Q3 2022 ON Semiconductor Corp Earnings Call
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good day and thank you for standing by welcome to the answer My third quarter 2022 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.
Can I ask a question during the session you'll need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Parag Agarwal, Vice President of Investor Relations and corporate development. Please go ahead.
Yeah.
Thank you Alicia.
Good morning, and thank you for joining us.
Third quarter.
Got it.
On this call I'm joined today by Adam Corey.
President and CEO I'd characterize our CFO .
This call is being webcast on the Investor Relations section.
Right.
Www <unk>.
On the call.
A replay of this webcast along with our country.
Honestly.
On our website approximately one hour following this conference call.
The recorded webcast will be available for them.
Proxy filing.
Following this conference call.
Additional information is posted on the Investor Relations section.
Yeah.
Our earnings release and this presentation.
The non-GAAP financial measures.
Confirmation of these non-GAAP financial measures with the most directly comparable GAAP measures under GAAP.
Honestly I guess supposed to separately.
I'm sorry.
Transportation section.
During the course of this conference call, we'll make projections or other forward looking statements regarding future events or the future financial performance.
We wish to caution that such statements are.
Subject to risk and uncertainty.
That could cause actual events.
For different mentally from projections.
Important factors that can affect our business, including factors that could cause actual results to differ from our forward. Looking statements are described in the most recent Form 10-K and Form 10-Q, and our other filings with the Securities and Exchange Commission and in our earnings.
As for the current quarter.
Our estimates or other forward looking statements.
And the company assumes no obligation to update forward looking statements to reflect actual results changed assumptions or other that you weren't talking America, except as required by law.
Now, let me turn it over to Stephane.
Thank you parag and thank you everyone for joining the call.
We have closed our sixth consecutive quarter of record financial results with revenue of $2 2 billion and non-GAAP EPS of $1.
<unk> 45 in the third quarter.
On semi.
Different companies.
Our strategy has proven successful and our employees are the one to thank for their commitment and dedication to excellence through these changes congrats.
Congratulations to our worldwide teams I am proud of your steadfast and consistent execution and I'm confident we will continue to deliver on our long term growth plan.
Now, let me address the current demand environment.
In the third quarter, we saw continued strong demand in the automotive and industrial end market with revenue, increasing sequentially, 11% and 5% respectively.
As we noted last quarter, we saw softening in our non strategic end markets of consumer and computing with both markets declining mid single digits sequentially.
We expect the weakness in these markets to persist and extend to some legacy areas of industrial while demand in design activity remain robust for EV, Adas and energy infrastructure.
Today more than 30% of our revenues generated from the sales of new products at accretive margins in the third quarter new product revenue.
It was a record for the company.
Over the last 18 months, we have taken a conservative approach to improve predictability and reduce the volatility of our business.
We have transformed the company into one with a sustainable long term growth outlook and attractive financial profile and a resilient operating model.
And we made proactive structural changes to prepare us for eventual headwinds.
We rationalized our product portfolio, and exited Q1 and $77 million of business to eliminate our exposure to price sensitive non differentiated products at diluted gross margins.
We address the price to value discrepancies and instill the discipline in the company to capture the right value of our products.
We executed our fab lighter strategy with planned exits of four fabs to reduce our fixed costs.
We secured long term supply agreements that provide committed and transparent supply assurance against long term customer demand.
We decreased wafer starts by 20% from the peak in Q1 to limit the inventory build with distribution now at an all time low under seven weeks.
We drove efficiencies and streamlined operations to control opex below our 17% target.
These changes set on semi apart from the legacy on semiconductor and we are now well equipped to navigate through the coming quarters.
And while we are planning for short term uncertainty long term demand for our highly differentiated intelligent power and sensing solutions continue to grow with Q3 design wins, increasing 19% quarter over quarter.
Our intelligent power revenue grew by 35% year over year, and 6% quarter over quarter, driven by the accelerating momentum in electric vehicles and alternative energy and these markets customers are increasingly relying on us to enable their long term product roadmaps with market leading efficiency.
Of our solution and our end to end supply chain capabilities.
Our progress towards Silicon carbide leadership is accelerating as compared to our exit rate in Q4 of 'twenty, one we tripled our silicon carbide revenue in the third quarter and we continue to install capacity across the entire supply chain we.
We just passed the one year mark since acquiring <unk> and we remain on track to expand our global capacity by five times year over year exiting 2022.
We have also increased silicon carbide wafer fab starts by three times this year to keep up with our bull output a number which we plan to double again next year.
We remain on track to Triple our Sip revenue in 2022, and deliver $1 billion of revenue in 'twenty three based on committed revenue from <unk>.
To limit our long term capex investments most of the silicon carbide equipment, we are installing around the world as 200 millimeter capable and we are on track for 200 millimeter wafer qualification in 2024 and related revenue ramp and 25.
Our energy infrastructure revenue is accelerating with a year over year increase of 70% in the third quarter for.
For 'twenty, two we expect our energy infrastructure revenue to grow by 60% exceeding our target of 50% year over year growth.
The volatility in global energy markets is driving an accelerated transition to alternative energy and with a broad portfolio of silicon carbide and silicon power modules, we have emerged as the leader in this market.
The top 10 solar inverter providers in the world collectively have a market share of 80% and we have now signed <unk> with eight of them.
As countries around the world to strive for energy security and lower greenhouse gas emissions associated with fossil fuels. We can expect to see strong long term growth in our alternative energy business.
Traction for our Silicon carbide solutions is complemented by continued growth in our silicon power business.
A key differentiating advantage for on semi is our ability to offer silicon and silicon carbide solutions across a wide range of power and voltage requirements.
Many <unk> customers use our silicon carbide solution for rear axle any silicon solution for the front axle.
Similarly, solar inverter customers choose our silicon carbide or silicon solutions based on power and efficiency requirements.
Customers, who use a combination of power solutions value our ability to offer a complete range of products, which enables us to gain market share across both technologies.
In the third quarter alone, our IGT and MOSFET businesses grew 37% year over year, driven by high growth Megatrends and automotive and industrial.
Our intelligent sensing revenue increased 43% year over year, and 11% quarter over quarter.
Growth was driven by additional semiconductor content required in automotive and industrial applications as well as an increase in units shipped.
The number of sensors per car will continue to grow and the level of sophistication delivered by the latest generation system is also driving asps higher.
Safety rating requirements for new vehicles continue to increase such as a broader field of view and higher resolution sensors accelerating the shift from one megapixel image sensors to eight megapixel sensors for Adas applications.
On semi was the first to market with eight megapixel automotive grade sensors that provide both high detection range and a wide field of view.
Delivering consistent performance across all temperature and lighting condition.
Based on this industry, leading dynamic range dark noise performance and led flicker mitigation feature of our sensor we are winning new designs and in the third quarter, we displaced large incumbent at local <unk>.
<unk> automotive Oems.
We expanded the internal backend capacity to ensure we can support the growth of our business and enhance our margins demand has been outpacing our ability to supply.
But our early investments in capacity expansion allowed us to deliver 38% more automotive sensors in Q3 than in the quarter a year ago.
In addition to our technology advantage, we are the only image sensor supplier with internal and external capabilities across every manufacturing state of the supply chain for automotive and industrial sensors.
We are a much stronger company today because of our commitment to our transformation and the structural changes we have implemented over the last 18 months.
We have executed our strategy and one of the most challenging environments, we have ever seen not only for our industry, but for the world and we've set ourselves up for the leadership position in our target markets.
Driven by exposure to secular megatrends of vehicle electrification Adas energy infrastructure in factory automation, we are well positioned to continue to outgrow the semiconductor market.
Now I will turn the call over to Thad to provide additional detail on our financials and guidance.
Thanks Hassan.
Our third quarter results clearly demonstrate the success of our transformation strategy with record revenue operating income and free cash flow.
The steps we have taken to strengthen our operating model will not only enable us to get through short term market volatility, but also propel us to scale in the long term.
Defining our primary areas of focus has enabled us to double down unintelligent power and sensing technology and lead where we bring differentiation to the automotive and industrial market.
Our customers now choose <unk> as a strategic partner to enable their success and emerging and disruptive areas such as electric vehicle data energy infrastructure and factory automation.
Customers are entering new agreements with us while others are expanding the scope and duration of their existing TSA.
Secure even longer supply.
Revenue committed through our <unk> increased five $3 billion in the third quarter and now totals $14 1 billion with Lts revenue over multiple years and often include hundreds of parts.
As Todd mentioned, we also made additional structural changes to improve the sustainability of margins by rationalizing our product portfolio and eliminated our exposure to price sensitive non differentiated products.
So far we have walked away from $277 million of revenue and average gross margin of 25%.
$39 million of this revenue was in the third quarter at gross margin of 35%.
We continue to execute our fabs lighter strategy through the rationalization of our manufacturing footprint.
Following the sale of our Belgium, and South Portland, Fabs and the first half of the year, we closed the sale of our eight inch fab in Pocatello, Idaho in October when we also entered into a definitive agreement to sell our six inch fab in Nevada to Japan.
We expect in the <unk> transaction to close in the fourth quarter.
Exiting these port Fabs will reduce our annual fixed cost by $160 million.
Hitting our target of $125 million to $150 million.
The full benefit of these divestitures will be realized over the next several years as we transition production to other fabs that are network further supporting our long term gross margin expansion plans.
Turning to results for the third quarter as I mentioned Q3 was another quarter of record results.
Total revenue was $2 2 billion, an increase of 26% over the third quarter of 2021 and 5% quarter over quarter.
We reported record revenue for our strategic end markets of automotive and industrial which together accounted for 68% of revenue as compared to 61% in the quarter a year ago.
Persisted in our non strategic end markets of computing and consumer offset by sequential growth in automotive and industrial of 11% and 5% respectively.
Revenue from both intelligent power and intelligence.
Also at record levels.
Intelligent power grew 35% year over year and intelligence sensing grew by 43% year over year.
Additionally, all three business units reported record revenue in the third quarter.
Revenue for the power solutions group or PSG was one $1 2 billion, an increase of 25% year over year.
Revenue for the advanced solutions group or ESG for $734 million, an increase of <unk>, 20% year over year and revenue for the intelligent sensing group or ISG was $342 million, an increase of 45% year over year.
Gross margin GAAP gross margin for the third quarter was 48, 3% and non-GAAP gross margin was 49, 3% or.
Our non-GAAP gross margin declined as expected by 40 basis points quarter over quarter, primarily due to an accelerating ramp with silicon carbide and lower factory factory utilization at 75% as we proactively slowed wafer starts by 20% from the beginning of the year.
As indicated in previous conference calls, we expect silicon carbide startup costs to be 100 to 200 basis points dilutive to gross margins during the initial revenue ramp.
GAAP operating margin for the quarter was 19, 4% and non-GAAP operating margin was a record of 35, 4% an increase of 90 basis points quarter over quarter, and approximately 1100 basis points year over year.
GAAP earnings per diluted share for the third quarter was <unk> 70, <unk> flat as compared to the quarter a year ago.
non-GAAP earnings per diluted share was at a record high of $1 45, as compared to 87 in the third quarter of 2021.
Now let me give you some additional numbers for your models.
GAAP operating expenses for the third quarter were $634 million as compared to $322 million in the third quarter of 2021.
non-GAAP operating expenses were $304 million as.
Compared to $296 million in the quarter a year ago.
non-GAAP operating expenses were below our guidance due to a push out of certain programs into the fourth quarter delayed hirings and proactive management of discretionary spending across the company.
For the third quarter, our non-GAAP tax rate was 15, 8% and we expect to remain in the 15 five to 16, 5% range.
Our GAAP diluted share count was 449 million shares and our non-GAAP diluted share count was 441 million shares.
We repurchased one 2 million shares for $81 million in the third quarter.
Please note that we have an updated reference table in the Investor Relations section of our website to assist you with calculating our diluted share count and various share prices.
Turning to the balance sheet cash and cash equivalents was 245 billion and we had $1 5 billion undrawn on our revolver.
Cash from operations was $1 billion and free cash flow was $731 million at a record level of 21% of revenue on an LTM basis.
Capital expenditures during the third quarter were $271 million.
Which equate to a capital intensity of 12, 4% as we indicated previously we are directing a significant portion of our capital expenditures for our silicon carbide and enabling our 300 millimeter capability.
East Fishkill fab.
Accounts receivable of $857 million declined by $281 million in DSO of 36 days declined by 14 days quarter over quarter.
Days of inventory declined by seven days to 129 days from 136 in Q2.
This includes approximately 23 days rich inventory to support that transition.
In total carbide ramp.
Distribution weeks of inventory declined to $6 nine weeks down from 7.0 in Q2, as we proactively manage inventory at historically low levels for a distribution partners.
And total debt was $3 2 billion.
Turning to the guidance for the fourth quarter and.
A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our third quarter results let.
Let me now provide you elements of our non-GAAP guidance for the fourth quarter.
We continue to see strong demand from our automotive end market driven by electrification and Adas.
We are beginning to see softening in certain industrial application and we expect increased weakness in our non strategic end market. We plan to exit as we continue our portfolio rationalization.
Given the macro uncertainty we are taking a cautious stance in our guidance for the fourth quarter.
As such we anticipate revenue will be in the range of $2.01 billion to $2 $1 4 billion.
We expect non-GAAP gross margin to be between 47% and 49% due to lower factory utilization and the dilutive impact of ramping silicon carbide.
This also includes share based compensation of $3 million.
Due to the delayed hiring and project spending in the third quarter, we expect non-GAAP operating expenses to increase to $305 million to $320 million, including share based compensation $21 million.
We anticipate our non-GAAP , Hawaii will be $22 million to $26 million.
We expect our non-GAAP tax rate to be in the range of 15, 5% to 16, 5% and our non-GAAP diluted share count for the fourth quarter is expected to be approximately 441 million shares.
This results in non-GAAP earnings per share to be in the range of $1 18 to $1 34.
We expect capital expenditures of $300 million to $330 million in the fourth quarter.
As we continue to ramp our silicon carbide production and invest in 300 millimeter capability to support our long term growth, we expect our capital intensity to be in the mid to high teen percentage range for the next several quarters.
In summary, our transformation strategy is made on semi are more resilient and sustainable company.
We have recently been named to Investor's business Daily 100, Best ESG companies for 2022, as we drive to net zero by 2040.
We are well positioned to invest in our business and deliver long term financial performance for our shareholders, while extending our competitive lead.
With that I'd like to turn the call over to Liz to open up for Q&A.
As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for letting me ask a question I guess the first one is the signs on the revenue side and the demand side of the equation you mentioned uncertainties and then you talked about auto staying strong but weakness in other places can you just talk a little bit about the linearity of demand and maybe dive a little bit deeper into what you're seeing in the industrial market I think people understand your other segments event weekend Mark.
And arent strategically a focus for you, but the industrial side is a little bit of color on those metrics would be helpful.
Sure.
At a high level automotive we we.
We see the strength, we see the strength in orders and it supported all by the <unk> that we had and I have been talking about including the renewed <unk> and extended out yesterday that cover.
The demand outlook that we have and Thats why we are building capacity for.
You've seen the strength in our business, even this quarter as we ramp but electrification as we ramp for Adas.
Those are the mega trends that are driving our automotive demand, we don't see that changing in the outlook. We have on the industrial side you see factory automation, you see renewable energy that strengths, where we made including our medical business, where we see a little bit of softness.
And.
The industrial is really in the segments that are closer to the consumer think like white goods or so.
We see that obviously, it's a macro driven.
Softness we're watching it but that's kind of the pockets that we see softness in the industrial.
Hitting the linearity side of the equation just the back half of that question.
It's up into the right.
Thank you for that and I guess as my follow up one for that in the gross margin side of things. It's good that you guys are still sticking with the 1% to two percentage point headwind from the silicon carbide ramp, but we've heard a number of your competitors talk about the difficulty in that ramp.
Just give us a little bit more color on what gives you the confidence in maintaining that hit.
As you are ramping so significantly and if the revenue side of the equation and the demand side is up as high as it is it doesn't the capex have to rise accordingly, if youre going to do over $1 billion in revenues. How is your capital intensity staying roughly the same shouldnt those two lines move in sync.
Yes look all covered.
The first part of that as far as the difficulty that talk about the capex.
<unk>.
Yes, this is hard stuff.
I sympathize with.
With our competitors because it is not easy stuff to do.
We've been facing you know standard ramping challenges, but we're able to leverage our scale worldwide and the worldwide manufacturing scale that we had and the experience to address these issues as they come up.
We have a excellent and very experienced operations team.
And Thats, what they do every day.
We have mature processes, we have a very strong scale of manufacturing playbook.
So any excursion if they do happen, we're able to tackle it quickly we're able to resolve it quickly and that impact is always minimal that's why you've seen us.
Always focusing on the ramp and more importantly, our confidence and our ramp against the difficulties of what that silicon carbide ramp will bring in so our targets.
We've been giving and our targets that we've been talking spa.
Specifically on the revenue ramp are all within our capabilities and we do believe strongly believe the risks are very manageable for us.
Yes, and Ross on the capital intensity as I said in my prepared remarks, we expect our capital intensity to go up to the mid <unk> mid to high single mid to high teens over the next several quarters.
Clearly, we're having to place orders for equipment further out.
To support this revenue ramp, but we do expect our capital intensity to go up.
Thank you.
Okay.
Our next question comes from the line of Chris Danley with Citi. Your line is now open.
Hey, Thanks, guys.
As part of this weakness of your pricing expectations changed.
For 2023, and then do you expect the weakness to bleed over into the automotive end market as well.
This is a song no we don't see any any movement on pricing obviously, we've been talking about the <unk> that we have in our strategic Prada.
Products.
Based on the value of the products and that does not change based on the outlook and the demand in the lts's provide that certainty of both volume and pricing as we've said in the past so I don't expect that to.
To be any place in the equation not even in automotive and industrial obviously, where the.
The pricing would be potentially volatile as in the businesses that are noncore that we plan to exit and that has always been part of our exit strategy that would actually be favorable to margin. So we're not worried about the pricing environment at this point.
And Chris the one thing I would add is as well.
Input costs going up we are passing that onto our customers and we will continue to do that as well so the pricing environment is very stable.
Great and for my follow up.
Have you seen or are you seeing any change in your lead times and then are there any as part of that are there any shortage as existing for for the products or are those all gone.
Lead times is flat is very consistent.
As far as shortages, yes, we do have technologies that.
Our remaining in short supply versus the demand that we have.
And we expect those technologies to remain supply constrained even through 2023 and those are the ones that were covered with <unk> with our customers to make sure strategic customer to make sure. We cover the whole bond for our customers in order to sustain our ramps and new products next year.
Great. Thanks, guys.
Okay.
Our next question comes from the line of.
Vivek Arya with Bank of America.
Line is now open.
Thanks for taking my question.
I just wanted to follow up on the question. Chris also asked which is on just the supply demand balance on the automotive side.
There is a concern that automotive could be kind of this next shoe to drop and this rolling correction in semi is what are you hearing from your auto customers about are the bidding inventory right now.
What does the supply demand balance when you look at the Oems and tier ones, especially.
Towards the first half of next year.
Look the visibility we have there is no inventory are there small pockets because the golden screw problem yeah.
We work with our customers to make sure when we batch build something we will give them a few weeks or two to three weeks ahead and then they drain it over the next few weeks. So those are those I'm not worried about because we work with our customers directly if you look at the demand environment, and where our growth and our demand is coming from it's coming from Evs.
No matter what report you look at or what customer you talked to an OEM pure play EV OEM or abroad OEM.
Theres one thing consistent no matter, what the SAR does they will build more EV next year than they did this year.
That's where our growth is coming from both power and then more and more safety is getting into cars, that's where our sensing comes in between those two megatrends.
Our content is going to grow and remain growing even through 'twenty three no matter what the SAR does in this case based on a lot of the prediction.
So thats what gives us the confidence.
Again, we have secured debt outlook with lts as.
So I'm not worried about that part of it.
As ice engine going to have some softness because of rates going up or.
Demand going down potentially but again the EV plants are the ones that we focus on the ones that are Oems want to make sure the secured their EV penetration or are they going to lose share. So that's what we work on but it is not because of any inventory if anything.
Potentially just demand, but at this point, we don't see it for our business given our exposure.
Got it and for my follow up.
On the gross margins that I think on the last call. You said you feel comfortable staying in this 48% to 50% range.
So when I look at the Q4 outlook you out at 48% already.
How should we think about the puts and takes for from a calendar 'twenty 'twenty perspective, because you'd be taking on the east Fishkill fab right, but you have outlined some of them had been trauma and then of course silicon carbide ramps. So there is some headwind in your utilization right now is 75%. So can you stay in this 48.
<unk> kind of range for next year, just what are kind of the puts and takes of gross margins for next year.
Yes.
For 2003 and by no means by trying to provide a guidance here, but for 'twenty three you've got a couple of headwinds as you mentioned.
Under the 200 basis points.
You've got <unk>.
3% to 70 basis points for the East Fishkill foundry business.
That will be dilutive for next year I think more than anything this will be driven by the market dynamics in terms of what our margins will do.
We're very comfortable.
And pricing for next year, I think it really comes down to utilization.
In this environment I think we're going to be very cautious we're already seeing that take utilization and starts down already.
As we go into next year I think we're modeling it very conservatively, but.
We feel pretty comfortable sitting here based on what we can see today that there.
There is a floor on our gross margins.
The mid 40% range.
That will be driven by the market more than anything.
Thank you.
Yes.
Our next question comes from the line of Matt Ramsey with Cowen. Your line is now open.
Hey, guys. This is Josh buchalter on behalf of Matt Congrats on the results and thanks for taking my question.
I wanted to ask you about capex. It seems like at least next year or the next couple of quarters, it's going to be running materially higher.
The initial 12% outlook.
Were there any can you walk us through what's driving the increased spending in particular why the uptick now thank you.
Yes.
To support the <unk> <unk> revenue that we continue to lock in.
I referred to the.
The increase that we had in Q3, but clearly we are locking up more and more.
Carbide wind and the ramp.
We will go out further years and that requires additional capital.
And thus the reason that we continue to make investments.
Then obviously you also had mentioned the equipment lead time, we want to make sure. We stay ahead of it so that's forcing us to play.
Place order materially earlier than than we typically would need to.
We don't want to run the risk of not being able to support our ramp.
So we're being very proactive given the environment and the lead time of equipment vendors.
Okay.
Thanks, I appreciate the color there and then.
You sort of mentioned.
The issue at one of your competitors with yields that we found out about last week. Since then we've been getting a lot of questions on.
Are there any read through into your own internal substrate ambitions can you walk us through your thinking there is just sort of just a normal part of coming up the yield curve or was it from your view with something specific to design decisions that they made thank you.
Look I can't comment on what decisions or what are the assumptions. They made I can only comment on our business and what we're doing.
We've always given the same outlook for our business as far as the ramp as far as the margin targets at scale and the headwinds from the ramp with the start up cost that we.
Include all of them in our reported results.
Those have not changed.
And we've been very consistent over the last few quarters. Since we started disclosing them and that should give you an idea that.
And really the confidence from our site that the numbers in the models, we're giving are all well within our capabilities inclusive of any challenges, we may or may not have.
We've had all of those baked in because as I mentioned, we have a very strong process and a very strong playbook, given our scale of manufacturing of power products over the last two decades with IGT.
So our ability to scale power products.
And walked through all the yield and walk through all of the production.
Challenges that we have we're still at exactly where we were since we started disclosing those numbers we're meeting both the top line.
And the margin and add scale those margins will be accretive there is no change from our site.
Got it thank you guys and congrats again.
Okay.
Our next question comes from the line of Toshi Hari with Goldman Sachs. Your line is now open.
Hi, good morning. Thank you so much for taking the question.
Todd you mentioned that you guys exited from $39 million in revenue in Q3.
Three months ago, you talked about.
$150 million in the second half of this year and an incremental $450 million.
And then 2023 is that still the plan or given the weakness in.
The consumer end markets could some of those initiatives be accelerated.
Yes, we've always said that the exit the market driven and the faster we can exit the better off we would be.
We exited $35 million.
You referred to as we look forward to Q4.
Think we're going to exit somewhere between $65 million to $75 million in Q.
Q4, and for 2023, we still think we're on track and again this will be market dependent but we think it will be in the neighborhood of 400 to 450 exits for next year as well. So we think we're on track for that.
We think the softness in this market.
Yes.
This exit it allows us to reallocate that capacity somewhere else, it's more valuable to us.
So those are that those are the numbers that.
We have line of sight to right now.
Great and then.
My follow up.
Another one on gross margins I'm curious what your plans are from a wafer start or utilization rate perspective into Q4.
You said, 75% utilization rates in Q3.
Im guessing it continues to move move south but curious.
The assumption is there and in response to another question to a prior question you said.
You're expecting the mid 40 <unk> to be a floor for gross margins.
In making that statement, what kind of volume and pricing assumptions are you, making for 'twenty three thanks, so much.
Okay. So.
So look.
Coming back I'll start in reverse order here.
The floor of what we think is the mid $40 in a downturn next year.
Pricing remains very very.
<unk>.
In terms of next year.
We think the business as well.
Well I'm not going to provide a guidance on that one we'll let you guys figure out what that is going to be more market driven.
We'll model it the way you model it.
What was the first part of the question.
Gross margin.
Utilization rates in.
The Plaza.
Thanks for the later so.
Q2, we were at 77% we dropped to 75% here in Q3 as we look forward into Q4 again, we assume incremental softness here, but we think it's flat.
Flat to down slightly in Q4 with our assumptions.
Got it thank you.
Our next question comes from the line of Watchman <unk> Gill with Needham. Your line is now open.
Yes, Thank you for taking my questions.
Question on the on the guidance.
On the top line can you give us any kind of direction.
Okay.
By the non strategic for strategic.
Yes.
Yes rajeev.
Let me break it out by end market.
Auto we think is going to be up kind of low single digits.
We think industrial is down kind of mid single digits, and we think our other category non strategic is down kind of mid to high single digits.
With that we think about the guidance there.
Got it so on the industrial being down mid single and kind of seeing.
A deceleration in and kind of the year over year growth rate.
Quarter by quarter, the growth rate has been decelerating and obviously, we've heard commentary about softness in industrial.
Some competitors.
I'm just curious if you think this softness in white goods.
Just kind of relegated to that particular market.
That seems to be.
Even if it is relegated to that small segment of the market, it's still a relatively.
Decent percentage of your industrial if youre seeing kind of a.
Mid single decline quarter over quarter.
So just wondering if thats the case or are there other kind of indications that youre seeing with respect to your customers outside of alternative energy are you seeing.
Slower industrial production and medical or other different segments.
Well look the industrial factory automation alternative energy is going to be up the white goods I gave it as an example.
What we call legacy industrial meaning the industrial segment that is the closest to the consumer and that is driven by consumer spending or even real estate.
The industrial market is very broad and we're starting to see the softness.
And multiple of these legacy industrial areas.
Our focus specifically is on factory automation and alternative energy industrial we have really been investing in driving new products through and that remains strong and that remains growing.
But obviously automotive.
Industrial is a very broad market.
And just for my follow up I appreciate those site.
On the Opex, it's been kind of volatile quarter by quarter based on kind of push outs of programs.
So during $12 five for Q4 as you kind of go into 2023 I'm wondering.
Wondering how youre thinking about the opex ramp.
Is there going to be continued investment in R&D just curious if there you obviously are.
[noise] managing in Opex, a system, that's going to be.
Conducive if the if the demand environment flows down same thing that youre managing inventory.
Curious, how youre thinking about the opex controls into into calendar 2023. Thank.
Thank you, yes look we've already been managing discretionary.
And very carefully some of the Lumpiness is as I mentioned in my prepared remarks, with the timing of some R&D projects.
What youll see us continue to do is reallocate some of the spending in R&D.
As we grow as we think into next year.
Set our model at 17%, we've been running well below that.
Kind of too low at this point.
As I look into next year I don't think were going to get to 17% I think we're probably going to be somewhere around maybe max out at 16% of the top end that would be my thinking for next year.
Perfect. Thanks, so much.
Our next question comes from the line of tourist Lundberg with Stifel. Your line is now open.
Okay.
Yes. Good morning, this is Jeremy Kwan, calling for Tori.
I guess just two quick questions here the first regarding your module supply agreements are there any.
Upfront cash commitments or peak pace associated with this.
Just wanted to get a sense of.
Any kind of.
National commitments that customers have given.
Can you repeat the first part of your question you broke up a little bit.
Sorry about that yes.
Long term supply agreement just wondering if theres any.
Prepayments associated with these.
Oh, yes, absolutely I mean, our customers have been co investing with us.
Saying that for a while.
And think about those being prepayments it can be payments for capital it could be.
Co investing in R&D that very typical.
Any chance you can quantify that for us.
They vary by by agreement and duration, so I wouldn't want to try and put up.
We're on it.
Got it okay.
And then just circling back to the pricing question.
Are there is there anything that you.
You might want to highlight in terms of maybe the timing of these price increases.
That you're passing along versus.
The price increase that youre seeing in the supply chain and.
Any way to quantify this as well.
No, we're not giving quantitative because we're just passing on whatever we get.
From the outlook and from our margin you can think about as being neutral.
So as we get it we pass it on.
Okay.
Thank you.
Our next question comes from the line of Harlan sur with Jpmorgan. Your line is now open.
Hey, good morning, Thanks for taking my question Youre intelligent sensing group, primarily image sensor solutions.
Which is where you have quite a bit of the portfolio, which is outsourced.
Remember it was capacity constrained back last year. This business has been outperforming this year I think it's up like 41% for the first nine months I assume you guys are getting better capacity allocations from your foundry partners.
<unk> image sensors demand still tracking higher than supply and can.
Can you just give us an update on the in sourcing initiatives.
Yes look I'll give you the demand environment, obviously demand.
Outpaces supply.
Based on a lot of the penetration that.
We see in Adas for automotive, which is agnostic.
Evs or ice engine.
So very healthy demand environment, and more importantly, very healthy position that we hold in that market.
We also have a lot of new products that we've launched both in automotive and industrial that are fit for purpose for these markets individually and that is driving some of our new product ramps as well.
On the supply side, we have been getting incrementally more supply over over time.
Quarter, we get incrementally more as our roadmap with our foundry partners and internally what we've been doing also is expanding some of our that I mentioned in my prepared remarks.
Increasing some of our capacity for.
Back end in order to get closer to the demand environment as we get more wafers from our foundry partners. So both of these have enabled us to increase.
Power units.
As well as our revenue because of the higher asp's given the technology advancements that I talked about in my.
Our prepared remarks.
We don't see that slowing down we're going to keep increasing our capacity, we're going to keep getting more wafer foundry partners.
And thats going to keep driving the growth in that business even through next year.
Great. Thanks for that and you also talked about this a little bit in your prepared remarks being a leader in power you guys have.
Pretty broad portfolio of solutions right. So in addition to the silicon carbide traction inverter for Aegean onboard charging like how successful has the team been and also pulling in for example, the gate driver module, which uses your MOSFET portfolio.
We will drive IGT traction Inverters. This I assume is not included in the $4 billion pipeline, but it does sit alongside your silicon carbide solutions represents sort of further content gain opportunities. So.
All successful has the team been in sort of attaching.
Attaching these these other components to year silicone carbide pipeline.
That's a good question on so the team has been very successful what I refer to as cross selling it's something that our sales team drives with the business unit.
But I track as well so just to give some more specifics the $4 billion committed revenue, we talked about and for silicon carbide, that's purely on the silicon carbide.
<unk> talked about our <unk> in general being north of 14 billion and increasing more than 5 billion last quarter.
Including hundreds of parts. So you can think about thats the cross selling at a customer.
We want to make sure that everything on that bond, but the customer need is secured in the LTE assay. The worst thing you can have us have a 99 parse and youre missing the Golden screw from US also and we can ship the 99%.
We have the full content on per bomb.
<unk> per new designs, we pull a lot of our other content that will support that system level cell.
I've mentioned in the past, we knew that even with <unk>.
Image sensors were new.
Highly advanced image sensors also carry appealing.
With them. So it's not just power with empower we carry power, even our intelligent sensing business as a cross selling so we do that as a as a matter of day to day. Our sales team is focused on it and our business units are focused on.
Thank you.
Our next question comes from the line of Timothy Arcuri with UBS. Your line is now open.
Hi, Thanks.
I was wondering if you could quantify in Q4, the gross margin headwinds from the under utilization and then maybe help us think about does that get better in Q1 or or or worse.
Yes.
We were thinking about the market right now we think it remains soft.
I think the utilization.
And kind of stays in the level, maybe maybe even goes backward slightly.
As we go into Q1, so I don't expect I don't expect that to improve just based on.
What we're all we're all seen in the news.
In terms of the quantification we set.
Silicon carbide is a 100 to 200 basis points.
Diluted there and.
The utilization is a factor in addition to that.
Okay.
And then I guess can you help quantify you just talked about the <unk> and it sounds like most of the increases youre kind of sweeping other content inside of the silicon carbide business.
Given the importance of that can you just talk about how much of the $2 2 billion right now is moving inside of <unk> I guess the question really goes to Theres, just a lot of general skepticism typically around <unk> and and maybe can you just talk broadly about any change in customer behavior inside of an <unk> versus revenue that moves outside of them.
L TSA. Thanks.
Yes.
As I said customers are extending their lts.
You know they are coming back and increasing as well. So I think the behavior has been very consistent with our customers trying to lock up long term supply.
And just to clarify our <unk> our committed revenue in LTE.
A year period.
Over $14 billion up over 5 million $5 3 billion.
The third quarter. So you can see that.
This is <unk>.
Customers.
Locking in supply on silicon carbide, but beyond that as well across the entire portfolio. What we're not doing is we're not doing LTE assays on the business, we're looking to exit obviously.
We don't want them Havent commitment there.
Okay.
Excellent.
Our next question comes from the line of Tristan <unk> with Baird. Your line is now open.
Hi, Good morning, just a quick.
Put it up on this so.
Industry wide.
Yes.
<unk>.
PSA is we know that.
Companies had implemented earlier this year noncancelable.
Orders to <unk>.
Are those holding into next year or at least into the first half of this next year in terms of how youre dealing with the desk outside of here at GSK.
Yes look it's not.
About just it's.
Also with that customer is obviously <unk>.
Broader view and it's a multi year as far as end CNR.
We've had we have an cnr's that extend up to 12 months of backlog.
But it always remains our cautious outlook, even if you have an end CNR order, but theres inventory at <unk>.
Will you still ship it you've seen us be very very disciplined on this the inventory and trying to make sure it doesn't balloon out of control.
We've kept it around the seven week, we're comfortable with the visibility we have at that we have to add CNR orders to support all of the.
Demand that we have but we are very cautious and disciplined about how much we ship and when we ship it because we have to ensure that it does pass at the end of the day.
During the quarter so it doesn't.
Get above R.
Our expectations as far as weeks of inventory.
Partners.
Yes, Tristan I would add that.
Of our $14 1 billion adult TSA. It does not include the <unk> our orders. So when you combine the two we have we have very good visibility.
Our backlog and what we're truly going to ship.
Okay. That's great and then for my follow up it looks like based on the specs provided on your website.
Silicon Silicon carbide products are rated at 650 votes.
I know.
The sudden seeking callback products on the other suppliers out there going all the way to 200 votes.
So could you talk about this in terms of specs and whats your expectation because I am assuming that increasing both edge also increases your Tam.
And EDI.
Yes, I don't know where youre, referring to but we have 200 volts already in production and supplying to customers.
So I'm very comfortable with our roadmap and the breadth of our portfolio both in silicon and Silicon carbide, but our 1200 volts is already in production and it has been.
Okay, great very useful thank you.
Thank you.
Our next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open.
Hi, guys. Just a quick question on the Silicon carbide side, obviously, you're seeing pretty solid traction just wondering if you could give us an idea of what the.
And you are getting.
But.
In terms of.
On a range if you can.
As you go from the dual motor to Quad motor et cetera. So.
Yeah look Vijay I'll give you.
Couple of comp because it depends on how much power.
For the drive train or the inverter and so on so it's a broad range, but just to give you an idea for an equivalent reference.
For us on Evs, you can think about incremental content, there's about $700 for an EV versus an ice obviously the majority of it is from the traction Invertor then you add onboard Chargers and so on and then as far as.
<unk> you can think about it as the silicon carbide ASP is about three <unk> that are in IGT.
So that gives you kind of an apples to apples as far as <unk>.
Normalizing on a specific power output.
Got it and then the.
The second question is if you look at your.
Our design win pipeline is growing very nicely you talked about how you are displacing some legacy suppliers as well incumbents.
Just wondering if you could kind of go through what are the top three things that are helping you drive the design wins I think that'd be very helpful. And if you had an updated backlog assuming kind of a backlog number there as well thanks.
So from an overall, obviously there are two things driving a lot of our design wins and the new product revenue and you know all of the.
Forward looking revenue confidence one is this always starts with technology, our technology and a lot of our focus area on a strategic area for us.
Compelling and it's very.
Competitive against what's in the market today, obviously, we've talked about silicon carbide and why do we win both on the technology and the packaging as far as module getting more power in a smaller and smaller module, reducing costs and improving efficiencies. So thats on the silicon carbide.
Sensing I'll give you a few examples.
Led flicker mitigation is a great example of where our superior technology in a market need.
Where a lot of the signs are Leds in a standard camera or competitive camera cannot detect and led sign we have technologies that address that.
Global shutter is what is needed for occupant detection and or factory automation.
Every single.
Strategic market, we are going after we have products that are tailor made with specific technology to address real problems that the customers have that's what creates value and thats what number one puts us in the lead for immune design.
And also puts us in the lead when Theres a refresh in the designed for us to capture share, but it always starts with technology and capability.
Got it thank you.
That concludes today's question and answer session I would like to turn the call back to Hasan Al Carey, President and CEO for closing remarks.
Thank you all for joining us today, our teams have yet again delivered outstanding results in the third quarter I am excited about our future as we have not yet reached our full potential and we have everything we need to lead in the fastest growing markets superior technology committed customers and a talented workforce that will continue to expand.
To support our long term growth.
And as always we remained consistent and committed to executing with the highest degree of excellence Wheeler.
We look forward to seeing you at various investor events during the quarter. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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