Q4 2022 ON Semiconductor Corp Earnings Call
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Okay.
Good day and thank you for standing by welcome to the answer me fourth quarter 2022 earnings conference call.
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I would now like to hand, the conference over to your speaker today Parag.
<unk> Agarwal, Vice President of Investor Relations and corporate development. Please go ahead.
Thank you crystal good.
And thank you for joining <unk> fourth quarter.
Patrick Scholes.
I'm joined today by our final Corey our president and CEO .
Patrick our CFO .
This call is being broadcast on the English TV section.
That's right Www dot.
Doug.
A replay of this webcast along with our country.
Fourth quarter earnings release.
We'd be able to live on our website approximately one hour following this call.
And the recorded webcast would be available.
Perhaps.
Following this conference call.
Additional information is posted on the Investor Relations section.
Yeah.
I went on it.
In addition, certain non-GAAP financial measures.
Yes.
Because the nature of its nonproliferation measures with the most directly comparable GAAP measures under GAAP financial measure.
Our earnings release.
As opposed to a separate entity under one roof.
In fact in English definition section.
During the course of this conference call.
It doesn't make projection or other forward looking statements regarding future events or the future financial performance of the company.
Maybe just to caution that such statements are subject to risk.
That could cause extra few months.
It wasn't materially from protections.
Certain factors that can affect our business, including factors that could cause actual results to differ from our forward. Looking statements are described in our most system Form 10-K and Form 10-Qs.
In our filings with Securities and Exchange Commission and in our earnings release.
For the fourth quarter of 32.
Our estimates are.
Therefore, while it may.
Rent change and the company assumes no obligation to update forward looking statements to reflect actual resource changes options.
I bet, you want except as required by law.
Now, let me turn it over the long term.
Hi, Sam.
Thank you parag and thank you all for joining us today.
2022 has been an excellent year from semi and nothing makes me prouder than to share our latest progress after closing the second year of our transformation.
Our worldwide teams have yet again delivered outstanding results, allowing us to deliver the most successful year in the company's history with record revenue of $8 3 billion in 2022, an increase of 24% year over year with earnings growing three times faster than revenue.
Our gross margin of 49, 2% increased 880 basis points for the full year and <unk> hundred 50 basis points. Since we began our transformation journey.
Our manufacturing footprint to our product portfolio and go to market strategy, we have transformed all facets of our business and set ourselves up to win in the fastest growing mega trends of the automotive and industrial markets.
We arent ourselves in a position in the S&P 500.
And we created more value for our shareholders than ever before.
The uncertainty in the macro environment has impacted demand and we have seen a slowdown in some areas of our business, which include consumer computing and parts of industrial.
Demand for our automotive business remains healthy as automakers have been catching up on production levels in.
In Q4, our automotive business grew 54% year over year, 13% quarter over quarter and accounted for 47% of our total revenue as compared to 35% in the quarter a year ago.
Our industrial business grew 6% year over year in Q4 and accounted for 26% of our total revenue.
While we saw softness in parts of our industrial business in Q4 demand for energy infrastructure and medical applications, such as continuous glucose monitors and hearing AIDS remains strong.
We continue to extend our leadership in silicon carbide with our customers who value the leading performance of our silicon carbide modules and our end to end supply chain capabilities.
In 2022, we shipped more than $200 million in silicon carbide revenue.
We remain on track to deliver $1 billion in 2023 based on committed revenue from Lts age and.
And we now have more than $4 $5 billion of committed silicon carbide revenue between 2023 and 2025.
By focusing on the areas, where we provide the most value to our customers we have positioned ourselves with the market leaders in the fastest growing segments in automotive and industrial.
Top automotive Oems are not only choosy on semi for silicon carbide, but for our worldwide class.
Intelligent power and sensing solution.
In automotive we are seeing tremendous momentum in silicon carbide, and we believe that vehicle electrification will be long term driver for our business we.
We expect to remain supply constrained for the next several years, even as we aggressively add capacity to our Hudson, Czech Republic, and South Korea manufacturing sites.
As we recently announced Volkswagen group had selected on semi as a corporate strategic supplier to provide the silicon carbide modules at enable are complete traction inverter solution for its entire fleet of next generation electric vehicles.
Sami will deliver its elite sick 1200 bolt traction inverters power modules. These.
These modules facilitated small footprint and low wage system solution, which will support the front and rear Axel and burgers and a large range of VW models.
We have already shipped more than 500 different devices to Volkswagen group, including Igt's MOSFET image sensors and power management integrated circuits and this expanded engagement to include our silicon carbide further strengthen our partnership with one of the largest carmakers, leading the charge and vehicle electrification.
In 2022, we began to recognize revenue that's left from silicon carbide shipments and expect revenue to see a continued ramp in 2023.
We have also expanded our partnership beyond silicon carbide and image sensor to numerous power and analog solution totaling over 300 different part numbers.
Jaguar land Rover signed a seven year long term supply agreement.
On semi and silicon carbide for their next generation platforms and other solutions are there 11 kilowatt onboard Chargers and other ex EV applications.
<unk> also provides jaguar and land Rover when the supply assurance for their current production model across our broad portfolio of power solutions.
In addition, Hyundai Motor group selected onsite means elite family of Silicon carbide power modules for their high performance electric vehicles.
<unk> elite <unk> silicon carbide modules increased efficiency and lower the weight of the traction and burgers, extending electric vehicle range and improving performance.
Our high power density sick modules delivered the most innovative package technology to reduce power losses associated with DC to AC conversion, along with the reduced size and weight of the traction burden extend range and increase performance.
We remain just as focused on our engagement with tier ones, where we are seeing a steep increase in non semi content for upcoming EV platforms and advanced safety applications.
We recently secured a win with a major tier one for a marquee European platform that includes more than $800 a content across our portfolio of silicon carbide and other intelligent power solutions for traction Inverters.
These are just a few of our recent wins and the fastest growing automotive applications given us confidence in our outlook for this business and our $1 billion revenue year for Silicon carbide.
As the leading automakers accelerate the transition towards vehicle electrification.
Increased autonomy and advanced safety they are choosing <unk> as their preferred partner for the performance of our Silicon carbide solutions and vertical integration from substrates to state of the art modules.
World Class image sensors and for the breadth of our complementary intelligent power and sensor portfolio and for our manufacturing excellence in supply assurance.
And industrial while fourth quarter revenue declined 10% over Q3, we expect our traction in energy infrastructure and medical applications to offset the softness we are seeing in the legacy parts of this madness.
The global energy crisis is triggering an acceleration and alternative energy deployment with solar as the most installed renewable power capacity by 2027 tripling from 2021.
This accelerated deployment trend is reflected in our revenue for energy infrastructure, which increased 75% year over year above our forecast of 60% growth.
Our newest 200 kilowatt wins with leading energy storage system suppliers contained nearly $370 of content per system and silicon carbide and other power solutions.
Last month, we announced our partnership with.
The World number one DC optimizer company for large scale solar and energy storage systems.
<unk> uses our elite <unk> silicon carbide critical power switching applications.
Customers like <unk> expect leading edge technology, and our silicon carbide solution meets the high performance and reliability standards required for these renewable energy applications.
In addition to our alternative energy opportunities our customer <unk> are providing demand visibility into the broader industrial market, where we expect our growth to come from over the counter hearing aid and emerging requirements and factory automation.
We're at the beginning of a transition cycle, where our award winning inductive position sensors and new generation image sensors engineered for robotics, and scanning provide better performance and lower power.
We have spent the last two years, making structural changes in all areas of the company to improve the resiliency of our business.
We are a different company today.
We have rationalized our product portfolio and manufacturing footprint, we are leading in the fastest growing markets and we are now getting the true value for our products with multiyear commitments from our customers we.
We will not be distracted with the current market environment and remain focused on our execution against our near term objectives and our long term strategy.
Our customers are planning well beyond 2023, and they are investing with on semi to deliver leading edge technologies that address complex intelligent power and sensing requirements in automotive industrial and cloud power markets.
We will grow faster than the markets, we plan and our traction in silicon carbide, coupled with the demand visibility that long term supply agreements afford us leaves me confident that with a disciplined approach in 2023, we will continue to meet our customers' expectations and delivered on our commitments to our shareholders.
Now I will turn the call over to <unk> to provide additional details on our financials and guidance.
Thanks Hassan.
Let me first start by going through our full year's performance followed by our results for the quarter and wrap up with guidance for the first quarter.
As I mentioned, our results have only been possible because of the incredible effort of our worldwide teams.
I want to thank our employees for embracing our fast paced transformation and going above and beyond for our customers.
A year, where the macro environment and geopolitical uncertainties, we are front and center, we remain steadfast in our execution to achieve a record financial year on semi.
Our 2022 revenue close to $8 3 billion.
An increase of 24% year over year, primarily driven by strength in our automotive and industrial businesses.
Our non-GAAP gross margin of 49, 2% increased 880 basis points year over year, achieving our target model of 48% to 50% for the full year.
Our non-GAAP earnings per share was $5 33.
Compared to $2 95.
In 2021 growing three times faster than revenue.
We just closed the eight quarters since the beginning of our transformation and our continued success is a direct result of the structural changes we've made to improve the resiliency of our business.
The company's transformation has taken shape by optimizing three key areas of our business.
Our manufacturing footprint, our product portfolio and our go to market strategy.
In 2022.
Divested for subscale fab to improve our cost structure.
We completed the acquisition the acquisition of East Fishkill Fab in New York, which became part of our manufacturing network on December 31.
We further reduced price to value discrepancies to maximize value for our technology investments.
We exited volatile and highly competitive businesses, allowing us to walk away from $294 million of noncore revenue to date at an average gross margin of 26%.
We pivoted our portfolio to high margin products and end markets with auto and industrial and exiting the year at 73% of total revenue versus 59% in Q4 of 2020.
We exited the year with $16 $6 billion of signed LTE assays.
Across our entire portfolio.
We increased our new product revenue by 34% and we increased the design win funnel by 38% year over year.
These structural changes have yielded a three fold increase in free cash level since the start of our transformation growing approximately four times as fast as revenue with 2020 to come in at a 20% free cash flow margin.
Our strategy has driven the radical improvements in the performance of our business units and these businesses are now best in class among their immediate and broader peer group.
For example, our intelligent sensing group transformation has yielded a high growth high operating margin business.
ISG is now comparable to peers, who typically come in valuation multiples that premium.
Premium of more than two times the industry average.
ISG exited Q4 with record gross margin of more than 49%.
By rationalizing the portfolio and exiting low margin consumer facing markets Isg's gross margin has improved by more than 16 100 basis points.
The start of our transformation and the revenue mix is now more than 90% high margin automotive and industrial.
ISG revenue of $1 8 billion in 2022 increased 73% over 2020, driven by the transition to higher resolution sensors at elevated asps.
As I mentioned earlier, we assumed ownership of our 300 millimeter fab in East Fishkill on December 31.
This fab is a key enabler of our brownfield manufacturing strategy by providing incremental capacity for our silicon power products that we are transitioning from our fab in Korea to create capacity for our silicon carbide ramp in.
In addition, <unk> provides us with the capabilities to support long term growth for our intelligent sensing business.
Since the acquisition closed on the last day of the year. There is no P&L impact in Q4, but the acquired assets are now reflected on our balance sheet.
Sure.
Turning to results for the fourth quarter as I mentioned Q4 was another quarter of strong results total revenue was $2 1 billion, an increase of 14% over the fourth quarter of 2021, and a 4% decline quarter over quarter.
Record automotive revenue of $989 million increased 13% quarter over quarter, and 54% year over year to 47% of our total revenue as compared to 35% in the quarter a year ago.
Industrial revenue grew by 6% year over year, but declined by 10% quarter over quarter, primarily due to macroeconomic factors.
As Ivan mentioned, our energy infrastructure and medical businesses continued to grow despite macroeconomic headwinds.
Revenue from intelligent power intelligent accounted for 69% of our total revenue in Q4.
Telegent power grew 18% year over year, and intelligent sensing grew by 47% year over year, both driven by continued growth in the automotive and industrial markets.
Revenue for the power solutions group or PSG was $1 billion, an increase of 10% year over year revenue for the advanced solutions group or ISG with $701 million, an increase of 8% year over year and revenue for the intelligent sensing group or ISG was a record $354 million and impressive.
The increase of 44% year over year.
Yes.
GAAP gross margin for the for the fourth quarter was 48, 5% and non-GAAP gross margin was 48, 4% and above the midpoint of our guidance.
Our non-GAAP gross margin declined by 90 basis points quarter over quarter with our planned ramp in silicon carbide and lower factory utilization at 74% as we proactively slowed wafer starts from the beginning of the year.
We also exited an additional $17 million of revenue in the quarter at an average gross margin of 40%, bringing the total to date to $294 million of noncore business exits.
GAAP operating margin for the quarter with 33, 5% and non-GAAP operating margin was 34, 1% an increase of 550 basis points year over year decrease of 130 basis points quarter over quarter.
GAAP earnings per diluted share for the fourth quarter was $1 35, as compared to 96% in the quarter a year ago.
non-GAAP earnings per share was $1 32, as compared to $1 nine in the fourth quarter of 2021.
We remain confident in the sustainability of our long term gross margin model of 48% to 50% despite near term headwinds from silicon carbide startup cost and our ramp at <unk>.
As we enter 2023, we're maintaining tight control of our wafer start managing inventory levels and we remain disciplined in our spending.
We expect continued favorability as we plan to exit more than $400 million of low margin business.
And starting in 2024, we will start recognizing a $160 million of gross gross margin benefit as we transition our wafer supply from the divested fabs.
Now let me give you some additional numbers for your models.
GAAP operating expenses for the fourth quarter were $316 million as compared to $352 million in the fourth quarter of 2021.
non-GAAP operating expenses were $300 million as compared to $306 million in the quarter a year ago non.
non-GAAP operating expenses were below the midpoint of our guidance as we proactively manage spend across the company.
For the fourth quarter, our non-GAAP tax rate was 15, 9%.
<unk>.
Our GAAP diluted share count was 448 million shares and our non-GAAP diluted share count was 440 million shares.
We repurchased one 3 million shares for $90 million in the fourth quarter for the full year, we repurchased 4 million shares for a total of $260 million at an average price of $65 13 per share, which was 16% of 2022 free cash flow.
Turning to the balance sheet cash and cash equivalents increased 19% sequentially to $2 9 billion and we had $1 5 billion undrawn on our revolver.
Cash from operations was $731 million in free cash flow was $380 million or 18, 5% of revenue.
Capital expenditures during the fourth quarter were $340 million, which equates to a capital intensity of 16% for the quarter and 12% for the full year.
As we indicated previously we are directing a significant portion of our capital expenditures towards silicon carbide, and enabling our 300 millimeter capability.
East Fishkill fab and expect our capital intensity to be in the mid to high teens percentage range for the next several quarters.
Accounts receivable of $842 million declined by $15 million in DSO of 37 days increased by one day.
Inventory increased by $41 million sequentially and days of inventory increased by seven days to 136 days.
This includes approximately 26 days of bridge inventory to support the transition and the impending silicon carbide ramp.
We continue to proactively manage distribution inventory decrease.
Inventory in the channel by $10 million sequentially and at historically low levels with weeks of inventory at seven three weeks compared to $6 nine weeks of Q3.
And net leverage is approaching zero.
We accrued $15 $7 million on our balance sheet under property plant and equipment related to the 25% investment tax credit for investments our U S factories.
This will eventually flow through our income statement and lower depreciation and will receive the associated cash benefit in the future.
Let me now provide you key elements of our non-GAAP .
Guidance for the first quarter.
<unk>.
Table detailing our GAAP and non-GAAP guidance is provided in the press release related to our fourth quarter results.
We continue to see strong demand from our automotive end market, driven by electrification and Adas and accelerating ramp of our silicon carbide business.
We continue to see softening in certain industrial applications, and we expect increased weakness in our non strategic end market, we plan to exit.
Given the macro uncertainty we are taking a cautious stance in our guidance.
Despite a slowing macroeconomic environment our business continues to strengthen with total committed revenue under <unk> 16.
$16 6 billion.
An increase of $2 5 billion quarter over quarter.
We expect to recognize more than $5 billion of revenue from a committed <unk> in 2023. In addition to our non <unk> non returnable orders.
We anticipate Q1 revenues will be in the range of $1 87 billion to $1 97 billion with continued strength in automotive amid softness and all other end markets.
We expect non-GAAP non-GAAP gross margin to decline to be between 45, 7% and 47, 7% due to lower factory utilization and the dilutive impact of ramping silicon carbide in EMEA, which is within our expected range of 100 to 200 basis points and 50.
<unk> to 70 basis points, respectively.
This also includes share based compensation of $3 4 million.
We expect 2023 to be a transition year for our gross margin as we manage the temporary headwinds.
We expect non-GAAP operating expenses of 298 million to $313 million, including share by share based compensation of $23 million.
We anticipate our non-GAAP or the 21% to $25 million.
We expect our non-GAAP tax rate to be in the range of 15, five to 16, 5% and our non-GAAP diluted share count for the first.
First quarter is expected to be approximately 441 million shares.
This results in non-GAAP earnings per share to be in the range of $1 two to $1 2014.
We expect capital expenditures of 340 to 300 million $380 million, primarily in brownfield investments, which are more efficient use of capital and the Greenfield alternative building a fab from the ground up.
As a company we've become much more agile controlled and purposeful in our execution and we will benefit from our disciplined approach in 2023 and beyond.
Given our confidence in our strategy to invest for long term profitable growth, we remain committed to a balanced capital allocation strategy to drive shareholder value.
With a three fold increase in free cash flow, a strong balance sheet and our net leverage approaching zero, we have increased flexibility in deploying capital towards our shareholder return program.
Today, we announced that our board of directors has approved a new program authorizing up to $3 billion of share repurchases through 2025, representing twice that of the last authorization, which.
Which expired at the end of last year.
This is aligned with our stated strategy of returning 50% of free cash flow to shareholders over the long term.
And finally, we hope Youre saving the date for our analyst day in New York on May 16th we look forward to sharing more of our long term vision at that time and with that I'd like to turn the call back over to Crystal to open the line for questions.
Thank you. Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be earn out.
Draw. Your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
And our first question will come from Ross Seymore from Deutsche Bank. Your line is open.
Hi, guys. Thanks for letting me ask a question first question for either you guys in the first quarter guiding down about 9% sequentially. I know you said auto staying strong and everything else is kind of softening can you give a little bit more color on the puts and takes with exits et cetera, and then perhaps more importantly, how those trend throughout the year between the <unk>.
<unk> within that $5 billion of Lts as you plan to represent.
Yes, Ross this is Matt. So if you look at the planned exits that we have for Q1, we think will exit up to another $75 million.
In the first quarter as we've always said this will be market dependent, but we do kind of see that in the cards here.
In terms of overall, what we're seeing for Q1, we're looking at automotive continuing to be strong think about it is kind of low single digits. We think industrial is down kind of low single digits and the rest consumer.
The other being down pretty significantly to make up that the rest of it to be down approximately 9%.
Sure.
I think for the year, it's hard to tell at this point I think with the audit auto remains strong I think industrial kind of.
Potentially flat year on year and the rest of the business.
Being down slightly were down but.
It's obviously too early to tell what's going to happen long term.
Got it thanks for that color at that and then.
On the gross margin side of things it seems like thats holding in well despite the utilization dropping and all the other headwinds it doesn't seem like there's any surprises any sort of linearity about how the buckets work throughout the year.
It's being a positive the silicon carbide side and in the East Fishkill being negative is that something that peaks out in the headwinds in the beginning of the year and then lessons or is this the shape a little more backend loaded anything you could provide on color on that would be helpful.
Yes, you nailed it right I mean, there's no surprises here on where margins are coming in and we're really happy with where we are performing.
All of the ramps in silicon carbide and <unk>.
Just as we would expect.
We think these headwinds kind of peak.
Probably Q2 Q3, and we think by the end of this year, we've got silicon carbide, the headwinds there and has it gotten to parity and.
And the margins are at corporate average at that point. After all these headwinds are behind us, but we're pretty happy with with the performance and the tracking of gross margin at this point, Brian on track with what we've been Telegraphing for a couple of quarters now.
Thank you. Thank you.
Thank you.
And our next question comes from Vivek Arya from Bank of America. Your line is open.
Alright, Thanks for taking my question I, just wanted to dig into the Silicon carbide comments. It seemed like you are.
Reaffirming the $1 billion commitment for this year and I think you raised the longer term outlook by 5 billion to four and a half.
1 billion I was wondering if Tom if you could give us some more color whats helping to drive.
That upside and that's kind of part b of that question.
How should we think about any incremental headwinds on the cost or the gross margin side as you bring on more internal material and supply are you getting the yields that you're getting the performance are you getting what you need from your internal <unk> bio will you have to rely more on external wafers.
That could change.
Profitability of your Silicon carbide business.
Yeah, So vivek.
Few parts of your question. So first yes, we're reconfirming the $1 billion revenue for 'twenty three.
The increase of half a billion dollars in the same timeframe the 23% to 25, obviously, we've always said we continue to engage with customers customers continue to value.
The performance of our products and the end to end capability as I mentioned in my prepared remarks, so that obviously has.
Maintaining the strength of our business, where customers are committing to long term supply agreements, even even in what I would call a shorter term horizon, which is a 23% to 25. So that's again, a testament of where we stand with the technology and the supply now as far as your comments on.
Internal substrate, we remain committed to our internal substrates. So of course, we have been through 'twenty, two we have ramped our capabilities and our internal substrates that ramp is going to keep increasing.
And that ramp is as a plan to support our growth in the LTE assay that we have from $23 25 and even beyond.
And as far as yields are concerned.
I know there is conversations about yields none of which have been made by the company. So I'll use the opportunity to set the record straight.
Any commentary by yields from unreliable sources I'm not going to comment on what I will tell you is our yields are coming in per plan. Our ramp is coming in per plan and as shown in our margin and <unk>.
The fourth quarter and our guide in the first quarter, which all have com between that 100 to 100 basis points. So our business is healthy our ramp is on track and we will continue to invest in brownfield to support our customers.
Very helpful.
And then.
Just as a quick follow up.
Was hoping you could give us some color on your automotive business, excluding silicon carbide sales have now grown in your auto business for I believe 10 quarters and Youre guiding to another quarter of sequential growth how under supplied is the automotive market right now and is your non silicon carbide business.
You think can it grow in line or above the market this year.
Yes look I think I think we're going to outgrow the market in automotive we said that.
That goal even back in our analyst day, and we've been outperforming our own goal outside of Silicon carbide. The breadth of our portfolio is what is really highlighting the strength of that business. We've always said that our growth is going more pack to content versus unit sold.
With that talked about the transformation that we've had in our image sensing intelligent sensing group.
That is content both in number per vehicle, but also the asp's with the higher resolution.
That's driving growth in our business a lot of the power, whether it's <unk> or support other medium and high voltage fats outside of Silicon carbide, that's more content, both content and share gains I can tell you I am we are.
Winning more share as others can't supply and we're locking in that share gain in <unk> to sustain the long term.
So all of that is what has given us the confidence.
And our ramp and look we still are oversubscribed as far as demand is concerned which puts us in a very good buffer as far as whatever demand does in the macro does we feel very strongly about.
Position in our automotive and of course other segments from ISG as the LCD driver ultrasonic sensing all of these are macro trends that are happening in automotive driving our content in that business.
Thank you.
Thank you.
Our next question comes from Chris Danley from Citi. Your line is open.
Thanks, guys.
Last quarter, you gave us an update on the shortage situation in lead times that you talked about lead times being 45 weeks, where they normally 15, how have the shortage situation in lead times changed over the last three months.
Yes. So the lead times are relatively flat I mean, I think they are down a couple a couple of weeks on average, but when youre out at 45 weeks that really isn't material.
So I would say things have been very consistent throughout the quarter.
Lead times as well as just.
The shortages in the number of Escalations that we've seen.
Sure and then any comment on the Q2 outlook.
It's been sort of flat slightly up slightly down over the last several years has husky.
How does Q2 look and can we expect this week just to spread into Q2.
So Chris will talk about Q2 in 90 days.
Yes.
Fair enough.
Too early to make that call.
Thank you.
Our next question comes from <unk> Hari from Goldman Sachs. Your line is open.
Hi, good morning, Thanks, so much for taking the question.
I was hoping you could talk a little bit about your philosophy around <unk> with the macro softening I guess one of the common questions. We get from investors is how does the company. How do you guys manage any requests around push outs and things of that sort.
I think in the past you've talked about not being flexible on the pricing side, because that's a committed.
Contract, if you will but how are you managing the volume side of things as it relates to <unk> TFS.
Yes look obviously, our philosophy has not changed the pricing has firmed. The backdrop is the LTE assays are legally binding.
We will engage with with customers for the right reasons, obviously, it's not in anybody's benefit too.
Inventory on their shelves or even inventory in the channel. So we've been managing the inventory in the channel and you've seen that consistently in our performance. So that's.
Our philosophy is holding and we will maintain that engagement with customers, it's not about price, but we will have a win win.
Situation with the customer and that remains our philosophy.
Got it thank you and then.
And as a quick follow up.
For side.
Guess, what kind of utilization rates are you assuming for.
The current quarter just a quick clarification then my question is.
In terms of long term gross margins at the 21 Analyst day, I think you gave a range of 48% to 50% it sounds like your strategy.
The execution to our strategy has been has been really good in terms of your portfolio your manufacturing footprint et cetera.
Is 48 to 50, 550% still the right range or do you feel like there could be upside given.
The 160 million.
Benefit you spoke to in your prepared remarks. Thank you.
Yes, so on the on the utilization rates, we expect that will be kind of in this range, maybe it's flat to down slightly in Q1.
Just given kind of the macro softness we're seeing here in the first half of the year, that's probably going to be remain in that range and we'll see how the second half shapes up.
Later.
And what's the second part of the question with it.
Can you repeat the second part yes.
Yes long term gross margins you gave a 48% to 50% range.
I don't expect you to give us a preview on EMEA analyst day, but how are you thinking about the puts and takes and I think you gave us.
A number in terms of the benefit from from transitioning manufacturing from your divested fabs any potential upside to that 40% to 50% long term.
Yes.
We remain confident that 48 to 50.
In our prepared remarks.
We've also said that target is a milestone not a destination right.
We're confident our business we have a lot of tailwind after we get through 'twenty three.
Stay tuned on that but we remain committed to the <unk> 48 to 50 and believe that as that is a milestone.
Thank you. Thank you.
Thank you.
Our next question comes from harsh Kumar from Piper Sandler Your line is open.
Hey, thanks.
First of all some great color on Tesla, Volkswagen <unk>, particularly the traction and better than at Volkswagen I think thats huge.
Had a question on gross margins Youre basically guiding gross margins 400 basis points, but you are saying that the headwind from silicon carbide is between 102 hundred.
Should we assume that it's closer to 200 at the beginning of the year and could you give us some color on how that number will trend do you expect it to be gone by the end of this year will it continue into next year and then any color on fishkill that 50 to 70 bps of <unk>.
Ben as well would be helpful.
Yes, So let me start with a lag or the east Fishkill is 50 to 70 basis points, you can think about that as being linear throughout the year and very consistent.
That's where the foundry services that we'll be providing to globalfoundries that kind of a low low margin low single digit type margin.
In terms of the Silicon carbide, you know as I said earlier, we're really happy with the execution, there where in that range of 100 to 200 basis points, we think that starts to peak.
Kind of in mid year, we think that based on what we can see now with the $1 billion run rates or the $1 billion.
The number that we're going to hit in 2003, we think we'll exit the year with that headwind behind us. So that's why I said, the 2023 is really a transition year for us.
Okay. So that will be gone by the end of the train.
Just curious.
But the softness in March.
Have you seen any kind of noise cancellations and core industrial is just outside of the consumer industrial.
A couple of the other companies have talked about cancellations in the auto business I was curious if you've seen anything kind of a strange or weird and your auto business increase in cancellations.
No no.
We haven't seen any any of that in automotive.
Like I said earlier, we still remain oversubscribed in auto so it's not really a demand.
For us it's more of a supply so as we get more supply we're going to be able to cover more of the demand, but cancellations have not been.
An issue in automotive, obviously, we've seen cancellations.
I look at a trend actually Q4 was with <unk>.
Slightly down as far as cancellations on the non auto.
So I think it's too soon to call it a trend.
But it looks like it's getting better, but like I said with our lts as we're able to engage with customers for a win win so we don't see that impact beyond what we what we guided.
Great guys. Thank you so much.
Thank you.
Our next question comes from Chris Caso from Credit Suisse. Your line is open.
Yes. Thank you good morning.
Just a follow up question on the on some of the industrial weakness that you saw and I recognize for us the industrial market is very broad and it sounds like you've seen some different trends there.
Perhaps you could give some more color on what youre seeing and how that looks like it's trending.
Into mid year.
Yes look I think.
Even even last.
Quarter, when we when we talked about the third quarter, even we talked about how some of the industrial market that are closer to the consumer like power tools and so on those remain soft.
We've seen softness in the broader market again, we believe this is more consumer and macro driven.
Where we are have been investing in industrial and alternative energy that has actually been up by 75%. Even ahead of our 60% growth target that we had so that exceeded our expectation that gives you the strength of the market that will continue.
'twenty three and then pockets in the medical business that we focus on and have seen a lot of growth and we see that continuing.
In 'twenty, three obviously offset by <unk>.
Softness in other broader pockets of industrial so no real change in.
The performance of that business or the outlook as we get into 'twenty three.
Okay. Thank you.
Just a follow up on pricing and.
I think you've been clear on a number of aspects of pricing it sounds like principally in auto this is covered by the <unk>.
And so the noncore segments, where pricing is declining thats, where you're exiting but what about industrial which I imagine probably more in CNR orders are you seeing any changes as the <unk> tail off.
And youre signing new orders for these customers or is that pricing remaining resilient as well.
No the pricing is holding up because I had just two.
Clarify one thing our industrial business, where I highlighted the growth and where we have been focusing and where we want to keep investing those are those remain under <unk>. So the <unk> are not only.
For automotive, but they are four growth areas, where we have been putting investments and we want that return on the investments to be solid so that.
Carved out the big portion of the growth in industrial and puts it on high confidence obviously the <unk>, we are getting the renewed backlog in these in the backlog comes in at the same rate as far as pricing is concerned so we don't see any.
Any softness there as far as pricing, even even on the NCR.
Got it thank you.
Thank you.
Our next question will come from Matt Ramsay from Cowen Your line is open.
Thank you very much guys. Good morning for my first question I wanted to follow up on the last topic, there that Chris brought up.
Do you guys.
Now have <unk>.
<unk> and a half something like that $1 billion in LTE assays, only maybe a quarter of that is from the silicon carbide business to get a lot of attention I wonder if.
If you might spend a little bit more time on the rest of the business <unk>, where they're concentrated.
I took note of that increase of $2 5 billion that you just announced from from where the number was that you reported previously so just where you maybe a little bit more detail on I don't know the last answer of where youre seeing the strength in the market in order for a customer to be willing to sign up for those long term agreements and other segments outside of Silicon carbide.
Sure. This is a science so look the <unk> are broad in nature I highlighted some examples where we have hundreds of parts per LTE assay and that goes back to the strength of our.
Portfolio and the breadth of our portfolio as we target applications like vehicle electrification or autonomous driving or even parts of the industrial where we provide for example.
The sensing part of it as well as the motor control in the areas of factory automation as an example, so all of these is really the strength of our portfolio.
If I look at it majority is automotive just because obviously it ties to the total market total market in automotive is larger and therefore, our lts's are larger.
And like you said a quarter of it is the silicon carbide. So the rest is really the broad portfolio that we have image sensing for example remains a constraint technology and given that is a very key enabler for autonomous driving.
In the future.
Mobility.
<unk> has customers really locking in supply in order to ensure that they have what they need as they start converting their vehicles to more adas or level two plus.
With more content that's.
Thats the breadth that I can talk about across all.
Applications that we target.
Yes, let me just add that the $1 5 billion.
Silicon carbide Lts.
Through 25, so it's actually a much larger number thats included in the $16 6 billion of total lts's, but.
As this onset it's broad the place that we are not doing lts's, obviously, the non core business that we're trying to exit.
Sure.
Essentially trying to get out of that business.
Got it thanks guys.
As my follow up I wanted to ask on Silicon carbide down a little bit of a different angle acute focus for obvious reasons on.
Materials and yields and whatnot, but.
Sean I wanted to know if you could talk a little bit about the work that the company is doing and potentially the differentiation of your products in areas like.
Using depreciated fabs to do silicon carbide, rather than building new facilities or packaging.
Anticipation size of modules.
Everything downstream from the raw materials.
Just how your company's position there I see lots of conversation around the materials and not as much around the rest of the supply chain.
Yeah look that's a great question. So we've been obviously investing in brownfield, we've been very upfront about it.
Given our manufacturing footprint and the optimization that we've been on.
They're going in the last couple of years, we're very well positioned to grow in the areas. We want so let me give you some color.
Have a large scale manufacturing site in South Korea, and bouchon that is a existing highly.
Highly capable high output power fab that today manufacturers IGT.
We've been able to do over the last few years is transferred at IGT technology to East Fishkill converted to 12 inch so theres benefit from that by itself and then use an existing power fab with slightly fewer gap tools in order for us to run silicon carbide and start running silicon carbide in that.
Fab.
That's what allowed us to ramp so quickly.
And with the Capex efficiency that you've seen from us.
That for example is on the front and the same thing with the back end, we have a very robust backend.
A footprint that is already leading in power and packaging for power semiconductors and modules, we have been able to retool those backend factories in order to support our world class.
Modules.
Mentioned in my prepared remarks for Silicon carbide. So that's on the front end and the backend now right after the material.
We've been talking about there is of course capabilities of wafers and Abbvie.
And Thats, where we do it in the Czech Republic, we have been able to increase that capacity to match the output from our Hudson facility for our substrates and to match the capabilities that our fab has been able to ramp to so all of these can be sites are what is increasing.
Proportionately in order to support our not only the $1 billion, but you can imagine we're investing into 'twenty four ramp into 'twenty five grant based on those lts as those are coming in on on track those are coming in on time, obviously equipment has been a challenge over the last few years, but we've been able to stay ahead of it given that.
We're utilizing our existing manufacturing footprint.
I'm very proud with what the team has done because it's not an easy task, but they have been able to do it and Thats, obviously, a testament of the capabilities of the team to run such a complex manufacturing and we will continue to invest in brownfield in order to support our long term strategy.
Thank you.
And our next question will come from Vijay Rakesh from Mizuho. Your line is open.
Yes, hi, thanks, guys.
Pat and his son, Greg ideas, given all the concern.
On the inventory side just a quick question you had inventories are up only 3% sequentially, which is probably the lowest among all the analog guys. Just wondering if you can give us some color on how inventories look the channel and the OEM Lewis.
Yes.
If you look at our inventory on our balance sheet in terms of days went up as I mentioned, there were 2006 days of bridge inventory for the VAT transition and the silicon carbide ramp.
You look at that quarter over quarter, our base inventory.
Strategic portion of with the transition of the bridge.
It is actually down so you can see we've talked about reducing wafer starts from earlier in the year starting in Q2, and you can see that coming from inventory. So this is just that our tight management of inventory.
At the same time in the channel we've been managing it very tight as well. So we took inventory in the channel down by $10 million sequentially.
Seven three weeks.
We plan on running not really tightened as well we've been in that range for quite a while here.
We continue to go through the softness will manage both internal inventory and channel inventory.
Very tight.
And just be cautious in terms of what we're seeing out there.
Got it and then on the silica sorry go ahead.
No that was it.
Yes, I know the silicon carbide side.
Just wondering what is it.
If you can give us some color on what's driving the wins.
Obviously, you compete with a lot of established.
Suppliers on the Silicon carbide side, what's driving the Vinson how defensible is it.
Well, we are an established supplier to for silicon carbide, so that puts us in that bucket.
But look I remain consistent and why we are.
Winning.
A lot of people focus on technology as call. It the silicon carbide wafer technology or something before that like substrates.
Always couple the <unk>.
Imperative advantage, we have on technology is encompasses the wafer technology, but also the packaging technology.
Any power semiconductor for us to be.
Competitive and really win in the market you have to have both the best power.
Silicon or silicon carbide die if you can't get the patent the heat off of it and a very light.
Efficient manner.
Then it's not going to work in the whole system. So we're able to do.
The best highest power.
This density power and a very light and cost effective package using our roadmap and our innovation customers have validated that and customers have signed up for us So the combination of.
The power semiconductor or silicon carbide, plus the packaging co developed is what puts us in the lead and customers are obviously seeing that benefit and signing up with us for those long term agreements. So you have to have both and we have the best of both.
Got it. Thank you. Thank you.
Thank you.
Our next question will come from.
Moore from Morgan Stanley Your line is open.
Yes, hi, guys. Thank you for all the clarity on the.
So it can carbide customers Thats really helpful. I guess when you look at some of those that have also been announced by competitors.
Our social competitors, how is that business being split is it one vendor does the onboard charger another dose of traction inverter are there cases, where people are multi sourcing within those individual components.
Yes look I mean in all fairness, let me let me just give you a little bit of a time based questions. A lot of the ramps that are happening today are ramps that have been won call. It three maybe four years ago.
Before on semi was call it a credible and a focused player and silicon carbide, we talked about our strategy of doubling down in silicon carbide in 2021.
So my focus in our strategy and a lot of the wins that we have our forward looking obviously they already started they are ramping are four against that 1 billion dollar we have in 'twenty three but forward looking so how it split.
Mike I said.
Most of the platforms are single sourced so I can tell you because the packaging is not like it's swappable. So most of them are single sourced there are a few cases, where we may share.
Platform by majority of them are single sourced and those will be ramping think about what we're winning now is in the $25 26 and beyond.
What we are ramping now has already been won.
A few years ago. So that gives you a little bit on the timing of what others have been disclosing.
Which is not a surprise to me by the way.
Great. Thank you.
And then in terms of that.
Forward looking outlet you guys talked about maybe exiting a higher amount of business and you have the last couple of quarters the $75 million.
So how much of the cautious guidance is sort of the.
The factors that you talked about the non automotive markets versus the ability to maybe and a less tight supply environment to exit some of those businesses more quickly.
Well, it's really a combination of both right.
In Q4, we exited $17 million it was below our expectations of what we thought we would exit.
In Q1, we're looking at $75 million. So I think it's a combination of that but we're definitely.
We're definitely seeing slowness in the.
The other noncore markets rate consumer and computing has been down and continues to be down as I said, our automotive we expect to be up sequentially in Q1.
And we think industrial has got some headwinds as well, but so I would I would look at it as a cautious guy but.
Just kind of taking into account the exits as well as just the overall softness that we're seeing right now.
Okay. Thank you.
Thank you.
Our next question comes from <unk> Gill from Needham <unk> Company. Your line is open.
Yes, Thanks for squeezing me in I appreciate and congrats on the on the Silicon carbide ramp just a follow up on the long term supply agreement I was wondering if you could maybe talk about any changes that you're seeing within those agreements I know a couple of quarters ago, you talked about certain customers requesting more volume.
Near term some customers extending the agreements.
Some customers.
Requesting higher volume, so any kind of positive.
Specific changes within those lts.
You would like to call out or noticeable.
Yes.
<unk> been the same.
We've done a lot of amendments.
Amendments, while we call amendment, where customers came in and wanting more.
<unk>.
Volume and obviously in the areas, where we have been able to release volume because of the decline in the other markets and our ability to convert we have been able to sign up for more volume for the customers still unfortunately less than what their demand.
Natural demand would be.
But we have been able to increase that so customers always engaged with us on kind of almost what about now what about now are we able to get that some of the technology or our medium voltage remained constrained our IGT remain constrained silicon carbide, obviously, we maintain our constraint.
Page sensor constraints. So we do have technologies across the company and that remained constrained so any opportunity we have where we were able to gain efficiency in our manufacturing footprint or convert.
From non strategic or non core to core technology in our fab, we actually will either proactively go out and talk to our customers that we know we're not supporting a 100% or they come to us with some mix some of it is again.
Our sockets that we want to get to a 100% and lately its been where others cannot support and customers have come to us and those were have been share gains.
So we're able to solidify those and in <unk> SA to sustain five to sometimes seven years.
Bank.
So it's still the environment is positive as far as the Lts aid because it's more on a long term, it's not anything about what we can do in 'twenty three.
I appreciate that color and just one follow up in terms of the overall pricing environment I know as part of your strategy you talked about reducing the price the value discrepancy.
Obviously, you have prices kind of locked in regarding the <unk>. How do you think about the pricing environment overall blended pricing this year.
You see the benefits of those.
Those strategies, but then kind of offset by maybe the non strategic.
Look I think we would expect the pricing environment to be stable. This year are our approach to pricing has been strategic where you mentioned.
Looking at the price to value discrepancy.
A lot of that so that's all behind US right now, it's really focusing on supporting our customers with.
Supply so we don't see any.
Any call it pricing.
That we do.
Obviously, we're always sensitive to cost and we keep an eye up on cost. So if we do get cost increases that are not part of already our LTE SA or cost increases that are.
New that we havent gotten yet from some of the vendors. We are of course, we will pass those on but as far as the pricing environment net of that and we do see it as stable.
Thank you.
Thanks.
Thank you.
This does conclude the question and answer session for today's conference I'd now like to turn the call back over to Hassan <unk>, President and CEO for any closing remarks.
Thank you again for joining our call and thank you for the thousands of employees, who have had a direct impact on our exceptional results as we entered this new year amid a dynamic macro environment I am confident that we will maintain our momentum and navigate this market better than we ever have as a company.
<unk>.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly two reasons lower Johan during Q&A, you can dial one one.
Yes.
Yes.
Sure.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.