Q1 2022 ON Semiconductor Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to.
First quarter 2022 earnings conference call at this time, all participants iron on a listen only mode. After the presentation. There will be a question and answer session to participate simply press star one on your telephone. Please be advised that today's program is being recorded.
And now like to hand, the conference over to Paraguay, where wall, Vice President of Investor Relations and corporate development. Please go ahead.
Thank you Carmen good morning, and thank you for joining us on this corridor.
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Oh, well honestly and this presentation includes certain non-GAAP financial measures.
Reconciliation of these non-GAAP financial measures the most directly comparable measures under GAAP are included in our earnings release.
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Thank you parag and thank you everyone for joining us today.
I will start off by saying how extremely proud I am of our team's execution in the first quarter.
Employees worldwide continue to push through challenging times and their efforts have delivered yet another quarter of outstanding results.
We had strong revenue growth of 31% year over year, driven by solid performance of our intelligent powered and sensing solutions in the automotive and industrial end markets.
Key megatrends, such as vehicle electrification Adas energy infrastructure and factory automation are accelerating and we expect to see sustained growth as we service our customers under long term supply agreements and expand our pipeline of new intelligent power and sensing products at favorable margins.
Along with our strong revenue performance in the first quarter, we achieved a gross margin of 49, 4% an increase of 1420 basis points from a year ago.
This outstanding margin performance was driven by improvements we implemented in 2021, including manufacturing efficiencies reallocation of capacity to strategic and high margin products to drive favorable mix shift and continued elimination of price to value discrepancies.
On the market environment, despite an overhang of unfavorable macro economics, and geopolitical dynamics demand for products in our focus end markets of automotive and industrial continues to be strong.
In the first quarter, automotive and industrial 8% quarter over quarter, and 42% year over year to 65% of our revenue both delivering record quarters.
The growth in our automotive revenue.
I'll start was revised down highlights the strength of our portfolio and supports the content growth, we expect per vehicle driven by Adas <unk> and vehicle electrification.
Lead times are flat quarter over quarter, and we do not see meaningful customer push outs or increase in cancellation trends.
We are fully cognizant of potential risks from inflation higher interest rates and ongoing geopolitical tensions we are monitoring the business environment diligently and have been managing our inventory manufacturing and customer engagements to support our long term financial targets and sustain our gross margin within our target range of 48% to 50 <unk>.
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As of now the Covid related Lockdowns in China have not had any meaningful impact on our business. However, there is potential risk in the second quarter, if the lockdowns extend much longer than our current guidance already accounts for a few percentage points of growth of risks we are seeing at this point.
To mitigate any chance of supply disruptions to our customers due to the Lockdowns, we have initiated capacity transfers to our Manila and Singapore locations to maintain supply continuity for our customers.
We have been making selective investments to expand our capacity in strategic areas and really bottlenecks, especially in back end factories for imaging products.
We are improving the efficiency of our factories and are reallocating capacity to strategic products and end markets, allowing us to expand our margin by driving favorable mix shift.
We have been able to secure additional capacity from our external manufacturing partners are qualifying products and our 300 millimeter fab to meet the long term capacity needs.
In 2022, we are on track to ship more than twice the number of 300 millimeter wafers, we shipped in 2021 and the continued ramp in our east Fishkill fab should improve the efficiency of our fab network over the next few years as we execute our fab lighter strategy by consolidating our fab footprint.
We have redeployed capacity to strategic higher margin products and over the last 12 months, we have exited approximately $200 million in revenue at an average gross margin of 21% of which $32 million occurred in the first quarter at an average gross margin of 22%.
Some of these losses are already being offset with new product revenue, which increased 31% year over year and favorable gross margin and will continue to ramp through 2023 and beyond.
Our customer engagement remained strong as we see our increased customer base driving approximately 100% year over year growth in our design wins.
This increase is driven by wind intelligent power and sensing with design wins for both doubling year over year.
Our intelligent power and sensing revenue makes up 65% of total revenue up from 62% a year ago.
We are continuing to make progress on our silicon carbide growth and we remain on track to more than double our silicon carbide revenue in 2022, as we ramp shipments to customers, who have signed long term supply agreements with us.
At this pace exiting 2023 on semi will be on a 1 billion run rate for silicon carbide revenue.
In addition to market leading efficiency of our products our end to end vertically integrated solution in a supply constrained environment and the compelling and differentiated competitive advantage.
I am extremely happy with the progress of our <unk> operation.
Since we closed the acquisition, we have already expanded to a second building as we increased our substrate capacity and are still on track to more than quadrupled exiting 2022 and support of our <unk> customers and the broader market.
From the engineering side, all yields and output are meeting our committed production levels and we are making fast progress on our 200 millimeter substrate development and released to production.
We continued to expand our silicon carbide engagement beyond automotive traction and have made inroads into the energy infrastructure market with our power modules.
In the first quarter, our revenue for energy infrastructure grew 64% year over year, and we secured significant wins for our silicon carbide and silicon power modules with market leaders.
We are currently shipping to seven of the top 10 global providers of solar Inverters and we have signed L. TSA with three of the top five players.
The energy infrastructure market will be a long term driver for our business as utility scale power plant installations are expected to grow worldwide to reduce the climate impact of fossil fuel based power plants.
In the first quarter or five G cloud point of load revenue and design wins, both increased 33% year over year as we displaced an incumbent to secured design win at a leading <unk> infrastructure OEM with a new product based on our superior technical performance and security of supply.
And cloud power, we secured a major win with our high performance power management solution delivering over 94% of peak energy efficiency.
They were adopted by one of the largest cloud providers in the world to power their next generation Intel servers in their data centers refresh and expansion.
Our best in class energy efficiency, together with supply assurance and technical support enabled us to secure this win delivering both market share gains and favorable gross margins in the second half of this year.
On the intelligent sensing front, we continued to sustain our momentum in automotive imaging with 44% revenue growth year over year, our strong presence on most leading Adas software platforms and broad ecosystem. We have built over time have been a key driver of our strong market position.
We further strengthened our position in the Adas ecosystem through a key win with a leading Adas software platform provider in China.
We expect this platform to proliferate at all Oems in China, with our content in excess of $150 per vehicle.
The growth in our image sensing revenue and design wins is attributed to a doubling of the average number of cameras per vehicle over the past five years and a doubling again in the next five years and.
In fact, we have designed in 28 cameras per vehicle and a level five autonomous vehicle already are.
Our industry, leading eight megapixel camera has already been adopted by eight car Oems and will quadruple in revenue and 23 over 22.
In addition to Adas applications in light vehicles, we are seeing traction for image sensors in the industrial market for warehouse automation autonomous delivery robot and agriculture applications.
In the first quarter, we secured a win for our image sensors for use in robotic drive units and fulfillment centers was $70 of imaging content ramping in 2023 at a leading e-commerce player.
In addition, we continue to win new designs in the growing intelligent Agri business segment for improving crop yields which uses 36 image sensors per machine with revenue starting this year.
Customers select our sensors based on superior imaging performance market, leading global shutter efficiency and a strong ecosystem comprising of players that provide supporting software and hardware solution to rapidly enable complete imaging solutions.
Our intelligent sensing products are long lived and design wins tend to be sticky.
Awarded projects typically span multiple years with lifetime in excess of 15 years as customer valued the programmability and leveraged their software architecture over multiple platforms and products.
This longer lifecycle and sticky nature of our products gives us greater revenue stability and visibility.
Now I will turn the call over to Pat to provide additional detail on our financials and guidance.
Thanks Hassan.
We had another quarter of record results as we continue to execute on our transformation journey.
We reported record revenue gross and operating margins and earnings per share driven by structural changes to the business.
And a reallocation of investment and resources to strategic products and markets with high growth and high margins.
Vehicle electrification, Adas factory automation and energy infrastructure or in the early stages of adoption in these trends will accelerate with the need for higher energy efficiency in the automotive and industrial markets.
With an expanding portfolio of highly differentiated intelligent power and sensing products long term supply agreements and end to end supply chain capabilities for the fastest growing product, we are well positioned to drive long term revenue earnings and free cash flow growth.
The hard work and disciplined execution of our worldwide teams are reflected in our financial transformation.
Our first quarter revenue increased 31% year over year gross margin improved 1420 basis points.
And operating income increased seven five times faster than revenue, while free cash flow was 21%.
No basis.
Additionally, revenue in our strategic end markets of automotive and industrial increased 42% year over year, and now account for 65% of revenue as compared to 60%.
A year ago.
We also continue to make progress in our fab lighter strategy rationalizing our manufacturing footprint by exiting subscale fabs accelerating our 300 millimeter ramp and improving operational efficiencies all of which will double our capacity per factory overtime.
Transitioning production to more efficient fabs will eliminate fixed costs and lower unit cost, while reducing the volatility on the P&L.
As previously announced we closed the sale of our six inch fab in Belgium, and expect to close the sale of our eight inch fab in Maine to diodes in the second quarter.
We're also on track to close the acquisition of the 300 millimeter fab in east Fishkill from Globalfoundries at year end as.
As these transitions take years to fully execute and realize we've been building bridge inventory to ensure consistent supply of product to our customers.
These structural changes along with our differentiated portfolio are driving momentum in our design wins, while LTE assays and the stickiness of our products are providing improved visibility into long term revenue and profitability.
Turning to the results for the first quarter as I know.
Q1 was another quarter of record results.
Total revenue was $1 95 billion, an increase of 31% over the first quarter of 2021 and 5% quarter over quarter.
This increase was driven by favorable mix of automotive and industrial which together grew by 8% quarter over quarter and 42% year over year Rev.
Revenue from both intelligent power and intelligent sensing that record levels intelligent power grew by 37% year over year to 47% of revenue and intelligent sensing grew by 35% year over year to 17% of revenue.
Turning to the business units revenue for the power solutions group or PSG with $986 7 million, an increase of 32% year over year.
Revenue for advanced solutions group, or ESG with $689 3 million, an increase of 30% year over year.
Revenue for the intelligent sensing group or ISG for the quarter was $269 million, an increase of 32% year over year.
GAAP and non-GAAP gross margin for the first quarter was 49, 4% our non-GAAP gross margin improved 420 basis points quarter over quarter, driven primarily by favorable mix and pricing ahead of rising input costs.
Over the last year, we have exited approximately $200 million of noncore revenue at an average margin of 21% and reallocated this capacity to strategic products with accretive gross margins.
The structural changes we have them implemented give us confidence in the sustainability of the margin structure raising the floor in all market conditions.
We expect to see modest headwinds to our gross margin with increases in raw material and other input costs as well as startup costs as we aggressively ramp our silicon carbide manufacturing.
All set by additional cost savings and manufacturing efficiencies as.
As such we expect to maintain gross margins within a narrow range of our Q1 margin for the remainder of the year.
We also achieved record quarterly GAAP and non-GAAP operating margin of 33, 3% and 33, 9%, respectively with our Q1 non-GAAP operating income growing quarter over quarter at four five times faster than that of revenue.
GAAP earnings per diluted share for the first quarter was $1 18, and non-GAAP EPS was $1 22 as compared to 35 cents in the first quarter of 2021 and $1 nine in Q4.
Now let me give you some additional numbers for your models.
GAAP operating expenses for the first quarter were $314 million as compared to $395 million in the first quarter of 2021.
non-GAAP operating expenses were $302 8 million as compared to $324 7 million in the quarter, a year ago and decreased $3 6 million sequentially.
The decrease was primarily due to delayed hiring as we continue to reallocate resources to our focused products.
We expect opex to trend towards our long term model over the next several quarters as we increase investments for long term growth.
Our factory utilization was 81% flat as compared to the fourth quarter, and we expect utilization to be approximately 80% in the second quarter.
As we guided in the past our non-GAAP tax rate will increase in 2022, as we have substantially utilized all of our NOL attributes for.
For the first quarter, our non-GAAP tax rate increased to 15, 6% from roughly 6% in 2021. This change accounted for 16 cents of EPS dilution from the fourth quarter.
Our GAAP diluted share count was $448 9 million shares non-GAAP diluted share count was 442 million shares.
Note that we have an updated reference table on the Investor Relations section of our website to assist you with calculating the diluted share count at various share prices.
Turning to the Q1 balance sheet cash and cash equivalents was $1 $6 billion.
We had $1 $97 billion.
Undrawn on our revolver.
Cash from operations was $470 million in free cash flow $305 billion.
Capital expenditures during the first quarter was $173 8 million, which equates to a capital intensity of 9%.
As indicated previously we are directing a significant portion of our capital expenditures towards enabling our 300 millimeter capability at east Fishkill fab and the expansion of Silicon carbide capacity.
This increase is in line with the higher capital intensity in the near term as mentioned at our analyst day.
Accounts receivable was $910 $7 million, resulting in DSO of $43 inventory increased $116 $5 million sequentially to one $5 billion and days of inventory increased by 15 days to 139.
This increase was driven primarily by growth in width, and raw material and additional build of inventory to support our fab transition and our L. T S. A commitment.
We expect to reduce days of inventory in the second half of the year.
Distribution inventory was slightly down at seven one weeks, we continue to maintain distribution inventory at historically low levels to hold more inventory on our balance sheet for our customers' needs.
Other than building inventory in the supply chain.
Total debt was $3 $2 billion and our net leverage remains under one.
Turning to guidance for the second quarter, the table detailing our GAAP and non-GAAP guidance is provided in the press release related to our first quarter results let.
Let me now provide you key elements of our non-GAAP guidance for the second quarter.
Just on current market trends bookings and backlog levels. We've done we believe demand will continue to outpace supply through much of 2023.
We anticipate that revenue for the second quarter will be in the range of $1 96, 5 billion 2.065 billion.
This guidance range includes the anticipated impact of the China locked down a couple percentage points of revenue growth.
We expect non-GAAP gross margins between 48, 5% and 55%. This includes share based compensation of $3 $2 million.
We expect non-GAAP operating expenses of 305 million to $320 million, including share based compensation of $23 $2 million.
We anticipate our non-GAAP , Oh, I E the 20% to $24 million.
For the remainder of 2022, we expect our non-GAAP tax rate to be in the range of 15, 5% to 16, 5% and non-GAAP diluted share count for the second quarter to be approximately 443 million shares.
This results in non-GAAP earnings per share to be in the range of $1 20 to $1 32.
We expect capital expenditures of $240 million to $270 million in the second quarter as we ramp our silicon carbide production and invest in 300 millimeter capabilities.
In summary, we believe <unk> differentiated portfolio focused on the sustainable ecosystem, coupled with the structural changes in our business will continue to drive profitable long term growth and value for our shareholders. Our worldwide teams continue to impress us with their unwavering commitment and dedication to our customers.
Despite ongoing challenges across the globe and I want to thank them for their outstanding results.
With that I'll turn the call back over to Carmen to open up the line for Q&A.
Thank you.
Binder to ask a question you will need to press star one on your telephone.
Two other questions Krista husky or the pound key.
Your first question comes from Ross Seymore with Deutsche Bank. Please go ahead.
Hi, guys. Thanks for letting me ask a question congrats on the strong results.
The first question is for you I know you went through that.
Not seeing any changes from the demand side of the equation, but our investors clearly are having a hard time, believing that that's going to persist even if you're not seeing it now so could you go into a little more color on any change in the demand behaviors by either end markets geographic geographies.
Just a little bit more of a cyclical comfort and detail on what youre seeing so investors can kind of gauge that versus their recessionary or cyclical downturn fears.
Yeah look I mean.
I'll comment on the automotive and industrial which is where are our highest exposure as we don't see any changes in the demand environment or even the outlook as far as demand versus supply like the outside at least through 2023.
We have the engagements that we've been talking about with a long term supply agreements that we have engagement through 'twenty, one and even in the first quarter of 'twenty two that extend beyond 'twenty three into some of them 'twenty four 'twenty five and right now we are in a path to extend most of these <unk>.
Long term supply agreements beyond the original timeframe that we've had of 24 our average so the fact that customers are still focusing on the supply base on a very highly credible demand and their willingness to sign up for long term supply agreement beyond 'twenty four 'twenty five sometimes gives us that.
Visibility and comfort of the sustainability of the demand and just remember our biggest exposure and it keeps increasing as you mentioned in the analyst day on the auto and industrial are driven by the the Mega trends that I talk about you know evs are going to happen.
Whether they are you know they get to 50% of total demand in 28 or 26 or 27 is irrelevant, it's still fundamentally growing as a percent of total Saar. That's the content that's driving our growth and that's the exposure, we have where customers are highly confident of their outlook and willing to sign up for it.
Yeah.
Great. Thanks for that color Hassan I guess just for my follow up one for Fad or are you Hassan if you want to pivot to the gross margin side of things. Obviously, you guys have done a great job surprised to the upside pretty much every quarter. Since you took over I wanted to get into two parts of that the flatness going forward for the rest of the year that if you could walk through the puts and.
On that.
And then the confidence in with keeping the higher floor. A four handle has that changed has it what used to be 40% is now 45 per cent any sort of color on the gross margin sustainability there.
Yeah, Ross it's bad.
Our prepared remarks.
We're really confident with the floor, especially where we are today with the the margin today.
We believe the floor is definitely with a four handle.
If I, if I kind of think about the the impact to gross margin.
We saw favorable mix this quarter we saw.
Favorable pricing ahead of the input cost. So we saw input costs coming down as we've always said, we're going to pass on those cost increases to our customer.
So as you look forward, we've got a number of factors coming in play right. So we've got favorability in the manufacturing side as we continue our south lighter strategy.
That's offset by increases in the input cost as well as in the second half of the year. We've got the ramping of Silicon carbide, which is a headwind to margins because we don't exclude those startup costs.
non-GAAP numbers and so you've got a headwind associated with that in the second half and that's why we believe that the margins can sustain in that.
That Q1 range for the remainder of the year longer term, we still remain very optimistic.
In terms of where we're going but.
We've got a we've got a lot to do between here and the end of the year.
Thank you.
Thank you. Your next question comes from Chris <unk> with Citi. Please go ahead.
Chris Barney Okay.
So right now.
Hey, guys I Hope this is me by the way I hope it doesn't take some crisp Arnie asked a question.
One more question on the on the gross margin can you talk about.
How much of the upside in Q1 was mix versus pricing and your pricing expectations for the rest of 'twenty two.
Well the.
The mix versus pricing in Q1.
First order pricing was first followed by favorable mix and that's that's what gave us the upside to our guidance in Q1.
As we go forward, we will continue to pass on incremental cost increases that we get in our models to either through input cost or from our external foundries.
I think we continue to close the price to value discrepancy.
On those products.
And then we also plan on exiting the $300 million of Encore business later in the second half of the year and as we've always said, we're basically pricing ourselves out of that market and when supply comes online we will exit that business.
Got it and for my follow up.
You said no change in lead times, So would you say that the I guess the overall shortage situation for AWN is about the same as it was in the last couple of quarters and do you anticipate any improvement.
And the shortage slash the supply situation before the end of the year.
Yeah. This is a sin yeah. So I would say there is no change as far as the demand versus supply.
To date, we don't see that changing.
Changing materially over the next few quarters call. It for the remainder of 'twenty. Two we do have some manufacturing efficiencies and some supply coming online from investments we've done in 'twenty one.
But not to the level to meet our demand. So we will still be a supply constrained to a 22 and even with the outlook we have for a 23.
Okay, great. Thanks, guys.
Thank you. Your next question comes from Vivek Arya with Bank of America. Please go ahead.
Thank you for taking my question.
I found that Todd you mentioned that you have excluded some impact of China Lockdowns in your Q2 outlook I was hoping you could help us quantify how much is that and is this something you can recovered later in the year or is this something that you can deliver to customers outside of the other I believe you said Manila in sync.
Poor.
Distribution centers, just how are you quantifying the impact of Lockdowns or is this a headwind even for the second half of the year.
Yeah look I mean, obviously, we see let me give you some some of the numbers. So what we have already included in our guide for Q2 is a couple of percentage point of topline. So that's kind of the impact. We've included Thats based on what we see today not knowing when a potential lift of the restrictions.
To be so that's why we put in.
We don't see that demand going away. It's still there. That's why we are trying to funnel as much of it as we can through our other distribution.
But we do see that that challenge in the short term so I don't see that as a the demand environment.
Outlook impact impacting outlook, but it is a short term now you can call short term, but I don't have that visibility of when the Lockdown does happen. You know we are engaged with all customers as far as the men.
It's still there all it does is it puts us a little bit more behind on meeting that demand from a supply perspective, but I do expect that to flush out as soon as the lockdowns are done, but we thought it would be prudent to just put that in as far as a guide because the risk is out there.
Got it and then longer term silicon carbide could you maybe give us a sense of what percentage of fuel cell does silicon carbide represent today and then did you see it going and how do you differentiate between some of your competitors who are focused on the material side such as Volkswagen.
Or to say it and then others, who are coming at it from a device and competency perspective, such as Infineon and SD Wan owns a main differentiator is in the silicon carbide market.
Yeah sure.
So for them for the first part of the question I'm not breaking up the breaking out of the silicon carbide I'm, just given the ramp rates and those ramp rates just to remind everybody were expecting to more than double our revenue this year and puts us on track for the $1 billion run rate 23.
Those are kind of the high growth in all of this again to put in perspective are all committed in a committed revenue and long term supply agreements. So right now we're building capacity to service that demand that we already have as committed revenue from across a wide variety of geographies and customers.
From the differentiation you mentioned to kind of the two ways of coming at it and we're on semi sits is actually the sweet spot in the middle where we are able to support our customers with our substrate the vertical integration and support our customers with the know how that we've built over.
Multiple decades of device and more importantly packaging so the ability to have you know.
Substrate from a supply assurance the knowhow for device design, all the way to packaging in order to get the best solution to fit the customer need is why we win and why our customers have been awarding us a lot of that business that we've been talking about over the last few quarters and more to come but our.
<unk> right now is ramping.
Ramping up our supply chain ramping up our silicon carbide substrate through the <unk> as I mentioned, we have a heavy ramp coming.
But our focus is on our L. P. S. A commitment to our customers and we continue to win this quarter and some of our funnel as it keeps converting to committed revenue.
Thank you.
Thank you. Your next question comes from Toshi Hari with Goldman Sachs. Please go ahead.
Hi, good morning. Thanks, so much for taking the question I had two as well first on Silicon Carbide Hassan I was hoping you could give us an update on the design win funnel. Obviously you reiterated your view on 'twenty to an exit run rate for 'twenty, three but last quarter. I think you gave a $2 6 billion.
Dollar number through 2024, I was hoping to get an update on that and if you can speak to the mix between automotive and energy infrastructure, there that would be helpful.
Yeah sure I mean look I will reiterate the committed revenue number of $2 6 billion. Obviously, we have a lot of design offered debt I'll be hoping to talk about over the next.
Few quarters through 'twenty two as.
As we close these out.
But from a.
At a high level the highest percent of that revenue is coming from traction just because of the Tam you know evs as the biggest Tam for silicon carbide. So therefore, our biggest are about I would say, 80% or so 2 billion of that is in our automotive traction the rest of the two six that I talk about.
It is in non automotive traction so think about it as the industrial side of alternative energy or infrastructure.
Infrastructure that I talk about that has been ramping I talked about being 50% growth in 2022 from 2021 last quarter. We closed the first quarter at 65% growth. So we're growing that business nicely outside of just the automotive and that's very broad.
Rod across geographies and very broad across our customers and more importantly, we are engaged with the top 10 as I mentioned in my prepared remarks.
Great. Thank you and then I've got a quick follow up for that as well on the gross margin side. I mean, you talked about silicon carbide and the ramp there being a headwind later this year and I guess potentially into 2023.
I was hoping you could quantify that for us and when you'd expect that to reverse and to be more of a tailwind for your business is it late 'twenty three.
You're run rating at about $1 billion is it beyond that any comment there would be helpful and the positive benefits from Belgium, Maine, and I guess East Fishkill I know this is probably takes a couple of years, but if you can if you can speak to that as well that'd be super helpful. Thank you.
Yeah, so the silicon carbide will be a headwind for us starting the second half of this year, we'll go through really a headwind probably for the first half of next year as well and then start to be accretive.
Product margins are accretive obviously is the startup cost as we as we ramp up production to support those L. TSA.
You know in terms of the Belgium fab.
Over time, we will get.
Let me talk about the main thought versus about 30% to $35 million of fixed cost that come out over time.
We'll be buying products from the acquirer over time, so as we exit that's when we started to see the benefit.
The lower scale fab, so it's less than that it's roughly about $20 million of fixed cost that disappear overtime as well.
Thank you.
Your next question comes from Williams gain with a tourist securities. Please go ahead.
Hi.
Thank you for taking my question I Wonder if you can remind us what the.
Revenue level.
Products that you're exiting it.
As expected to do over the next couple of quarters and are you done with those product exits by the end of this year. Thank you.
Yeah, So we exited.
About $32 million in Q1, we don't see anything meaningful in Q2 in the second half of this year. We think there is another roughly $300 million that we would exit and you know you can think about that.
Margin has been higher than what we've done in the past you know what we said is so far we've exited in total $200 million at 21% gross margin. This next 300, just because of the pricing environment is higher than that but still dilutive to overall margins.
We are as we set at our analyst day back in August of last year, We said it would be 10% to 15% so in total.
Got to get somewhere around $800 million to $900 million of of of losses.
We will still as we as we detailed at our analyst day, there's still more to come in 2023, and obviously, we'd move that capacity into the higher margin products.
Allows us to free up that capacity, rather than put more money and more capital into the manufacturing and move it into the high margin products. So you know a favorable mix.
Great and if I could follow up with any change in order patterns or point of sale through the channel.
I think you said demand is still very stable and strong.
In the direct business I Wonder if that if you were including a channel in that or if there's any change there. Thank you.
Yeah. This is a sign we don't see that we I include demand across whether it's direct or through distribution just to.
To make the point, even our distribution customers.
Customers, we have the right contact with them. So we have a quick touch point on the demand we see that across the board at this point as a sad mentioned, we're holding inventory and maintaining the distribution inventory at a historically low level in order to maintain that visibility and be able to service the demand that we need for all of our customer.
So when we made comments about demand we include direct and distribution demand.
And all of them are within the commentary that we set highly constrained and supply is not yet meeting the demand through 'twenty three.
And congrats on the great results.
Thank you.
Thanks, and the next question comes from harsh Kumar with Piper Sandler Your question. Please.
Yeah, Hey, guys first of all congratulations on implementing an amazing turnaround. What you guys have done has just been amazing so far.
Hassan intact.
Okay.
The business as we go into the June quarter and look at the guidance do you sort of expect something similar to like what happened in <unk>, where industrial and automotive grow to the same degree on a sequential basis.
Or is there something else that we should think about maybe you could provide some color on how we think of revenue breakdown.
So tied to a first order and the answer is yes.
Our guide is driven by auto and industrial more led by by automotive in the second quarter as we see more of the strength and really the ramps for some of our customers under the <unk> that we've talked about.
So it will be about the same growth, but led by automotive.
Great and then.
My question was on gross margin.
This incredible rise as shown in the March quarter, I think you mentioned earlier in response to <unk> question that there was an element of price increase here.
Are you specifically raising prices in the channel or is this just getting out of sort of cheaper style for legacy stuff and sort of implementing a mix change. So maybe you could clarify if there's an absolute dollar increase is.
Asps that you're implementing.
Look I, it's all of the above that you mentioned Ah. So first off you know it is all led by the price to value discrepancies that I keep talking about where we are recalibrating, our complete demand across the value of our products. When we do that and as we mix shift more to auto and industrial.
All of which drive higher ASP and higher margin that gives us that sustainable.
Margin expansion that we've been we've been seeing so all of these are both in.
Increase in AR and the book value of our products and a mix shift more to these increases that's one two we do have net price increases that we've talked about that $200 million, though we've exited so far or the $32 million of exited with 22% margin this quarter.
That is in a favorable pricing environment. So there is pricing increases included in that but.
But that's not sustainable you know as we talked about we lost that revenue, we expect another $300 million in <unk>.
<unk> 22 at dilutive margin so when we.
When we exited that business our margins will have a more of an expansion because of it but that was a net price increase because we're pricing ourselves out of that market. So that's the two buckets you can take a look at it one is the sustainable bucket that we see forward looking and longer term in the shorter term bucket that we want.
Net increase from where we were historically still dilutive, but not sustainable and that will be exited throughout this year and a little bit next year.
Thanks, guys.
Your next question comes from Matt Ramsey with Cowen. Please go ahead.
Thank you very much good morning.
Finally, I wanted to ask another question about silicon carbide and I guess the.
The question that I get from investors most is not the demand side, it's not the visibility of design wins that you have the confidence that you can scale capacity with with Chi Tak to the levels that you're forecasting and maybe you could give us a little bit of insight of how the operations are going.
And your confidence in being able to scale that revenue so quickly with internal supply at good margins. Thanks.
Sure I guess the biggest vote of confidence that I can give is we opened up another building because the first building is already a full and outputting exactly what we expected it to and I mentioned that in my prepared remarks, as far as yield and a capacity or you know how many millimeters of substrate.
Our factory output. So we're on track with all of those metrics.
And right now it's no longer about the engineering side under development its more about the manufacturing expansion. We secured another site. We are on track to quadrupling our output exiting 'twenty two as far as again, a number of furnaces that translate into millimeter height of substrates.
Hi confidence I guess in summary, very high confidence our Capex is going there we're already generating revenue based on that material. So all in all I'm very bullish about the prospects and we're pushing forward supporting in order to support our L. P. S. A.
So that would be what I would say.
Thanks, that's really helpful.
As my follow up question Theres been a lot of of backup.
Back and forth on gross margin on this call.
And I think it's remarkable what you guys have done my own view was that given the barriers of entry empower Siamese that the margin profile of of yourselves and your competitors should be sort of higher than it's been and.
And we're seeing that with your results and with some of your competitors' results as well I guess the question is.
How have you seen any competitive response from from the rest of the players in this space to increase pricing that you've put out there increased margins for the group have are everyone's sort of acting rationally do you think this is sort of sustainable for for yourself and peer companies or do you see any kind of changes in the pricing environment from competitors that might make.
Some of this temporary thanks.
Sure. That's a that's a very good question and obviously I can't comment on what my competitors will do in an environment today or later, especially on pricing and so on and the only thing I can control is what our view of the market is in our view of the pricing environment is so I'll focus my answer on that we view this as sustainable because it's drew.
By value, but I will.
Mind, everybody the portion that we acknowledge is not sustainable as on the noncore that we plan on exiting and we price ourselves out of the market.
So what does that mean, you know in the future where demand and supply starts to come in balance.
We're not going to chase that down you know our competitors may end up hashing it out amongst themselves.
But you are not going to see on semi engaging in a N a.
Pricing down to keep market share that's not what our company is about we're going to focus on the value our products today that we're focusing on our strategic and our growth are based on value. We provide to customers that pricing is stable I don't see it going go into anywhere.
Anywhere else.
And for the rest of the market you know, let them hashed it out, but we're not going to chase it down.
Thanks, very much guys I appreciate it.
Yeah.
Thank you. Your next question comes from Harlan sur with Jpmorgan. Please go ahead.
Good morning, and congratulations on the strong results and execution.
On the noncore low margin businesses as you've mentioned you're exiting another 300 million in the second half previously you thought that this exit with temporary the second half some full year revenue growth profile, but drive strong margins.
The team actually continues to unlock better than expected manufacturing efficiencies and it does seem like you guys are getting more external suppliers as well. So I guess, how should we think about the profile of a second half revenues versus the first half.
Well look probably that's not what.
What we're seeing right now is we're seeing strength out there right now.
Men continues to outstrip supply.
As we've noted we are getting more supply from our external foundry.
Foundry partners, we're extracting more out of our own manufacturing footprint.
That will give us some upside.
Now again keep in mind, we've got the headwind of the 300 million that will roll off so so we don't see.
Significant growth that we see we see that the second half will actually outperformed the first half if you look Q3 before versus one in Q2.
Perfect I appreciate the insights there.
And then as my follow up you know despite the aggressive exit of the noncore low margin businesses.
Other segments still adult strong 15% year over year growth in the quarter.
And then you do actually have a fast growing high margin end market focus, which you touched upon a little bit but this is a cloud data center and fiber infrastructure markets, where do you guys have a pretty strong portfolio medium voltage MOSFET power management analog products.
Talked about the strong design win pipeline, but from a revenue perspective, I know you guys have targeted this market to grow at a bother need 11% CAGR going forward, but just given.
Data center compute spending trends strong five gene non China Buildout activity can you guys just give us a rough sense on how fast this.
Part of the business is currently growing on a year over year basis.
Yeah look I I didn't break it out specifically as far as growth, but are you know the the design win that is fueling that growth was about 33% year over year. This is new designs and.
Replacing incumbents further supporting our 11% so the 11% we talked about you're absolutely right. We do have growth in that other segment and that's driven by the cloud which is key for us from a growth and margin expansion our business.
Our design wins or revenue today supports a comfortable 11% growth over the next five years.
Great. Thanks, guys.
Thank you. Your next question comes from Joe Moore with Morgan Stanley . Your question. Please.
Great. Thank you going back to the China potential disruption that you talked about could you talk about how much of that is your facilities in China.
<unk> impact from your customers' manufacturing do you see impact from either of those and then there was some press.
<unk> commentary that there was an image sensor specific.
<unk> coming out of China.
Can you just talk if that if there's any disproportionate impact there. Thank you.
Yeah look so I'd say its primarily the supply disruption overall, you know think about logistics thinking about getting materials in and out of factories and so on so we're able to mitigate some of that by rerouting.
But the the lack of mobility is what it is hard to judge a I don't know what commentary you're referring to on the image sensor I can't comment on that because that did not come from.
From on semi source I don't see any specific product impacted versus just like I said, the logistics that everybody's been commenting about that's really their president on the ground.
And like we talked about we do see that we put it into our our guide already so depending on on how that loosens up.
Well, we'll talk about it in the second quarter.
Great. Thank you very much.
Your next question comes from Rajiv Gill with Needham and company. Please go ahead.
Yes, Thank you and congratulations on the strong results across the board just just that goes back to pricing. If I can we talked about some of the impact of a favorable pricing on the margins, but with respect to revenue the auto industrial segment grew 42% year over year combined.
Is there a way to kind of break that out between unit unit growth versus ASP growth and it really speaks to the larger point about the sustainability of the pricing in the core business.
It's part of your LTA LTA agreement.
Do you have price increases.
So I just wanted to talk a little bit about kind of price versus units.
Look a lot of the growth in our strategic core is driven by a buy units, but we talk about the content.
Because a lot of the price to value.
The discrepancy that we talked about that wasn't implemented primarily in 'twenty. One so a lot of the growth moving forward as a lot of it is content.
But overall units will be down because a lot of the exits that we've done is low ESP low margin high volume.
So we focus our our unit comps to where our strategic focus has been and that's been increasing and I've mentioned that in my prepared remark driven a lot by the content.
Not just per car.
From apples to apples carb to car, where there's more content, whether it's imaging or power, but also as we shift more into E. V that have much more content. So from that perspective is driven by a buy units. They S. B as in the baseline to a first order and as we ship more of the auto and industrial were going to benefit from.
S P reset that we've done throughout 'twenty one.
Which called that in my view sustainable as we move forward.
Got it that's really helpful. And then just for my follow up with that.
Talking about getting capacity from your external foundries as well as kind of a better capacity from your internal factories.
And that's driving some some upside in the second half, but you also kind of mentioned that the demand is going to exceed supply if I heard you correctly through much of 2023.
So just wanted to get a get a sense in terms of the demand supply conditions as you kind of look out to 2023.
We continue to be in a very tight supply environment.
Is there a way to kind of assess the magnitude of it isn't going to be less constrained next year, but still constrained any sense there in terms of demand supply imbalance.
Yeah, Yeah. That's a good so we are getting obviously some increases from our foundry and some some reducing bottlenecks internally in our manufacturing, but like I said not enough to catch up to two the demand. So if I answered your question directly we do see increase in supply.
Through 'twenty, two and even 'twenty three but based on where the demand is it's not going to get into into balance.
And that's where I keep talking about the supply constraint because the.
Supply and demand side, both of them increase demand has increased at a faster rate, which keeps us a.
A little bit behind because it takes you know 18 to 24 months to add capacity. These days with all of the lead times and everything the man has been increasing so net net we're not catching up.
But we haven't been making investments in our capex, but very specifically on technologies. For example, we're not adding capex just across the board to increase our capacity for noncore products, although that demand is still high because we plan on exiting we're focusing our capex.
<unk> on E S. K on Silicon carbide on some of the mixed signal analog that all drive growth and accretive margins.
But net net we don't see us catching up.
Yeah, that's super helpful.
I appreciate it.
Yep.
And your next question comes from Christopher Roland with Susquehanna. Please go ahead.
Hey, guys.
Congrats on the results and especially that gross margin line I'm just kind of following up on that last question. Then so are we to assume that east Fishkill. You know you guys are getting that in 2023.
The full facility should we assume that that fab is then filled and then what is your external but as you look at internal versus external what's what's the plan moving forward once.
East Fishkill is full things.
Yeah, Hey, Chris it's that here. So we take ownership in January of 2023, there is a plan for Globalfoundries to exit just as we've been ramping up over the last couple of years that will ramp down over three years as we continue to move production into that facility.
So.
We've said that our our units are actually doubling this year in 2020.
It will continue to accelerate that beyond 'twenty three but there is a three year period, where were they wind down we wind up and our assumption right. Now is yeah. We have a full fab at that time no. We said this in the past you know at that time in 'twenty three for a couple of years, we're going to do in foundry business.
How would your business for Globalfoundries and that's at a low margin, which is a little bit of a headwind as well that we'll be able to offset that with the.
The cost improvements that we get across the portfolio.
And long term I'll confirm our what that will do for us long term.
As we exited those other fabs that we've announced already and ramp east Fishkill up fixed cost will be better overall like the numbers that <unk> talked about for Belgium, and Oh, North America fab, but net net capacity will it be it's about a.
213 X when we have the 300 millimeter on and we exited the low and the low scale fabs. So nothing that we see our increase from capacity reduced our fixed costs.
When she gets us the growth that we will be looking for in a much better fab lighter footprint.
Great and Ken can considering the 300.
The fact that it's kind of spoken for what would have to happen to consider a second 300 fab.
Or are there is there the ability to increase capacity at east Fishkill somehow.
Look there is of course as a global foundry exits over the last three years, we have a lot of headroom to go for 300 millimeter.
Capacity within that facility and over the next five years as we.
Look at the outlook and where we can do that will will address our need for additional manufacturing.
Thank you guys.
Thank you and this concludes our Q&A session I will turn the call back to the President and CEO Hassan Al Cory for final remarks.
Thank you all for joining us today.
Thank our worldwide team for their hard work and accelerating our transformation and driving record results once again with leadership and intelligent power and sensing solutions and exposure to fast growing megatrends, such as vehicle electrification Adas energy infrastructure in factory automation, and we are well positioned to deliver sustained and profitable long term revenue growth.
And margin expansion. Thank you.
And we can conclude today's conference. Thank you for participating you may now disconnect.
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