position.
Thanks, Sean and for the next one just wanted to ask you and Todd about the cost side. So.
As you look at some of the cost initiatives that you guys have started on would you say that the easy things that you've sort of done.
On a sort of underway and close to getting done in the high book has started a wave of June sort of characterize where you on in the process of cutting costs.
Yes, it's not it's not the hard on easy way.
How long it takes to implement and get the benefit of.
We can we can implement if I use the two categories. We can implement two things one is easy one is hard.
The easy one is implemented but it's not going to see results for another quarter or so we're doing all of these in parallel.
Obviously anything that is what I call low hanging fruit.
<unk> has already been launched initially initiated the <unk>.
Question is have we seen all of the benefit of Ed the Answer's no.
So it's not really I look at it as the timing to get or reap the benefits of hard or easy implementation. While we have done is we've launched a lot of them in Q1, you starting to see.
Of that benefit in Q2 and back to my prepared remarks, those benefits are obviously favorable but more importantly to me they are sustainable.
So it's the accumulative the cumulative.
The fact as these things kind of start.
Showing the benefit there are cumulative on what we've already established as a baseline and thats. The gross margin trajectory that we are we set ourselves up for.
Thank you.
Your next.
Question comes from the line of.
Harlan sur with Jpmorgan Your line is open.
Good morning, great job on the according to the execution the iOS.
Keith business was down about 2% sequentially.
It was up 9% year over year, I believe auto and industrial makeup of a majority of of ISG revenues. In these two end markets combined were up 5% sequentially and 17% year over year. So the largest health of those appear to reflect the capacity constraints on foundry that you guys talked about similar to your overall business do you guys expect that ISG.
The capacity to be more in line with your demand by the fourth quarter of this year.
So the issue specifically, obviously at the revenue is 100% constrained by.
By supply so that is a one to one supply constrained.
And that will.
The remain through probably the first half of 2022, that's the one business that.
We will.
Remain a little bit out of out of balance between the supply and demand given the growth in that market with a desk on everything.
We're working very closely with our foundry partners to get more and more capacity, obviously, because we have a lot of common customers with the microcontrollers or the advanced nodes that they ship.
And that's how we're going to be able to get a little bit of.
The more capacity, we do have a path to more capacity for the second half of the year.
That's the capacity that we've negotiated in the first quarter. So of course, that's going to alleviate some of that GAAP, but it was not going on it's not going to resolve it but it will get us closer to it.
No I appreciate the insights there.
And then despite the potential for Q3 revenue to be maybe a bit sub seasonal.
I would assume that the team would expect gross margins to continue to move higher I mean, you always seem to be executing two of focus on a higher mix of gross margin on products. So while Q3 revenues might be seasonal should we expect gross margins to continue to move higher as we move through the second half of the year.
Yeah. Harlan this is that we expect gross margins to continue to expand through the remainder of the year. This is from one of the things we've talked about whether it's the cost initiatives also the mix the.
The benefit of the utilization and the cost structure on the Fabs, but yes, we do expect even as revenue.
Is is coming back into balance we expect gross margins to continue to accelerate.
Yeah, great job. Thank you.
Sure.
Your next question comes from Mark what types of of Jefferies. Your line is open.
Hi, Thanks for taking my question.
That's on a lot of times what happens at this part of the cycle is to get Oems and contract manufacturers order more components than they need some.
Some people call that double ordering some call it building inventory safety stock and then what happens the industry adds capacity lead times shrink and then the requirement for the safety stock declines in semiconductor companies see the quarter cancellations.
So the questions here or.
As this cycle the cycle would be different than all of the other ones and as I listen to how you're planning to retool on manufacturing operations I'm trying to figure out of it.
If you're insulated from this dynamic in some way for your future.
And I had a follow up thanks.
Yes. So if you think about a lot of the commentary that we've talked about all of that is to in order to set us up to be more distance from any any clinical of cycle debt.
That as you say as expected it's the same thing that happened in <unk>.
Coming out of 18 into 19.
So what does that look like for US we talked about the holding the inventory on our balance sheet versus putting it in the channel because that gives us a more clearer and quick response to the true demand signals.
It's much harder to put double orders on on our direct book rather than through the <unk>. So that gives us much better visibility the ing.
Engagement, not just with the tier one but with the Oems directly.
When you have a OEM debt is going lines down in a few days because they are not getting parts I guarantee you. There is no double ordering in that nobody has got those products on the shelf and causing an OEM lines down. So that's another signal that we look at again more responsive when we hold the inventory than what it is.
When it is in the channel as far as the portfolio rationalization of the manufacturing footprint, specifically, that's why I said, we're very cautious about investing to add more capacity versus removing some bottlenecks as we changed the product mix in our manufacturing just changing the bottleneck. So we're not.
Adding the Capex that will end up.
Loading us with the depreciation it is adding very light investment and whether it's the tester or one machine in order to get that throughput out in order to support the high demand, but not really impact our long term utilization outlook that we want to maintain and debt 85, plus so all of these.
Whether day Shield us.
I can't comment on that as you know.
Who knows what the cycle would look like but what I will tell you is it will make us much more immune than just letting it right.
So very helpful on things that in the follow up of the Oems that seem to be doing better right. Now are those that are.
Abandon these just in time inventory of processes and built inventories on their own volition last year and I'm wondering if you're hearing from your customers the desire to take that approach, even as you and other semiconductor companies.
The plan to increase your on days of inventory on your on balance sheets.
It's not.
I wouldn't say it is common across the board ourself on customers on portion of that are in denial.
And we're working with them.
Everybody has the decision to make we can make the decision for us and they have to make there on decision about how they want to manage inventory.
But I will tell you. The just in time era is not going to be sustainable and customers who are going to keep pushing for it. After this is done we'll just find themselves in it and the.
The next demand.
Turn of the demand strength or even even slight upside.
For me the focus is a productive engagement with the customer where they are confident in their demand signal and I am confident in my investment in order to meet that the.
Short term cancellation all of that I think is going to be a thing of the past and thats going to be the difference between the strategic customer in the non strategic customer as the ones that we are able to run a healthy and profitable, but more importantly, a predictable business with the that's where our focus has been and part of it as part of those long term agreements.
Now when I look at the inventory.
For customers, who have done it you know I've done it in my past lives, where some customers will work with us on what we call of BCP business continuity plan, which includes some inventory with us, but more inventory with them that we have visibility to.
Where they will hold it they will order it they have two months or so of it.
And we just have to make sure. It's replenished we've done that a lot of it with the Japanese strategic customers and I'm, hoping that we'll start expanding for European and.
North American customers as well.
That makes a lot of sense, thanks to us on very helpful.
Your next question comes from William Stein with two of Securities. Your line is open.
I think of my question and congratulations on the very strong outlook.
In the past we've talked about this.
Of the split between.
The relatively more let's say specialized or unique products versus ones that are somewhat more commoditized in nature.
And.
I think your prior responses around this had been that it's not so straightforward. It's not just looking at margins you have to look at parts and in particular parts by end market and I'm wondering if you've had the opportunity to complete that analysis, and maybe help us understand a little bit better about what the split.
It might look like today and going forward in terms of.
The balance between those two categories.
So that's the real question is yes, I have had a lot of opportunities to look at it we're in almost the.
All of the last.
The stages of review where.
A two week long kind of wrapping up the strategic plans on the strategic reviews, but what you said is true for us not just on the margin.
Because you have to look margin and our ability to manufacture it at a very aggressive cost you can have a product today at a low margin that we are targeting an automotive it is valued product and the margin impact is because it is not running efficiently as far as cost structures through our manufacturing footprint.
So by consolidating and rationalizing the manufacturing that's kind of give an uplift to those specific products. So before I rush on I'll say low margin kill it or move away from it I have to be able to make sure that we have of benchmark cost in order to make those assessments and then the decision for US here is.
Do we act on the product right away or do we fixed the cost on keep the product and Thats part of the strategic review.
Can't tell you at this point.
How much of the products fall in which bucket that's going to be part of the work we are going to be finalizing as we get ready for analyst day, but I just wanted to give you.
The preview of the mindset that I have going into that work.
I appreciate that so on and maybe a follow up along the same lines.
In terms of.
Not getting a quantified.
<unk> are split today.
Do you think the size might be big enough to take.
To take a significant action that doesn't look like just.
On.
Sort of letting letting it price.
On yourself out of the market or letting it fall off the income statement over time and something that could be more of the strategic action like monetizing the asset through the JV or something like that.
Yeah, absolutely I mean, if you think about <unk>.
Once you disposition your assets in categories, you know, you'll have a harvest core and growth.
<unk>, we have to look at what do we how do we disposition assets of pricing yourself out of the market or exiting or selling and shutting down of manufacturing site that supports of those products is one side of it but.
But monetize monetizing the assets.
Is of course, something that is on the table that we're going to be looking at.
All options are out and we're going to do the best thing for the company as far as balancing.
Cash flow and balancing our manufacturing footprint.
Great. Thanks, guys.
This concludes the Q&A session for today's call I'd now like to turn the call back over to Hudson <unk>, President and CEO.
Alright. Thank you all for joining us today I'd like to think of our worldwide teams for stepping up to help drive our transformation, which has already started delivering favorable results.
We remain focused on our execution as we navigate the current market conditions and I look forward to seeing you all at our analyst day on August 5th Thank you.
This concludes today's conference call you may now disconnect.
Okay.
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