Q4 2023 ON Semiconductor Corp Earnings Call
Operator: Yeah.
Speaker Change: Good day, and thank you for standing by.
Speaker Change: Come to the on semiconductor fourth quarter 2023 earnings conference call.
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Speaker Change: After the speaker's presentation, there will be a question and answer session.
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Speaker Change: Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand, the conference over to your host today Parag Agarwal, Vice President of corporate development and Investor Relations. Please go ahead.
Parag Agarwal: Thank you Lee.
Parag Agarwal: Good morning, and thank you for joining our premise fourthquarter portico discrete quarterly results broker.
Speaker Change: I'm doing pretty brief a frontal corey.
Parag Agarwal: Our president and CEO.
Kurt: Kurt our CFO.
Kurt: This call is being webcast on the Investor Relations section.
Kurt: Our website www dot <unk> dot.
Kurt: Dot com.
Kurt: A replay of this webcast along with our country correctly fourth quarter earnings release will be available on our website approximately one hour. Following this conference call.
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Kurt: Our earnings release and this presentation includes certain non-GAAP financial measures.
Kurt: Reconciliation of these non-GAAP pricing measures through the roof directly companies with comparable GAAP measures.
Kurt: A discussion of certain limitations when using non-GAAP pricing measures.
Kurt: Included in our earnings release, which is posted separately on our website.
Kurt: Rest of Asia fixture.
Kurt: During the course of this conference call will be.
Kurt: Make projections or other forward looking statements regarding the future levered.
Kurt: The future pressure performance of the company.
Kurt: We wish to caution that such statements are subject to risks and uncertainties that could.
Kurt: EBIT for our results to differ materially from projections.
Kurt: Important factors.
Kurt: That's been affect our business, including vector that quarter.
Kurt: Cause actual results to differ materially from our forward looking statements are described in our most systems.
Kurt: Dedicated form 10, Qs and other filings with Securities and Exchange Commission.
Our earnings release for the fourth quarter of <unk>.
Kurt: Our estimates or other forward looking fit with the change and the company.
Kurt: Assumes no obligation to update forward looking statements.
Kurt: Extra reserve.
Kurt: <unk>.
Kurt: I bet you work that aircraft, except as required by law now, let me turn it over to Hassan Hasan. Thank you <unk>. Good morning, and thank you all for joining us on the call.
Hassan Hasan: We are pleased to share our results with you following another year of significant accomplishments as we continue transforming the company to achieve our long term financial model.
Hassan Hasan: Our intelligent power and sensing technologies accounted for 71% of our revenue in 2023 compared to 62% in 2021, as we have driven our portfolio to strategic areas with higher gross margin.
Hassan Hasan: Our revenue from <unk> products in 2023 increased more than 40% over 22 year over year design win growth continues to outpace the long term revenue growth target, we outlined during our analyst day.
Hassan Hasan: We had a record year of automotive revenue, increasing 29% over 2022, driven by both intelligent power and sensing.
Hassan Hasan: We achieved our first $1 billion revenue year for automotive image sensors with design wins, increasing more than 50% year over year fueling our future growth with new products.
Hassan Hasan: It was a great year for Silicon carbide, we shipped more than $800 million in 2023, or four times 2022 revenue our silicon carbide revenue had the highest growth in the industry. Both in terms of dollars and percentage in 2023, delivering an estimated 25% market share.
Hassan Hasan: We increased our customer base to more than 600 customers in 2023, our top 10 customers are geographically distributed with over 50% in APAC, including Korea, followed by the U S and we expect to further diversify our customer base in 2024 as European customers ramp production.
Hassan Hasan: We continued to make progress on our transition to 200 millimeter with material already running through our manufacturing steps and we announced the world's largest silicon carbide fab with our expansion in Bouchon South Korea.
Hassan Hasan: While market report still project 30, or 40% growth for silicon carbide in 2024.
Hassan Hasan: Oems latest EV plan indicate a more tapered growth signaling a sick market growth in the range of 20% to 30%.
Hassan Hasan: We still expect to grow at <unk> the market growth in 2024 with customers ramping production in both industrial and automotive.
Hassan Hasan: Electrification remains of content expansion opportunity for us our broad portfolio of silicon carbide and <unk> combined with our high power packaging solutions give us a competitive advantage across all levels of evs ranging from <unk> to <unk>.
Hassan Hasan: <unk> and BV.
Hassan Hasan: In fact, our 2023 hybrid vehicle related revenue nearly doubled year over year, while the number of vehicles grew 30%.
Hassan Hasan: We have significant content gains across all ex evs, and specifically up to $350 of content and hybrid electric Drivetrains and onboard Chargers, we grow no matter, which one gains traction unintended.
Hassan Hasan: On semi is number two in silicon power with best in class IGT and MOSFET technologies, our overall <unk> revenue nearly doubled over the last two years driven by market share gains and further penetration in ex EV and energy infrastructure.
Hassan Hasan: And automotive.
Hassan Hasan: Semi is number one in image sensors with 2023 revenue increasing more than 12% year over year, driven by the shift to higher value eight megapixel sensors.
Hassan Hasan: As customers move to better performance options at higher Asp's.
Hassan Hasan: Eight megapixel image sensor revenue nearly doubled year over year, demonstrating the market trend toward higher resolution for Adas systems.
Hassan Hasan: We're also number one in automotive led lighting inductive and ultrasonic sensing and we plan to advance our leadership position with our upcoming analog and mixed signal platform.
Hassan Hasan: In industrial we are number one in solar and energy storage solutions with our <unk> silicon carbide and module portfolio from commercial to utility scale string inverters.
Hassan Hasan: Energy infrastructure is still our highest growth mega trend in industrial where we continue to see demand for our hybrid modules with silicon and silicon carbide.
Hassan Hasan: In 2023, the international Energy agency or IEA reported that the world's renewable energy surpassed 50% growth over 2022, its fastest rate in the past 25 years.
Hassan Hasan: Our revenue for energy infrastructure during the same period grew 60%.
Hassan Hasan: The IEA predicts that renewable energy is on course to increase by two five times by 2030.
For EV Chargers, we just released a full suite of elite sic power integrated modules, enabling bi directional charging capabilities for D. C. Ultrafast electric vehicle Chargers, our newly released modules can be used up to 350 kilowatts and EV Chargers the highest in the industry to reduce.
Hassan Hasan: Charging time to 15 minutes for a near full charge.
Hassan Hasan: Our broad portfolio of products has enabled us to become a one stop shop for our customers and the source for the most optimized solutions. It is critical for customers to extract the best performance for their system and using our portfolio to provide a system level optimized solution across our power and sensing technologies remain a competitive advantage.
Hassan Hasan: We're also excited about our power opportunity to support the transition to 48 volt. We are already in production with a leading automotive customer on their new 48 volt architecture as we had already planned our portfolio for such a transition.
Hassan Hasan: Last year, we responded to the market uncertainty by focusing on our execution as demonstrated with more predictable and sustainable financial results. Our worldwide teams delivered operational excellence in the face of challenging market conditions without losing sight of innovation to further our leadership position.
Hassan Hasan: In intelligent power and sensing solutions.
Hassan Hasan: We are happy with the progress we've made in 2023, having built a resilient business model capable of performing in all market environments.
Hassan Hasan: We are now turning to the opportunities for operational improvements in 2024 to achieve our target financial model.
Hassan Hasan: In the near term.
Hassan Hasan: Based on our current outlook and early L. TSA signals, we expect continued softness across all end markets through a period of inventory digestion and slowing and demand.
Hassan Hasan: The bottom line is that we will weather 2024 with substantially better financial performance than in prior downturns. Meanwhile, we will continue to invest in extending our leading portfolio and we will benefit disproportionately as the market recovers with that I'll turn it over to <unk> to provide further details on our results.
Thanks Hassan.
Speaker Change: Our ongoing transformation in 2023 delivered significant improvement towards our long term financial model.
Speaker Change: Our ability to proactively navigate through the current cycle, while delivering better results than ever in a downturn is a testament to the work our teams have accomplished over the last three years.
Speaker Change: Today on semi the dip.
Speaker Change: And more resilient company, having achieved 2023 non-GAAP gross margin of 47, 1%, which is 1440 basis points higher than 2020, the last year, and which utilization with a comparable levels.
Speaker Change: We maintained revenue of $8 3 billion for the year non-GAAP operating margin of 32, 3% and delivered $5 16 of non-GAAP earnings per share.
Speaker Change: For the year, we returned 140% of free cash flow to our shareholders through share repurchases and we have $2 $4 billion remaining on the buyback authorization, we announced a year ago.
Speaker Change: For the fourth quarter, we reported revenue of 2.02 billion non.
Speaker Change: non-GAAP gross margin of 46, 7% and non-GAAP earnings per share of $1 25.
All above the midpoint of our guidance.
Speaker Change: Looking at the fourth quarter breakdown by end market.
Speaker Change: Our automotive business of $1 1 billion grew 13% as compared to the quarter, a year ago and declined 4% quarter over quarter in line with our expectation.
Speaker Change: Still vehicle electrification and advanced safety features are driving upside as demonstrated by our record automotive revenue for image sensors in 2023.
Speaker Change: Our revenue for industrial was $497 million down, 10% versus Q4, 2022, and down 19% sequentially as anticipated all segments have been impacted by macroeconomic factors and slowdown in industrial activity.
Speaker Change: Our automotive and industrial revenue accounted for 80% of our business in 2023 as compared to 68% in 2022, following our strategy to shift to high growth Megatrends for the sustainable ecosystem.
Speaker Change: In Q4, we exited another $30 million of noncore business and for the full year, we exited $180 million.
Speaker Change: While we expected customers defined alternative options the remaining noncore portions of our business are now healthy nearing corporate gross margins and demonstrating the power of our portfolio.
Speaker Change: Looking at the split between the operating unit revenue.
Speaker Change: Revenue for the power solutions group or PSG was $1 1 billion.
Speaker Change: An increase of 4% year over year due to an increase in silicon carbide revenue for auto and energy infrastructure.
Speaker Change: Revenue for the advanced solutions group or ISG was $625 million, a 11% decline year over year, driven by softness in compute and mobile end markets.
Speaker Change: Revenue for the intelligent sensing group or ISG was $308 million, a 13, Pittsburgh, 13% decrease year over year due to a decline in compute and industrial.
Speaker Change: In the fourth quarter, our GAAP and non-GAAP gross margin of 46, 7% was above the midpoint of our guidance.
Our gross margin exceeded expectations. Despite total utilization decreased to 66% from 72% in Q3 further validating the structural changes we have implemented over the last three years.
Speaker Change: Should see the full impact of the declining utilization materialized in Q1.
Speaker Change: At East Fishkill, we have already made progress by improving the overall cost structure of the fab, making it 50 basis points less dilutive than expected in the fourth quarter.
Speaker Change: Based on our current outlook, we expect to hold our gross margin above the mid 40% floor with utilization in the mid 60% range.
Silicon carbide gross margin also remained above 40% with high profit fall through and we expect to maintain these levels through 2024.
Speaker Change: Now let me give you some additional numbers for your models.
Speaker Change: GAAP operating expenses for the fourth quarter were $330 million as compared to $316 million in the fourth quarter of 2022.
Speaker Change: non-GAAP operating expenses were $306 million as compared to $300 million in the quarter a year ago.
Speaker Change: GAAP operating margin for the quarter was 33% and non-GAAP operating margin was 31, 6%.
Speaker Change: Our GAAP tax rate was seven 8% and our non-GAAP tax rate was 15, 4%.
Speaker Change: GAAP earnings per diluted share for the first fourth quarter was $1 28, as compared to $1 35 in the quarter a year ago non.
Speaker Change: non-GAAP earnings per share was above the midpoint of our guidance at $1 25, as compared to $1 32 in Q4 of 2022.
Speaker Change: Our GAAP diluted share count was 440 million shares and our non-GAAP diluted share count was 434 million shares in Q4, we were aggressive with our share repurchases and returned 136% of free cash flow to shareholders through $300 million of buybacks.
Speaker Change: Turning to the balance sheet cash and cash equivalent was $2 5 billion and we had $1 1 billion undrawn on our revolver.
Speaker Change: Cash from operations was $611 million in free cash flow was $221 million or approximately 11% of revenue.
Speaker Change: Capital expenditures during Q4 were $390 $91 million, which equates to a capital intensity of 19%.
Speaker Change: We expect 2020 for capital intensity to be in the low teens for the full year ahead of our original plan and driven by our improved silicon carbide manufacturing output on a 150 millimeters.
Speaker Change: Inventory increased by $27 million sequentially and days increased by 13 days to 179.
Speaker Change: This includes approximately 74 days of bridge inventory to support fab transitions and the silicon carbide ramp.
Speaker Change: Excluding these strategic builds our base inventory decreased $52 million sequentially with days of inventory at 105 days.
Speaker Change: We continue to proactively manage distribution inventory.
Speaker Change: Inventory was down $11 million sequentially with weeks of inventory at $7 two weeks versus $6 nine weeks in Q3.
Speaker Change: We have been under serving the mass market through this channel, while we focused on our <unk> commitments, we expect to replenish the channel in 2024 to service the long tail of customers and expect inventory to start to normalize with increase in inventory levels between seven to nine weeks over the next few quarters.
Speaker Change: Now let me provide you the key elements of our non-GAAP guidance for the first quarter, a table detailing our GAAP and non-GAAP guidance is provided in the press release related to our fourth quarter results.
Speaker Change: Given the current macro environment and our demand visibility, we anticipate Q1 revenue will be in the range of $1 8 billion to $1 9 billion.
Speaker Change: With softness across all end markets.
Speaker Change: We expect non-GAAP gross margin to be between 44, 5% and 46, 5% primarily due to lower factory utilization and continued <unk> headwinds.
Speaker Change: Our Q1 non-GAAP gross margin includes share based compensation of $5 million.
Speaker Change: We expect non-GAAP operating expenses of $305 million to $320 million, including share based compensation of $27 million.
Speaker Change: We anticipate our non-GAAP other income to be a net benefit of $8 million with our interest income exceeding interest expense.
Speaker Change: This benefit as a result of the debt restructuring activities. We have completed over the last two years, reducing a significant historical drag on the P&L.
Speaker Change: We expect our non-GAAP tax rate to be in the range of 15, five to 16, 5% and our non-GAAP diluted share count for the first quarter is expected to be approximately 433 million shares.
Speaker Change: This results in non-GAAP earnings per share to be in the range of <unk> 98 to $1 10.
Speaker Change: We expect capital expenditures of $310 million to $340 million in brownfield investments, primarily in silicon carbide and Esa.
Speaker Change: As we navigate through 2024, we will focus on operational excellence without losing sight of our long term commitments to our customers and our shareholders.
Speaker Change: We remain perfectly positioned in the markets, where we focus and continue to engage in long term supply agreements with our strategic customers.
Speaker Change: We remain confident in our 53% long term gross margin target as we execute our fab right strategy to optimize factory utilization and drive operational efficiencies across the company.
Speaker Change: With that I'd like to start the Q&A, So I'll turn it over to Liz to open the line.
Speaker Change: Okay.
Liz: As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
Liz: Withdraw your question. Please press star one again please.
Liz: Please standby, while we compile the Q&A roster.
Liz: Our first question comes from the line of Ross Seymore with Deutsche Bank.
Ross Seymore: Hi, guys can you hear me.
Ross Seymore: Yes, yes.
Ross Seymore: Great first question is on the automotive side of things I guess kind of two parts to it the silicon carbide side it sounds like Theres, a little bit of a difference between the third party estimates and what Youre seeing from Oems and then last quarter, you talked about some weakness emerging in the tier one guys. In Europe can you just give us an update on what you've seen kind of that side of the business is.
Ross Seymore: Well.
Ross Seymore: Sure.
Ross Seymore: Yes look we started the.
Ross Seymore: The year regarding the silicon carbide.
All know what.
The third party estimates are but when you look at customers even public announced.
Ross Seymore: Outlook for 2024.
Ross Seymore: Dialog has been tapered down a little bit.
Ross Seymore: From our side however.
Ross Seymore: Purely demand driven.
Ross Seymore: Platforms are qualified.
Ross Seymore: The designs have been shipping. The question now is tied to end demand and Thats why were still very confident in <unk> the market growth.
Ross Seymore: <unk> is what will the market due in 2024 based on the few announcements that have been made.
Ross Seymore: But it's a demand driven will just tag onto demand.
Ross Seymore: And then the.
Ross Seymore: On the automotive in general look we saw softness I mentioned it in my prepared remarks, it is inventory digestion, but it's also a slowing demand.
Ross Seymore: You'll see that in our in our guide as we work through it but one thing for us as a very high priority is.
Managing the inventory internally and managing inventory externally, which means we have been taking utilization down in order to match, what we believe the outlook is and what the outlook recover.
Ross Seymore: Get all of that as a tailwind. So that's the cautious approach we've had given the signals we've seen and we've seen them kind of come in as.
Ross Seymore: <unk>.
Ross Seymore: As we've talked about since last quarter because of the <unk> are given us that outlook.
Speaker Change: Thanks for that and I guess my follow up for Thad on the gross margin side. It looks like Youre going to hold the 45, Florida you talked about before can you just walk us through the puts and takes as the year progresses, and perhaps how big of a headwind as the utilization of 65% is going to be the Florida utilization side, approximately how much of an <unk>.
Speaker Change: Packed in that versus kind of a long term target of getting back to 53%. Thank you.
Speaker Change: Yes Ross.
Thad: Youre absolutely right. So we plan on holding that for that mid 40% floor, we think utilization will bottom out around the mid sixties.
Thad: We're pretty close to that now and if you look at our margin today I think the company has executed very well, which really shows that our fab lighter strategy that we implemented two years ago has worked very effectively and as we execute fab right will continue to drive cost efficiency across across that network.
Thad: What you should think about as every point of utilization is about 15 basis points of gross margin.
Thad: Going both ways up up and down. So you can kind of think about where we are there we proactively taken our utilization down we started taking it down.
Thad: In late 'twenty two.
Thad: And where we're kind of at that point, where we think we can manage through this at this level.
Speaker Change: Thank you.
Speaker Change: Thanks Ross.
Speaker Change: Yes.
Speaker Change: Our next question comes from the line of Vivek Arya with Bank of America.
Speaker Change: Yes.
Vivek Arya: Alright, Thanks for taking my question I'm curious what do you think has helped you avoid some of the deeper 30%, 40% kind of peak to trough correction that we have seen that several of your peers and I think kind of related to that what we're all trying to grapple with do you think Q1 is kind of the trough because when I listen to attack.
Vivek Arya: Talking about utilization on that deal close to the bottom that suggest Q1 is the trough but.
Vivek Arya: Do you think of it that way and should we be modeling kind of seasonal.
Vivek Arya: So kind of to parse what does head to avoid.
Vivek Arya: Some of the correction and from what you can see today is Q1 kind of the relative trough of the cycle for on semi.
Vivek Arya: Yes.
Speaker Change: Thanks for that question look.
Speaker Change: If you think about what.
Speaker Change: Helped us navigate better than a lot of our peers given the guide of comp.
Speaker Change: Companies that guided already and like you mentioned, 2030% is really the fact that we talked about the <unk>, we talked about how at a minimum the <unk> are going to provide us a phone call when things start getting softer.
Speaker Change: Those phone calls started happening in industrial before anyone.
Speaker Change: <unk> talked about industrial softness I'm talking six quarters ago. That's when we started taking utilization down that's why we tightened even more what we ship into the channel to be way closely tied to what we believe the demand is at that point in time.
Speaker Change: The other thing in automotive, we talked about it in our Q3.
Speaker Change: Earnings over 90 days ago, when we talked about we started to see signs because we started getting the calls about the lts as in customers wanting to get.
Speaker Change: Get some relief on the volume. So those are the tools that we have implemented over last few years in order to give us that visibility, but it's not.
Speaker Change: The <unk> are not going to solve a demand.
Speaker Change: Problem, what <unk> have done is allowed us to prepare what we do in response to a softer demand environment and you have seen we put a tight management on this.
Speaker Change: Inventory it Didnt, Bob will bubble up we've actually reduced our utilization.
Speaker Change: Utilization, we've reduced our base inventory in all of these are signs of the resiliency, we have in our model, which by the way all of them will be tailwind on the other side of that now.
Speaker Change: Now as far as do we build what we believe the trough as Q1 or not.
Speaker Change: Im smart enough not to call a bottom until I'm standing on top of the hill looking back at it. So I'll, let you know when that happens.
Speaker Change: On Silicon carbide.
Speaker Change: Could you.
Speaker Change: Give us some sense of what it was in Q4.
Speaker Change: What the auto industrial and mixes whats the implied for Q1, and why guide to a market rate.
Speaker Change: Why not in the past you have given us very specific in absolute numbers, because you had those supply agreements. So why not give an absolute number why tied to.
Speaker Change: To our market.
Speaker Change: Just any more quantification of what silicon carbide did in Q4, what the implied is for Q1 and then.
Kind of an absolute number for this year instead of giving tying it to a market rate.
Speaker Change: Yeah. So I'll first cover on in Q4, our revenue for Silicon Carbide went up as we are.
Speaker Change: Discussed in the Q3 call and as we expected. So it came in line with our expectation again, a grew from Q3 to Q4.
Speaker Change: That shows both the diversification and the strength in that business that will also remain in 2024 with the growth we're going to see in 2024 now. The reason we don't talk about absolute numbers. It is the ramping business and it is the lumpiness of a very new ramping business is going to be.
Speaker Change: Silicon carbide like it is with any ramping business that is tied to adoption.
Speaker Change: Thats. The reason, we went to <unk> and by the way. It is what we <unk> at our analyst day. So we didn't really change what we do we change the short term more on the long term. We've always said, we're going to outgrow the market, we're going to be to exit the market that is our trajectory for the next five years.
Speaker Change: <unk> that we discussed in analyst day, and my comments are we will remain committed to that trajectory based on the design ins, we have and as I mentioned in Ross's question.
Speaker Change: All of the designs are done.
Speaker Change: All of the shipments have been made.
Speaker Change: To put a ramp to start with a very broad range of customers.
Speaker Change: Question remains what is end demand going to do and if end demand is better than what we are forecasting were going to grow better than what we forecast at two extra market and Thats, where I would leave Canada.
Speaker Change: To call it the short term, which is 2024.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Chris Daly with Citi.
Speaker Change: Hello.
Chris Danely: Hello, Thank you Patrick.
Chris Danely: Alright, I got cut off for a second.
Chris Danely: Anyway. So just a few clarifications on the Silicon carbide business do you still expect to have one major customer this year, let's say, 30%, 40% of revenue and then heavier.
Chris Danely: Pricing expectations for Silicon carbide changed for this year versus say the <unk>.
Chris Danely: Three to six months ago.
Speaker Change: Let me cover the pricing on one because its easier pricing has not changed as we've always discussed.
Speaker Change: Our pricing is tied to the <unk>, although we will discuss with customers on volume changes depending on ramps.
Speaker Change: Our end market as I discussed earlier pricing is consistent and therefore I'm not seeing any any of the pricing impact other than the efficiencies that we get in our as we improve yields as we transfer technologies et cetera, those are very tied to technology advancements.
Speaker Change: That actually enhance our gross margin.
Speaker Change: So that's on that as far as customer concentration.
Speaker Change: We will remain with a few handful of lead customers, that's not going to be any different from 2023.
Speaker Change: However, as a percent we're going to see more diversification.
Speaker Change: As we ramp more customers across across our worldwide, both in Asia, and North America, and Youre going to start seeing Europe ramp up in the second half of the year from design wins, we've done over the last couple of years.
Speaker Change: So we will remain with a profile of having key customers I'll discuss the percentage of revenue for each.
Speaker Change: But it will just keep diversifying as we predicted in.
Speaker Change: The Q3 call.
Speaker Change: Great. Thanks, Hassan and for my follow up can you just talk a little bit more about your <unk>.
Trends in overall expectations for the big two end markets automotive and industrial.
Speaker Change: Which one would you expect to start to recover sooner.
Speaker Change: Do you think that either of them can get much worse from here, maybe just give us a sense of your confidence in both the markets.
Speaker Change: Yes.
Speaker Change: Lack thereof.
Speaker Change: Yeah.
Speaker Change: Im laughing.
Speaker Change: I can only management comment of what we see and therefore, while we see as kind of that.
Speaker Change: And inventory digestion and softer end demand.
Speaker Change: Therefore, that's what we're managing to you know have been very consistent over the last almost two quarters that we're going to manage 2024 as there is no recovery per se.
Speaker Change: And then if there is one will just take advantage of it and it will become a tailwind across all financial metrics margin goes up with utilization revenue goes up et cetera. So.
Speaker Change: So that's how we're going to manage now what I will say, though is both of these markets auto and industrial you know two of the largest markets that we have.
Speaker Change: We've been we saw the softness I would say even ahead of a lot of our peers.
Speaker Change: As I mentioned, we talked about automotive softness in the Q3 quarter, we talked about industrial softness in Q4, 'twenty two quarter. So we've seen it we've managed to it we've done very well managing through it and we're going to keep managing to the signals. We can control and we can see and then when they start recovering we'll take advantage of it is.
Speaker Change: Well, but one thing for sure we're not sitting here ignoring it just keeping utilization artificially high hoping for a recovery and if it doesn't come then.
Speaker Change: The correction is much harder.
Speaker Change: Harder, which you've seen with some of our peers, we're taking a much more disciplined approach as far as how we address our markets.
Speaker Change: And Chris to give you a little more color on the Q1 for auto and industrial we expect both of those end markets to be down kind of high single digits quarter on quarter. In Q1, So we're not seeing a recovery of either one of them yet.
Speaker Change: Great. Thanks, guys.
Speaker Change: Our next question comes from the line of tissue <unk> Hari with Goldman Sachs.
Hari: Hello can you hear me yes.
Yes, sorry.
Hari: Sorry about that yes, I had two as well thank you for taking the question.
Hari: In your prepared remarks, you talked about your automotive image sensor business, I think hitting or exceeding $1 billion in 'twenty three.
Hari: You also talked about design wins being up 50% year over year.
Hari: How are you thinking about that business specifically in 'twenty four and can you speak to the profitability of that business as you continue to in source more than in the past.
Hari: Yeah look the business given that the business is tied to auto and industrial over 90% of our revenue in.
Hari: Image sensor is auto and industrial that has been a very active trend.
Hari: <unk> really transition over the last few years moving our capacity too.
Hari: Auto and industrial where a lot of the growth has been away from the consumer and the webcams and all of that so that transition is behind us therefore, what im seeing from our financial performance.
The margin performance is much better than it's ever been.
Hari: It's higher than.
Hari: Corporate average so it is actually accretive and.
Hari: Profitability is in.
Hari: I would say around the corporate as we maintain opex in that business and invest in innovation like the eight megapixels and the fact transfers as.
Hari: As far as the mix changed from outside to inside that's more of a longer term, we sampled our products out of east Fishkill.
Hari: <unk>.
Hari: Until that ramps and becomes a meaningful percent of revenue youre not going to see an impact on margin from a mix change to an internal sourcing, but that will be part of our call. It outlook as we get to the 53% margin model for the company.
That will be a contributor.
Speaker Change: That's great. Thank you and then as my follow up.
Speaker Change: That's kind of where I wanted to go long term gross margins maybe for that.
Speaker Change: So you're reiterating the 53% medium to long term in the past you've talked about the <unk>.
Speaker Change: Divestitures contributing to gross.
Speaker Change: Gross margin expansion, you talked a little bit about <unk>.
Speaker Change: <unk> normalized and you've got utilization rates, hopefully marching higher over time.
Speaker Change: I guess my question is in the 2027 model the revenue assumption was somewhere in the $13 billion plus to maybe 14 $5 billion range do you need to get to those revenue levels to 53% gross margin or do you do you think you can you can hit those levels, even at a significantly lower revenue.
Speaker Change: Global given the progress you've made on multiple fronts. Thank you.
Speaker Change: Yes associates that look I don't think the March to the 53% gross margin is revenue dependent.
Speaker Change: Clearly, we've got a tailwind as we crank up utilization as the market normalizes and recovers in the outer years.
Speaker Change: But we don't look at it given our current manufacturing footprint, we don't look at that as the primary driver being revenue you've nailed it right. Its the utilization is.
Speaker Change: The.
Speaker Change: <unk> getting that cost under control, it's the monetization of the divested fabs that were divested in 2022 and then it's the ramping of these new products that are accretive to gross margins.
Speaker Change: All of that will give us the tailwind that gets us there.
Speaker Change: Clearly we've got to have some growth from here, but we don't need to have that that growth that you talked about so we look at it much more as internally controlled but what we can execute to versus a demand driven revenue driven number.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of Gary Mobley with Wells Fargo.
Gary Mobley: Hi, guys can you hear me.
Gary Mobley: Yes, yes.
Gary Mobley: Alright, sorry, the operator keeps cutting out I guess for everybody.
Gary Mobley: Okay. Ed you mentioned that I believe you mentioned that Q1 represents the bottom for utilization manufacturing utilization for the year.
Gary Mobley: And given that we've seen your inventory increase in days for four consecutive quarters.
Gary Mobley: Should we read into that as if Youre also saying that Q1 represents the bottom for the fiscal year for revenue.
Ed: No look I think consol answered that earlier, we're not calling a bottom here in terms of utilization. We think we're going to be in this kind of mid 60% range until we normalized the market normalizes and starts to return to.
Ed: To the levels that we saw earlier in the year and in 2022.
Ed: So utilization will kind of stay at this level in terms of inventory. If you look at what we've been doing we've actually been growing what we call our strategic inventory silicon carbide in the fab transition. If you look at the inventory what I call, our working inventory or base inventory it was actually down $52 million sequentially.
Ed: <unk> were up just because of the <unk>.
Ed: Cogs number was a lower number but we've been managing that very effectively in kind of in a good tight range here.
I expect as we go through the year, we'll build a little bit more of the strategic inventory in terms of dollars but.
Ed: We'll burn that off over a multiyear period thats always been in our plan as we exit those fabs and.
Ed: And start to bring that production into our internal fabs. So we're actually in terms of base inventory, we're happy where we are.
Pat: That's helpful Pat.
Pat: For you Hasan I know that you began to highlight your analog and mixed signal platforms. At your May analyst day, I believe that was maybe the first time that youre really vocal on it and maybe if you can give us.
Hasan: An idea of where that ramp stands how material can a BS we look through the balance of fiscal year, 'twenty, four or maybe into fiscal year 'twenty five.
Hasan: Yes.
Hasan: Look the fact that I am highlighting it in my prepared remarks, <unk> excited I am about the progress that we've made with a brand new platform.
Hasan: So as far as technology development technology development is actually on track a little bit ahead of schedule as far as products are concerned we have already taped out a few of our lead products.
Hasan: We will be sampling here in early 'twenty four and then obviously there is a design cycle before you get to revenue. So from all leading indicators of one the competitiveness of the platform and to the competitiveness of the products and the adoption that I see from early adoption that I see from customers all of <unk>.
Hasan: Those are at or ahead, where we thought that technology will will get us.
Hasan: We'll hear you'll hear more about it as we get through 2024.
Hasan: What that technology platform is but I will tell you. It is the most competitive.
Hasan: Mixed signal analog platform that exists in the market today and it will carry with it products that are highly synergistic with what we do on the.
Hasan: On the power side of it so very complementary drivers controllers as <unk> mentioned in the analyst day. So we remain on track I'm more bullish than I was when we did analyst day, given the progress and we will continue to push forward through 2024.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of Joshua <unk> with TD Cowen.
Joshua: Hey, guys. Thank you for taking my question and good morning I.
Joshua: I wanted to follow up on the earlier question I think the conventional view is silicon carbide is constrained in your hands a lot of your peer commentary seems to be shifting more demand focused right now.
Joshua: Ask it simply do you still view silicon carbide as constrained and and given we are moving towards more and demand signals now how are you managing investment levels given all the efforts and long lead time that a lot of your vertical integration efforts take thank you.
Joshua: Yes from a from a supply if you look at a lot of the Fabs and the capacity that the whole industry has talked about versus a trajectory of growth for electrification in general.
Joshua: I do believe.
Joshua: That technology will remain constrained now of course in the <unk>.
Joshua: The short term.
Joshua: <unk> for 2024 to a first order is.
Joshua: <unk> put in place. So it is a demand driven but that goes back to the lumpiness of our.
Joshua: Of the ramp that we've always talked about so I don't see that as additional capacity or overcapacity given that it is temporary in nature and the growth is going to remain the way we are managing it of course is.
Joshua: A lot of it is internally driven majority of our.
Joshua: Substrate as the majority of our.
Joshua: Supply is generated internally and we modulate that as we convert to eight inch we talked about taken utilization down in the last quarters, earning utilization or sorry, the capacity capital intensity will be down in 2024, and that's because we've been performing.
Joshua: <unk> better on our six inch and therefore, we're able to ramp eight inch faster than we originally expected. So we're going to modulate this internal external supply in order to tag on to what we see as a demand signal. So we don't see a under loading be above.
Joshua: And beyond what you see in the company and we will manage it that way because revenue is going to recover.
Joshua: <unk> are going to keep growing whether it's 20% to 30% 30 to 40, it doesn't matter, it's going to grow and it's a multi decade growth given that the penetration of silicon carbide in Evs is still below 25% and <unk> in general are below 25% a lot of upside.
And that business it does not change our outlook for the Mega trend and we will continue to invest in the long term.
Joshua: And Josh for the investments over the long term, we can modulate our investments very easily because we are a capital light strategy of converting from six to eight ish. Our fabs are already eight inch.
Joshua: Capable so as we think about substrates, we can convert slowly.
Joshua: Versus having to go out and do Greenfield investments of a new fab, a new facility and having to bring that up so as the as the market takes off we can modulate our investments correspondingly kind of at an equal basis, depending on what's happening and move very quickly to bring on capacity if needed.
Speaker Change: Got it. Thank you there's a lot of helpful context, there as my follow up I believe in the prepared remarks, you mentioned that at some point in 2024, Youre going to look to refill. The channel could you maybe provide some context of what signals you would need to see to.
Speaker Change: Go ahead, and do that I know you mentioned youre not planning on a recovery, but as a recovery needed.
Speaker Change: To get you to refill the channel or I guess, how much of a revenue tailwind would you expect that to be thank you.
Speaker Change: Yes in the prepared remarks, I said, we're going to start replenishing seven to nine weeks. We're at seven two this this quarter.
Speaker Change: We need to start filling that channel now.
Speaker Change: We're under serving that mass market. So if you look over the last few years, where supply constraint. So we started the long tail and then we focused on our strategic L. PSA customers and again continue to start that long tail. So we do need to start replenishing that.
Speaker Change: For the first quarter you May say you may see us go up in terms of weeks go up.
Speaker Change: A week plus or minus but keep in mind on this revenue basis.
Speaker Change: Likely down in terms of dollars right, but we're going to be thinking about it that way is we've got to actually start moving inventory into that channel to support that longer tail. So you think about all of those customers that broad set of customers industrial through the catalog, we have not been servicing them well our distributors have been putting orders on us they actually want.
Speaker Change: More inventory than what we've allowed them to hold so we've got to start replenishing that but we don't see a big step function here as much as just a gradual increase over the course of several quarters.
Speaker Change: Thank you Pat.
Speaker Change: Our next.
Speaker Change: Question will come from the line of Christopher Roland with Susquehanna.
Speaker Change: Okay.
Christopher Rolland: Hey, guys. Thanks for the question.
Christopher Rolland: Can you guys talk about your overall levels of LTE assays, and then if you can double click into sick L. TSA. So I think you've given industrial in the past as well anything there and then the update on the sick customer from last quarter did they come back and did you fill them this quarter or what are your expectations there.
Speaker Change: Thank you.
Speaker Change: Yes, so our LTE phase for the next 12 months the value is $4 8 billion.
Speaker Change: The breakdown of what that looks like roughly is about 80% auto.
Speaker Change: About 17% industrial and the rest are kind of in that other bucket.
Speaker Change: So that gives us that view over the over the next 12 months.
Speaker Change: <unk> coverage.
Speaker Change: Yes, as far as I don't want to comment about.
Speaker Change: Specific customers, but it came exactly as we guided last quarter and overall came higher than Q3. So we said last time that we will keep ramping will keep ramping through 'twenty, four and thats coming in exactly as we expected so that temporary I would say demand signal that.
Speaker Change: Q4 is behind Us and we're moving forward with with the ramp.
Speaker Change: Great.
Speaker Change: Thank you.
Speaker Change: And in terms of your non core.
Speaker Change: Customers, if you could update us there or are we done with that at this point.
Do you keep any remaining.
Speaker Change: Any other thoughts there would be great.
Speaker Change: Yes, Chris when we rolled this out we thought we would exit somewhere between 800 $900 million over a multi year period and as you know we have.
Speaker Change: We've overhauled this for a couple of years now.
Chris: I think that gives you an indication of the value that we bring to these customers. So for the year, we exited $180 million.
Chris: About over the multiyear periods of about $475 million what's.
Chris: Meaning is good healthy business at the corporate average so as we've said at this point if our customers haven't found another source. We're just going to consider this good business as long as we don't need that capacity so.
Chris: So we will continue to support those customers those customers are valuing that and evaluate our ability to support them because we provide them. Many products not just these these products were talking about.
Chris: So we're not going to talk about exits any further just be in our baseline.
Perfect. Thank you Todd.
Chris: Our next question will come from the line of Quinn Bolton with Needham.
Quinn Bolton: Hey, guys. Thanks for taking my questions first for Hassan you mentioned.
Quinn Bolton: Vacation of the Silicon carbide business in Asia, and I think you specifically called out Korea.
Quinn Bolton: And then Europe, just wondering if you could comment how do you feel positioned in China, both with the battery electric vehicles and hybrids.
Quinn Bolton: Yes, we're actually our position in China is we're very well positioned I think last quarter, we talked about having lts's with four of the top five China Oems.
Quinn Bolton: Both qualified and ramping revenue.
Quinn Bolton: But again, it's tied to.
Quinn Bolton: The end demand commentary I put before so all our ducks in a row as far as the platforms. The qualification on these platforms. The early ramps on these platforms.
Quinn Bolton: That's both sick and IGT as I mentioned, both are seeing the growth on electrification in general all flavors of electrification.
Quinn Bolton: But we feel pretty good about.
Quinn Bolton: Our success and our exposure in China for EV, and that's by the way I would.
Quinn Bolton: Extend that to the industrial side of it with energy storage is it the same commentary.
Quinn Bolton: With our engagement at the Oems a lot of them are based in China.
Speaker Change: Got it thank you for that and then.
Speaker Change: A question on the utilization rates.
Speaker Change: What gives you the confidence that utilizations will sort of hold in the mid sixties, obviously kind of an uncertain demand environment inventory needs to be reduced is it just the visibility of the <unk> give you is the fact that <unk> been able to reduce.
Speaker Change: Sort of normal inventory by $50 million at this utilization rate just how do you how do you feel confident holding the line there on utilization.
Speaker Change: Yes, it's exactly that I mean, we get visibility through the <unk>, but more importantly, as we've been managing that based inventory it's down at a working level, we have not we haven't over over a shift towards <unk>. We've kept our working based inventory at optimal levels here.
Speaker Change: So as we look forward in the current market dynamics, we feel like we can hold that that mid 60, just because of where we are in an inventory position, we don't need to take it lower it because we are not over inventoried anywhere and the fact that we've got to start shipping into the into the channel the sport that mass market, we're going to have to build some products for that as well.
That broad based product line.
Speaker Change: Something specific to silicon carbide. So that's what gives us the confidence of where we are here given the current market dynamics.
Speaker Change: Got it thank you.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line.
Speaker Change: Joseph Moore with Morgan Stanley.
Joseph Moore: Great. Thank you.
Joseph Moore: You guys have talked about some automotive deceleration and are running the business conservatively when I look at your automotive revenue you were down low single digits sequentially. In Q4, you are still up double digits year on year, which is kind of theres a gamut of companies.
Joseph Moore: <unk> for a bunch of different.
Joseph Moore: Kind of use of all of us, but everybody is kind of in that same ballpark. So maybe could you talk to.
Joseph Moore: The year on year growth, how much of that is silicon carbide.
Joseph Moore: Incremental silicon carbide minus hebt's it replaces and how much of that is just general autos.
It seems like the numbers are a little bit better than maybe your conservatism would imply.
I'm trying to tie all the.
Joseph Moore: So what we.
Joseph Moore: I guess in general if you take out.
Joseph Moore: Silicon carbide.
The silicon business declined.
Joseph Moore: I guess, that's the at a high level the silicon business decline. If you look at the amount of decline it declined with what the expected market decline based on the early reports that I'm starting to see.
Joseph Moore: In general So I don't think our business is an outlier from the market and may be an outlier for what some of our peers in some what others have said.
Joseph Moore: <unk>.
Joseph Moore: But for US we're tied more to market because we've been taking a very disciplined approach about what to ship based on the <unk> and the discussions we've had with the customers that have been ongoing. So I think we feel we feel pretty good about our response to demand signals being pretty quick as far as taking utilization.
Joseph Moore: <unk> down in response to it and making sure we don't build inventory in the channel in response to it or at the direct customers and matter of fact, so between these two.
Joseph Moore: I think I think automotive came in line, except a few of the strength in pockets like we talked about an image sensor, which is a content growth on an ASP growth.
Broach here.
Speaker Change: Okay, great. Thank you very much.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Our next question will come from the line of harsh Kumar with Piper Sandler.
Speaker Change: Yes.
Harsh V. Kumar: Yeah, Hey, guys James first of all congratulations on doing a lot better than our peers.
Harsh V. Kumar: Im giving you a loan a compliment because other companies are guiding down 10% to 20% on a sequential basis youre guiding down a lot smaller do you think you're cutting enough in other words why not go ahead and cut a lot more.
Speaker Change: And then part two of my question is assuming demand stays at this level and we know that.
Speaker Change: I don't know what the demand will go but at this 65 something percent utilization.
Speaker Change: Many quarters of excess inventory do you think you might have.
Speaker Change: Yes look.
Speaker Change: Ill cover the first one and then a little bit on the second question look it's not a matter of did we cut and often did we do in <unk>.
Speaker Change: We are guiding based on our level of.
Speaker Change: Visibility and based on our very close engagement with the customers.
Speaker Change: Where we guided is where we believe in.
Speaker Change: Just on the quarter progression, where we believe the customers need.
Speaker Change: From us.
Speaker Change: So it is a demand driven signal now the difference between.
Speaker Change: Our smaller reduction in the first quarter versus some of the larger reductions from some of our peers.
Speaker Change: Is historical.
Speaker Change: We've been tapering down a lot of our.
Speaker Change: What we shipped to customers and we believe we have been.
Speaker Change: Closer and more in line with demand that our customers need versus some of our peers that don't have that same visibility levels with whatever construct they have on.
Speaker Change: Whether <unk> or.
Similar program.
Speaker Change: We believe the Lts's gave us that visibility we have been engaged with customers earlier than most of our peers and we believe we have been closer to what real demand signal is and therefore changes to demand signals are not as drastic.
Speaker Change: As with some of our peers. So when we talk about our guide is better than some of our peers I think our business and where we are with our business we.
Speaker Change: We put ourselves in a much better position than some of our peers and you can see that by the way not just on the revenue you can see that on our utilization you can see that on our base inventory you can see that on our channel inventory.
Speaker Change: All of these are better and show better disciplined than some of our peers that had a much larger correction.
So we don't see this as a quote unquote correction, while we see it as a.
Speaker Change: <unk>.
Speaker Change: A view and a transparent view of what we believe demand is going to do in the first quarter yes.
Speaker Change: Yes, so harsh on the utilization just to remind you we started taking utilization down in Q3 of 2022 as we saw softness in industrial at that time. So if you look at our base inventory, we've managed it very effectively.
Speaker Change: If you really think about utilization, it's been a soft landing in terms of utilization that we weren't in a position where we got over inventory too much inventory in the channel and they had to take it down hard. So at these levels. It's what gives us confidence that this mid 60 that we can hold here.
Speaker Change: Understood guys very helpful. And then just my follow up Sean should I think of your Silicon carbide business is having a starting point of about $1 billion in 2024, because that at capacity I believe that came on the $200 million.
Sean: So my understanding reallocated to other customers and then part two of the question is you made a very subtle, but I think important comment that something to the tune off youre already running 200 millimeter silicon carbide in the Fabs are maybe on China could you just expand on that yeah.
Speaker Change: Yes.
So look I'm not going to give her an absolute guide on silicon carbide at what I would say is two extra market, we feel comfortable with two extra market given all of the platforms and given the customers and the ramps that we've seen the question now is on.
Speaker Change: And demand.
Speaker Change: But end demand is better we're going to grow better and demand is where we believe it is we're going to grow at that but it will be two extra market and thats showing.
Speaker Change: Both an aggressive ramp and share gains so that's on on the outlook for 2024 as far as the 200 millimeter.
Speaker Change: This one it was it was more I would say I thought it was a more of a direct comment because what we've always said is we're going to qualify 200 millimeter in 2024 and ramp in 2025. So my prepared remarks is purely highlighting the fact, we are on track to achieve that.
Speaker Change: That goal that we set out which is qualifying and 24 ramp and revenue ramp in 'twenty five.
Speaker Change: It is already running in the fab, which is a pretty good leading indicator of where our qual and our confidence in the quality going to be in 'twenty four.
Speaker Change: Very helpful guys. Thank you.
Speaker Change: That concludes today's question and answer session I would like to turn the call back to Sean <unk> for closing remarks.
Sean: Through the structural changes we've made over the last three years, we built the resilience required in our business to navigate a dynamic macro environment, we remain close to our customers. We're committed to our financial target model with our strategy of enabling the sustainable ecosystem.
Sean: Again, we'd like to thank our worldwide team for their continued tenacity and ongoing contributions to the company's success and thank you for joining our call today.
This concludes today's conference call. Thank you for participating you may now disconnect.
Sean: Okay.
Sean: [music].
Sean: Okay.
Sean: Yeah.
Sean: Okay.
Sean: Okay.