Q1 2023 On SemiConductor Corp Earnings Call
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Good day, and thank you for standing by walking through the answer would be first quarter 2020 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone you will then hear an automated Mr. Tobias This race to withdraw your question. Please press star wouldn't want again, please be advised.
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I'd now like to hand, the call over to your speaker today Parag Agarwal. Please go ahead.
Thank you Kevin.
Good morning, and thank you for joining us I mean, that's part of our capital.
Part of the <unk> results conference call.
John .
And I'm, sorry, our president and CEO .
And Patrick our CFO .
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The calculation of these non-GAAP financial measures to the most directly comparable GAAP measures and the GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations director.
Yeah.
During the course of this conference call.
We will make projection or other forward looking statements regarding future events or the future financial performance of the company.
We wish to caution that such statements are subject to risks and uncertainties that could cause actual results or events to differ materially from projections.
Factors that can affect our business.
Factors that could cause actual results to differ from our forward looking statements are described in our most recent Form 10-K as well.
<unk> other filings with Securities and Exchange Commission and in our earnings release for the first quarter of quality quantity.
Our estimates are therefore were looking statements may change.
Company assumes no obligation to update forward looking statements to reflect actual results changed assumptions or other events that may occur except as required by law.
Now, let me turn it over to Hassan Hassan. Thank you parag good morning, and thank you all for joining us today.
As we continue our transformation I am pleased to report another quarter, where we've exceeded expectations with revenue of $1 $96 billion and non-GAAP gross margin of 46, 8% both above the midpoint of our guidance.
The current market environment did not deter us from our goals. We have teams around the world are committed to operational excellence and I am proud of the results. They have achieved in this first quarter.
Over the last two years, we centered our transformation around the structural changes that would enable us to better navigate the uncertainty in the semiconductor industry.
We streamlined our product portfolio reduced price to value discrepancies double down on silicon carbide and improve the overall operations of the company.
We have incredible talent in the company and we have all have been all hands on deck to solve some of the worlds toughest engineering problems to accelerate the ramp of this next generation technology.
Thanks to our team's relentless efforts, we are seeing greater than anticipated silicon carbide results.
Ahead of our internal plans for manufacturing output at every stage of the process from both to die to modules.
In Q1 alone. These results allowed us to ship nearly double our Q4 revenue and more than half of our 2022 full year revenue.
We are on track to grow our revenue to $1 billion in 2023, and Thats approximately by Baxter revenue of 2020 to setting ourselves up for leadership in the silicon carbide market with the majority of the substrate sourced internally.
Demand for electric vehicles, a desk and energy infrastructure remain healthy and made a broad based macroeconomic slowdown.
While our automotive revenue increased 38% year over year. It was flat quarter over quarter, we are still supply constrained across several automotive technologies, while in some other technologies, we are cautiously monitoring inventory digestion.
In Q2, we expect to see quarter over quarter growth in our automotive revenue.
In Q1, we shifted our mix to energy infrastructure, where there is high demand and high growth our industrial.
Revenue in turn increased 1% sequentially instead of the declined we had anticipated.
Driven by the need for our tolling of energy sources and accelerated by global geopolitical issues installation of energy storage systems is increasing along with our content that includes silicon carbide and silicon power solutions.
Pricing across our business is stable and we don't anticipate any changes in the pricing environment, a significant part of our business is secured by long term supply agreements and pricing in these agreements is fixed for multiple years.
Also as part of our business transformation, we have walked away from price sensitive businesses and non strategic areas to drive predictable financial results.
In Q1, automotive and industrial accounted for 79% of our total revenue as compared to 65% in the quarter a year ago when.
When we started our transformation, we targeted 75% of our business to be automotive and industrial by 2025, and we have achieved our desired end result, two years earlier.
We also improved our demand visibility across all markets with commitments from our customers new and existing in the form of <unk>.
These L. TSA has also helped reduce our exposure to the volatility in the consumer and computing markets.
Volkswagen as an example signed a three year agreement for more than 100 current production devices, giving them the required supply chain sustainability with a major semiconductor partner are committed revenue through <unk> increased again in Q1 by $1 billion.
We are supporting our customers today, while working closely with them on next generation designs for their intelligent power and sensing needs.
In addition to the <unk>, we announced last quarter. We were recently honored with the 2022 supplier of the year Award from Honda Motor Group with truck ignite on semi as a trusted provider for key technology and its ecosystem offering supply chain resilience and manufacturing sustainability.
Customers also recognize us as a strategic partner that provides high value through the entire design cycle, which gives them a competitive edge over their peers.
In March we launched our new elite power simulation tool to bring complex power electronics applications to market faster through system level simulations saving design engineers from expensive time consuming hardware fabrication and testing in the early stages of development.
This tool will also allow us to get a broader customer reach through our distribution network with a low touch model to design in our products.
Global automotive Oems are choosing to partner with on semi for the superior performance of our end to end Silicon carbide solutions.
Just last week, we announced an <unk> TSA with Zika, a leading all EV manufacturer in China, who has selected on Sami's third generation <unk> hundred volt elite sic MOSFET to increase the electric powertrain efficiency and extend the range of his expanding portfolio of high performance electric vehicles.
<unk> elite sic power devices deliver improved power and thermal efficiency, which reduced the size and weight of the traction inverters to deliver improved performance, resulting in extended driving range and faster charging speeds.
BMW Group has also selected on Sami's elite sick to support range extension for their next generation electric vehicles.
They secured now TSA with us to equip their future electric drivetrains with our silicon carbide technology to increase efficiency and system level performance.
We also continued to invest in silicon power and as auto Oems move to zonal architecture, we deliver intelligent power solutions that meet all voltage range requirements from 12 volt to 48 volts and beyond.
Through these strategic partnerships, we are enabling our customer sustainability efforts, while also working on our own.
We committed to the science based targets initiative and flex to set near term science based emission reduction targets in line with Spi criteria and our de Carbonization journey to achieve net zero emissions by 2040.
Our Q1 revenue for intelligent sensing increased 26% year over year.
We introduced our new hyper Lux family of image sensors to support the transition to eight megapixel devices.
Asps can be up to two five times that of one or two megapixel image sensors.
Our traction for image sensors, and automotive has proliferated into industrial automation and smart retail applications.
Our newest eight megapixel image sensor achieved stunning four K video quality with optimized near infrared response necessary for industrial applications with harsh lighting conditions, such as security and surveillance body cameras doorbell cameras in robotics.
The shift out of lower value commodity applications, coupled with capacity expansion and differentiated products and packages.
<unk> to supply to demand gap and is driving margin expansion and revenue growth in our focused markets.
Automotive and industrial now account for more than 95% of our intelligent sensing business.
Beyond image sensing our intelligence sensing penetration is expanding with other sensing solutions in our portfolio.
We shipped our one billionth inductive position sensor IC to Halla, one of the largest automotive supplier who uses our technology in their drive by wire systems, such as accelerator pedal sensing steering and torque sensors as well as actuators for pressure boost in turbos.
We also lead the market in automotive ultrasonic sensors with more than 20 sensors and one of the latest EV models from a leading European Oems.
In Q1, our intelligent power and intelligence sensing revenue accounted for 69% of our total revenue as compared to 64% in the quarter a year ago.
As we get ready for the next chapters in our journey, we are applying what we know operational excellence and controlling what we can and executing to our commitments we.
We have positioned ourselves to lead in our focused markets with superior technology to offer customers and we have the agility to pivot and adapt to change as required by the business and market environment and more importantly, we have the team to execute.
Now I will turn the call over to <unk> to provide additional details on our financial and guidance.
Thanks Hassan.
As I highlighted we exceeded expectations in the first quarter, which is a testament to our employees around the globe, who are committed to operational excellence.
Our ability to focus invest and execute as <unk>.
The benefits across all areas of the business and allowed us to maintain our financial targets, while navigating the market uncertainty.
We continue to identify and extract operational efficiencies in our business groups and corporate functions, while identifying gross margin expansion opportunities.
I'll start by diving into our results for the first quarter total.
Total revenue was $196 billion.
The midpoint of our guidance driven by strength in silicon carbide and energy infrastructure.
In Q1, our silicon carbide manufacturing output was ahead of our internal plan and we nearly doubled our Q4 revenue increasing our confidence in our path to the $1 billion a year.
Our automotive business now accounts for 50% of total revenue.
And at $986 million in Q1, it was flat sequentially offset by a recovery in industrial revenue and.
Industrial revenue grew by 1% quarter over quarter, surpassing our original projections.
We anticipate another stellar year for our energy infrastructure business with projected 50% growth over 2022 at accretive gross margins.
Revenue for the power solutions group or PSG was $1 billion, an increase of 3% year over year, and we saw sequential gross margin expansion as our silicon carbide ramp exceeded expectations on both revenue and margins.
Revenue for the advanced solutions group or ISG was $593 million.
A decrease of 14% year over year and revenue for the intelligent sensing group or ISG was up an impressive 32% year over year at a record of $354 million.
ISG is impressive turnaround continues as Q1 was also their 11th quarter of gross margin expansion with record gross margin exceeding 50%.
As a corporation, our consolidated gross margin held up nicely.
GAAP and non-GAAP gross margin for the first quarter was 46, 8% above the midpoint of our guidance driven by higher than anticipated industrial revenue and improved manufacturing performance for silicon carbide output.
We also exited an additional $47 million of revenue in the quarter at an average gross margin in the mid 40% range, bringing the total revenue to date to $341 million of noncore business exits.
Our non-GAAP gross margin declined by 160 basis points quarter over quarter as expected with the ramp up of silicon carbide, and <unk> headwinds and lower factory utilization of 71% as we continued to slow wafer starts.
Q1 was our first quarter of operations since acquiring our 300 millimeter fab in east Fishkill.
The current operating cost is much higher than we had anticipated. So the dilutive impact is greater than we previously expected.
However, based on our current outlook. We are confident we can realign the cost structure of the fab and drive efficiencies to recover by early 2024 as.
As demonstrated in Q1, we expect to maintain our gross margin trajectory for 2023.
Our financial strategy remains unchanged as does our capital allocation strategy in Q1, we returned more than 100% of our free cash flow to our shareholders with share repurchases of $104 million.
This was the first repurchase from our new authorization, which allows us to repurchase up to $3 billion through 2025.
Additionally, we issued $1 5 billion in convertible notes in Q1 with the proceeds used to repay our term loan. This was essentially leverage neutral and highly accretive as we swapped out a portion of our variable rate debt approaching 7% with the fixed rate convert with a coupon of 50 basis point.
We also entered a call spread transaction, increasing the effective strike price to $156 78 per share providing significant dilution protection.
Now let me give you some additional numbers for your models.
GAAP operating expenses for the first quarter were $352 6 million as compared to $314 1 million in the first quarter of 2022.
non-GAAP operating expenses were $286 million as compared to $302 8 million in the quarter a year ago.
non-GAAP operating expenses per BOE were below our guidance as we manage discretionary spending across the company given the uncertain macro environment.
We also initiated structural changes to AFG to improve operational efficiency by reallocating resources to high growth R&D initiatives, while improving our product development and time to market and industry, leading proprietary products.
Our non-GAAP tax rate was 16, 3%.
GAAP earnings per diluted share for the first quarter was $1 three as compared to a buck 18 in the quarter a year ago non.
non-GAAP earnings per share was $1 19 above the high end of our guidance.
Our GAAP diluted share count was $448 5 million shares and our non-GAAP diluted share count was $439 1 million shares.
Turning to the balance sheet cash and cash equivalents was $2 $7 billion, and we had $1 6 billion undrawn on our revolver.
Cash from operations was $408 9 million in free cash flow was $87 4 million or four 4% of revenue.
Free cash flow was negatively impacted by timing of annual bonuses and capex payments.
Capital expenditures during Q1, with $321 5 million, which equates to a capital intensity of 16, 4% for the quarter.
As we indicated previously we are directing a significant portion of our capital expenditures towards silicon carbide, and enabling our 300 millimeter capabilities at east Fishkill Fab and expect our capital intensity to be in the mid to high teen percentage range for the next several quarters.
Accounts receivable of $889 million increased by $38 6 million and DSO of 41 days increased by four days.
Inventory increased by $198 $1 million sequentially and days of inventory increased by 23 days to 159 days.
This includes approximately 43 days of bridge inventory to support fab transitions and the impending silicon carbide ramp.
We continue to proactively manage distribution inventory decreasing inventory in the channel by $79 million sequentially.
And at historically low levels with weeks of inventory at seven weeks compared to $7 three weeks in Q4.
Total debt was $3 5 billion and net leverage is two five.
In Q1, we accrued $41 million on our balance sheet under property plant and equipment related to the 25% investment tax credit for investments in our U S factories.
This will eventually flow through our income statement as lower depreciation and will receive the associated cash benefit in the future.
Let me now provide you a key element of our non-GAAP guidance for the second quarter.
A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our first quarter results.
Our business continues to strengthen with total committed revenue under <unk> of $17 6 billion.
An increase of $1 billion quarter over quarter.
We expect to recognize approximately $5 8 billion of committed revenue from our LTE assays in the next 12 months. In addition to our non cancer, both non returnable orders.
Given the macro uncertainty.
We're taking a cautious stance in our guidance, we anticipate Q2 revenue will be in the range of one 975 billion to 2.075 billion, we expect automotive and industrial to increase quarter over quarter with other markets flat to down as we plan further exits in our non strategic.
And markets.
We expect non-GAAP gross margin to be between 45, 5% and 47, 5% due to lower factory utilization.
<unk> headwinds and the dilutive impact of ramping Silicon carbide, which remains ahead of plan.
This also includes share based compensation of $4 $5 million as.
As we previously stated 2023 will be a transition year for our gross margins and we expect to maintain our trajectory as we manage these temporary headwinds.
We expect non-GAAP operating expenses of 297 million to $312 million, including share based compensation of $28 8 million.
We anticipate our non-GAAP of Hawaii will be $3 million to $5 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 second quarter is expected to be approximately 440 million shares.
This results in non-GAAP earnings per share to be in the range of $1 14 to $1 28.
We expect capital expenditures of $420 million to $460 million.
Marilee in brownfield investments in Silicon carbide, and <unk>, which are more efficient use of capital than the greenfield alternative or building a fab from the ground up.
We are very proud of our financial results through this transformation and we will continue to deliver value for our shareholders.
We are equally pleased with our cultural transformation on semi is a very different company today.
We challenge the status quo, and we hold ourselves accountable to our commitments.
As many of you know we have been holding an analyst day in New York on May 16th and we look forward to sharing our future plans to accelerate value for our shareholders.
We hope to see you there.
With that I'd like to turn the call back over to Kevin to open the line for questions.
Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.
Okay.
Okay.
Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.
Hi, guys. Thanks for letting me ask a question Sean I wanted to ask about the auto side of your business investors are getting a little more concerned just about that market given that it's one of the few that hasnt cyclically adjusted and you guys were flat sequentially versus what you thought would be up a bit and that's all despite the silicon carbide side upside and so I guess could you.
Just talk a little bit about what youre seeing there inventory demand and perhaps separate the silicon carbide side from.
The other parts of the business when you give that answer please.
Sure look I, obviously for silicon carbide, so ramping.
For us you've seen tremendous progress in the first quarter slight.
Slightly ahead of where we thought we would be based on just the team doing a stellar job ramping the technology, that's going to keep ramping throughout the year you can think about it as.
An uptick in the second half as we accelerate exiting the year on track for the $1 billion that we talked about and then every day, we add more and more confidence in those numbers.
The rest of automotive obviously, we have some technologies that remained constrained so demand demand is healthy we remain constrained in our ability to supply to that demand.
Think about that as our silly.
Silicon high voltage silicon medium voltage that not just go to the EV.
Demand, but also a broader.
Aspect of that demand.
Other technologies, we're monitoring.
The inventory digestion I as I said in my prepared remark.
That was kind of the first quarter, where we want it to look at it we use that opportunity to drain.
Distribution inventory, where you see we went from seven 3% to seven weeks and Thats, a pretty big number over $70 million.
Dollar drained from the inventory because we wanted to set ourselves up for the uncertainty in the second half of the year that everybody keeps talking about so from a demand I am comfortable with the EV, that's a ramping business for us the rest were cautiously monitoring.
As I mentioned in my prepared remarks, Q2 is an up quarter for us in Q1. So you can think about automotive as we took a breather in Q1 to test the inventory and we're going to keep ramping for the rest of the year full year, we're going to be up from last year. So that gives you kind of an idea on the overall demand as we see it outside of <unk>.
Quarter on quarter.
Fluctuation.
Perfect. Thanks for that and I guess moving for my follow up over to Thad on the gross margin side of things.
It seems like there were quite a few moving parts, especially the east fishkill on the silicon carbide side, but the net of it all seemed to be right in line with your plan can you just talk a little bit about those moving parts east Fishkill is more expensive, but silicon carbide is ahead of plan does that still net out to the same trajectory through the rest of the year just walk us through those puts and takes and maybe the utilization side as part of that as well.
Please.
Yes, so the.
The utilization dropped in the quarter from about 74% to 71%, we expect kind of what we're seeing right now is utilization to stay in that range plus or minus for the remainder of the year.
Obviously, if there is a second half recovery, we can we can ramp up quickly.
You nailed it on the rest of our silicon carbide performed better than expected <unk>.
Cost as I said is coming in significantly higher than we expected.
You can think about these as being kind of orders of magnitude.
More dilutive than what we expected the good news is we are absorbing that.
As I said, we're finding additional opportunities to improve gross margin across the company and we're able to absorb that.
We believe by week by the time, we get into 2024, we've got the cost structure of EBIT came back in line to where we would expect it to be.
So we're really confident in the margin outlook for this this year I don't think anything changes I think if we look at.
Street consensus for gross margin for 2023, even with these headwinds we think we can execute to that.
Those expectations.
Thank you.
One of them are <unk> next question.
Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.
Thanks for taking my question.
Thought I wanted to ask about your plans for in sourcing the materials side <unk> silicon.
But can you give us a progress on how that's going I believe you said during the prepared remarks that you.
You are targeting to be majority in sourcing is that a full year comment or is that an exiting Q4.
So just give us an update on where you are from an in sourcing.
<unk> and let's say if you are a majority in sourced exiting the year, how does that help you on the gross margin side.
Yes look my comment is exiting the year basically reiterating our plan that I've stated.
Throughout the year last year.
Establishing the supply establishing the growth in our Hudson facility in order to set ourselves up exiting the year majority so that holds.
That holds even more now given the progress that we've had in Hudson just in the last.
<unk>, which drove a lot of our favorability in our results and the gross margin.
<unk> talked about so I remain very very happy with with where we are from the progress.
And the confidence that we have in reiterating our plans.
As far as the gross margin obviously in sourced as always is always better because you can see that.
The merchant there is always margin stacking that happens to our ability to be able to mix and have a majority exiting of course helps the margin as we move.
Through the year, but the biggest portion of the margin expansion for Silicon carbide is really going to come from the utilization of that fixed cost that we've implemented and that remains on track for us to get that business too.
At or above the corporate margin. So we remain very.
Focused on that and really satisfied with.
With where we've done so far.
Got it and for my follow up is on I think you mentioned that so specific to autos that you took the opportunity to in Q1 to drain some of the inventory.
How are you seeing the overall pricing environment as you look Q2 through Q4 versus what you had talked earlier are there any changes there is a lot of macro crosscurrents, but how is that impacting your automotive outlook Q2 through Q4, especially on the pricing.
<unk> side are there any changes one way or another.
Absolutely no changes.
Actually very very predictable and thats really the benefit that we've been talking about with the <unk> that have us really with our customers align on pricing and volume.
Through the duration of the <unk>. So no conversations about pricing. The focus has always remained on on supply.
And that's holding up not just through the year, but through the.
The extent of the <unk>, we have with the customers. So.
Very very stable and no no pressure on that and by the way. It's not just in automotive the pricing is holding up across all markets, where we have <unk> and we because we as you know we've been focusing on products that provide value, it's not a pricing conversation, it's about what the products bring to the customer.
The things that would have pricing pressures fact talked about how we have been focusing on exiting those that business.
The point, where it's above.
The business, we exited had a four handle on the gross margin and we still are steadfast on exiting because that is where the margin pressure will come in and the pricing pressure and we're not going to play in these markets and were getting ahead of it and exiting those businesses.
Excellent. Thank you Sam.
One moment for our next question.
Our next question comes from Christopher <unk> with Citi. Your line is open.
Thanks, guys I didn't know I went from Jewish to Italian overnight.
Anyway can you just give us a little update and some color on the shortages in the lead time situation.
I guess for Hassan our shortages pretty much exclusively.
In the automotive business or are they elsewhere and then is there any point in time this year, where you think the shortages will go away.
Yes.
For me I always refer to shortages as technologies, because they are across all markets, where we provide them.
High voltage.
Silicon.
Of course, a constraint technology for us we ramped capacity yet the demand is much higher than even our increased capacity and for that business. For example, it goes into automotive and it goes into industrial specifically in our alternative energy and as that said that's ramping very nicely. This year after a <unk>.
Stellar 22 ramp that we talked about last year. So that is technology that is constrained we have some intelligent power technologies that are constrained.
It is mixed signal analog where demand in automotive and demand in industrial.
Both have been increasing ahead of the capacity we've added.
Those are technologies agnostic of markets, we remain constrained.
Not because of just capacity, but demand keeps accelerating because of the markets. We are participating in.
As far as the second half of the year that really depends on what your view is for the second half of the year based on our outlook that technology will still remain constrained.
There while in other areas not in these specific technologies, we're seeing some <unk>.
Flattening and our lead times and therefore, we can see some of that easing by the second half is really going to depend on how what the demand does and based on our outlook, we're going to remain constrained.
Yes.
Lead times lead times are relatively stable.
Running kind of in that 41% to 43 week timeframe.
In quarter, I think down a week to two weeks, but I would I would call it pretty much across the board and lead times are stable.
Okay, Great and then for my for my follow up just I guess, one for that so as the Capex is ramping that can you just talk about maybe over the next three to five years.
How thats going to impact depreciation and gross margin and can this all of the offset by the efficiencies or what will be the I guess the gross margin headwind from all this capex a little farther down the road.
Yes.
I'll start out by saying.
We're making big investments in Silicon carbide and <unk> as I've mentioned now as you think about our capital.
Spansion and an expansion in capacity.
It's to support the <unk> that we have right. So this is not a situation where we're building capacity, hoping that we can fill it. So we're very comfortable that with our margin projections that we can absorb that additional depreciation.
In general I wouldn't call it significant but which you would see is offsetting revenue and gross margin to offset that depreciation.
Perfect. Thanks, guys.
Okay.
One moment for our next question.
Okay.
Alright.
Our next question comes from <unk> Hari with Goldman Sachs. Your line is open.
Hi, good morning. Thanks, so much for taking the question I had a follow up question on gross margins as well just curious how we should be thinking about the timing of headwinds from both the silicon carbide ramp and the F K ramp, peaking.
Is that sort of a second half 'twenty three dynamic or should we expect the headwinds to stay relatively elevated in the early part of 'twenty four.
And also the.
The benefits from your Fab Lite strategy, I think you've sized it at $160 million and reduce costs over time once we expect those benefits to kick in.
Yes, so the <unk>.
The impact of the $160 million to start there.
We expect to get that as we exit those fabs, we think that really starts to kick in in 'twenty, four and 'twenty five.
It takes it.
At least three years to exit a fab. So I think most of that starts to roll in $24 25 on.
On the headwinds from Silicon carbide and FDA. So the FDA is already hit us in Q1, you can think about that as being pretty consistent through the year. We think by early 2024, we can get that back in line and it isn't the headwind that we that we do.
We got surprised with.
Silicon carbide.
Ahead of schedule, which is really great.
It's performing much better than we expected there is a headwind there we think it likely peaks kind of in that Q3 timeframe and then we think by the time, we get to 'twenty four.
Those margins are at the corporate average so that's behind us as well.
<unk> will be a little bit of a drag as we've talked about previously and 24%, 25% as we continue to do that foundry business for <unk>.
For Globalfoundries, but we think we can get the cost structure back in line this year.
That's helpful. Thank you and then as my follow up one for Hassan a little longer term.
Previous analyst day, you had guided revenue growth for the overall company and kind of the 7% to 9% range.
I think you have pretty good visibility given given the <unk> pipeline is the 7% to 9% range still the right range in your view as you think about the overall company over the next several years.
Or do you think with silicon carbide and some of the other opportunities that you have secured you could potentially outgrow that thank you.
Well.
I would say must be present to win.
I'll see you in.
At our analyst day on May 16th.
For that one.
Okay. Thank you.
One moment for our next question.
Our next question comes from harsh Kumar with Piper Sandler Your line is open.
Yeah, Hey, guys first of all congratulations on a very successful transition so far Hassan Pat and team and then also the near term results in a choppy environment.
So first question I had is we had a.
A peer of yours and other perhaps segment in the auto business that headquarters outside of China are you can you stay blame China EV slowdown.
I'm just curious given your position in China, if you could comment on what Youre seeing in the EV market and then I've got a follow up.
Yes look I mean, we all see the EV market in China, but the difference for US is China for us is a ramping market.
And thats really going to be contributing to a ramp throughout the year. So even if.
The demand call it on the top demand.
A little choppy out of China for Us, it's incrementally favorable and we're going to continue to ramp there. So we don't see it we're kind of.
Disconnected from it given that for us it's a ramp it's not a mature market yet and that puts us in a very good position.
Thanks, John and then maybe one for Todd what is you talked about the timing for the silicon carbide headline in the Fishkill headwind.
Could you quantify what youre seeing in terms of a headwind would you be able to give us a number and then the second part of that question is I think Hassan you mentioned in your comments that maybe Todd did that by the third quarter timeframe. Your silicon carbide business would be at corporate margins. So are we thinking 40 as high fourteens or are we thinking <unk> ultimate.
Italy as a stable gross margin for the silicon carbide business.
Yes, so harsh what we've said is at.
At scale.
Once we fully ramp silicon carbide, those margins would be at or above the corporate average.
As I said, we've got headwinds that we think peak in Q3, we think by the time, we get to 'twenty for that headwind is behind us in terms of the magnitude of the headwind. We've said historically that silicon carbide is 100 to 200 basis points of a headwind we're performing better than we are.
<unk>. So you can think about that is it's not at the high end of that range somewhere in between there.
But we're very very confident in our outlook here based on our performance that that.
We can continue to execute there and we feel very good.
On <unk> as I said, we had the full impact in Q1, you can see we absorbed it and offset it with.
Gross margin expansion in other areas.
Historically, we've said that's 40 to 70 basis points I've said, it's significantly higher you can think about it as being greater than two X, what our expectations, where again, we think we can absorb that throughout the year our margin trajectory doesn't change and we're very comfortable with street consensus on gross margin for the year.
So I think it gives you our confidence in managing through this.
Thanks Fellas.
Yes.
One moment for our next question.
Our next question comes from Rajeev <unk> with Needham Your line is open.
Yes, Thank you and congratulations as well on great results in a tough environment just a quick question on the automotive market.
You mentioned this on a modest.
Inventory digestion in the end market and then you're also kind of reducing distribution inventory.
Can you talk a little bit about the overall demand picture for automotive.
I know, it's hard to kind of separate the significant ramp that you are seeing in electric vehicles and in turn silicon carbide.
But just curious if there is.
Softness in the demand market. If there is a shift away from high end to mid range any kind of color on the automobile automotive market will be appreciated.
Yes look we don't see a big big disconnect in the demand.
Like I said it was a momentary thing where we use this opportunity to kind of reposition.
The inventory that we have externally and we get back to growth in the second quarter and through the year.
Giving us an increase in our automotive revenue year over year, so that really doesn't change.
The outlook about what we are.
While we take a look at if you think about it it's a stable environment.
We're going to be growing in automotive because I really don't see it.
We don't see any areas that causes us pause or a change in our outlook. So we remained confidence confident with that.
Alright, very good and for my follow up on the <unk>.
You talked about $17 6 billion that was up 1 billion quarter over quarter was that all primarily related to silicon carbide incremental designs or other drivers in and just along those lines you saw significant growth in energy infrastructure, you are talking about it up 50% year over year can you describe what.
What are some of the tailwind in that market. Thank you.
Yes, so the <unk>.
We continue to stack those up another $1 billion.
This quarter to $17 $6 billion, it's broad it's across the board.
Silicon carbide theres non silicon carbide, but.
When we think about how we're engaging with our customers that want assurance of supply, they're looking at the entire portfolio and and locking that up with us for multiple years and again keep in mind. These help TSA as on average of four to five years. So.
So as.
As Arne said pricing stable in those really gives us better predictability of our business and we're happy that we continue to engage with customers on that way.
See customers expanding.
<unk>, either by adding additional part numbers or extending the duration and then we've got new customers that have been on the outside looking in that are coming in saying, we need to get an LTE assay with you.
So we think that trend will continue.
And then I'll go to alternative energy.
Tailwind as the market driven we had a stellar year in 'twenty two from 'twenty one.
And that's compounding now.
What we're going to see in 'twenty three from 22, and that's all of it is market driven and Thats, primarily the big components here, our silicon power and Silicon carbide, but again as Todd mentioned, we have a penetration with the whole Bom bill of material and if you recall.
Most of that market for us is under <unk>.
We have <unk> with eight of the top 10.
<unk> vendors in the world and they are ramping given the demand and we're ramping with them given our content.
Thank you very much.
One moment for our next question.
Our next question comes from Matt Ramsay with TD Cowen Your line is open.
Thank you very much guys good morning.
Hassan I wanted to.
There is so much focus that typically goes into the silicon carbide space on substrate.
Yeah.
Mentioned, a few times ramping capex and other things around brownfield fabs in order to support the business as you ramp the substrates allergy Tat, maybe you could give us a little bit of color on how the non substrate part of your supply chain is going for silicon carbide and just what position that might give you guys on.
Our cost basis relative to some others that are doing greenfield facilities.
Yes, so look I as I mentioned, where we have been increasing capacity. We started in 2022 in preparation for the 23 ramp and really the 24 ramp in this case.
Where a lot of the focus like you said has been on substrate because thats. The first thing we have to ramp.
But we've increased capacity in our wafer ing and internal apps that gives us a very big cost advantage versus getting turnkey externally and then following that is increase in our fab capacity, which also gives us a much better cost structure because of the fab. We are ramping is an existing power.
Our fab that's why we do.
Really most of our <unk> and having a power fab at scale.
It gives us that edge and one from a cost and two from the speed at which we can we can scale. So think about it this way.
Increasing capacity in an existing fab that already does power, it's way cheaper and weigh less risk than brownfield and a power fab and silicon carbide.
<unk> has always given us the confidence in our ramp.
Has always given us the confidence in the slope of the ramp which really exceeds everyone else out there and we're on track to achieving at all of these give us what the cost to the risk mitigation and three the confidence in our outlook.
Thanks Hassan.
As my follow up I wanted to ask I think both of you guys mentioned in your script. This morning.
Some little pockets, where you're I think the words, we're cautiously monitoring inventory.
And maybe you could obviously the growth of the company and the results speak for themselves and you're overcoming some of those things, but if you could just give us a little bit of color on where you are.
Those pockets of inventory are they clearing up are they getting worse just any color there would be helpful. Thanks guys.
Yes look.
And I say pockets again I'll go back to my comment from prior about the technology.
We remain constrained and technologists across all markets and there are areas, primarily you know as you can think about it mostly on the consumer and compute where we've been one is cautiously monitoring specifically to this the inventory and that's why you've seen us even this quarter be very aggressive in draining.
The dollars in the channel so although.
The weeks or three weeks down in the channel, but dollars are almost $80 million.
Down and Thats, a pretty steep decrease that we have been managing and look we've been managing it throughout the whole even when supply was constrained across the board. So inventory for US is a big focal point, not just internally, but externally and until we get.
Higher and higher confidence in what the second half is going to bring we're going to be cautiously optimistic and really holding back on what we ship out of the company unless we are seeing high confidence in our POS thing, we're not going to have inventory just sitting around whether it's our distribution shelf or the customer shelf and that really.
It's us up for a very nice recovery whenever that starts turning out to be.
Thanks Hassan.
One moment for our next question.
Our next question comes from Christopher Roland with Susquehanna. Your line is open.
Hey, guys. Thanks for the question.
Im going to talk about image sensors.
Did talk about supply constraints across several auto Tech I just wanted to check the update of that and then it seems like some of the drivers there are the move to eight megapixel.
I was wondering kind of what your competitive position is there what percent of revenue.
It might be at eight versus one or two.
Overall, thanks, so much.
Yes look obviously, our competitive advantage across the board in image sensor is really on technology. We've talked about specific technology I mentioned, a few of them were near infrared that helps with.
Different lighting conditions that of course applies in automotive in the examples I've given in my prepared remarks, our SAR industrial but it also applies in automotive where the high dynamic range, whether it's very bright light with Sun are very dark.
At night.
These are all competitive advantage on detect not inherent in our technology that customers value and that we provide solutions for them.
The eight megapixel, that's a new generation that we have we have launched.
Cross both auto and industrial you're going to you can expect that to be forward looking.
A mix shift as we ramp that so today, it's very small but.
But the commentary I gave about ASB with of course.
Also translates to improved margins that is on a forward looking basis that both that and I have always said, our new products are at or ahead of our model the 48% to 50 and as we ramp these products youre going to see the margin expansion that will be.
Contributed to buy these products, becoming a higher percent of revenue. So that's more of a forward looking statement that again gives us the confidence in our margin trajectory and the fact that we've always said.
The model is not the destination, it's really a milestone.
Excellent and just maybe following up there and then a quick one so you mentioned the supply constraints across several auto attack technologies. I think you mentioned, some but just wanted to kind of that more comprehensive less and then.
Lastly, M&A.
You have a ton on your plate organically, but are you still considering.
Inorganic.
And how do you see that market.
Yes look so across the board, obviously I think.
I'll comment on image sensors image sensors.
Our foundry business for us we're.
We're seeing some easing in the foundry, so we get a little bit.
More capacity allocated to us.
And I mentioned in my prepared remarks, we use this opportunity to really bridge that supply to demand.
Gap that we've had in the last couple of years, and we're making progress into catching up we're not caught up yet, but we're making progress so that remains a constraint obviously.
<unk>.
The high power Silicon think about it is <unk> or silicon carbide really we've always said we're sold out on silicon carbide. So improvements that we have contribute to.
To our achieving our numbers.
<unk> as I mentioned remained constrained because of the strength and not just the automotive market, but also in the industrial a lot of our energy storage systems, our silicon and silicon carbide, but a lot of it is remains still today on silicon so that adds.
Some of that constraint. So you can see it's really across the board.
Not specifically.
Specifically on markets, but it's driven by Mega trend growth that we are participating in as.
As far as M&A look you're right our focus is on.
On execution, we have a lot going on a lot of it is great work and that creates a ton of value for our shareholders. So execution is key and execution as our focal point.
But.
We never we never look away from.
M&A, we're always looking because those are opportunities that.
We will participate in but as we sit here today I can't tell you. There is something we are missing in order to achieve our organic plans of value creation.
So we'll be opportunistic will always drive and participate in the M&A landscape.
But there's nothing I would say we have to have which is the best place to be because we can be very disciplined in our approach of M&A.
Great update thanks Hassan.
Sure.
One moment for our next question.
Our next question comes from Gary Mobley with Wells Fargo. Your line is open.
Hey, guys. Thanks for taking my question and sneaking me in here.
I know harsh asked about the China EV market, but I wanted to ask more broadly about China digital demand where do you.
See that demand profile set today than.
Maybe give us a sense of China digital demand as a percentage of sale currently.
Versus where were extended in the past in terms of thinking about the optionality upside there.
Yes look and adjust for China, specifically in our non strategic markets, obviously thats been down both the market is down but also that is not a strategic market for us. So we've been exiting and a lot of the exit is driven by.
The market in China for us so that contributes its part of our plan. So that's not a surprise for us it's actually what we anticipated and that's how we've been focusing on these exits as far as <unk>.
Protecting our margin and Thats been our strategic plan all along.
We're starting to see it play out which is not a surprise for us.
On the EV.
Though there are some.
Pause in EV or a little bit of a redirection on the EV market in China for us that market is actually net incremental.
The ramping party and EV in China, and therefore that will remain through the through the rest of the year, even with the current outlook as a net favorable to our revenue growth.
So we're.
I would say no surprises no changes to our outlook and no changes to our execution as we move forward this year.
Got it.
As my follow up I wanted to ask about.
The supply of Silicon carbide materials to support your $1 billion revenue I. Appreciate the fact that you will be.
Majority internally sourced score substrates exiting the year, but I presume that.
Publicly purchased somewhere close to $200 million in merchant supply. This year, maybe if you can give us an update in terms of some of the constraints that you might be seeing there from your more traditional suppliers and how you might be broadening your supplier list there.
Yes look I'm not I'm not worried about the merchant supply obviously our percent of internal is going to be incrementally going up.
Throughout the year, we're going to be majority internal.
But as far as the de risking we've done a very good job on having multiple sources that we are able to pull on.
All in all sources not internal are qualified and we are getting what we need so therefore.
Think about it as a.
Very good and already in the playbook risk mitigation strategy.
While we continue to execute greatly on our internal subs.
Substrate.
I would just add that although it's a tight market out there obviously I think that's well known.
As I've said, we've been building inventory in silicon carbide for this ramp so we've been preparing for it and then obviously as we get more flex into internally supplied substrates that helps us.
Thanks, Ken.
One of them are for our next question.
Our next question comes from William Stein with <unk> Securities. Your line is open great.
Great. Thank you.
At the Silicon Carbide event, you hosted I think it was perhaps about a year ago.
You talked about the trend in supply and demand in silicon carbide likely remaining in the shortage situation for many years.
And we had this surprise.
Certainly a surprise to many people announcement from Tesla that on their nextgen vehicle. The so called Robo taxi theyre going to be reducing silicon carbide usage meaningfully.
I know, it's only one customer I know there.
Still a small share of global auto production, but it's an important customer.
It's an important data point I wonder how that influences your view of supply and demand for silicon carbide longer term not just next year, but as we think about five years plus.
Yes look the actually the announcement doesn't it doesn't change my outlook it actually.
I would say confirms it because.
If you think about it this is a new platform in a much broader platform as far as volume and therefore, it's incrementally beneficial as far as demand is in the market.
That's just on Silicon carbide. The other thing is when you start thinking and I don't want to talk about customers, specifically, but as more and more you can start thinking about silicon and silicon carbide. So GBT plus sick. This is a business that I've been talking about for really a couple of years and you've heard me talk about how it's always.
Customer choice and our ability to supply both is incrementally beneficial for us.
Therefore, when you start seeing silicon carbide, even with lower penetration of Silicon carbide on our platform is still a net incremental silicon carbide in mass market vehicles and that actually supports that.
The concept that I talked about.
That we are going to be.
Constrained over the next.
Few years.
That's super helpful. One other if I can.
Perhaps that you talked about the product.
New and margin of the exits you did during the quarter can you remind us how much is left of that what.
Sort of duration you expect for the exits to last and should we continue to expect sort of this mid <unk> gross margin.
Level on the exits going forward. Thank you.
Yes, so we think for the year there is a total of about $400 million of exits.
The first quarter, we were at $47 million below our original expectations. We thought it was going to be higher than that this quarter.
But we actually think we will still exit this throughout the year.
I think this next quarter in Q2, we're probably looking at about $85 million.
<unk> and.
The remainder of that to be in the second half. So youll see these exits ramp. Additionally in the second half.
The gross margin is yes. It is kind of in that mid 40% range of what we're going to lose currently and this is the stuff that's price sensitive.
The reason, we're going to lose it is because we're not going to we're not going to go down that pricing curve right. So this is these exits over time, we think these gross margins go back into the in the low range that we're not willing to participate in.
Yes, so for the year about $400 million and you can think about it as kind of the mid 40% gross margin range.
Thank you.
Yes.
Hello, Ladies and gentlemen, this does conclude the Q&A portion of today's conference I'd like to turn the call back over to Hassan <unk>, President and CEO for any closing remarks.
Thank you again for joining our call as Todd mentioned, we look forward to seeing many of you at our analyst day, our future is bright and we look forward to sharing with all of you what's next for on semi.
No.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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