Q3 2023 ON Semiconductor Corp Earnings Call

[music].

Okay.

Good day.

Welcome to the on semi third quarter 2023 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 all then.

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Please be advised today's conference is being recorded I would now like to hand over to your speaker today, Parag Agarwal, Vice President of Investor Relations and corporate development. Please go ahead.

Thank you Kevin.

Good morning, and thank you for joining us I mean, it's Kurt Goddard Continentally peak quarterly results conference call.

I'm joined today by Hassan at Ekati.

Our president and CEO and Pat per.

Our CFO.

This call is being webcast on the Investor Relations section of our website at Www Dot dot.

Dot com.

A replay of the exact cost along with our 'twenty 'twenty Pete third quarter earnings release will be available on our website approximately one hour. Following this conference call.

The recorded webcast will be available for approximately 30 days following this conference call.

Additional information is posted on the Investor Relations section of our website.

Our earnings release and this presentation includes certain non-GAAP financial measures.

Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain limitations when using non-GAAP financial measures are included in our earnings release, which is posted separately or number of website.

The Investor Relations section.

During the course of this conference call, we will make projections or other forward looking statements regarding future events or future financial performance of the company.

We wish to caution that such statements are subject to risk and uncertainties that could cause actual results or events to differ materially from projections.

Important factors that can affect our business.

Including factors that could cause actual results to differ materially from our forward looking statements.

Scrap in our most recent Form 10-K Form 10-Qs.

Our other filings with Securities and Exchange Commission and in our earnings release for the third quarter of 2023.

Our estimates or other forward looking statements for change and the company has.

<unk> no obligation to update forward looking statements to reflect actual results James attempt shirts.

Except as required by law.

Now, let me turn it over to.

Hassan thank.

Thank you parag good morning, and thanks to everyone on the call for joining us.

This morning, we are pleased to announce another quarter, where we delivered revenue of 2.18 billion non-GAAP gross margin of 47, 3% and non-GAAP earnings per share of $1 39, all exceeding the midpoint of our guidance.

Our automotive and industrial segments achieved record revenue driven by demand in both silicon and silicon carbide.

Despite these results in the third quarter, we are taking a very cautious approach as we are starting to see pockets of softness with tier one customers in Europe, working through their inventory and increasing risk to automotive demand due to high interest rates.

It has been nearly three years since the start of our transformation and our worldwide employees have been relentless in their pursuit of operational excellence.

The structural changes we have made across the company have allowed us to maintain our performance and deliver predictable financials.

We have build the resilience required in our business to navigate a dynamic macro environment and we remain focused on controlling what we can our execution and our commitment to our customers.

And Silicon carbide has been a prime example of our execution.

Our factories in Hudson Ross novel, Bouchon, all had record output for silicon carbide in Q3.

Acquiring <unk> two years ago was a strategic investment that allowed us to produce our own substrates internally and accelerate our path to becoming the world leader in Silicon carbide power devices.

By the end of 2023, we expect to have more than 25% market share of the silicon carbide market. We are now producing more than 50% of our own substrates internally one quarter ahead of schedule and we plan to continue to do so through 2024, even as we transitioned furnaces for 200 mill.

<unk> production.

In fact last week, we announced that we completed our expansion of the world's largest silicon carbide fab and bouchon.

At full capacity the state of the art facility, we'll be able to manufacture more than 1 million 200 millimeter silicon carbide wafers per year.

Our manufacturing output continues to exceed expectations and the acceleration of our ramp resulted in achieving $1 billion run rate quarter in Q3, increasing nearly 50% over Q2.

However for the full year, a single automotive Oems recent reduction in demand will impact our $1 billion target and we now expect to ship more than $800 million of silicon carbide in 2023.

<unk> last year's revenue.

In 'twenty four we expect the growth of our silicon carbide business to double the market growth.

Over the past few quarters, we have accelerated the broad deployment of silicon carbide solutions and the design activity has been robust across all regions.

So far in 2023, we have shipped to more than 500 unique customers that will continue to ramp through 2024 further expanding our geographical customer distribution.

Additionally, we have design wins and <unk> with the leading automotive players who have over 50% share of the global EV unit sales, which includes <unk> with four of the top five China EV customers.

Neil is among them and in Q3, they made on semi their prevailing silicon carbide supplier by signing an extension to their multi year long term supply agreement doubling down on 200 volt elite <unk> technology as they transition into 800 volt battery solutions through 2030.

As we navigate the current market conditions, <unk> continued to provide demand visibility and stability in pricing.

EV traction remains the fastest growing part of our <unk> business with 70% growth sequentially.

Most recently in OEM awarded on semi and a platform for their 750 volt and 1200 volt EV traction Inverters previously awarded to an incumbent.

Opting for superior technology, and a vertically integrated supply chain. This leading OEM has now signed and al TSA without that semi through 2031, putting us in a position to support higher volume production.

Energy infrastructure remained healthy in Q3, driven by the continued adoption of solar and energy storage solutions, we remain on track to our full year projections with nearly 70% revenue growth over 2022, and we expect the growth to continue in 'twenty four as demand for our hybrid modules with <unk>.

Silicon and Silicon carbide solutions for this high growth industrial Mega trend remains strong.

Our medical revenue, which is reported within our industrial end market also remains healthy driven by the improved accessibility of continuous glucose monitoring and hearing AIDS.

We have deep long standing customer engagements and high margin high growth areas of continuous glucose monitors in hearing health, where we have leading market share with our technologies.

Our CGM business increased nearly 38% quarter over quarter, driven by a ramp from the top two leaders in the market.

Non semi is number one and image in automotive image sensors and number one in the industrial scanning.

In the industrial end market. Our design activity has already surpassed all of 2022. This is a good indicator for the business given that more than 40% of our image sensing revenue comes from new products.

Last month, we introduced another eight megapixel image sensor with the world's smallest lowest power family of hyperlinks products that can extend battery life by up to 40% for industrial and commercial cameras.

In fact, our eight megapixel revenue more than doubled year over year in the third quarter as the business is shifting to higher resolution higher ASP image sensors.

And now let me turn the call over to <unk> to give you more details on our results.

Thanks Hassan.

At the start of our transformation, we committed to delivering intelligent power and sensing technologies for the sustainable ecosystem.

This meant tailoring our investments our portfolio, our manufacturing footprint and our resources to focus on the high growth Megatrends and automotive and industrial such as electric vehicles, Adas and energy infrastructure.

This has become a winning formula, allowing us to deliver the greatest value for all our stakeholders.

Combined intelligent power and intelligent sensing now account for 72% of our business as compared to 68% in the quarter a year ago.

In the third quarter, our financial results exceeded the midpoint of our guidance demonstrating the resilience in our business in a challenging market environment.

Revenue of $2 $1 8 billion.

Increased 4% sequentially and non-GAAP operating margin was 32, 6%.

Revenue from intelligent power and intelligence sensing combined increased 5% year over year.

As for the end markets they serve.

We had another quarter of record automotive revenue with nearly $1 2 billion in Q3, increasing 9% sequentially and 33% year over year drew.

Driven by Silicon as well as silicon carbide as the need for electrification and advanced features in vehicles continues to rise.

In industrial our record revenue of $616 million increased 1% sequentially and was up slightly year over year with continued strength in energy infrastructure and medical.

The rest of our businesses decreased 4% sequentially and 42% year over year as we exited $46 million of noncore business, which was below our expectations and is highlighting the resiliency of this business and the value of our full portfolio delivers for these customers.

As always we will continue to be opportunistic in these non core markets, where margins are favorable and engagements our strategic with our customers.

Looking at the split between operating units revenue for power solutions group or PSG was $1 2 billion, an increase of 10% year over year with more than 60% increase in auto and 50% increase in energy infrastructure.

Revenue for the advanced solutions group or ISG was $622 million, a 15% decline over Q3 dollars 22, driven by deliberate exits and continued softness in noncore markets.

Revenue for the intelligent sensing group or ISG was $329 million a.

A 4% decrease year over year due to lower revenue in industrial applications.

Our GAAP and non-GAAP gross margin of 47, 3% was down 10 basis points sequentially and 200 basis points as compared to non-GAAP gross margin in Q3, 22, primarily due to headwinds for our east Fishkill Fab and factory utilization offset by strong manufacturing performance and silicon carbide.

Total utilization increased slightly to 72%.

Silicon carbide utilization improved while silicon utilization trended lower as planned for.

For the next few quarters, we expect to proactively lower utilization to the mid to high 60% range, while maintaining our gross margin above mid 40%.

This is a direct result of our fab lighter strategy of divesting four fabs in 2022, which is reducing our fixed cost footprint, while we continue to consolidate operations and larger more efficient fabs.

As we move to our fab right strategy to optimize and drive efficiencies across our manufacturing network.

We expect to generate incremental cost savings over the next few years.

We continue to identify opportunities to drive operational efficiencies and remaining committed to our long term gross margin trajectory.

Turning to Silicon carbide is a thorn mentioned, our silicon carbide manufacturing output is exceeding our internal expectations.

And thanks to the tremendous efforts of our team around the world, we have accelerated our gross and operating margin trajectory.

Q3 gross margin for Silicon carbide was greater than 40% with strong fall through on a fully loaded basis, including all startup cost.

And as we previously highlighted we expect our silicon carbide business to be at the corporate gross margin in Q4.

Further the yield improvement learnings, we're getting from our 150 millimeter wafer production ramp is increasing our confidence in our 200 millimeter capability and validating our strategy of driving cost savings through brownfield investments.

It's incredible execution and improved manufacturing output on a 150 millimeters enables us to slow our capacity expansion and lower 2024 capital intensity from the high teens to the low teens percentage points ahead of our original plan and closing in on our long term model.

Now let me give you some additional numbers for your models.

GAAP operating expenses for the third quarter were $344 million as compared to $634 million in the third quarter of 2022.

non-GAAP operating expenses were $322 million as compared to 304 in the quarter a year ago.

The increase in operating expenses is attributable to a reserve against the receivable balance with our manufacturing partner.

GAAP operating margin for the quarter was 31, 5% and non-GAAP operating margin was 32, 6%.

Our GAAP tax rate was 16, 4% and our non-GAAP tax rate was 15, 6%.

GAAP earnings per diluted share for the third quarter was $1 29, as compared to <unk> 70 in the quarter a year ago.

non-GAAP earnings per diluted share was near the high end of our guidance at $1 39, as compared to $1 45 in Q3 of 2022.

Our GAAP diluted share count was 451 million shares and our non-GAAP diluted share count was 439 million shares.

In Q3, we returned 75% of our free cash flow through.

Through $100 million of share repurchases and we remain committed to our long term strategy of returning 50% of free cash flow to our shareholders.

Turning to the balance sheet cash and cash equivalents was $2 7 billion and we had $1 1 billion undrawn on our revolver.

Cash from operations was $567 million in free cash flow was $134 million or six 1% of revenue.

Capital expenditures during Q3 were $433 million, which equates to a capital intensity of 19, 9% as.

As we indicated previously we are directing a significant portion of our capital expenditures towards silicon carbide, and enabling our 300 millimeter capabilities at Esa.

Accounts receivable of $958 million increased by $14 million in DSO was 40 days down one day from the second quarter.

Inventory increased by $120 million sequentially and days of inventory increased by three days to 166 days. This.

This includes approximately 64 days of bridge inventory to support that transition and the silicon carbide ramp.

Excluding these strategic builds our base inventory declined seven days quarter over quarter to 102 days.

We continue to proactively manage distribution inventory.

<unk> inventory declined $25 million sequentially with weeks of inventory at $6 nine weeks versus seven seven in Q2.

Total debt remained flat at $3 5 billion and net leverage is two five X.

As we look forward I would like to highlight that on semi today is the completely transformed company as compared to on semiconductor of the past.

The structural changes in our business model have eliminated the historical volatility in the margins and earnings of the company.

We remain fully committed to delivering strong operational and financial performance for our shareholders in all market conditions.

Now let me provide you the key elements of our non-GAAP guidance for the fourth quarter, a table detailing our GAAP and non-GAAP guidance is provided in the press release related to our third quarter results.

Given the current macro environment, we are taking a cautious stance in our guidance. We anticipate Q4 revenue will be in the range of $1 95 billion to 2.0, a $5 billion.

We expect a mid single digit decline in automotive given the softness in Europe that Hassan described with greater sequential declines in industrial and other end markets.

We expect non-GAAP gross margin to be between 45, 5% to 47, 5%, primarily due to lower factory utilization and continued <unk> headwinds.

Our Q4 non-GAAP gross margin includes share based compensation of $4 3 million.

We expect our non-GAAP operating expenses of $300 million to $315 million, including share based compensation of $28 5 million.

We anticipate our non-GAAP other income to be a net benefit of $4 million with our interest income exceeding interest expense.

This benefit as a result of the debt restructuring activities, we completed over the last two years.

Reducing our historical drag on the P&L, while effectively eliminating exposure.

So elevated rates going forward.

We expect our non-GAAP tax rate to be in the range of 15, 5% to 16, 5% and our non-GAAP diluted share count for the fourth quarter is expected to be approximately 438 million shares.

This resulted in non-GAAP earnings per share to be in the range of $1 13 to $1 27.

We expect capital expenditures of $425 million to $465 million in brownfield investments, primarily in silicon carbide and Esa.

On a final note given the market uncertainty we are taking a cautious approach as we exit 2023 and plan for 2024, we're taking proactive actions to set ourselves up for success and we remain focused on our execution.

The structural changes we have brought to our business have already proved effective in these market conditions, we have been exiting volatile businesses lowering utilization managing channel inventory controlling wafer starts and we plan to continue to seek opportunities to improve our efficiencies as we navigate through the current market conditions.

I'd like to turn the call back over to Kevin to open up for Q&A.

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 and wish him with yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.

Okay.

Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Hi, guys. Thanks for let me ask a question Hassan I wanted to ask about two questions on the automotive side. The first one you talked about Europe being weaker burning inventory can you give a little bit more color is that just Europe are you worried at all about that spreading to other regions and any more color is it just inventory is it true demand any any details would be helpful.

Sure. So we see it in Europe, obviously, theres a big concentration of.

I highlighted the tier ones.

A big concentration of tier ones in Europe, but I think it's driven by end demand coupled with we've always said there may be pockets of inventory that were being black to normal demand, but having demand kind of start to soften again at a high interest rates is causing the burn the inventory burn to last <unk>.

<unk>. So we have always said you know the <unk> provide us a phone call.

It sets us up very nicely to see it coming.

So therefore, we're taking a very proactive measure on.

Setting ourselves up to be able to allow customers to burn while we maintain our inventory levels add their shelves. This D and at <unk>.

On our balance sheet as well.

I guess as my follow up also within automotive, but on the <unk> side, specifically you lowered the bar from $1 billion roughly to over $800 million. I think you mentioned one customer I don't expect you to name that one customer, but again as that inventory are you worried at all about any secular changes obviously, the evs cost more on.

Average than ice vehicles. So some of the dynamics I would assume impacting Europe in general would impact the EV side, but any sort of change in your secular belief on the silicon carbide side.

Unknown Executive: Our automotive and industrial segments achieved record revenue driven by demand in both silicon and silicon carbide Despite these results in the third quarter, we are taken a very cautious approach as we are starting to see pockets of softness with tier one customers in Europe, working through their inventory and increasing risk to automotive demand due high interest rates.

No no change on the secular trend for us.

For Evs Evs are going to grow.

They're going to grow for us in the fourth quarter as well as just not going to grow in the fourth quarter at the rate that we expected and of course.

We're all looking at the same headlines as far as Evs are concerned I think evs are a long term growth opportunity.

Even with the backdrop of a lot of the headlines that we're seeing customer designs have not slowed down conversions to EV platforms have not slowed down.

Take this as a temporary wall.

A lot of the macro stuff gets worked out whether it's the interest rates, which you called it <unk>.

<unk>.

Associated with purchasing an EV to the cost to the energy.

<unk>.

Cost all of that is just.

Taken having an impact, but we do not change our long term view of the opportunity we have in EV and like I said, we're still going to grow in Q4, just not at the rate.

Thank you.

One moment for our next question.

Okay.

Our next question comes from Vivek Arya with Bofa Securities. Your line is open.

Thanks for taking my question.

Can you help us with kind of the building blocks as the think about calendar 'twenty four or so silicon carbide on non silicon carbide and the exits that you are planning from.

From the noncore areas I just wanted to understand what the puts and takes are for those three building blocks of weekend banner models Accordingly.

Yes, Silicon carbide is what we are looking at is silicon carbide in 'twenty four base.

Basically growing about <unk> the market.

So it's still on track to the target that we have.

Put out analysis day of growing <unk> the market that we still have that visibility in 24 on the silicon side.

We see a flat slightly down.

Depending on what you believe the market we are not planning nor are we looking at.

First half of 'twenty for recovery as I said on the last quarter. We see 24 is kind of going sideways with growth in silicon carbide.

For us.

As far as <unk>.

Exit by the end of this year, whatever we didn't exit.

Is it going to stay with us as a business. So we're not going to see us talking about this.

Exits on the legacy business any longer in 2024, I put that all into the silicon outlook that I put out there.

Okay. So if I put it all together.

And look at the growth in silicon carbide, and sort of the flattish plus minus and other areas is it unreasonable to expect on overall sales to grow.

Next year, it and if they do grow next year.

How do you kind of a line the gross margin can gross margins kind of hang on to these Q4 levels are or are there other utilization or other things that can take gross margins down. So both kind of conceptually can say, let's grow even if it's modest and then and gross margins kind of continue at these at Q4 type.

<unk>.

Hey, Vivek it's that.

As you know we guide one quarter at a time I think given the macro uncertainty.

We're not going to try and forecast 2024 at this point.

Unknown Executive: It has been nearly three years since the start of our transformation and our worldwide employees have been relentless in their pursuit of operational excellence. The structural changes we have made across the company have allowed us to maintain our performance and deliver predictable financials. We have built the resilience required in our business to navigate a dynamic macro environment and we remain focused on controlling what we can, our execution and our commitment to our customers.

We feel really good about our pipeline our design pipeline and our <unk> at this point, but I think it's too early to provide guidance.

Guidance on 'twenty four.

Thank you.

One moment for our next question.

Our next question comes from Chris Danley with Citi. Your line is open.

Hey, Thanks Kim.

So another question on Silicon carbide can you tell us how much of the weakness in Q4 is silicon carbide versus I guess, just regular semi and then.

You say that you still expect silicon carbide to grow to exit the market in 2024 has your silicon carbide I guess market expectations have those moved downward over the last three months for 'twenty four.

No.

I would say majority of the weakness in Q4 as the.

Silicon carbide obviously.

But.

The rest of the business came in exactly where we expected it at the end of the year as far as the.

The outlook and the silicon carbide market in general or <unk> market in general It really has not changed our.

Our outlook our investments that we have been putting in even the investments we announced in Abu China are not investments for 'twenty or 'twenty for those are long term investments and that adds to the.

The confidence we have in that market being a megatrend market for us and that's why we're investing in to.

To gain that leadership in that market as it evolves.

So no change in the outlook and the strategy.

Okay, Great and then for my follow up.

I know you are not commenting on next year, but I think you said your gross margins should hold mid forties. So if we look at at your peers that have started to see the downturn, they're generally forecasting like three quarters in a row of declining sales. If you guys do you have.

Q1, Q2 revenue down sequentially like like your peers that are feeling this can you still hold.

Gross margins in the mid <unk>, which you have to lower utilization rates further or I guess, what that depend on just how much the silicon carbide versus how much is semi.

Yes, so right now we're looking at taking our utilization down to that over.

Over the next several quarters down into that mid to high 60% range and as I said.

We still expect to be able to all of that 40% that mid 40% gross margin floor there.

This is really a result of all the structural changes that we've made inside the company, reducing that manufacturing footprint and really now focused on fab right, where we're getting optimized cost out of our existing footprint, but.

<unk>.

We're being cautious for the next several quarters and we will take that utilization down, but we do believe we can hold that floor of mid 40.

Got it thanks, Thanks, guys.

Well remember for our next question.

Our next question comes from harsh Kumar with Piper Sandler Your line is open.

Yes, Hey, guys.

I guess, it's been a while since you guys have seen a revenue decline on a sequential basis.

There's a lot of things going on in the marketplace and strike the China economy, you talked about a European I guess it would be.

Be curious if you could give us a sense of magnitude you don't have to give us numbers, obviously, but just some color on.

What are some of the bigger factors and what are some of the smaller factor then I do have one more thanks.

Sure I mean at a high level.

And demand if you think about it and demand is driven by.

You can call. It two things one is the financial which is the higher interest rates.

That.

I have been with us and now they have taken a toll on on end demand, but also in all honesty.

Uncertainty the macro uncertainty that as consumers people are starting to feel.

Unknown Executive: Silicon carbide has been a prime example of our execution. Our factories in Hudson, Rosnov, and Vushan all had record output for silicon carbide in K3. Requiring GTA two years ago was a strategic investment that allowed us to produce our own substrates internally and accelerate our path to becoming the word leader in silicon carbide power devices. By the end of 2023, we expect to have more than 25% market share of the silicon carbide market. We are now producing more than 50% of our own substrates internally, one quarter had a schedule, and we plan to continue to do so through 2024 even as we transition furnaces for 200 millimeter production.

Between these two we look at it and we look at the inventory levels across the board, we look at inventory levels internally that we have and we've.

Unknown Executive: In fact, last week we announced that we completed our expansion of the world's largest silicon carbide fab in Vuchan. At full capacity, the state-of-the-art facility will be able to manufacture more than 1 million 200 millimeter silicon carbide wafers per year. Our manufacturing output continues to exceed expectations and the acceleration of our ramp resulted in achieving a billion dollar run rate quarter in Q3, increasing nearly 50% over Q2. However, for the full year, a single automotive OEM's recent reduction in demand will impact our billion dollar target and we now expect to ship more than 800 million dollars of silicon carbide in 2023 for acts last year's revenue.

<unk> always seen us operating with a very proactive approach so our decisions and our outlook is driven by that cautious.

Look on what we can control, which is our execution.

Unknown Executive: In 24, we expect the growth of our silicon carbide business to double the market growth. Over the past few quarters, we have accelerated the broad deployment of silicon carbide solutions and the design activity has been robust across all regions. So far in 2023, we have shipped to more than 500 unique customers that will continue to ramp through 2024 further expanding our geographical customer distribution. Additionally, we have designed wins and or LTSAs with the leading automotive players who have over 50% share of the global EV unit sales, which includes LTSAs with four of the top five China EV customers.

With that talked about taken our utilization down because we don't want to.

Bridget by keep building inventory, you've seen us take down.

Lot more on channel, which sets us up very nicely should that turn the other way. So all of these are proactive decisions that we have taken in the short term, but set us up much better in the long run.

Got it. Thank you so it sounds like it's pretty broad and then I did Miss I think Ross asked earlier about silicon carbide, if there's one customer given I did miss that in the Comm G. Could you just confirm if it's mostly one customer driven or are you seeing.

Kind of broad based weakness in answer to the tune to my earlier question is that broad based weakness also prevalent in Evs overall with other guys and is this also tied to a European carbon sheet.

<unk> side and the European are they wanted the same problems.

Look I think from an automotive I would say, it's a broader stroke as far as the.

The inventory comment I made specifically with tier ones in Europe as far as the EV. Yes. It is a single customer I wouldn't say it is it as broad as far as in this immediate quarter.

But we still expect it to grow in Q4. So it is not a I don't want to paint it as any decline or any issue in demand for Evs EV demand is going to grow it's going to grow in the fourth quarter and it's going to grow in 2024 is just didn't grow as much.

Much as we expected it to and that's demand driven whether it's short term demand or or anything different will have to wait until we get closer to 'twenty four.

Alright, guys, thanks very much.

Just to be clear on the silicon carbide.

The expectation of being eight over $800 million of the impact there is one customer it's the recent demand softness at one customer.

Thank you so much.

One moment for our next question.

Our next question comes from Gary Mobley with Wells Fargo Securities. Your line is open.

Hey, guys. Thanks for taking my question.

So I don't want to pin you down on your market forecast for Silicon carbide for for next year.

Really good insight into what your expectations are I know you cited in your footnotes of your presentation today, a lot of Youll forecast and Youll forecasting.

Roughly 43% growth in Silicon carbide for next year. So are you expecting to grow.

Your silicon carbide revenue to 80% next year is that the proper read here.

Well it depends on what they already but yes, we're expecting it to us.

<unk> market.

Okay.

And with respect to.

<unk> distribution inventory, you've been running your distribution inventory below the long term targets purposefully REIT.

<unk> here.

What are the triggers and dashboard metrics that youre looking at before you start to take up that distribution inventory back up to normal levels. It just as simple as seeing better sell through.

It's more yes seeing sell through in the mix that we're expecting so we have.

Theres no one kpis.

Sat and I look at about.

30.

Pages of Kpis that try to triangulate the health of the business and the sell through because what we don't want is shipping into the distribution because there is demand orders backlog, but the sell through happens at a different mix. So you end up with what we call sludge in the channel.

Unknown Executive: NIO is among them and in Q3, they made on semi, they're prevailing silicon carbide supplier by signing an extension to their multi year long term supply agreement doubling down on 1200 volt elite tech technology as they transition into 800 volt battery solutions through 2030. As we navigate the current market conditions, LTSAs continue to provide demand visibility and stability and price. E.V.

Unknown Executive: Traction remains the fastest-growing part of our stick business with 70% growth sequentially. Most recently, an OEM awarded onsemi a platform for their 750-volt and 1200-volt E.V. Traction inverters previously awarded to an incumbent. Opting for superior technology and a vertically integrated supply chain, this leading OEM has now signed an LTSA with onsemi through 2031, putting us in a position to support higher volume production.

<unk> been managing this very very tightly we have a very robust process that.

Unknown Executive: Energy infrastructure remained healthy in Q3, driven by the continued adoption of solar and energy storage solutions. We remain on track to our full-year projections with nearly 70% revenue growth over 2022, and we expect the growth to continue in 24 as demand for our hybrid modules with silicon and silicon carbide solutions for this high-growth industrial mega-trend remains strong. Our medical revenue, which is reported within our industrial and market, also remains healthy, driven by the improved accessibility of continuous glucose monitoring and hearing aids.

That's us and has maintained.

<unk> tight control over.

Distribution inventory and like that that said last quarter in Q3, we actually reduced the dollars and the weeks putting ourselves up very nicely for a.

Unknown Executive: We have deep, long-standing customer engagement and high-margined, high-growth areas of continuous glucose monitors and hearing health, where we have leading market share with our technologies. Our CGM business increased nearly 38% quarter over quarter, driven by a ramp from the top two leaders in the market. Onsemi is number one in an automotive image sensors and number one in an industrial scanning. And the industrial end market, our design activity, has already surpassed all of 2022.

Unknown Executive: This is a good indicator for the business given that more than 40% of our image sensing revenue comes from new products. Last month, we introduced another 8 megapixel image sensor with the world's smallest, lowest-power family of Hyperlux products that can extend battery life by up to 40% for industrial and commercial cameras. In fact, our 8 megapixel revenue, more than double-year over year in the third quarter, as the business is shifting to higher resolution, higher ASP image sensors.

Q4 mix shift or even getting ready for 2024. So all of these kpis are what lead us to making these decisions. So we're going to look at our metrics and make the decision as we see it.

Unknown Executive: And now, let me turn the call over to that to give you more details on our results. Thanks, Susan.

Unknown Executive: At the start of our transformation, we committed to delivering intelligent power and sensing technologies for the sustainable ecosystem. This meant tailoring our investments, our portfolio, our manufacturing footprint, and our resources to focus on the high-growth, mega-trend, and automotive and industrial, such as electric vehicles, ADF, and energy infrastructure. This has become our winning formula, allowing us to deliver the greatest value for all our stakeholders. Combined intelligent power and intelligent sensing now account for 72% of our business, as compared to 68% in the quarter of a year ago.

Yes, I would add that we've been managing that inventory in the seven to eight week range for several quarters now I think we're going to stay in that range just given the uncertainty until we see the strong.

Sell through but.

We are cautiously optimistic on that as we think about it but I think for the foreseeable future youre going to see us in that seven to eight week youre not going to see us bouncing back up to historical levels. The company ran at several years ago.

Thanks, guys.

One moment for our next question.

Our next question comes from Joshua <unk> with TD Cowen Your line is open.

Hey, guys. Thanks for taking my question I wanted to follow up on one of Gary So.

I totally understand the near term dynamic where your customer concentrated in ramping silicon carbide.

But I'm a bit surprised to see that 24 guidance pegged to market growth given.

I think the overwhelming consensus is that silicon carbide is going to be constrained per for at least for the near term can.

Can you walk through how much I guess of your Silicon carbide revenue in 'twenty for US is really program specific and how fungible supply is if there is changes in mix across your end customers. Thank you.

Sure.

So it is all.

All of our 24 by now for the 24, we have visibility on exactly what program, what voltage what volume and what.

It makes we need.

As far as the inventory if that talks about ramping strategic inventory for silicon carbide, we stage inventory primarily in I would say in two spots. One is blank wafers, our substrate wafer substrate, which is fully fungible across any customer any platform with any any.

Volume.

And as we get closer we stage inventory at <unk>, which is when we I.

Unknown Executive: From the third quarter, our financial results exceeded the midpoint of our guidance, demonstrating the resilience in our business in a challenging market environment. Revenue of $2.18 billion increased 4% sequentially, and non-gap operating margin was 32.6%. Revenue from intelligent power and intelligent sensing combined increased 5% year over year.

Partition with the voltage levels of the product. So this is where we maintain inventory to give us full flexibility should the shift change because we've always said when we we would have one or two platforms at a customer if one vehicle sells better than the other the customer would want to shift while still using on semi.

Unknown Executive: As for the end markets they serve. We had another quarter of record automotive revenue with nearly $1.2 billion in Q3, increasing 9% sequentially and 33% year-over-year driven by silicon as well as silicon carbide as the need for electrification and advanced features and vehicles continues to rise. Continued strength in energy infrastructure and medical. The rest of our businesses decreased 4% sequentially and 42% year-over-year as we exited $46 million of non-core business, which was below our expectations and is highlighting the resiliency of this business and the value of our full portfolio delivers for these customers.

Unknown Executive: As always, we'll continue to be opportunistic in these non-core markets where margins are favorable and engagements are strategic with our customers. Looking at the split between operating units, revenue for Power Solutions Group for PSG was $1.2 billion and increase of 10% year-over-year with more than 60% increase in auto and 50% increase in energy infrastructure. Revenue for the Advanced Solutions Group for ASG was $622 million, a 15% decline over Q3, 22, driven by deliberate exits and continued softness in non-core markets.

So we give that flexibility to be able to shift on between platforms that is similar OEM or between Oems. So the best place to keep that inventory is in black.

Unknown Executive: Revenue for the Intelligent Sensing Group for ISG was $329 million, a 4% decrease year-over-year due to lower revenue in industrial applications. Our gap in non-gap gross margin of 47.3% was down 10 basis points sequentially and 200 basis points is compared to non-gap gross margin in Q3, 22. Primarily due to headwinds from our East Fiskill Fab and factory utilization offset by strong manufacturing performance in silicon carbide. Total utilization increased slightly to 72%.

Blank wafers and <unk>.

Okay. So is it safe to assume that takes going to remain constrained through 'twenty four.

Yes, I believe so it will be from our.

Unknown Executive: Now, silicon carbide utilization improved while silicon utilization trended lower as planned. For the next few quarters, we expected proactively lower utilization to the mid to high 60% range while maintaining our gross margin above mid 40%. This is a direct result of our FabLighter strategy of divesting for fabs in 2022, which is reducing our fixed cost footprint while we continue to consolidate operations and larger, more efficient fabs. As we move to our FabRite strategy to optimize and drive efficiencies across our manufacturing network, we expect to generate incremental cost savings over the next two years. We continue to identify opportunities to drive operational efficiencies and remain committed to our long-term gross margin trajectory.

Got it thank you for my follow up.

Unknown Executive: Turning to silicon carbide, as I saw and mentioned, our silicon carbide manufacturing output is exceeding our internal expectations. And thanks to the tremendous efforts of our team around the world, we have accelerated our gross and operating margin trajectory. Our Q3 gross margin for silicon carbide was greater than 40% with strong fall through on a fully loaded basis, including all startup costs, and as we previously highlighted, we expect our Silicon Carbide business to be at the Corporate Gross Margin in Q4.

You've called out bridge inventory to support the fab transitions and silicon carbide ramps.

Unknown Executive: Further, the yield improvement learnings we are getting from our 150-millimeter wafer production ramp is increasing our confidence in our 200-millimeter capability and validating our strategy of driving cost savings through brownfield investments. This incredible execution and improved manufacturing output on 150-millimeter enables us to slow our capacity expansion and lower 2024 capital intensity from the high teens to the low teens percentage points ahead of our original plan and closing in on our long-term model.

Unknown Executive: Now let me give you some additional numbers for your models. Gap operating expenses for the third quarter were $344 million as compared to $634 million in the third quarter of 2022. Non-Gap operating expenses were $322 million as compared to $304 in the quarter a year ago. The increase in operating expenses is attributable to a reserve against a receivable balance with a manufacturing partner. Gap operating margin for 16.4% and our non-Gap tax rate was 15.6%.

Days above a 160 can you walk us through how this unwind basically just want to make sure that as your peers are cutting inventory levels at their end customer or is it that won't become an issue as you complete some of the fab transitions and sick ramps more fully thank you.

Unknown Executive: Gap earnings per diluted share for the third quarter was $1.29 as compared to 70 cents in the quarter a year ago. Non-Gap earnings per diluted share was near the high end of our guidance at $1.39 as compared to $1.45 in Q3 of 2022. Our Gap diluted share count was $451 million and our non-Gap diluted share count was $439 million shares. In Q3 we returned 75% of our free cash flow through $100 million of share repurchases and we remained committed to our long-term strategy of returning 50% of free cash flow to our shareholders.

Yes, so strategic.

Inventory for fab transition usually are.

Committed backlog, we call it no change no return so we build a bridge inventory given that the customer needs that bridge between the old fab and the new fab. So we see this as a very low risk and will work itself down.

Down over a few quarters as we shut.

<unk> down to old fab and before we start on the new Fab, we will bleed inventory to a level and then we'll ramp it back up into other fabs. So we don't see this as.

Unknown Executive: Turning to the balance sheet, cash and cash equivalence was $2.7 billion and we had $1.1 billion under on our revolver. Cash from operations was $567 million and free cash flow was $134 million or 6.1% of revenue. Capital expenditures during Q3 were $433 million which equates to a capital intensity of 19.9%. As we indicated previously, we are directing a significant portion of our capital expenditures towards Silicon Carbide and enabling our 300-millimeter capabilities at ESK.

Jeff.

Inventory jeopardy.

<unk>.

It allows us to be a little bit more comfortable.

Comfortable with the elevated levels of inventory, but one thing also also Thad mentioned is the based inventory actually we dropped that down which is the one that you're more referring to would be at risk of demand. That's the one we've been managing down that's the one we'll keep managing down with the lower utilization that talked about yes.

Unknown Executive: Accounts receivable of $958 million increased by $14 million and ESO was 40 days down one day from the second quarter. Inventory increased by $120 million sequentially and days of inventory increased by three days to 166 days. This includes approximately 64 days of fridge inventory to support bad transitions and the Silicon Carbide ramp. Excluding these strategic builds, our base inventory declined seven days, quarter over quarter to 102 days. We continue to proactively manage distribution inventory. Difty inventory declined $25 million sequentially with weeks of inventory at 6.9 weeks versus 7.7 in Q2. Total debt remained flat at $3.5 billion and net leverage is 0.25x.

Unknown Executive: As we look forward, I'd like to highlight that onsemi today is the completely transformed company as compared to onsemi conductor of the past. The structural changes in our business model have eliminated the historical volatility in the margins and earnings of the company. We remain fully committed to delivering strong operational and financial performance for our shareholders in all market conditions.

Unknown Executive: Now let me provide you the key elements of our non-gap guidance for the fourth quarter. A table detailing our gap in non-gap guidance was provided in the press release related to our third quarter result. Given the current macro environment, we are taking a cautious stance in our guidance. We anticipate Q4 revenue may in the range of $1.95 billion to $2.05 billion. We expect a mid-single digit decline in automotive given the softest in Europe that has been described with greater sequential declines in industrial and other end markets.

And just to be clear the fab transitions the inventory for the fab transitions is primarily for the divested fabs that we've divested over the last year. So it takes three plus years to fully transition out of our fab in <unk>.

Unknown Executive: We expect non-gap gross margin to be between 45.5 and 47.5% primarily due to lower factory elevation and continued EFK headwind. Our Q4 non-gap gross margin includes share-based compensation of $4.3 million. We expect our non-gap operating expenses of $300 million to $315 million including share-based compensation of $28.5 million. We anticipate our non-gap other income to be a net benefit of $4 million with our interest income exceeding interest expense. This benefit is result of the debt restructuring activities we completed over the last two years, reducing a historical drag on the canal while effectively eliminating exposure to elevated rates going forward.

Unknown Executive: We expect our non-gap tax rate to be in the range of 15.5% to 16.5% in our non-gap diluted share account for the fourth quarter is expected to be approximately $438 million shares. This results in non-gap earnings per share to be in the range of $1.13 to $1.27. We expect capital expenditures of $425 to $465 million in brown-filled investments, primarily in token carbide and EFK.

Unknown Executive: On a final note given the market uncertainty, we are taking a cautious approach as we exit 2023 and plan for 2024. We are taking proactive actions to set ourselves up for success and we remain focused on our execution. The structural changes we have brought to our business have already proven effective in these market conditions. We have been exiting volatile businesses, lowering utilization, managing channel inventory, controlling wafer starts and we plan to continue to seek opportunities to improve our efficiencies as we navigate through the current market conditions.

Situations, you build inventory and you bleed it off over time, but is a sunset. We've got good visibility on that and a lot of cases defense anr with those customers over a longer period of time, but it takes time, what we focus on is that base inventory and we feel good that we're driving that down.

Unknown Executive: With that, I'd like to turn the call back over to Kevin to open up for Q&A. Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster. Christopher.

Ross Seymore: Our first question comes from Ross Seymore with Deutsche Bank, your line is open. Hi guys, thanks for being asked a question. I thought I wanted to ask about two questions on the automotive side. The first one that you talked about, Europe being weaker, burning inventory. Can you give a little bit more color? Is that just Europe? Are you worried at all about that spreading to other regions and any more color? Is it just inventory?

Ross Seymore: Is it true demand? Any details will be helpful. Sure, so we see it in Europe, obviously there's a big concentration of, you know, I highlighted the tier ones, big concentration of tier ones in Europe. But I think it's driven by end demand coupled with, you know, we've always said there may be pockets of inventory that were being glad through normal demand, but having demand cannot start to soften because of the high interest rates is causing the burn, the inventory burn to last longer.

Ross Seymore: So we've always said, you know, the LTSA provide us a phone call. It sets us up very nicely to see it coming. So therefore, we're taking a very proactive measure on, you know, setting ourselves up to be able to allow customers to burn while we maintain our inventory levels, add their shelves, the density, and at our, on our balance sheet as well. I guess this is my follow-up also with an automotive, but on the six sides specifically, you lowered the bar from a billion roughly to over 800 million.

Is that down to about 102 days right now.

I appreciate the color. Thank you.

Ross Seymore: I think you mentioned one customer. I don't expect you to name that one customer, but again, is that inventory? Are you worried at all about any secular changes? Obviously the EVs cost more on average than ICE vehicles. So some of the dynamics I would assume impacting Europe in general would impact the EV side. But any sort of change in your secular belief on the Silicon Carbide side? No, no change on the secular trend for EVs.

One moment for our next question.

Ross Seymore: You know, EVs are going to grow. They're going to grow for us in the fourth quarter as well. They're just not going to grow in the fourth quarter at the rate that we expected. And of course, you know, I, we're all looking at the same headlines as far as EVs are concerned. I think EVs are a long term growth opportunity, even with the backdrop of a lot of the headlines that we're seeing.

Your next question comes from Joseph Moore with Morgan Stanley. Your line is open.

Okay.

Ross Seymore: And customer designs have not slowed down conversions to EV platforms have not slowed down. You know, I take this as a temporary while, you know, a lot of the macro stuff gets worked out, whether it's the interest rates, which you called it, you know, the expenses associated with purchasing an EV to the cost to the energy cost. All of that is just taken to having an impact, but we do not change our long term view of the opportunity we have an EV. And like I said, we're still going to grow in Q4 just not at the rate.

Great. Thank you I Wonder if you could talk to to pricing are you seeing anything thats different in terms of pricing given these shortfall dynamics and is that different in the businesses that you're exiting versus the kind of core automotive businesses.

Unknown Executive: Thank you.

No none of the none of the outlook BARDA cautionary outlook that we've had has anything related to pricing in our place pricing is stable it's locked into the <unk>.

Unknown Executive: One room before next question.

The conversations we have had with customers regarding outlook regarding inventory starting out yesterday has all been around demand and therefore, it's just volume.

So we feel pretty good about our pricing decisions.

Great. Thank you for that and then.

I may have missed it did you give a number for how much business you'll be exiting in.

Vivek Arya: The next question comes from the area with the basic security. Sure. Joseph. Thanks for taking my question. I saw, can you help us with kind of the building blocks as we think about calendar 24. So, silicon carbide, non-silicon carbide, and the exits that you're planning from the non-core areas. I just want to understand, write how what the puts and takes are for those three building blocks so we can plan our models accordingly.

The current quarter.

And can you talk to the dynamics of could that accelerate in an environment, where there is more plentiful supply would that does that help you to get out of those bids just quicker.

Yes, so we exited $46 million in Q3, it was below our expectations and coming back to your pricing question. We're just not seeing pricing decline enough that customers are exiting that business.

We are looking as we look into Q4, we think theres about another 125 that we would exit that bring the year up to somewhere around $275 billion below what we originally forecasted.

Vivek Arya: Yeah, silicon carbide is what we are looking at is silicon carbide in 24, basically growing about 2x the market. So, it's still on track to the target that we've put out an hour's day of growing 2x the market. That we still have that visibility in 24. On the silicon side, we see flat, slightly down. Again, depending on what you believe the market, we are not planning nor are we looking at a first half of 24 recovery.

Just as a point of reference the businesses now that we're talking about exiting are at about a 45% gross margin. So it's not a bad business, assuming the pricing does hold up.

<unk> customers. This is all customer driven customers are leaving is that we expected.

I believe that at the end of this year whatever is left we are going to say is good business and we're going to continue to manage if customers don't leave through the softness.

Great. Thank you.

One moment for our next question.

Vivek Arya: As I said on the last quarter, we see 24 as kind of going sideways with growth and silicon carbide for us. As far as the exits, by the end of this year, whatever we didn't exit is going to stay with us as a business. So, we're not going to see us talking about the exits on the legacy business any longer in 2024. I put that all into the silicon outlook that I put out there.

Our next question comes from Christopher Roland with Susquehanna. Your line is open.

Hey, guys. Thanks for the question.

I think the discussion for most broad based guys are returning to the balance between.

Bookings and backlog coverage going into a quarter and the turns business that is needed in the quarter.

Vivek Arya: I see. So, if I put it all together and look at the growth in silicon carbide and sort of the growth, growth next year, and if they do grow next year, how do we kind of align the growth margin? Can growth margins kind of hang on to these Q4 levels or are there other utilization or other things planned that can take growth margins down? So, both kind of conceptually can save growth even if it's modest and then can growth margins kind of continue at these Q4 type levels.

So I was wondering if you could perhaps talk about this for what's in your guide.

Backlog coverage versus turns and how should we be thinking about that for next year. If you can break it down.

Into sub segments too.

That would be that would be great as well. Thank you.

Sure. The dialogue is not it has nothing to do with returning to turns business. We have full visibility about where to Q4 revenue is going to come in <unk>.

<unk> full backlog coverage.

What we are talking about is getting the call ahead, which is the power of the <unk>, we keep talking about where our customers look at what their consumption is going to be in the consumption is lower than what they had expected and of course, we're not here to push inventory to make the problem worse at customers. So we negotiate a win win.

Unknown Executive: Hey, Vivek, it's sad. As you know, we guide one quarter to time. I think given the macro uncertainty, we're not going to try and forecast 2024 at this point. We feel really good about our pipeline, our design pipeline, and our LTSAs at this point, but I think it's too early to provide guidance on 24. Thank you.

With every single one of them.

So the outlook is purely demand we know exactly what the mix is going to be there is no turns business even in the current quarter.

And I would say that comment is across all markets.

Christopher Danely: One moment for our next question. Our next question comes from Chris Dainley with City Online is open. Hey, thanks, Gang. So, another question on silicon carbide. Can you tell us how much of the weakness in Q4 is silicon carbide versus, I guess, just regular semis? And then, you know, you say that you still expect silicon carbide to grow to X the market in 2024. Has your silicon carbide, I guess, market expectations? Have those moved downward over the last three months for 24? No.

Okay, great. Thanks, just maybe quick follow up there.

Are you seeing push outs and cancellations or push outs in those lts's is that why that number is lower just just wondering why we had that sequential decrease in December maybe the street was just miss modeling.

And then my other question is around and you had some comments around industrial and solar in particular, I think we've seen guys like enphase solar edge mis.

Unknown Executive: So, I would say majority of the weakness in Q4 is the silicon carbide, obviously. But, you know, the rest of the business came, it's kind of exactly where we expected it at the end of the year. As far as the outlook and the silicon carbide market in general, or the EV market in general, it really has not changed our outlook. You know, our investments that we have been putting and even the investments we announced in Buchen are not investments for 23 or 24.

Huge.

It sounded like you had some very product specific drivers there but was just wondering why you are so optimistic.

Around that business when it's falling generally so fast.

Yes, I'll take the first part of your question on the cancellations.

We saw cancellations peak late last year I would say at this point as we look at the quarterly trends it's pretty.

That's pretty Flatlined at this point.

So we're not seeing a lot of current quarter cancellations.

Unknown Executive: Those are long term investments. And that adds to the confidence we have in that market, being a mega trend market for us. And that's what we're investing in to gain that leadership in that market as it evolves. So no change in the odd look in the strategy.

Or even push outs within the forecast horizon here.

On the <unk> when a customer comes in and has a challenge as Stefan said, we're talking about a win win with them and in some cases, we are allowing some pushed out.

Unknown Executive: Great, and then for my follow-up, I know you're not commenting on next year, but I think you said your gross margin should hold mid-40s. So if we look at your peers that have started to see the downturn, you know, they're generally forecasting like three quarters in a row of declining sales. If you guys do have Q1, Q2 revenue, downs clentially like your peers that are feeling this, can you still hold gross margins in the mid-40s, which you have to lower utilization rates further, or I guess with that depend on just how much is sold in Carbide versus how much is Semi's.

Long as theirs.

A win win for both companies in that situation, we don't want to over ship natural demand, but in terms of cancellations were not seeing a spike like I said, we saw that peak late last year.

As far as the industrial.

Demand youre right I called out.

Renewable energy our energy storage those are all mega trends of the company's you referred to are more impacted by the residential which obviously is expected given the interest rates given the consumer spending sentiment that.

Unknown Executive: Yeah, so right now we're looking at taking our utilization down to that over the next several quarters, downed into that mid-to-high 60% range. And as I said, we still expect to be able to hold that mid-40% gross margin for there. This is really a result of all the structural changes that we've made inside the company, reducing that manufacturing footprint, and really now focused on Fabright where we're getting optimized costs out of our existing footprint. But look, we're being cautious for the next several quarters. We'll take that utilization down, but we do believe we can hold that floor of mid-40. Got it.

Referred to earlier.

Business, we are targeting is the energy storage.

Lot of it is larger scale energy storage, which drives a lot more content and it's not typically impacted by the residential specifically.

Unknown Executive: Thanks, guys.

That business has remained strong and we expect that business to remain strong on a forward looking basis.

Thank you guys.

One moment for our next question.

Okay.

Our next question comes from Quinn Bolton with Needham <unk> Company. Your line is open.

Thanks for taking my question just a clarification in response to one of the earlier questions. I think you said you were not looking for growth in the first half of.

Harsh Kumar: One moment for our next question. Our next question comes from Harsh Kumar with Piper Sandler. Your line is open. Yeah, hey guys. I guess it's been a while since you guys have seen a revenue decline on sequential races. There's a lot of things going on in the marketplace to strike the China economy. You talked about a European. I guess I'd be curious if you could give us a sense of magnitude. You don't have to give us numbers, obviously, but just some color on what are some of the bigger factors and what are some of the smaller factors? Then I do have one more things.

Next year, just wasn't sure if that was sort of sequential comment or a year over year comment. If you could clarify and then I've got a follow up on the silicon carbide business.

Yes.

We.

We're cautiously looking at the first half of next year, we think it's going to be soft, but we do think there is.

Is.

A sequential down in Q1 based on what we can see today, we'll look at the rest of the year as we go further but.

We're being very cautious in the first half yes, my comment was more LLC a recovery of market recovery. So it was more of a macro commentary.

Unknown Executive: Sure. I mean, at a high level, it's end demand. If you think about it and end demand is driven by. You can call it two things. One is the financial, which is the higher interest rates that have been with us. And now they're taken a toll on, on end demand, but also an honesty, the uncertainty, the macro uncertainty that as consumers, people are starting to feel. Between these two, we look at it and we look at the inventory levels across the board.

Got it. Thank you and then on the Silicon carbide business, you talked about overall utilization rates being managed down to 68% for the next few quarters to manage inventory I assume given the outlook for Evs still growing in the fourth quarter into next year that the silicon carbide.

It's probably immune from some of those lower utilization rates, but wanted to clarify that and if utilization remains high and silicon carbide could you actually see a scenario where silicon carbide moves above corporate average in 2024.

Unknown Executive: We look at inventory levels internally that we have. And we've always seen us operating with a very proactive approach. So our decisions and our outlook is driven by that cautious outlook on what we can control, which is our execution. You know, if that's talked about taking our utilization down, because we don't want to, you know, bridge it by keep building inventory. You've seen us take down a lot more on the channel, which sets us up very nicely should that turn the other way.

Unknown Executive: So all of these are proactive decisions that we have taken in the short term, but set us up much better in the long run. Got it. Thank you. So it sounds like it's pretty broad. And then I did miss. I think Ross asked earlier about so it can provide if it's one customer driven. I did miss that in the commentary. Could you just confirm if it's mostly one customer driven. Are you seeing kind of broad based weakness and answer to the tune to my earlier question is that broad based weakness also prevalent in EVs overall with other guys.

Yes, that's a good question so.

The utilization for Silicon carbide in Q3 was up where silicon was down and that pulled the total up as we look forward, we don't see the silicon carbide utilization decreasing we will be bringing on additional capacity next year to support 25 and beyond but I don't expect that utilization to decline.

And I think it's a silicon that will actually decline that gets us down into that 65%.

Mid <unk> to the high 60% range.

Thank you.

One moment for our next question.

Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Yes, hi.

Just a quick question on <unk>.

Currently on softer demand with the higher inventory I guess is that model is that pretty well.

What are you seeing across the board in both combustion engine and EV okay.

Unknown Executive: And it's just also tied to European commentary, the EV side and the European other one in the same problem. Look, I think from an automotive, I would say it's a broader stroke as far as the inventory common I made specifically with tier ones in Europe. As far as the EV, yes, it is a single customer. I wouldn't say it is broad as far as, you know, in this immediate quarter, but we still expect it to grow in Q4.

You characterized that.

Uh huh.

While it's hard to for a lot of the general content in automotive, it's hard to figure out if it's easy or not but I can tell you it's not silicon carbide, it's not <unk> it's not.

EV specific constrained.

It's more of a general I would call a general purpose automotive demand that can go in either car, but given the volume for EV, it's more driven by the internal combustion.

<unk>, because thats, where the volume is skewed too.

Unknown Executive: So it is not a, I don't want to paint it as any decline or any issue in demand for EVs. EV demand is going to grow, it's going to grow in the fourth quarter, and it's going to grow in 2024. It just didn't grow as much as we expected it to, and that's demand-driven, whether it's short-term demand or anything different, we'll have to wait until we get closer to 24. All right, guys, thank you so much.

Got it and then as you look at your Silicon carbide roadmap.

Talked about going forward might be a transition at 200 millimeter or is that still something that you see and what's your expectation on what the mix would be on 200 millimeter, let's say exiting 2004.

So while we've so we're on track to what we've always said we're finished qualifying and the conversion started I talked about in my prepared remarks for 200 millimeter, we feel very comfortable and actually more confident today than we were even 90 days ago on the 200 millimeter given the performance that we've had in the <unk>.

Unknown Executive: Yes, just to be clear on the Silicon Carbide, the expectation of being over $800 million, the impact there is one customer. It's the recent demand softness of one customer. Thank you so much, Todd.

<unk> carbide business ramping all the way from substrates, all the way through devices.

Gary Mobley: One moment for our next question. Our next question comes from Gary Mobley with False Fargo Securities. Your line is open. Okay, thanks for taking my question. Asana, I want to pin you down on your market forecast for Silicon Carbide for next year to really get it inside into what your expectations are. I know you cited in your footnotes of your presentation today a lot of your forecast and your scorecasting roughly 43% growth in Silicon Carbide for next year.

The Fabs are ready at P is ready and furnaces started conversion. So our plan has always been qualified 24 and ramp revenue in 25, so youre not going to really see a mix shift in 24 that would be more of a $25 24 is when we transition manufacturing to the 200 millimeter.

Got it and last question when you look at Silicon carbide, when do you start to see it getting it could be due to the corporate margins I guess.

Well, so we're going to hit the corporate average in Q4 as I said.

As you go into next year, I think it's going to be.

At or above.

Gary Mobley: So are you expecting to grow your Silicon Carbide revenue 80% next year? Is that the proper rate here? Well, it depends on what the YOLA, but yeah, we're expecting it to X market. Okay, and with respect to distribution inventory, you've been running your distribution inventory below the long-term targets, purposefully, I read here. What are the triggers in dashboard metrics that you're looking at before you start to take up that distribution inventory back up to normal levels?

Depending on kind of what the market does and that's going to be dependent on overall utilization, but we'll definitely be at parity and potentially higher in 2024.

Alright, thank you.

One moment for our next question.

Okay.

Our next question comes from Timothy Arcuri with UBS. Your line is open.

Hi, Thanks.

I just wanted to ask a question also on the 2023 silicon carbide cut from 1 billion down to $800 million.

You guys had always talked about the <unk> being legally binding and it didn't seem like they would be subject to any changes in EV ramps.

Gary Mobley: Is it just as simple as seeing better self-through? It's more, yeah, it's seeing self-through in the mix that we're expecting. So we have, you know, like there's no one KPI. Sat and I look at about, you know, 30 pages of KPI's that try to triangulate the health of the business and the self-through because what we don't want is shipping into the distribution because there's demand or there's backlog, but the self-through happens at a different mix.

It sounded like a little bit of a higher bar than we'll be here from others. So can you talk about that was that some structural change.

Program from one of your customers, where something is just permanently pushed out or should we still expect that that that.

I'm not you're not getting this year does that push into next year.

So obviously I'm not going to comment on specific customer detail specific programs, but I will comment on the <unk>. So the <unk> are legally binding therefore for us to agree or even acknowledging that push out or even the demand in general outside of silicon carbide in Q4.

Gary Mobley: So you end up with what we call sludge in the channel. We've been managing this very, very tightly. We have a very robust process that gets us and has maintained very tight control over the distribution inventory. And like that said, last quarter in Q3, we actually reduced the dollars and the weeks, putting ourselves up very nicely for a Q4 mix shift or even getting ready for 2024. So all of these KPI's are what lead us to making these decisions.

Sure.

There has there has to have been which there is a win win for us and the customer.

We've always said if anything the lts's get us a phone call. We got the phone call way ahead of time.

In certain areas when the customer knows that its coming and.

Gary Mobley: So we're going to look at our metrics and make the decision as we're... We see it. Yeah, I would add that, you know, we've been managing that inventory in the seven to eight week range for several quarters. Now, I think we're going to stay in that range, just given the uncertainty until we see the strong sell through. But we're cautiously optimistic on that as we think about it. But I think for the foreseeable future, you're going to see us in that seven to eight week. You're not going to see us bouncing back up to historical levels, the company ran at, you know, several years ago. Thanks, guys.

And we're able to manage with the customer for a win win whether that win win is a quarter later or a year later or a longer term.

Unknown Executive: One moment for an explanation.

That depends on case by case, so we manage it with the customer.

Because what we don't want is of course enforced TSA at the expense of just shifting inventory if demand is lower.

So we take it very.

Cautiously we have it has to be a win for us, but also a win for the customer and Thats what keeps the strategic customers engaged.

Got it got it sure. So given that is the commitment still to $4 $5 billion between 23% and 25. So that we still have $3 seven last between 'twenty four 'twenty five.

Joshua Buchalter: Let me ask you a question. Our next question comes from Joshua Buchalter with TD Cow on your line is open. Hey guys. Thanks for taking my question. I wanted to follow up on one of Gary. So, I totally understand the near term dynamic where you're customer concentrated and ramping silicon carbide. But I'm a bit surprised to see that 24 guidance peg to market growth, given I think the overwhelming consensus is that silicon carbide is going to be constrained for at least for the near near term. Can you walk through how much I guess of your silicon carbide revenue in 24 is really program specific and how fungible supply is if there is changes in mix across your end customers. Thank you.

We're not commenting on that.

Have commented is obviously, if you take the growth rate that.

Described in 2024.

And you can compare it to where we were before.

So no change in our outlook.

Okay.

Thank you.

One moment for our next question.

Okay.

Our next question comes from Tristan <unk> with Baird. Your line is open.

Hi, Good morning, just wanted to extend a little bit Tom the coverage for next year for HSA.

Unknown Executive: Sure. So it is all I guess all of our 24 by now for the 24 we have visibility on exactly what program, what voltage, what volume and what makes we need. As far as the inventory, you know, that talks about ramping strategic inventory for silicon carbide, we stage inventory primarily and I would say in two spots. One is blank wafers or substrate wafers substrate, which is fully fungible across any customer, any platform with any, any volume.

Do you see in guessing that.

Full year coverage to date entering this year, but could you talk about maybe percentage wise.

When these key average LTA expiring.

Expiring next year just wanted to Kenneth.

The transition to HCA.

Two with notably the second half of next year.

Yes so.

What youll see in our filing is that we've got five $7 billion of El TSA commitment over the next 12 months.

Unknown Executive: And as we get closer, we stage inventory at epi, which is when we, I guess, partition with the voltage levels of the product. So this is where we maintain inventory to give us full flexibility should the shift change because, you know, we've always said when we, we would have one or two platforms at a customer. If one vehicle sells better than the other, the customer would want to shift while still using on semi. So we give that flexibility to be able to shift on between platforms at a similar OEM or between OEMs. So the best place to keep that inventory is in blank wafers and or epi.

So hopefully that gets you in the ballpark there.

Yeah.

Okay, and what's the average duration and how should we look at how some of those on the winding later next year or even in 'twenty five.

Yes, so the number I gave you the 12 months from this point forward 12 months now your question is a broader question about <unk> in general.

<unk>.

Go out three to five years on average sometimes much longer it just depends on the customer situation.

I think last quarter, we talked about customers coming back extending <unk> or expanding <unk>.

Unknown Executive: So is it safe to assume that six can remain constrained through 24? Yeah, I believe so. It will be from art.

So it just as these things come up for renewal customers are coming in engaging I would say the customers are looking over the long term versus the short term when it comes to the negotiation and the extension of <unk>.

Unknown Executive: God, thank you for my follow up. You know, you called out bridge inventory to support the fab transitions and silicon carbide ramps with days above 160. Can you walk us through, you know, how this unwind that I basically I just want to make sure that as your peers are cutting inventory levels at their end customers that that won't become an issue as you complete some of the fab transitions and sick ramps more fully.

Great. Thank you very much.

One moment for our next question.

Our next question comes from Christopher Caso with Wolfe Research Your line is open.

Yes. Thank you good morning.

I think I'll just go back to the commentary on silicon carbide and into next year.

Unknown Executive: Thank you. Yeah, so strategic inventory for fab transition usually are committed backlog, you know, we call it no change no return. So we build the bridge inventory given that the customer needs that bridge between the old fab and the new fab. So we see this at a very low risk it will work itself down over, you know, a few quarters as we shut down the old fab and before we start on the new fab, we will bleed inventory to a level and then we'll ramp it back up in the other fab.

Some of the questions coming in during the call there was some uncertainty.

We get resolved so what my interpretation of what Youre seeing is silicon carbide. It sounds like it's down significantly in Q4 given.

The fact that the majority of the decline here, but you're also suggesting that it grows next year and you stay a supply constrained so that would suggest that what you're implying is some improvement at some point next year.

Unknown Executive: So we don't see this as the inventory jeopardy which which make a lot of us to be a little bit more comfortable with the elevated levels of inventory, but one thing also also that mentioned is the base inventory actually we drove that down, which is the one that you are more referring to would be at risk of demand. That's the one we've been managing down, that's the one we'll keep managing down with the lower utilization that's not the month.

Silicon carbide, how do we just reconcile those comments unless we got some of them wrong.

Yes.

Yes, I would say the one comment that I believe you got wrong is Q4 and silicon carbide is not down Q4 silicon carbide is.

Growth from Q3. It is just not at the level that we expected that's what drove the Miss so it is not silicon carbide going backwards.

With that correction.

Unknown Executive: Yeah, and just to be clear, the fab transitions, the inventory for the fab transitions is primarily for the devastated fabs that we've devastated over the last year. So it takes, you know, three plus years to fully transition out of a fab. And in that situation, you build inventory and you bleed it off over time, but as the sun said, we've got good visibility on that. In a lot of cases, the sensing and are with those customers over a longer period of time, but but it takes time what we focus on is that base inventory and we feel good that we're driving that down, you know, that's down to about 102 days right now.

The ramps that we're starting we have in Q4 and Q3 and it will continue to ramp in Q4, plus the breath of customers that I described those are going to drive sequential growth.

Through 2024.

So.

Silicon carbide is not down quarter will not be down quarter on quarter Q3, Q4, it will be up and will continue to be up in subsequent quarters through Q4.

Yes, that's very helpful.

Yes, yes, yes.

And just moving on to Capex for Silicon carbide as we go into next year and your earlier comments suggest this is long term investment.

Unknown Executive: I appreciate the caller. Thank you.

Joseph Moore: One moment for next question. Your next question comes from Joseph Moore with Morgan Stanley. Your line is open. Great. Thank you. I wonder if you could talk to pricing. Are you seeing anything that's different in terms of pricing given these these shortfall dynamics and is that different in the business? And this is that you're exiting versus the kind of core automotive businesses?

But given the current environment are there any changes to the investments that you were planning for calendar 'twenty four although.

Certainly it sounds like you would continue to invest what do we expect for the Capex profile next year in light of the changing environment.

Unknown Executive: No, none of the, none of the outlook or the cautionary outlook that we've had has anything or related to pricing, you know, our price pricing is stable. It's locked into the LTSA's the conversations we have had with customers regarding how both regarding inventory, starting LTSA has all been around demand. Therefore, it's a small. So we feel pretty good about our pricing. Great. Thank you for that. And then I may have missed it.

Yes, Chris in my prepared remarks, I noted that because of our strong performance in silicon carbide and being ahead of our internal plans and our confidence in moving into 200 millimeter that we're actually taking our capital intensity in 2024 down we had expected the high teens for 2024 I'm now seeing.

At the low teens and it's quickly closing in on that long term target.

So we will continue to make investments, but not at the rate that we needed to just because of the performance across the entire manufacturing chain is ahead of schedule.

And exceeding our expectations.

Very helpful. Thank you.

Unknown Executive: Did you give a number for how much business you'll be exiting in the current quarter? And can you talk to the dynamics of could that accelerate in an environment where there's more plenty full supply with that that help you to get out of those businesses quicker? Yeah, so we exited 46 million dollars in Q3 was below our expectations and coming back to your pricing question, you know, we're just not seeing pricing decline enough that customers are exiting that business.

One moment for our next question.

Okay.

Our next question comes from William Stein with true Securities. Your line is open.

Great. Thank you I am hoping you can discuss.

Unknown Executive: We are looking as we look into Q4 we think there's about another 125 that we would exit that bring the year up to somewhere around 275 million dollars below what we originally forecast it. Just as a point of reference, the businesses now that we're talking about exiting are at about a 45% gross margin, so it's not a bad business. Assuming pricing does hold up the fact is customers, this is all customer driven customers aren't aren't leaving us back.

The dynamics in the industrial end market. This is where we've seen more weakness from.

Other semi companies.

Similar component manufacturers over the last quarter.

The call has been very focused on the change in outlook in silicon carbide, but.

But for you to discuss trends.

In the industrial end market and your expectations as we progress into next year. Thank you.

Yeah. So for industrial obviously, we see the same as a lot of our broad base.

Pearce so weakness in industrial.

However, within industrial I call out the two areas that we have seen and we will continue to see strength.

Unknown Executive: We expected I believe that, you know, at the end of this year, whatever is left we're going to say is good business and we're going to continue to manage if customers don't leave through this office. Great, thank you. One moment for our next question.

Renewable energy that we talked about earlier with energy storage and so on and the medical both driven by very specific trends on the energy storage. Obviously it is the renewable deployment.

Not just not the residential scale, but more commercial scale, that's driving a lot of the strength and on the medical is a very specific trend.

Christopher Rolland: Our next question comes from Christopher Rowland with Susquehanna, your line is open. Hey guys, thanks for the question. I think the discussion for most broad based guys are returning to the balance between, you know, bookings and backlog coverage going into a quarter and the turns business that is needed in a quarter. So I was wondering if you could perhaps talk about this for, you know, what's in your guide, you know, backlog coverage versus turns.

Accessibility of the.

Continuous glucose and hearing aid, which is now almost over the counter that's driving a lot of that demand for us given that we have a leadership position here, we're seeing that strength. So outside of these two we do see the softness across industrial 2024.

Christopher Rolland: And how should we be thinking about that for next year, you know, if you can break it down, you know, into sub segments to, you know, that would be that would be great as well. Thank you.

I commented, we don't expect 2024 to see a very big change in recovery. So you can call. It we'll call it when we get closer to it.

But I don't have signs that will change the trend in my view of the trend and outlook.

Unknown Executive: Sure, the outlook is not has nothing to do with the returning to turns business. We have full visibility about where the people revenue is going to come in, including full backlog coverage. What we are talking about is, you know, getting the call ahead, which is the power of the LTSA is we keep talking about where customers look at what their consumption is going to be and the consumption is lower than what they had expected. And of course, we're not here to push inventory to make the problem worse at customers so we negotiate a win-win with every single one of them.

Okay.

Thank you 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 Al Carey for any closing remarks.

Thank you again for joining our call as always we aim to deliver consistency and transparency in our results and we thank you for your support along the way the executive staff and I are incredibly proud of our team's continued performance dedication to our customers and commitment to delivering shareholder value.

Our employees all over the world are solving complex technology and business problems customers congratulations to the team and thank you all.

Unknown Executive: Home. So the outlook is purely demand. We know exactly what the mix is going to be. There is no turns, business, even in the current quarter. And that, I would say, that comment is across all markets.

Hello, Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Unknown Executive: Okay, great. Thanks. Just maybe a quick follow up there. Are you seeing push outs and cancellations or push outs in those LTSA's? Is that why that numbers lower? Just just wondering, you know, why we had that sequential decrease in December. Maybe the street was just mismodeling.

Okay.

[music].

Okay.

Okay.

Okay.

Okay.

Okay.

Unknown Executive: And then my other question is around, you had some comments around industrial and solar in particular. I think we've seen guys like Nphase and solar edge miss pretty huge. It sounded like you had some very product specific drivers there, but was just wondering why you were so optimistic around that business when it's falling. Generally so fast.

Unknown Executive: Yeah, I'll take the first part of your question on the cancellations. Like we saw cancellations peak late last year. I would say at this point as we look at the quarterly trends, it's pretty, it's pretty flatline at this point. So we're not seeing a lot of, you know, current quarter cancellations or even push outs within the forecast horizon here on the LTSA's, you know, when a customer comes in and has a challenge.

Unknown Executive: And just the fun said, you know, we're talking about a win-win with them. And in some cases, we are allowing some push outs, you know, as long as there's a win-win for both companies in that situation. We don't want to overship natural demand. But in terms of cancellations, we're not seeing a spike. I, like I said, we saw that peak late last year.

Unknown Executive: As far as the industrial demand, you're right, I called out the renewable energy or energy storage. Those are all mega trends. The companies you refer to are more impacted by the residential, which obviously is expected given the interest rates, given the consumer spending sentiment that I referred to earlier, the business we are targeting is the energy storage. A lot of it is larger scale energy storage, which drives a lot more content, and it's not typically impacted by the residential specifically. That business has remained strong, and we expect that business to remain strong on a forward-looking basis.

Unknown Executive: Thank you, guys.

Quinn Bolton: One moment for our next question. Our next question comes from Quinn Bolton with Needham Company. Your line is open. Thanks for taking my question. Just a clarification in response to one of the earlier questions I think you said you were not looking for growth in the first half of the next year. Just wasn't sure if that was sort of sequential comment or year-over-year comment, if you could clarify it, and I've got to follow up on the Silicon Carbide business.

Quinn Bolton: We're cautiously looking at the first half of next year. We think it's going to be soft, but we do think there is a sequential down in Q1, based on what we can see today. We'll look at the rest of the years we go further, but we're being very cautious on the first half. Yeah, my comment was more, I don't see a recovery, a market recovery, so it was more of a macro, commentary.

Unknown Executive: Got it. Thank you. And then on the Silicon Carbide business, you talked about overall utilization rates being managed down to 68% for the next few quarters to manage inventory. I assume given the outlook for EVs still growing in the fourth quarter and in the next year that the Silicon Carbide is probably immune from some of those lower utilization rates but wanted to clarify that. And if utilization remains high in Silicon Carbide, could you actually see a scenario where Silicon Carbide moves above corporate average in 2024?

Unknown Executive: Thanks. Yeah, that's a good question. So the utilization for Silicon Carbide in Q3 was up where Silicon was down and that pulled the total up. As we look forward, we don't see the Silicon Carbide utilization decreasing. We will be bringing on additional capacity next year to support 25 and beyond. But I don't expect that utilization to decline. I think it's the Silicon that will actually decline, that gets us down to that 65 to, you know, mid 60 to the high 60% range.

Unknown Executive: Alright, thank you. One moment for our next question.

Vijay Rakesh: Our next question comes from Vijay Rakesh with Masuho. Your line is open. Yeah, hi. As I said, just a quick question on your commentary on software demand with higher inventory, I guess. Is that more of, is that pretty, what do you think across the board in both combustion engine and EV, or can you characterize that a little better? Well, it's hard to, you know, for a lot of the general content automotive, it's hard to figure out if it's EV or not, but I can tell you it's not Silicon Carbide.

Vijay Rakesh: It's not ITBT. It's not the EV specific constraint. You know, it's more of a general, how it's called a general purpose, automotive demand that can go in either car, but given the volume for EV, it's more driven by the internal combustion demand, because that's where the volume is skewed to. And then I should look at your Silicon Carbide roadmap. You know, talked about 2024 might be a transition at 200 millimeters. Is that still something that you see and what, you know, what's your expectation on what what mix would be on 200 millimeters, let's say exiting 24?

Vijay Rakesh: So what we've all, so we're on track to what we've always said. We're finished qualifying and the conversion started, you know, I talked about in my prepared remarks. For 200 millimeter, we feel very comfortable and actually more confident today than we were even 90 days ago on the 200 millimeter, given the performance that we've had in the Silicon Carbide business, ramping all the way from substrates all the way through devices. The fabs are ready.

Vijay Rakesh: Epic is ready. And furnaces started conversion. So our plan has always been qualify 24 and ramp revenue in 25. So you're not going to really see a mix shift in 24. That would be more of a 25. 24 is when we transition manufacturing to the 200 millimeter. Got it. And last question, when you look at Silicon Carbide, when do you start to see it getting accredited to the corporate margins, I guess?

Vijay Rakesh: Well, so we're going to hit the corporate average in Q4, as I said, as you go into next year, I think it's going to be at or above, depending on kind of what the market does. And that's going to be dependent on overall utilization. But we'll definitely be a parody and potentially higher in 2024. Thank you.

Unknown Executive: One moment for our next question. Our next question comes from Timothy Arcuri, would you be as your line is open? Hi, thanks. I just wanted to ask a question also on the 2023 Silicon Carbide cut from a billion down to 800 million. You guys had always talked about the LTSAs being legally binding, and it didn't seem like they would be subject to any changes in EV ramps. It sounded like a little bit of a higher bar than we'll be here from others.

Unknown Executive: So can you talk about that? Was that some structural change in a program from one of your customers where something is just permanently pushed out, or should we still expect that you're not getting this year? Or does that push into next year?

Unknown Executive: So obviously, I'm not going to comment on specific customer details, specific on programs, but I will comment on the LTSAs. So the LTSAs are legally binding, therefore for us to agree or even acknowledge that push out, or even the demand in general outside of Silicon Carbide in Q4, there has to have been, which there is, a win-win for us and the customer. You know, we've always said, if anything, the LTSAs get us a phone call.

Unknown Executive: We get the phone call way ahead of time in certain areas, when the customer knows that it's coming, and we're able to manage with the customer for a win-win, whether that win-win is a quarter later, or a year later, or a longer term, that depends on case-by-case. So we manage it with the customer, because what we don't want is, of course, enforce the LTSA at the expense of just shipping inventory if demand is lower.

Unknown Executive: So we take it very cautiously. It has to be a win for us, but also a win for the customer, and that's what keeps the strategic customers engaged. Got it, got it, sure. So given that, is the commitment still to $4.5 billion between $23 and $25 so that we still have $3.7 less between $24 and $25? We're not commenting on that. What I have commented is, obviously, if you take the growth rate that I described in 2024, then you can compare it to where we were before. So no change in our outlook. Okay, thank you.

Tristan Gerra: One moment for our next question. Our next question comes from Tristan Gare with Bear. Your line is open.

Unknown Executive: Hi, good morning. I just wanted to expand a little bit on the coverage for next year for LTSA. Obviously, I'm guessing that you don't have fully coverage like you did entering this year, but could you talk about maybe percentage wise, or when is the average LTA expiring next year? Yeah, so what you'll see in our filing is that we've got $5.7 billion of LTSA commitment over the next 12 months. So hopefully that gets you in the ballpark there.

Unknown Executive: Okay, and what's the average duration and how should we look at how some of those are on the winding later next year or even in 25? Yeah, so the number I gave you is a 12 months from this point forward 12 months. Now, your question is a broader question about LTSAs in general. So, you know, the LTSAs go out three to five years on average. Some times much longer. It just depends on the customer situation.

Unknown Executive: You know, I think last quarter we talked about customers coming back, extending LTSAs or expanding LTSAs. You know, so it just as these things come up for renewal. Customers are coming and engaging. I would say the customers are looking over the long term versus the short term when it comes to the negotiation and the extension of LTSAs.

Unknown Executive: Great.

Unknown Executive: Thank you very much.

Christopher Graffa: One moment for our next question. The next question comes from Christopher Graffa with Wolf Research.

Unknown Executive: Your line is open. Yes, thank you.

Unknown Executive: Good morning. I think I'll just go back to the commentary on Silicon Carbide into next year. Just some of the questions coming in during the call. There was some uncertainty that I hope we could resolve. So, my interpretation what you're saying is Silicon Carbide. It sounds like it's down significantly in queue for given the fact that it's majority of the decline here. But you're also suggesting that it grows next year and you stay supply constraints.

Unknown Executive: That would suggest that what you're implying is some improvement at some point next year in Silicon Carbide. How do we just reconcile those comments unless we got some of them wrong? Yes, so I guess I would say the one comment that I believe you got wrong is queue for it in Silicon Carbide is not down. Q4 Silicon Carbide is growth from Q3. It is just not at the level that we expected.

Unknown Executive: That's what drove the myth. So it is not Silicon Carbide going backwards with that correction. And the ramps that we're starting, we have in Q3 and we'll consider ramping Q4 plus the breadth of customers that I described. Those are going to drive sequential growth through 2024. So Silicon Carbide is not down quarter will not be down quarter on quarter Q3 Q4. It will be up and it will continue to be up in subsequent quarters through Q4.

Thad Trent: That's very helpful. Yes, yes. And just moving on to CapEx for Silicon Carbide as we go to the next year and your earlier comments suggest this is long-term investment. But given the current environment, are there any changes to the investments that you are planning for calendar 24, although certainly it sounds like you'd continue to invest. What do we expect for the CapEx profile next year in light of the change in environment?

Thad Trent: Yeah, Chris, in my prepared remarks, I noted that because of our strong performance in Silicon Carbide and being ahead of our internal plans and our confidence in moving into 200 millimeter that we're actually taking our capital intensity in 2024 down. We had expected the height teens for 2024. I'm now saying it's low teens and it's quickly closing in on that long-term target. So we will continue to make investments but not at the rate that we needed to just because the performance across the entire manufacturing chain is ahead of schedule and exceeding our expectations. Thad Trent.

Unknown Executive: Very helpful. Thank you. One moment for our next question. Our next question comes from William Stein with true securities. Your line is open. Great. Thank you. I'm hoping you can discuss the dynamics in the industrial and market. This is where we're seeing more weakness from other semi companies and similar component manufacturers over the last quarter. The call has been very focused on the change. You're not looking for good carbide, but I'd love for you to discuss trends more broadly in the industrial and market and your expectations as we progress in our next year.

Unknown Executive: Thank you. Yeah. So for industrial, obviously, we see the same as a lot of our broad-based peers, so weakness and industrial. However, within industrial, I call out the two areas that we have seen and will continue to see strength. That's the renewable energy that we talked about earlier with energy storage and so on. And the medical both driven by very specific trends on the energy storage. Obviously, it is the renewable deployment at not just not the residential scale, but more commercial scale.

Unknown Executive: That's driving a lot of the strength. And on the medical, it is a very specific trend of accessibility of the continuous glucose and the hearing aid, which is now almost over the counter. That's driving a lot of that demand for us. And given that we have a leadership position here, we're seeing that that strength. So outside of these two, we do see the softness across in industrial. 2024, I commented, we don't expect 2024 to see a very big change in recovery, so you can call it, we'll call it when we get closer to it. But I don't have signs that will change my view of the trend and outlook.

Hassane El: Thank you, ladies and gentlemen. That's included the Q&A portion of today's conference. I'd like to turn the call back over to Hassan Elkari for any closing remarks. Thank you again for joining our call. As always, we aim to deliver consistency and transparency in our results, and we thank you for your support along the way. The executive staff and I are incredibly proud of our team's continued performance, dedication to our customers and commitment to delivering shareholder value. Our employees all over the world are solving complex technology and business problems for customers. Congratulations to the team and thank you all.

Unknown Executive: Ladies and gentlemen, that's included today's presentation. You may now disconnect and have a wonderful day.