Q1 2024 ON Semiconductor Corp Earnings Call
Operator: Good day, and thank you for standing by. Welcome to the ON SEMI first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to today's speaker, Parag Agarwal. Please go ahead.
Okay.
Speaker Change: Good day, and thank you for standing by and welcome to the on semi first quarter 2024 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 special need to press Star one on your telephone you all didn't hear an automated message a box in your hand is raised to withdraw your question. Please press star one again.
Speaker Change: Please be advised today's conference is being recorded I would now like to hand, the conference Speaker Dr. Parag Agarwal. Please go ahead.
Parag Agarwal: Good morning, and thank you for joining ON SEMI's first quarter 2021 quarterly results conference call. I am joined today by Hassan Arcuri, our President and CEO, and Thad Trent, our CFO.
Parag Agarwal: Thank you Kevin.
Parag Agarwal: Good morning, and thank you for joining on Chinese productivity target for us.
Parag Agarwal: Quarterly results conference call.
Speaker Change: I'm young pretty quiet.
Parag Agarwal: Alright.
Speaker Change: Our president and CEO.
Parag Agarwal: This call is being webcast on the Investor Relations section of our website at www.onsemic.com. A replay of this webcast, along with our 2024 first quarter earnings release, will be available on our website approximately one hour following this conference call. And the recorded webcast will be available for approximately 30 days following this conference call.
CFO: Our CFO.
Speaker Change: This call is being webcast come back and we're still ambitious direction.
Speaker Change: I'm, sorry, Www dot com.
Speaker Change: Tom.
Speaker Change: A replay of this webcast along with our fourth.
Speaker Change: Fourth quarter earnings release.
Speaker Change: Under our drip sorry, Sumit you want.
Speaker Change: Tom.
Speaker Change: The recorded webcast, we'd be able to win or perhaps commodity packagers along this conference call.
Parag Agarwal: Additional information is posted in the Industrial Relations section of our website. Our earnings release and this presentation include certain non-capitalized financial measures. Reconciliation of these non-capital financial measures to the most directly comparable capital measures, and a discussion of certain limitations when using non-capital financial measures, are included in our earnings release, which is posted separately on our website in 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.
Speaker Change: Additional information is posted on the rest of Asia.
Sumit: I'm sorry.
Sumit: Our earnings release and this presentation.
Sumit: Turning to certain non-GAAP financial measures.
Sumit: The cancellation of these non-GAAP financial measures most directly comparable GAAP measures.
Sumit: Certain limitations when using non-GAAP financial measures.
Sumit: And included in our earnings release.
Sumit: Posted separately.
Sumit: Right.
Sumit: Distillation section.
Sumit: Yeah.
During the course of this conference call in May.
Sumit: Sure.
Sumit: We're looking statements regarding the future events.
Parag Agarwal: We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results 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, are described in our most recent Form 10-A, Form 10-Qs, and other filings with the Securities and Exchange Commission and in our earnings list for the first quarter of 2024.
Sumit: Future financial performance of the company.
Sumit: We wish to caution.
Sumit: Subject to risk and uncertainties.
Sumit: That could cause actual results to differ materially from our projections.
Sumit: Important factors that can affect.
Sumit: Business.
Three factors.
Sumit: Actual results or developments.
Sumit: Gary.
Sumit: Forward looking statements are described in our most recent strategy.
Sumit: Thank you and other filings with Securities and Exchange Commission.
Sumit: Our.
First quarter report.
Parag Agarwal: Our estimates or other forward-looking statements might change, and the company assumes no obligation to update forward-looking statements to reflect actual results, Change Assumptions, or other errors that may occur, except as required by law. Now, let me hand it over to Hassan. Hassan? Thank you, Parag. Good morning.
Sumit: Our estimates or other forward looking statements may change.
Sumit: And that comes to me.
Sumit: No obligation to update forward looking statements.
Sumit: Actual results.
Sumit: <unk> contracts are all done.
Sumit: That sounds good.
Sumit: As required by law now, let me hand, it over to Scott.
Hassane El: Thank you Parag, good morning, and thank you all for joining us on the call. In the first quarter, our worldwide team delivered revenue of $1.86 billion, a non-GAAP gross margin of 45.9%, and non-GAAP earnings per share of $1.08, all above the midpoint of our guide today.
Scott: Thank you Brock good morning, and thank you all for joining us on the call.
Scott: The first quarter our worldwide team delivered revenue of $1 86 billion non-GAAP gross margin of 45, 9% and non-GAAP earnings per share of $1 <unk>.
Hassane El: We have remained laser focused on our execution, driving new design wind growth of 30% quarter over quarter and gaining share in silicon and silicon carbide based on the strength of our technology. Customers value the breadth of our portfolio and the superior performance of our intelligent power incentive technologies, which continue to fuel platform wins. Leading indicators of future revenue support our plan to outgrow the market in automotive and industrial, with new product revenue in Q1 increasing 9% year-over-year, and we expect it to continue to outpace total company growth with favorable gross margins at scale.
Scott: All above the midpoint of our guidance.
Scott: We have remained laser focused on our execution driving new design win growth up 30% quarter over quarter and gaining share in silicon and silicon carbide based on the strength of our technology.
Scott: Customers value the breadth of our portfolio and the superior performance of our intelligent powered topology, which continue to fuel platform wins.
Scott: Leading indicators of future revenue support our plan to outgrow the market in automotive and industrial with new product revenue in Q1, increasing 9% year over year and we expect it to continue to outpace total company growth with favorable gross margins at scale.
Hassane El: Specifically, we believe our silicon carbide business to have the best financial performance in the industry on a fully loaded basis, with more than 50% of substrates coming from internal production in the first quarter. The performance of our silicon carbide solutions, combined with our vertically integrated supply chain, is enabling us to rapidly diversify our customer base. I've just returned from the China Auto Show in Beijing.
Scott: Specifically, we believe our silicon carbide business and have the best financial performance in the industry on a fully loaded basis with more than 50% of substrates coming from internal production and the first quarter.
Scott: The performance of our Silicon carbide solutions combined with our vertically integrated supply chain are enabling us to rapidly diversify our customer base.
Scott: Having just returned from the China Auto show in Beijing, I remain confident that we are continuing to gain share and expanding into the top 10, leading Chinese Oems, where we are already designed into the newly announced 800 volt EV platforms.
Hassane El: I remain confident that we are continuing to gain share and expanding into the top 10 leading Chinese OEMs, where we are already designed into the newly announced 800 volt EV platforms and set to start ramping in the second half of 2024. As for the global silicon carbide market, we still expect an increase in TAM, although at a lower rate than previously anticipated. The increase is primarily driven by incremental volumes of EVs produced globally over 2023, even as total SAR is projected to be flat to slightly down.
Scott: Start ramping in the second half of 2024.
Scott: As for the global Silicon carbide market, we still expect an increase in the Tam although at a lower rate than previously anticipated. The increase was primarily driven by incremental volumes Evs produced globally over 2023, even as total Saar is projected to be flat to slightly down.
Hassane El: We continue to gain share in silicon carbide and diversify across all markets and still expect our revenue to increase to exit the market growth in 2024. Outside of silicon carbide, there was incremental softness in the market in the first quarter.
Scott: We continue to gain share in silicon carbide and diversify across all markets and still expect our revenue to increase to <unk> the market growth in 2024.
Scott: Outside of Silicon carbide, there was incremental softness in the market in the first quarter inventory digestion persisted across the automotive and industrial markets with stabilization in the traditional part of our industrial business.
Hassane El: Inventory digestion persisted across the automotive and industrial markets, with stabilization in the traditional part of our industrial business. We remain cautious about the second half outlook, but we expect customer inventory levels to normalize and the market to stabilize. We will maintain our disciplined approach to navigating the current environment and expect to deliver predictable results as we have demonstrated. In this environment, we're also investing to further our leadership in the high-growth megatrends of automotive, industrial, and cloud, including data centers.
Scott: We remain cautious about the second half outlook, we expect customer inventory levels to normalize in the market to stabilize.
We will maintain our disciplined approach and navigating the current environment and expect to deliver predictable results as we have demonstrated.
Scott: Through this environment. We're also investing to further our leadership in high growth Mega trends of automotive industrial and cloud, including data centers during.
Hassane El: During our analyst day last May, we highlighted a $19 billion high-margin TAM opportunity that we could service by expanding our portfolio of power management and sensor interface technology. To best align with the strategic intent, we have formed the Analog and Mixed Signal Group, which will deliver industry-leading, full-system solutions for these markets. Electrification remains the largest growth opportunity for ON SEMI across XEBs from BEV to HEB. We provide a unique value proposition for our customers with our wide range of silicon carbide and IGBT solutions, along with our high power packaging technology.
Scott: During our analyst day last May we highlighted a $19 billion high margin Tam opportunity that we could service by expanding our portfolio of power management and sensor interface technologies.
The best aligned with the strategic intent, we have formed the analog and mixed signal group, which will deliver industry, leading full system solutions are these markets.
Scott: Electrification remains the largest growth opportunity from sandy across ex Evs from map to HEB.
Scott: We provide a unique value proposition for our customers with a wide range of silicon carbide and <unk> solutions, along with our high power packaging technology.
Hassane El: Our revenue from XEV grew by approximately 60% year over year, significantly outpacing unit production, and we continue to gain share with our silicon carbide and silicon products, primarily in BEV. In automotive sensing, the shift towards higher resolution image sensors for ADAS systems continues with customers moving to better performance options.
Scott: Revenue from <unk> grew by approximately 60% year over year significantly outpacing unit production and continue to gain share with our silicon carbide and silicon products primarily MBV.
Scott: And automotive sensing a shift towards higher resolution image sensors for Adas systems continues with customers moving to better performance options are revenue four eight megapixel image sensors increased more than 30% quarter over quarter and more than 60% year over year, demonstrating the market trend towards higher resolution.
Hassane El: Our revenue for 8 megapixel image sensors increased more than 30% quarter over quarter and more than 60% year over year, demonstrating the market trend towards higher resolution for ADAS systems. In medical, we are leveraging AI technology and our processors for hearing aids to adapt to the user's unique hearing environment for an improved listening experience, and we are designed into more than 50% of over-the-counter hearing aids currently available in the market. With a relentless focus on innovation, we are actively investing in new products and technologies to extend our competitive advantage and drive above-market revenue growth at feasible margins, consistent with our Analysts' Day commitment.
Scott: At systems.
Scott: In medical we are leveraging AI technology, and our processors for hearing AIDS.
Scott: After the user's unique hearing environment or an improved listening experience and we are designed in more than 50% of over the counter hearing AIDS currently available in the market.
Scott: With a relentless focus on innovation, we are actively investing in new products and technologies.
Scott: And our competitive advantage and drive above market revenue growth at favorable margins consistent with our analyst day commitment.
Hassane El: We remain on track and continue to make progress towards 200 millimeter in silicon carbide. We are already sampling new mixed signal products. And we are gaining share across the portfolio based on the differentiation of our technology. Our investment in the cloud and data centers over the last three years has enabled us to benefit from the incremental opportunity we are seeing from the Rapid Rise Bay Act. Next-generation AI server racks will require 200 to 300 kilowatts of power, as much as the power needed by a BEV.
Scott: We remain on track and continue to make progress towards 200 millimeter and silicon carbide, we are already sampling new mixed signal.
Scott: Products and.
Scott: And we are gaining share across the portfolio based on the differentiation of our technology.
Scott: Our investment in cloud and data centers over the last three years has enabled us to benefit from the incremental opportunity. We are seeing from the rapid rise.
Scott: Next generation AI server racks will require 200 to 300 kilowatts of power as much as the power needed and at BV.
Hassane El: Our full suite of high efficiency power tree solutions, from the power supply unit or PSU to the CPU or GPU consuming the power, continues to present the content expansion opportunity as customers look to us to solve their power density problems and data. As we look forward, with disciplined, consistent execution while maintaining a customer-centric mindset, we will navigate the current environment and continue to deliver value for our stakeholders. Let me now turn it over to Thad to give you more details on our results. [inaudible]
Scott: Our full suite of high efficiency power treat solutions from the power supply unit, our PSU CPU or GPU consuming the power continues to present the content expansion opportunity as customers look to us to solve their power density problems in data centers.
Scott: As we look forward with discipline and consistent execution, while maintaining customer centric mindset, we will navigate the current environment and continue to deliver value for our stakeholders.
Speaker Change: Let me now turn it over and in fact to give you more details on our results.
Speaker Change: Yes.
Thad Trent: Our teams have been relentless in their pursuit of operational excellence. Their focus on execution to drive more predictable and sustainable results once again delivered first quarter results that exceeded expectations. Our ability to respond to the current market environment and deliver better results than ever in a downturn demonstrates the resiliency we've built into the business over the last three years. Amid continued inventory digestion in automotive and industrial, we reported Q1 revenue of $1.86 billion, down 8% quarter over quarter and down 5% year over year.
Speaker Change: Thanks.
Speaker Change: Our teams have been relentless in their pursuit of operational excellence, our focus on execution to drive more predictable sustainable results. Once again delivered first quarter results that exceeded expectations.
Speaker Change: Our ability to respond to the current market environment and deliver better results than ever in the downturn demonstrates the resiliency built into the business over the last three years.
Speaker Change: Amid continued inventory digestion and automotive and industrial we reported Q1 revenue.
$186 billion down, 8% quarter over quarter and down 5% year over year.
Thad Trent: Our automotive business of $1 billion grew 3% as compared to the quarter a year ago and declined 9% quarter over quarter in line with our expectations. Vehicle electrification and advanced safety applications remain the long-term growth drivers for this business.
Speaker Change: Our automotive business of $1 billion grew 3% as compared to the quarter, a year ago and declined 9% quarter over quarter in line with our expectations.
Speaker Change: Vehicle electrification and advanced safety applications remains a long term growth drivers for this business.
Thad Trent: Our revenue for industrial is $476 million, down 14% versus the first quarter of 2023 and down 4% sequentially. We are seeing early signs of stabilization in our traditional industrial business, which is slightly less than half of our total industrial business. Long-term, we expect upside opportunities in industrial to come from energy infrastructure, factory automation, and medical applications.
Speaker Change: Our revenue for industrial is $476 million down 14% versus the first quarter of 2023 and down 4% sequentially.
Speaker Change: We are seeing early signs of stabilization in our traditional industrial business, which is slightly less than half of our total industrial.
Speaker Change: Long term, we expect upside opportunities in industrial to come from energy infrastructure factory automation and medical applications.
Thad Trent: As a result of our strategy to shift to the high growth megatrends for the sustainable ecosystem, our automotive and industrial revenue accounted for 80% of our business in Q1. Looking at the split between the operating units, revenue for the Power Solutions Group, or PSG, was $874 million, an increase of 2% year-over-year coming from higher silicon carbide revenue in automotive industrial applications, offset by the decline of silicon power products. Revenue for the Analog and Mixed Signal Group, or AMG, was $697 million, a 6% decline year-over-year driven by declines in industrial and automotive. As previously announced, we have formed AMG to deliver an industry-leading full system analog mixed signal solution.
Speaker Change: As a result of our strategy to shift to the high growth Megatrends for sustainable ecosystem, our automotive and industrial revenue accounted for 80% of our business in Q1.
Speaker Change: Looking at the split between the operating units revenue for the power solutions group or PSG was $874 million in.
Speaker Change: An increase of 2% year over year coming from higher Silicon carbide revenue in automotive industrial applications offset by a decline of silicon power products.
Speaker Change: Revenue for the analog and mixed signal group or AMG was $697 million, a 6% decline year over year, driven by declines in industrial and automotive.
Speaker Change: As previously announced we have formed AMG to deliver industry, leading all system analog mixed signal solutions.
Thad Trent: Prior period revenue has been reclassified and is available in the Investor Relations section of our website. Revenue for the Intelligent Sensing Group, or ISG, was $292 million, an 18% decrease year-over-year due to a decline in industrial and automotive revenue. Gross margin, gap gross margin was 45.8% in the first quarter, and non-gap gross margin was 45.9% compared to 46.7% in Q4 and 46.7% in These results exceeded expectations, even though utilization was at 65%, a slight decrease from 66% in Q4.
Speaker Change: Higher period revenue has been reclassified.
Speaker Change: And is available on the Investor Relations section of our website.
Speaker Change: Revenue for the intelligent sensing group or ISG was $292 million, an 18% decrease year over year due to a decline in industrial and automotive.
Speaker Change: Gross margin GAAP gross margin was 45, 8% in the first quarter and non-GAAP gross margin was 45, 9% compared to $46 seven in Q4, and 46, 8% in the quarter a year ago.
Speaker Change: These results exceeded expectations, even though utilization was at 65% a slight decrease from 66% in Q4.
Thad Trent: In prior downturns and at similar utilization levels, our gross margin was approximately 30%. However, although muted by utilization, our gross margin expansions continue. Most notably, our Fabrite strategy of optimizing our existing footprint is well underway, and our teams continue to drive operational excellence with cost improvement opportunities. At East Fishkill, for example, we have aggressively improved the operational efficiency of the fab, reducing the fixed and variable costs to reach parity in wafer costs with our other fabs.
Speaker Change: In prior downturns at similar utilization levels, our gross margin was approximately 30%.
Speaker Change: So muted by utilization or gross margin expansion to continue.
Speaker Change: Most notably our fab right strategy of optimizing our existing footprint is well underway and our teams continue to drive operational excellence with cost improvement opportunities.
Speaker Change: East Fishkill, we have aggressively improved the operational efficiency of the fab, reducing the fixed and variable cost to reach parity in wafer cost with our other fabs.
Thad Trent: The dilutive impact in Q1 was 140 basis points as compared to 200 basis points in the fourth quarter. We expect this to be roughly 100 basis points diluted for the remainder of the year due to the ongoing foundry business with Global Foundry. As a result of our cost reduction efforts at EFK and our FabRight initiatives, we now expect that one point of utilization improvement across our manufacturing network will result in approximately 15 to 20 basis points of gross margin improvement. Now, let me give you some additional numbers for your models.
Speaker Change: The dilutive impact in Q1 was 140 basis points as compared to 200 basis points in the fourth quarter.
Speaker Change: We expect this to be roughly 100 basis points dilutive for the remainder of the year for the ongoing foundry business with Globalfoundries.
Speaker Change: As a result of our cost reduction efforts at yesterday.
Speaker Change: And our fab right initiatives, we now expect one point of utilization improvement across our manufacturing network will result in approximately 15% to 20 basis points of gross margin improvement.
Speaker Change: Now let me give you some additional numbers for your models.
Thad Trent: GAAP operating expenses for the first quarter were $328 million as compared to $353 million in the first quarter of 2023. Non-GAF operating expenses were $314 million as compared to $286 million in the quarter a year ago. As Hassane mentioned, we continue to invest to further our leadership position in our focus market. GAF's operating margin for the quarter was 28.2%, and non-GAF operating margin was 29%. Our GAAP tax rate was 15.7%, and our non-GAAP tax rate was 16%.
Speaker Change: GAAP operating expenses for the first quarter was $328 million as compared to $353 million in the first quarter of 2023.
Speaker Change: GAAP operating expenses were $314 million as compared to $286 million in the quarter a year ago.
Speaker Change: As the song mentioned, we continue to invest to further our leadership position in our focus markets.
Speaker Change: GAAP operating margin for the quarter was 28, 2% and non-GAAP operating margin was 29%.
Speaker Change: Our GAAP tax rate was 15, 7% and non-GAAP tax rate was 16%.
Thad Trent: Yeah, earnings per share for the first quarter was $1.04 as compared to $1.03 in the quarter a year ago. Non-GAAP earnings per share was near the high end of our guidance at $1.08 as compared to $1.19 in Q1 2023. Gap's diluted share count was 437 million shares, and our non-gap diluted share count was 432 million shares.
Speaker Change: GAAP earnings per share for the first quarter was $1 four as compared to a $1 three in the quarter a year ago.
Speaker Change: non-GAAP earnings per share was near the high end of our guidance at $1 eight as compared to $1 19 in Q1 2023.
Speaker Change: GAAP diluted share count was 437 million shares and our non-GAAP diluted share count was 432 million shares.
Thad Trent: In Q1, we deployed $100 million, or 36% of our free cash flow, for share repurchase. In the last 12 months, we have repurchased $560 million worth of shares and returned nearly 100% of our free cash flow back to our shareholders. Turning to the balance sheet, cash and cash equivalents were $2.6 billion, and we had $1.1 billion undrawn on a revolver. Cash from operations was $499 million, and free cash flow increased 3x year-over-year to $276 million, representing 15% of revenue.
Speaker Change: Q1, we deployed $100 million or.
Speaker Change: Or 36% of our free cash flow for share repurchases.
Speaker Change: In the last 12 months, we have repurchased $560 million worth of shares and returned nearly 100% of our free cash flow back to our shareholders.
Speaker Change: Turning to the balance sheet cash and cash equivalents was $2 6 billion and we had $1 1 billion undrawn on our revolver.
Speaker Change: Gastro operations was $499 million and free cash flow increased three <unk> year over year to $276 million, representing 15% of revenue.
Thad Trent: Capital expenditures during Q1 were $222 million, which equates to a capital intensity of 12%. As previously indicated, we expect 2024 capital intensities to be in the low teens for the full year. Inventory increased by $35 million sequentially, and days increased by 15 days to 194. This included 86 days of bridge inventory to support the BAP transition and the silicon carbide ramp. Excluding these strategic bills, our base inventory decreased $31 million sequentially to approximately 190. We continue to proactively manage our distribution inventory. Disney inventory was down $19 million sequentially with weeks of inventory at eight weeks as expected versus seven to 7.2 weeks in Q4.
Speaker Change: Capital expenditures during Q1 or $222 million, which equates to a capital intensity of 12%.
Speaker Change: As previously indicated we expect 2020 for capital intensity to be in the low teens for the full year.
Speaker Change: Inventory increased by $35 million sequentially and <unk> increased by 15 days to 194.
Speaker Change: This includes 86 days of bridge inventory to support that transition and the Silicon carbide brand.
Excluding these strategic builds our base inventory decreased $31 million sequentially to approximately 190 days.
Speaker Change: We continue to proactively manage distribution inventory.
Speaker Change: <unk> inventory was down $19 million sequentially with weeks of inventory at weeks at eight weeks as expected versus seven to $7 two weeks in Q4.
Thad Trent: As previously mentioned, we expect to replenish the channel in 2024 to service mass market customers and expect inventory to start to normalize with increasing inventory levels to approximately nine weeks over the next few quarters. Now, let me provide you with the key elements of our non-GAAP guidance for the second quarter. A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our first quarter results. Given the current macro environment and our demand visibility, we anticipate Q2 revenue will be in the range of $1.68 billion to $1.78 billion, with softness across all regions. We expect non-GAAP gross margin to be between 44.2 and 46.2%.
Speaker Change: As previously mentioned, we expect to replenish the channel in 2020 or to service mass market customers and expect inventory to start to normalize with increasing inventory levels to approximately nine weeks over the next few quarters.
Speaker Change: Okay.
Speaker Change: Now let me provide you the key elements of our non-GAAP guidance for the second quarter.
Speaker Change: Vito in our GAAP and non-GAAP guidance is provided in the press release related to our first quarter results.
Speaker Change: Given the current macro environment and our demand visibility, we anticipate Q2 revenue will be in the range of 168 billion to $178 billion with softness across all end markets.
Speaker Change: We expect non-GAAP gross margin to be between 44 to 46, 2%.
Thad Trent: As we have shown, our structural changes are proving sustainable, and we expect to hold the mid 40% gross margin for floor with utilization in the mid 60% range. Our Q2 non-GAAP gross margin includes share-based compensation of $6.5 million. We expect non-GAAP operating expenses of $313 million to $328 million, including share-based compensation of $28.6 million. We anticipate our non-GAAP other income to be a net benefit of $12 million, with our interest income exceeding interest expense.
Speaker Change: As we have shown our structural changes are proving sustainable and we expect to hold the mid 40% gross margin or floor with utilization in the mid 60% range.
Speaker Change: Our Q2 non-GAAP gross margin includes share based compensation of $6 $5 million.
Speaker Change: We expect non-GAAP operating expenses of $313 million to $328 million, including share based compensation of $28 $6 million.
Speaker Change: We anticipate our non-GAAP other income to be in that.
Speaker Change: The effect of $12 million with our interest income exceeding interest expense.
Thad Trent: We expect our non-GAAP tax rate to be approximately 16%, and our non-GAAP diluted share count for the second quarter is expected to be approximately 432 million shares. This results in non-GAAP earnings per share being in the range of $0.86 to $0.98. We expect capital expenditures in the range of $180 to $220 million.
Speaker Change: We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP diluted share count for the second quarter is expected to be approximately 432 million shares.
Speaker Change: This results in non-GAAP earnings per share to be in the range of 86 to 98.
Speaker Change: We expect capital expenditures in the range of $180 million to $220 million.
Thad Trent: Our financial strategy and long-term targets remain unchanged. We are investing for our future while leaning on our playbook to drive operational efficiencies across the organization. We also remain committed to our capital allocation strategy of returning 50% of our free cash flow to shareholders over the long term. We are a different company today, and I'd like to take this opportunity to thank our employees around the world for the value they've unlocked during their transformation journey.
Speaker Change: Our financial strategy and long term targets remain unchanged, we are investing for our future while leaning on our playbook to drive operational efficiencies across the organization.
Speaker Change: We also remain committed to our capital allocation strategy of returning 50% of our free cash flow to shareholders over the long term.
Speaker Change: We are a different company today and I'd like to take this opportunity to thank our employees around the world for the value they've been blocked during their transformation journey.
Thad Trent: Their efforts were most recently recognized by the management top 250 ranking published by the Wall Street Journal, which identifies the most effectively managed businesses. We are proud to have been named as posting the biggest gain of any company, and we will continue to strive for operational excellence as we navigate the coming quarter. With that, I'd like to turn the call back over to Kevin to open it up for Q&A. Thank you. Ladies and gentlemen, if you have a question...
Speaker Change: Their efforts were most recently recognized by the management top 250 ranking published by the Wall Street Journal, which identifies the most effectively managed businesses.
Speaker Change: We are proud to have been named as the as posting the biggest gain of any company and we will continue to strive for operational excellence as we navigate the coming quarters.
Speaker Change: I'd like to turn the call back over to Kevin to open it up for Q&A.
Kevin: 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 who wished to move yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.
Operator: 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, you wish to move yourself from the queue, please press star one again. We'll pause for a moment while we compile our Q&A list. Our first question comes from Ross Seymour with Deutsche Bank. Your line is open.
Kevin: Yes.
Kevin: Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.
Hi, guys. Thanks for the question first question Hassan I, just wanted to get into the linearity of demand you saw in the first quarter and thus far in the second quarter and maybe specifically what you're seeing in the silicon carbide side. I know you said that the market Tam is going to be slower, but youll still grow to ex that what's your estimation for what the market Tam it's going to do.
Ross Clark Seymore: Hi guys, thanks for the questions. First question, Hassane, I just wanted to get into the linearity of demand you saw in the first quarter and thus far in the second quarter and maybe specifically what you're seeing on the silicon carbide side. I know you said that the market TAM is going to be slower, but you'll still grow 2x that. What's your estimation for what the market TAM is going to do?
Speaker Change: Yes, specifically.
The first quarter, we did see a slowdown through the.
Speaker Change: The quarter, specifically, if I were to break it.
Speaker Change: After Chinese new year, typically we would expect a.
Speaker Change: Slight recovery back to linearity and we didn't that's where.
Hassane El: Yeah, specifically, in the first quarter, we did see a slowdown through the quarter. You know, specifically, if I were to break it down, you can think about it after Chinese New Year. Typically, we would expect a slight recovery or back to linearity. And we didn't, that's where we started to see some of the incremental softness that we talked about specifically in the auto sector.
We started to see some incremental softness that we talked about specifically in auto.
Speaker Change: As far as.
Speaker Change: The silicon carbide, so it's too early in the year to call a market.
Speaker Change: What I'm basing my comment on <unk> and specifically the <unk> growth is really a.
Speaker Change: Bottoms up share gain that we have based on a vehicle by vehicle and socket by socket that we're designed in and we know what the sockets and the designs of the platforms are out there what is spending to see today and like I said, it's early in the year still.
Hassane El: As far as silicon carbide, like I said, it's too early in the year to call a market. What I'm basing my comment on, and specifically the 2x growth, is really a bottoms-up share gain that we have based on a vehicle-by-vehicle and socket-by-socket basis that we're designed in, and we know what the sockets and the designs of the platforms are out What we are pending to see today, and like I said, it's early in the year still, is the sell-through of these vehicles.
Speaker Change: The sell through of these vehicles as we get through the second half of the year that picture will get clear.
Speaker Change: Get a little bit more accurate as far as what the market would do but for right now we're looking at it as are we designed and more than two X. The sockets that are deployed this year and the answer is yes.
Thanks for that I guess for my follow up Brian Yu for one for you on the gross margin side of things Congrats for holding the 45% floor can you just walk through some of the idiosyncratic puts and takes going forward. I know you said, what the utilization impact will be when revenues and all of that go up but if their skill exiting fabs all those sorts of things.
Hassane El: As we get through the second half of the year, that picture will get clearer, and I'll get a little bit more accurate as far as what the market would do, but for right now, we're looking at it as, are we designed for more than 2x the socket?
Thad Trent: Thanks for that. I guess for my follow-up, Thad, on the gross margin side of things, congrats on holding the 45% floor. Can you just walk through some of the idiosyncratic puts and takes going forward? I know you said what the utilization impact will be when revenues and all of that go up, but East Fishkill, exiting fabs, all those sorts of things. What are the pluses and minuses as we think about gross margin through the year? Sure.
Brian Yu: What's sort of what are the pluses and minuses as we think about gross margin through the year.
Brian Yu: Sure sure.
Brian Yu: So just starting with the utilization so as I mentioned in the prepared remarks.
Brian Yu: One point of utilization as 15 to 20 basis points.
Brian Yu: Gross margin improvement, so think about us being at the mid 60 days, if we get back up into the low <unk> you can do the math.
Thad Trent: Sure, sure. So, you know, just starting with the utilization. As I mentioned in the prepared remarks, one point of utilization is 15 to 20 basis points of gross margin improvement. So, you know, think about us being at the mid-60s.
The tailwind there.
Brian Yu: For East Fishkill, we expect this year, it's about 100 basis points dilutive as we go through the rest of the year, that's the foundry business.
Brian Yu: I mentioned, we now have the cost parity with our other fabs. So we're happy with the progress we've made there.
Thad Trent: If we get back up into the low 80s, you can do the math on the tailwind there. For each fiscal year, we expect this year, it's about 100 basis points dilutive as we go through the rest of the year. That's the foundry business. As I mentioned, we now have the cost on parity with our other fabs, so we're happy with the progress we've made there. That fab is underutilized, so you get that benefit, as I mentioned, on utilization.
Brian Yu: That gap is underutilized, so they get that benefit.
Brian Yu: As I mentioned on the utilization.
Brian Yu: The other component is the fab divestitures from 2022 of the four Fabs, we start to see that starting to be monetized in 2000 $25 million to $160 million of annualized cost we won't see it all in 25, it will start to recognize it and 25 in the outer years as we move that production into <unk>.
Thad Trent: The other component is the fab divestitures from 2022, the four fabs. We start to see that starting to be monetized in 2025. That's $160 million of annualized costs. We won't see it all in 2025, but we'll start to recognize it in 2025 and the subsequent years as we move that production into our fab network. So that's another nice tailwind.
Our fab network. So that's another nice tailwind and then.
Brian Yu: Got the ramping of new products that are accretive gross margins that includes silicon carbide as we continue to scale silicon carbide in 'twenty, five and further that becomes accretive and.
Brian Yu: All new products as I mentioned.
The new new.
Brian Yu: New product revenue is growing that scale is all accretive as well.
Vivek Arya: And then we've got the ramping of new products that are in creative gross margins. That includes silicon carbide. As we continue to scale silicon carbide in 2025 and further, that becomes accretive. And all new products, as Hassan mentioned, the new product revenue is growing. That, at scale, is all accretive as well. So I think if you do the math there, you start to get pretty close to our target. Thank you.
Brian Yu: I think if you do the math there you start to get pretty close to our target.
Speaker Change: Thank you.
Speaker Change: Tom.
Speaker Change: <unk> next question.
Speaker Change: Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.
Vivek Arya: Thanks for taking my question Hassan and I'm trying to understand.
Vivek Arya: The message on the outlook for the second half.
Vivek Arya: That you get.
The weaker on the headwinds for Q2, but how should we think about that.
Hassane El: One moment for our next question. Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.
Vivek Arya: The pace of recovery.
Speaker Change: I'm here, because I thought I heard Pat say that you plan to increase.
Vivek Arya: Thanks for taking my question. Hassane, I'm trying to understand the message and the outlook for the second half, that we get the, you know, weaker and headwinds for Q2, but how should we think about the pace of recovery from here? Because I thought I heard Thad say that you plan to increase distribution inventory, you know, that sounds like a positive message, but if things started to get weaker towards the end of Q1, that doesn't sound like a positive message.
Speaker Change: I think distribution inventory.
Speaker Change: Sounds like a positive message, but if things started to get weaker towards the end of Q1 that doesn't sound like a positive message. So I'm just trying to understand what are you trying to signal for the second half skew to the bottom and how should we think about Q.
Speaker Change: From what we know today, obviously, it's a fluid environment.
Speaker Change: Yes ill let me.
Speaker Change: To clarify here first off I'm not going to call. The bottom I was very clear last time I'll call. It one of them sitting on the top on the other side.
Vivek Arya: So I'm just trying to understand, what are you trying to signal for the second half? Is Q2 the bottom? And how should we think about, you know, Q3 from what we know today? Obviously, it's a fluid environment.
But while we are seeing we did see the slowdown that slowdown inventory digestion and demand and I believe the two are related.
Speaker Change: Systems are.
Speaker Change: Our outlook for Q2 for the second half we are starting to see stabilization in demand now I wouldn't go as far as calling it a recovery, but I think if I were to use a letter that everybody talks about it's an al at this point, meaning we're seeing stabilization, we're seeing recovery, meaning it's not.
Hassane El: Yeah, I'll let me try to clarify here. First off, I'm not going to call the bottom. You know, I was very clear last time I'd call it when I'm sitting on the top on the other side.
Hassane El: But what we are seeing, you know, we did see the slowdown, that slowdown, inventory digestion, and demand, and I believe the two are related, persistence, and our outlook for Q2, but for the second half, you know, we are starting to see stabilization in demand. Now, I wouldn't go as far as calling it a recovery, but I think if I were to use a letter that everybody talks about, it would be an L at this point, meaning we're seeing stabilization, we're seeing recovery, meaning it's not deteriorating further. Now, whether or not demand will pick up, that's too close to call, but at least we see stabilization in our output.
Speaker Change: Anything further.
Speaker Change: Now whether or not the demand will pick up.
Speaker Change: To close too.
Speaker Change: Call that but at least we see stabilization in our outlook.
Speaker Change: Okay and then on.
Speaker Change: Silicon carbide, just one or two near term and then kind of the longer term on the near term what is your silicon carbide sales due in Q1, either sequentially or year over year.
Speaker Change: Whats your China exposure.
Speaker Change: And then there is a lot of industry discussion about low priced <unk> and I think you guys have both silicon and silicon carbide and I'm wondering if there is an industry move toward these so called lower priced EV, especially in the U S market would that be positive or neutral due on bottler opportunity.
Hassane El: And then on the silicon carbide, just you know, one or two near terms and then kind of the longer term. On the near term, what did your silicon carbide sales do in, you know, Q1, either sequentially or in or air? And what's your China Transcribed by https://otter.ai Yeah, so on the first...
Hassane El: Yeah, so on the first question, we're not breaking up the silicon carbide on a quarterly basis, you know, last year we gave the annual, and we talked about for both competitive reasons, we're not breaking up the quarterly. What we have said is it will obviously increase in 2024 from 2023, but we will update the annual year or the annual results for 2024 as we get towards the end of the year.
Speaker Change: Yes.
Speaker Change: The first quarter.
Speaker Change: We're not breaking up the silicon carbide on a quarterly last year, we gave the annual and we talked about for both competitive reasons, we're not breaking up the quarterly while we have said is it will obviously increase in 2024 from 2023, but we will update the annual.
Speaker Change: Year are the annual results for 2024, as we get towards the end of the year.
Hassane El: As for the low-cost EVs, you know, it's an interesting dynamic in the market. Our position, we will benefit regardless of what technology the customer uses, whether it's silicon carbide or IGBT. And we have seen areas where we have benefited from both, whether at the same customer account or even on the same platform. What I also want to highlight is we've been pushing the efficiency of silicon carbide, both device and package, with our new generation that we've announced and designed for customers, where it will be ramping in the second half of this year, specifically with a lot of the Chinese OEMs that you can argue are at a low cost or low price point for a low cost EV.
Speaker Change: As for the low cost Evs.
Speaker Change: It's an interesting dynamic in the market.
Speaker Change: Our position, we will benefit regardless of what technology. The customer uses whether it's silicon carbide are at GBT.
Speaker Change: We have seen.
Speaker Change: <unk>, where we have benefited from both weather at the same customer account or even in the same platform. While I also want to highlight is we've been pushing the efficiency on silicon carbide, both device and package with our new generation that we've announced and design to cost to customers, where it will be ramping in the second half of this year.
Speaker Change: Typically with a lot of the China Oems that you can argue are at a low cost or low price point for a low cost E D.
Hassane El: Those also have silicon carbide because the dynamic that you see, the benefit they get from using ON Semiconductor's silicon carbide with ON Semiconductor's packaging from a module perspective gives them the efficiency that they will save way more dollars on the battery than they were just going from silicon carbide to IGBT. So from a system-level solution, the battery is the biggest bomb. If they can save battery by using any of these technologies, they win on low cost. And we've seen customers do that. But regardless of what technology and what system level cost they want to optimize, we will benefit, whether it's silicon carbide or IGBT.
Speaker Change: Those have also silicon carbide, because the dynamic that you see the benefit they get from using on semi and silicon carbide with on semi packaging from a module perspective, given the efficiency that they will stay way more dollars on the battery, but then they were just going from silicon carbide <unk>.
Speaker Change: From a system level solution to batteries, the biggest bond and they can say battery by using any of the technology.
Speaker Change: A win on the low cost and we've seen customers do that regardless of what technology and what system level cost that were not optimized we will benefit whether it's silicon carbide are at GBT.
Kristen Elly: Thank you. One moment for our next question. Our next question comes from Kristen Elly with Citi. Your line is open.
Speaker Change: Okay.
Thank you one moment for our next question.
Speaker Change: Our next question comes from Christopher <unk> with Citi. Your line is open.
Hassane El: It's the Jew-turned-Italian again. Hey, just another question on silicon carbide. So if you're not going to give us the quarterly revenue, what are gross margins doing? Are they stabilizing, or are they going down? And then how about your pricing expectations for the rest of the year? Have your pricing expectations changed? And what revenue level do you need to get? um... to get that fifty percent? Yeah, the...
Christopher: Thanks, It's the <unk> turn to Italian again.
Christopher: Can you just another question on on Silicon carbide, So if youre not going to give us the quarterly revenue.
Christopher: What are gross margins doing are they stabilizing or are they going down and then how about your pricing expectations.
Christopher: For the rest of the year have your pricing expectations changed and what revenue level do you need to get to.
Christopher: Get to that 50% gross margin target.
Hassane El: Yeah, I think the gross margin for silicon carbide is stable. You know, as we talked about last year, it will remain stable as we increase revenue, but we've also added capacity. So the utilization and the growth will offset each other to give us that stability in the gross margin. Longer term, of course, you have utilization as we grow into our installed footprint. So that will give us a nice upside on the gross margin.
Christopher: Yes.
Christopher: I think the gross margin is where silicon carbide is stable.
Christopher: As we talked about last year. It will remain stable as we increase revenue, but we've also added capacity so what kind of utilization.
Christopher: Utilization and.
Christopher: The growth will offset each other to give us that stability in the gross margin.
Christopher: Longer term of course, you've got the utilization as we grow into our.
Installed footprint, so that will give us a nice outside.
Hassane El: As we ramp internal substrates, that will give us the incremental gross margin that gets us to, you know, be above the 50% that we talked about, and as we march closer to the model for the corporate level model at 53, long term. Now, one thing I do want to highlight is that we are also making incremental improvements on the efficiency side, which means that we are able to provide the same level of power that the customer requires with a smaller die.
Christopher: On the gross margin as we ramp internal substrates that will give us.
The incremental gross margins that gets us to.
Christopher: <unk> be above the 50% that we talked about and as we March closer to.
Christopher: The model for the corporate level model at 53 long term now one thing I do want to highlight is we also are making incremental improvements on our efficiency side.
Means that we are able to service the same level of power at the customer required with a smaller die. So from a system level cost. We are also making technology improvements in order to improve our cost sold between the cost the new products that we talked about earlier and growing into the capacity, that's where that is.
Hassane El: So from a system level cost, we are also making technological improvements in order to improve our cost. So between the cost, the new products that we talked about earlier, and growing into the capacity, that's where that's going to give us the incremental margin. We see it in the standard margin, you know, if you take out the underutilization, and that's what we're going to grow into. So we're pretty comfortable with our trajectory on silicon carbide margin, and we'll continue to
Christopher: Give us the incremental margin, we see it in the standard margin.
Christopher: The under utilization.
Christopher: And that's why we're going to grow into so we're pretty comfortable with our trajectory on silicon carbide margin and will continue to execute.
Kristen Elly: Great. And then for my follow-up question, between your two big markets, auto and industrial, would it be fair to say that, you know, the industrial market appears to be stabilizing, but the automotive market is getting a little bit weaker? And is all of that weakness in silicon carbide, or is there weakness in the automotive market outside of silicon carbide?
Speaker Change: Great and then for my follow up.
Between your two big markets auto and industrial.
Speaker Change: It would it be fair to say that the industrial market appears to be stabilizing, but the automotive market is getting a little bit weaker and as all of that weakness in silicon carbide or is there a weakness in auto outside of Silicon carbide.
unknown: You blanked out the last discussion. Here. Oh. OK. It's powerful. Yeah.
Speaker Change: Sorry.
Speaker Change: You blanked out the last discussion here.
unknown: Yeah, can you guys hear me okay now? Okay, great.
Speaker Change: Awesome.
Speaker Change: Yes can you guys hear me Okay now.
unknown: So just between the two big end markets, auto and industrial, is it fair to say that, you know, broadly speaking, the industrial market for you guys is stabilizing? And then on the automotive market, is it fair to say it's getting a little bit incrementally weaker? And is that incremental weakness all silicon carbide? Or is there weakness in the non-silicon carbide automotive market?
Speaker Change: Yes, Chris.
Chris: Great. So just between the two big end markets auto and industrial is it fair to say that broadly speaking the industrial market for you guys is stabilizing and then on the automotive market is it fair to say, it's getting a little bit incrementally weaker and is that incremental weakness all silicon carbide or is there weakness in the non silicon carbide automotive business.
Hassane El: Yeah, I think at a high level in the market, your comment is true. But I don't think from an overall, from the automotive side, the second part of your question; I don't think it's only silicon carbide. You know, silicon carbide, I think it's well understood in general, as far as the TAM is concerned. But our growth in silicon carbide is really more about share gains rather than just specific to the total market. And we've been very consistent about that. 2024 is still on track for that. But we did see incremental softness in automotive on the silicon side as well, which is more on the broader aspect of automotive. Great, thanks guys.
Chris: Yes.
Yes, I think at a high level between the market. Your comment is true I don't think from a.
Chris: Overall from the automotive side. The second part of your question I don't think its only on the silicon carbide Silicon carbide, I think it's well understood and <unk>.
Chris: General as far as the Tam.
Chris: But our growth on silicon carbide is really more on share gains rather than just specific to.
Chris: Total market and we've been very consistent about that 2024 is still on track for that but we did see.
Chris: Incremental softness in automotive on the silicon side, as well, which is more on the broader aspect of automotive.
Speaker Change: Great. Thanks, guys.
Toshiya Hari: One moment for our next question. Our next question comes from Toshiya Hari. Sorry, Goldman Sachs, your line is open.
One moment for our next question.
Speaker Change: Our next question comes from Toshi Hari with Goldman.
Goldman Sachs. Your line is open.
Hassane El: Hi, good morning. I had a question about the silicon carbide business as well. For this year, Hassane, what's the rough split between automotive and industrial? And more importantly, I was hoping you could speak to your diversification efforts. I think customer concentration, you know, has been a bit of an issue from an investor perspective. Your largest customer was a significant customer last year. I think they'll continue to be significant this year. But how should we think about, you know, your customer base and your customer mix broadening in SIC specifically going forward?
Toshiya Hari: Hi, good morning.
Toshiya Hari: I had a question on the silicon carbide business as well for this year, what's the rough split between automotive and industrial and more importantly, I was hoping you could speak to.
Your diversification efforts I think customer concentration.
Toshiya Hari: You know has been a bit of an issue from an investor perspective, your largest customer was significant last year I think they'll continue to be significant this year, but how should we think about your customer base and your customer mix broadening and Src specifically going forward.
Hassane El: Yeah, so the first part of the question, you know, it's been pretty consistent. You can think about it as 80-20, 80-auto, 20-industrial, give or take, depending on the quarter and when the ramp happened. They're a little bit asynchronous ramps based on the end markets. As far as diversification is concerned, you know, we've been very consistent in saying that 2024 will be more diversified than what 2023 was. That remains the case. You know, last quarter, we called out ramps in the automotive OEMs in Europe, starting to ramp up EV with ON Semiconductor Corp.
Src: Yes, so the first part of your question.
It's been pretty consistent you can think about it is 80 2080 auto or industrial.
Give or take depending on the quarter and when the ramp happened there a little bit asynchronous ramps based on the end markets as far as diversification. We've been very consistent on 2024 will be more diversified than what 2023 was.
That remains the case last quarter, we called out ramps in automotive Oems in Europe, starting to ramp EV with on semi and silicon carbide.
Hassane El: The comment I made today is further proliferation of Chinese EVs, which today is the biggest penetration of electrification in light vehicle production. Between those two efforts, as they ramp up in the second half, you know, getting us to that 2X market that I talked about, that's going to come with further diversification across all geographies. Very consistent with where our LTSAs originally were and where the ramps have started to occur. So, predictable, and consistent, and we're executing on that.
Src: The comment I made today is further proliferation and the Chinese which today is the biggest penetration of electrification in light vehicle production between those two efforts as these ramp in the second half.
Src: Getting us to that two X market that I talked about that's going to come with.
Src: Further diversification across all geographies.
Src: Consistent with where our lts as originally work and where the ramps have started to occur so.
Src: Predictable consistent and we're executing to that.
Hassane El: Great, thank you. And as a follow-up, I feel like you talked about data centers a little bit more than on prior calls. To level the playing field, can you speak to the exposure you have to AI or data centers more broadly today? And how are you thinking about the growth profile there over the coming years? You know, given the focus on AI infrastructure spend across your end customers? Thank you.
Src: Yes.
Speaker Change: Great. Thank you and as a follow up.
Speaker Change: I feel like you talked about data center, a little bit more then on prior calls.
Speaker Change: Level set us can you speak to the exposure you have to AI or data center more broadly today and how are you thinking about the growth profile there over the coming years.
Speaker Change: Given given the focus on AI infrastructure spend across your end customers. Thank you.
unknown: Yeah, if you go back to our last analyst day, where Sudhir in his prepared comments, he talked about the power tree being very similar in automotive, industrial, and cloud and data center. You know, we've talked a lot about our penetration and our success in the auto and industrial markets, and we've shifted our focus over the last three years to the cloud and data center. And at analyst day, we talked about that outlook being about 22% CAGR over the next five years.
Yes.
Speaker Change: If you go back to our last analyst day, where severe end.
Speaker Change: His prepared comments he talked about the power tree being very similar in automotive industrial and cloud and data center.
Speaker Change: <unk> talked a lot about our penetration and our success in auto and industrial and we've shifted our focus over the last three years.
Speaker Change: To the cloud and data center and at Analyst Day, we talked about that outlook being about 22% CAGR over the next five years.
unknown: That's what our investment thesis has been. We've been introducing products both on the power discrete side and furthermore on, you know, call it controllers and point of load and so on, which is more of the intelligent power coming from our analog and mixed signal group that we've organized around that effort. So all of these put together is where our investment has been. I talked more about it this quarter than I did last quarter, not just because of our progress on it.
Speaker Change: That's what our investment thesis has been we've been introducing products both on the power discrete site and Furthermore on.
Speaker Change: Call it controllers and point of load and so on which is more on the intelligent our coming from our analog and mixed signal group that we've organized around that effort.
Speaker Change: All of these put together are where our investment has been I talk more about it.
Speaker Change: This quarter than I did last quarter, even just because of our progress on it last quarter I talked about our success in sampling a lot of these products coming from that group, we're further sampling and engaging with customers.
unknown: You know, last quarter, I talked about our success in sampling a lot of these products coming from that group. We're doing more sampling and engaging with customers. I'm very bullish about it. You'll hear more about it as we get through the year. But the target markets are the automotive industry, but on top of that, it's the cloud and data centers.
Speaker Change: Bullish about it youll hear more about it as we get through the year.
Speaker Change: The target markets, our auto industrial but on top of that as the cloud and data centers.
unknown: Are you able to?
unknown: Are you able to size it for us today? Is it low singles, mid-singles, any hints there? Not yet. Thank you.
Speaker Change: Are you able to size it for us today is it low singles mid singles any any hints there.
Speaker Change: Not yet.
Speaker Change: Alright, thank you.
Gary Wade Mobley: One moment for our next question. Our next question comes from Gary Mobley with Wells Fargo Securities. Your line is open.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Gary Mobley with Wells Fargo Securities. Your line is open.
Hassane El: Hi guys, thanks for taking my questions. Hassan, you probably realize this already, but most investors are worried about the ability for non-China silicon carbide suppliers to compete in the Chinese market against local competition, and your messaging on that front was clear in that you're gaining share at the top 10 Chinese automotive OEMs, but you know, longer term, you know, what's your hook to remain successful in that marketplace? Is it focusing on higher voltage battery systems? Is it a hybrid silicon-silicon carbide solution? Is it local investment into the Chinese market? Any color there would be helpful.
Gary Wade Mobley: Hi, guys. Thanks for taking my question.
Gary Wade Mobley: Hassan.
Gary Wade Mobley: As you probably realize this already but most investors are worried about.
Gary Wade Mobley: The ability for non China silicon carbide suppliers to compete in the China market against local competition in your messaging on that front was clear and that youre gaining share at the top 10, China automotive Oems.
Gary Wade Mobley: Longer term whats your hook too.
Gary Wade Mobley: <unk> remained successful in that marketplace is it focused on higher voltage battery systems is it.
Hybrid silicon Silicon carbide solution as a local investment into the China market any color there would be helpful.
Hassane El: Yeah, look, I've always been very consistent in saying that we compete on the value of our products. Because at the end of the day, if you don't have value in the product, somebody somewhere is willing to take a lower margin for just good enough. That's not the business we're in.
Speaker Change: Yes look I have always been very consistent on we compete on the value of our products because at the end of the day. If you don't have value in the product somebody somewhere is willing to take a lower margin for just good enough.
Hassane El: Therefore, maintaining our investments and maintaining an aggressive roadmap that provides value for the customer. From a customer perspective, they need to be looking at it this way: if I use ON SEMI, I can save hundreds of dollars on the battery versus if I use somebody, maybe cheaper locally, and I will have to add that cost for the battery. If that is the case, which is what we do and why we win in any geography, then it's irrelevant what the competition is doing, as long as we maintain our leadership in the technology.
Speaker Change: That's not the business we're in.
Therefore, maintaining our investments and maintaining an aggressive roadmap that provides value for the customer.
Speaker Change: Or a customer perspective, they need to be looking at it by if I use on semi I can save hundreds of dollars on battery versus if I use somebody may be cheaper locally and I will have to add that cost on the battery.
Speaker Change: If that is the case, which is what we do and why we win in any geography.
Speaker Change: Is it relevant.
Speaker Change: What the competition is doing as long as we maintain our leadership on the technology.
Hassane El: We've proven this year after year. The competition in China has been no less or more, whether it's European vendors or local Chinese vendors, and we've proven our ability with our internal and vertically integrated strategy to compete, to have the best financial structured business for silicon carbide, and to grow above market by gaining share.
Speaker Change: We've proven this year after year.
Speaker Change: The competition in China has been no less or more whether it's European vendors or local Chinese vendor and we've proven our ability with our internal and vertically integrated strategy too.
Speaker Change: To compete.
Have the best financial structured business for silicon carbide and to grow above market by gaining share. All of these are the leading indicators of how we were going to continue to tackle that business. Both in the short term and long term.
Hassane El: I wanted to ask about your design wind metrics. You called out a 30% quarter increase in design wind. I presume that's lifetime value. But looking at it on a more long-term basis, the trends you're seeing there are lifetime value on maybe a trailing 12-month basis. Is that supportive of the 10 to 12% long-term revenue growth targets you guys have outlined?
Speaker Change: Thanks. This is my follow up I wanted to ask about your design win metrics you called out a.
30% quarter over quarter increase in design wins, I presume that lifetime value, but.
Speaker Change: Looking at it as a more.
More long term basis.
Speaker Change: The trends youre seeing their lifetime value on maybe a trailing 12 month basis is that supportive of the 10% to 12% long term revenue growth target you guys have outlined.
Hassane El: That's right. We do see that.
Speaker Change: That's right.
Hassane El: That's based on the model. You're right; it is a lifetime revenue. But the way I look at it to support the 10% to 12% is the overlaid annual revenue on top of the base, on top of the new products that continue to grow. If I put all of these together, our next outlook is supporting the 10% to 12%. So you take the base, you add the new products, you add the new design wins on top of it, and that layering effect gives us that 10% to 12%.
Speaker Change: We do see that that is kind of based on the model Youre right. It is a lifetime revenue by the way I look at it to support the 10% to 12% it is.
I guess the overlaid annual revenue on top of debates on top of the new products that.
Speaker Change: Continue to grow if I put all of these together our outlook is supporting the 10% to 12%. So you take the base you add the new products and you add.
Speaker Change: New design wins on top of it layering effect gives us that 10% to 12% growth.
Harsh V. Kumar: One moment for our next question. Our next question comes from Harsh Kumar with Piper Sandler. Your line is open.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from harsh Kumar with Piper Sandler Your line is open.
Hassane El: Yeah, thank you. Hassane, I had a quick question for you on distribution and OEM partner inventory. I guess the question is, which one is bigger for you? And then, are you comfortable at this point with the inventory you're holding? Clearly, you mentioned that you're raising inventory at the district, but would you give us some color on the inventory of the OEM partners? And also, this environment is a very good test of pricing. Are you seeing pricing generally hold up pretty well for your products? Yeah.
Harsh V. Kumar: Yes. Thank you Hassan I had a quick question for you on distribution and OEM partner inventory I guess, the question is which one of which one for you is bigger.
Harsh V. Kumar: And then are you comfortable at this point would be inventory, you're holding clearly you mentioned that youre raising inventory administrator, but would you give us some color on the inventory of the OEM partners and also <unk>.
Harsh V. Kumar: This environment is a very good test of pricing are you seeing pricing generally hold up pretty well for you for your products.
Hassane El: Yeah, let me start with the pricing. Pricing is, you know, we've been saying pricing is stable, you know, that's the power of the LTSA. A lot of the conversations we've had with customers on, you know, given the demand environment, have been more about what do we do with the volume rather than the pricing. That goes back to the win-win.
Speaker Change: Yes, let me start with the pricing our pricing as we've been saying.
Speaker Change: Same pricing is stable that's the power of the Lcs a lot of the conversations we've had with customers on given the demand environment has been more on what.
Speaker Change: What do we do on the volume rather than the.
Speaker Change: The pricing that goes back to the win win we invested in capacity, we will support customers.
Hassane El: We invested in capacity, and we will support customers in a softer market, but this has not been a pricing discussion, and we don't expect it to be a pricing discussion. As far as inventory is concerned, it changes based on the market. We believe the industrial side of it. If you recall, we started taking utilization down and reducing our shipments in industrial back at the end of 2022. So we've had, longer than most of our peers, a kind of period in 2023 where we've helped customers drain, in the industrial market, their inventory. That's why we're seeing that stabilization that Thad talked about and even a better outlook for the standard part of our industrial business. So that's on the industrial side.
A softer market.
Speaker Change: It has not been a pricing.
Speaker Change: Caution and we don't expect it to be a pricing discussion.
Speaker Change: As far as the inventory.
Speaker Change: Ben.
Speaker Change: It changes based on the market, we believe the industrial side of it if you recall, we start taking utilization down and reducing our shipments in industrial it back at the end of 2022, So we've had longer than most of our peers kind of a period in 2023.
Speaker Change: <unk> customer drain in the industrial market drain their inventory that's why we're seeing that stabilization that that talked about.
Speaker Change: And even better outlook for the standard part of our industrial business. So that's on the industrial on the automotive I don't think we're done.
Hassane El: On the automotive side, I don't think we're done, you know, we saw that softness in Q1, as I mentioned earlier, you see it in the outlook for Q2. But I do think that there will be further stabilization in the second half of the year. So that tells you kind of where we feel the inventory of the customer is. But I will remind everybody, you know, inventory of the customer is also related to demand. If demand picks up, the inventory drain accelerates. If demand stays stable, it will take longer.
Speaker Change: We saw that softness in Q1 as I mentioned earlier.
Speaker Change: You see it in the outlook for Q2, but I do think that there is further stabilization in the second half of the year. So that tells you kind of where we feel the inventory of the customers, but I will remind everybody an inventory of the customer is related to also demand if demand picks up inventory drain.
Speaker Change: Accelerates demand stay stable it will take longer but we feel like customers have a healthy level of <unk>.
Hassane El: But we feel like customers have a healthy level of inventory, and we feel good about it for the second half, which we call stabilization. As far as the DISD, we've always run very disciplined distribution inventory. We do have a second half ramp for new products that we talked about. If you're going to see us, you know, click that up.
Speaker Change: Inventory and we feel good about it for the second half to call the stabilization.
Speaker Change: As far as the desk.
We've always run very disciplined distribution inventory, we do have a second half ramp for our new products that we talked about when youre going to see us click that up and I remember this quarter or the prior quarter, we drained $19 million on the inventory in the channel.
Hassane El: You know, remember this quarter or the prior quarter, we drained $19 million on inventory in the channel. Although weeks of inventory went up, dollars went down, and we slightly beat the guide. So with that, that gives you the disciplined approach that we've been pushing for. And we'll continue to do that.
Speaker Change: Although with some inventory went up dollars came down although we beat slightly the guide so with that that gives you the disciplined approach that we've been.
Speaker Change: <unk> been pushing for and we'll continue to do that but we do expect inventory at the <unk> to go up just readying for the ramps both in silicon carbide and some other new products that we have in the second half.
Hassane El: But we do expect inventory at the DISD to go up just getting ready for the ramps, both in silicon carbide and some other new products that we have in the second half. Internal inventory. Internal inventory has been very disciplined. We drained the base aggressively, you know, based on utilization. We've taken a, you know, declining utilization to maintain inventory. The only inventory that went up was the strategic for good reason. It's all a trap.
Speaker Change: Internal inventory.
Speaker Change: Internal inventory and very disciplined.
Speaker Change: We drained debase aggressively based on the utilization we've taken eight.
Speaker Change: Declining utilization to maintain inventory the only inventory that went up as a strategic for good reason, it's all a cop transfers.
Harsh V. Kumar: Got it. Thank you, Hassane, for all that color.
Speaker Change: Got it. Thank you for all that color at a sort of a multipart question on Silicon carbide, you talked about two X growth relative to the market based on design wins bottoms up approach I guess when you talk to your customers what are what kind of growth are implying and then secondly, you talked about wins in China are these based on your own.
Hassane El: I had sort of a multi-part question on silicon carbide. You talked about 2x growth relative to the market based on design wins and a bottoms-up approach. I guess when you talk to your customers, what kind of growth are they implying? And then, secondly, you talked about wins in China.
Hassane El: Are these based on your own internal wafers? Are they based on your outsourced wafers or external wafers? And then is there any situation you see where silicon carbide is flat in 2024, and just kind of a wild possibility?
Internal may 1st are they based on your outsourced wafers are external wafers and then is there any situation you see where silicon carbide is flat in 2024, and just kind of wild possibility.
Hassane El: I don't want to talk about wild possibilities. I can only comment on what we see and where the customers and the market are. Silicon carbide is going to grow in 2024, and we are going to grow 2x. What I can say about the market is specifically what I commented on earlier. We know the platforms that are booming this year. We know the platforms we are on. We know what products we are putting on those platforms because, think about it; by now, all this stuff is qualified and is just shipping and ramping.
Speaker Change: I don't want to talk about wild possibility look I can only comment on what we see and where the customers and the market is silicon carbide is going to grow in 2024.
Speaker Change: And it's and we are going to grow to ask what I can say about the market is specifically what I commented on earlier.
Speaker Change: We know the platforms that are ramping this year, we know the platforms. We are and we know what products. We are putting in those platforms because think about it by now all of this stuff is qualified and just.
Hassane El: So based on that, that's where the 2x comes in. What I am not commenting on as far as the TAM is, well, until those cars ship in the market, you don't really have a TAM to call out. So that's the reason for that.
Speaker Change: <unk> and ramping so based on that that's where <unk> comes in.
Speaker Change: I'm not commenting on as far as the Tam is while until those cars shipped end market you don't really have a tam to call out.
Hassane El: As far as mix, you know, I thought 50% of our substrates, over 50% of our substrates are internal, but we don't, we don't ship a different mix, whether it's going to China or it's going to the U.S. or going to Europe. We ship out of our inventory based on what we need to run manufacturing. And right now, it is a mix of over 50 percent remains internal. But no customer has a requirement for where the substrates need to come from because the substrates are not what gets qualified at a customer level. It is the device that gets qualified at the customer level.
Speaker Change: So thats the reason for that as far as mix 50.
Speaker Change: 50% of our substrates over 50% of our substrates are internal but we don't want we don't ship I.
Speaker Change: I guess a different mix, whether it's going to China are starting to us are going to Europe.
Speaker Change: We ship out of our inventory.
Speaker Change: Just on what we need to run manufacturing and right now it is a mix of over 50% is remains internal but no customer has a requirement.
Speaker Change: Where does substrates need to come from because the substrates are not what gets qualified at a customer level. It is the device that gets qualified a customer level.
Hassane El: Very helpful, Hassan. Thank you. One moment for our next question.
Speaker Change: Any helpful. Sean Thank you.
Harlan Sur: Transcribed by https://otter.ai Our next question comes from Harlan Sur with J.P. Morgan. Your line is open.
Speaker Change: One moment for our next question.
Speaker Change: Okay.
Speaker Change: Our next question comes from Harlan sur with Jpmorgan. Your line is open.
Hassane El: Good morning. Thanks for taking my question. With a view that dynamics in the second half are going to start to normalize or stabilize, are LTSA customer calls to revise volumes, push-outs, cancellations on the non-LTSA business, are these activity levels here starting to stabilize or decline ahead of the second half shipment stabilization, or do these activity levels continue to remain at pretty high levels?
Harlan Sur: Hi, Good morning, Thanks for taking my question with a view that dynamics in the second half, we're going to start to normalize or stabilize.
Harlan Sur: Our lts, a customer calls to revise walliams push outs cancellations on the non L. PSA business are these activity levels here starting to stabilize or decline ahead of the second half shipments stabilization or do these activity levels continue to remain at pretty high levels.
Hassane El: Yeah, no, you're right about that comment. So they have, they have slowed down, you know, requests for pushouts, requests for changing volumes, and so on, which gives us that, which gives us that comfort to call out the second half stabilization that we talked about. But yeah, it's basically, just like the LTSAs have been a tool in the market for softness and seeing it earlier. That same tool for the slowdown in that discussion and the amendments that we're doing with customers gives us that other side of it.
Speaker Change: Yes no.
Speaker Change: Youre right in that comment so they are they have slowed down requests for pushout requests for changing volumes and so on which gives us that which gives us that comfort comfort to call out the second half stabilization that we talked about it but yes. It is it basically just like the <unk> have been a tool in the market.
Speaker Change: <unk> softness and seeing it earlier.
Speaker Change: That same tool, Florida slowdown in that discussion and the amendments that were doing with customers gives us that other side of it.
Thad Trent: And Harlan, I would add, if you look at the non-LTSA orders, the order pattern is getting stronger. So that's the stabilization we're seeing. We're seeing fewer cancellations, and fewer pushouts than what we saw over the last couple quarters.
Speaker Change: And Harlan I would add if you look at the non <unk> orders. The order pattern is getting stronger. So that's the stabilization, we're seeing and we're seeing less cancellation, let's push outs and what we saw over the last couple of quarters.
Harlan Sur: Oh, perfect. Thank you for that.
Hassane El: Then from a geographical perspective, Asia X Japan, which is primarily China, has declined about 24% in dollar terms over the past two years versus the total company, which is down four. How much of the decline in China is just broad-based Chinese weakness? How much of it is your lean distribution strategy? Or how much of it is just related to the low margin commodity focus China Business, which you've been moving away from over the past several years?
Speaker Change: Perfect. Thank you for that then from a geographical perspective Asia ex Japan, which is primarily China.
Speaker Change: <unk> declined about 24% dollar terms over the past 10 years first as the total company, which is down four how much of the decline in China is just broad based China weakness how much of it is your lean distribution strategy or how much of it is just related to low margin commodity focus.
Speaker Change: China business, which you've been moving away from over the past several years.
Hassane El: Yeah, I think, you know, I don't have the breakdown, but the majority of it is the exits that we talked about. Because, if you recall, a lot of those exits were in the non-auto and industrial sectors. So if you add it all up, and you do it year on year, then those exits are targeting that market, which is where the demand has been. So that's expected in the industrial and automotive sectors. Actually, we've seen share gains, you know, obviously, on silicon carbide, as I talked about in the automotive sector, but in the industrial sector.
Speaker Change: Yes. Thank you.
Speaker Change: I don't have the breakdown by majority of it is that the exits that we talked about.
Because if you recall a lot of those exits were in the non auto and industrial.
Speaker Change: Added all up and you do a year on year, then those exits are targeting that market, which is where.
Speaker Change: The demand has been.
Speaker Change: So thats expected.
Speaker Change: The industrial and automotive actually we've seen the share gains obviously on silicon carbide <unk> talked about in automotive but in industrial.
Hassane El: You know, in previous quarters, I've talked about LTSAs with eight of the top 10 energy storage or renewable energy vendors, and most of them are in China. We've had tremendous growth in those markets over the last few years, calling them out 22 to 23 even. So all of these are shared gains. But, yeah, they are offset by one the general weakness that everybody sees with how big the market is for semis in China. But specifically for ON SEMI, it is the exits which are today helping hold the margin where we are structurally. Thank you.
Speaker Change: In prior quarters, I've talked about <unk> with eight of the top 10 energy storage or renewable energy vendors. Most of them are in China, We've had tremendous growth in those markets over the last few years.
Speaker Change: That we called out 'twenty two to 'twenty three even.
Speaker Change: So all of these are share gains, but yes. They are offset and one is the general weakness that everybody sees with how big the market is for <unk> in China, but specifically for on semi is the exits which are today, helping hold the margin where we are structurally.
Speaker Change: Yes.
Christopher Adam Jackson Rolland: One moment for our next question. Our next question comes from Christopher Rolland, Susquehanna. Your line is open.
Speaker Change: Thank you.
One moment for our next question.
Speaker Change: Okay.
Speaker Change: Okay.
Our next question comes from Christopher Rolland of Susquehanna. Your line is open.
Hassane El: Hey guys, thanks for the questions. I guess my first one is on the image sensor business, primarily, if you could talk about the kind of demand and sell through there, but also inventories and your plans on internalizing some of those wafers from foundry into Glowfo as well.
Christopher Adam Jackson Rolland: Hey, guys. Thanks for the question.
Christopher Adam Jackson Rolland: I guess my first one is on the image sensor business primarily.
Christopher Adam Jackson Rolland: If you could talk about kind of demand and sell through there, but also inventories.
Christopher Adam Jackson Rolland: And your plans on internalizing some of those wafers from from foundry and <unk> as well.
Hassane El: Yeah, so I think like demand for, we have a high market share in image sensors. So demand for image sensors overall follows the automotive industry. We do believe that the inventory situation is getting better. I put that under the commentary I made about general automotive. But the growth that we've seen specifically on the 8 megapixel is specific to a migration to higher resolution cameras that we have really talked about over the last two to three quarters. We've been calling it out. So that continues.
Christopher Adam Jackson Rolland: Yes, so I think like demand for our we have a high market share in image sensors. So demand for image sensor overall demand follows the automotive we do believe that inventory situation is getting better.
I put that under the commentary I made about general automotive.
Christopher Adam Jackson Rolland: But the growth that we've seen specifically on the eight megapixel is specific to a migration to higher resolution cameras that we really talked about over the last two to three quarters, we've been calling it out so that continues that's a trend we can.
Hassane El: That's a trend we can clearly see based on the growth of that business, even in light of the light vehicle production numbers that are starting to come up. So from that perspective, it's clear we do have an effort to introduce new products coming out of the fab. It is not 100% internal. We do have foundry partners that we value in this business, and we will continue to work together internally and externally. But you can think about it as supply assurance rather than a shift in strategy to just go internal.
Christopher Adam Jackson Rolland: Clearly.
Christopher Adam Jackson Rolland: Based on the growth of that business, even in light of the light vehicle production numbers that are starting to come up so from that perspective, it's clear we do have an effort too.
Christopher Adam Jackson Rolland: <unk> introduced new products coming out of the fab it is not 100% internal.
Christopher Adam Jackson Rolland: We do have foundry partners that we value in this business and we will continue to work together internally and externally, but you can think about it as a as a supply assurance rather than a shift in strategy to just go internally.
Christopher Adam Jackson Rolland: Great. And also, just a couple of housekeeping questions. Did you guys give lead times, utilization rates, and then cumulative LTSAs and or next 12-month LTSAs?
Great.
Speaker Change: And also just a couple of housekeeping.
Speaker Change: Did you guys give a lead times utilizations.
Speaker Change: And then cumulative L TSA and or next 12 month L. TSA.
Thad Trent: Yeah, Chris, let me go through that. So just starting in reverse order, the lifetime LTSA value is $15.7 billion. Over the next 12 months, the value of that is $4.7 billion. I think that's consistent with what you heard last quarter, if you think about what rolled off in Q1. Lead times are down just slightly, roughly around 40 to 41 weeks, you know, so not a big change on that side of things.
Speaker Change: Yes.
Speaker Change: Yes, Chris it's that let me let me go through that.
Speaker Change: So just starting in reverse order.
Chris: Lifetime, Lts's values $15 7 billion.
Chris: Over the next 12 months.
Chris: The value of that is four 7 billion.
Chris: I think thats consistent with what you heard last quarter. If you think about what rolled off in Q1.
Chris: Lead times are down just slightly roughly around 40% to 41 weeks.
Chris: So not a big change on that side of things.
Thad Trent: And I did mention in the prepared remarks that utilization decreased slightly from 66% to 65%. We expect to be running kind of in this range, plus or minus, for the remainder of the year until we start to see more of a market recovery. As we see the stabilization, we believe we can kind of keep this utilization for the remainder of the year.
Chris: I did mentioned in the prepared remarks utilization decreased slightly from 66% to 65.
Chris: We expect to be running kind of in this range plus or minus for the remainder of the year and so we start to see more of a market recovery as we see the stabilization. We believe we can kind of keep this utilization for the remainder of the year.
Thad Trent: And Thad, since I have you here, do you have sick LTSAs as well?
Speaker Change: And Thats since I have you do you have sick L. TSA is as well.
Thad Trent: I don't have that. Thank you.
Speaker Change: I don't have that.
Speaker Change: Thank you.
Joseph Lawrence Moore: One moment for our next question. Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.
Hassane El: Great, thank you. I wonder if you could talk about the opportunity in hybrid cars, as you sort of see some of the demand shifting from battery-powered to hybrid, you know, what's the opportunity for ON? Is that silicon carbide? Is it IGBT? Just talk about that.
Joseph Lawrence Moore: Great. Thank you.
Joseph Lawrence Moore: I Wonder if you could talk to.
Joseph Lawrence Moore: The opportunity in hybrid cars.
Joseph Lawrence Moore: As you sort of see some of the demand shifting from battery powered to hybrid and what's the opportunity for ion is that silicon carbide is at GBT opportunity can you just talk to that.
Hassane El: Yeah, so the both the opportunity in, I would say, plug-in hybrid, parallel hybrid, or the non-BEV part of the electrification effort and mobility is both on IGBT, and some customers still are putting silicon carbide in there, depending on the drivetrain. But the opportunity for us, that I called out in prior quarters, is about $350 worth of content or non-BEV. That's only in the powertrain, and then about 750 in a full VEV vehicle compared to $50 in powertrain content in an internal combustion engine. So those are kind of the ballpark numbers that we've talked about.
Joseph Lawrence Moore: Yes.
Joseph Lawrence Moore: Both the opportunity and I would say plug in hybrid parallel hybrid or in the non <unk> part of the electrification effort in mobility as well.
Joseph Lawrence Moore: Both on IGT and some customers still are putting.
Joseph Lawrence Moore: Silicon carbide in there depending on the drivetrain, but the opportunity for us that I called out in prior quarters is about $350 worth of content or.
Joseph Lawrence Moore: Non <unk>.
Joseph Lawrence Moore: And thats only in the powertrain.
And then about 750 and a full vehicle.
Joseph Lawrence Moore: <unk> $250 powertrain content in internal combustion so those are kind of the.
Hassane El: And then in terms of the pricing conversation, you know, LPSA pricing is holding up. When you have new agreements, new customers, new designs, do you see, is the pricing for that any different than what you've seen in the past? What pricing is embedded in your current model?
Joseph Lawrence Moore: Ballpark numbers that we've talked about.
Speaker Change: Great. Thank you for that and then in terms of the pricing conversation.
Speaker Change: Lps a pricing you said is holding up well.
Speaker Change: You have new agreements new customers new designs.
Speaker Change: Is the pricing for that any different than what you've seen in the past.
Hassane El: No, I mean, we don't see on a product by product basis. If we say the value of the product is what we price it on, value doesn't change, whether it's design to design. Where you do see pricing movement is new technologies that we want to introduce, where the customer gets a benefit, but we also get a benefit, whether it's moving to a much smaller die, given the efficiency of our new model. Those are a normal course of the business, where it is an incremental margin for us, but you may see an ASB Delta, but it's a different product. But that's the way the industry runs. Hey, Jim. It's, uh, just a thought.
Speaker Change: What pricing is embedded in your current model.
Speaker Change: No I mean, we don't see on a product by product basis.
Speaker Change: If we say the value of the product is what we price on value doesn't change whether it's designed to design.
Speaker Change: You do see pricing movement is new technologies that we want to introduce where the customer gets the benefit but also we get a benefit whether it's moving to a much smaller die given the efficiency of our new model.
Speaker Change: Those are a normal course of business, where it is incremental margin for us, but you may see in <unk>.
Speaker Change: Different product, but that's the way the industry runs.
Thad Trent: And Joe, just remember, you know, we walked away from that $475 million highly volatile price sensitive market. So, you know, I think in this situation, you probably see some pricing pressure on that. Obviously, we're not seeing it because we don't have that business today. Appreciate that. Thank you.
Speaker Change: Hey, Joe it's that just remember we walked away from that $475 million of highly volatile price sensitive market.
Joe: So I think in this situation you would probably see some pricing pressure on that.
Joe: Obviously, we're not seeing that because we don't have that business today.
Joe: Appreciate that thank you.
Joseph Lawrence Moore: One moment for our next question. Our next question comes from Joshua Buchalter with TD Cal, and your line is open.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Joshua Buchalter with TD Cowen Your line is open.
Joshua Louis Buchalter: Hey guys, thanks for squeezed me and taking my question. I apologize for beating the silicon carbide horse, but I understand there's a lot of volatility in that market and your reluctance to give a granular market forecast right now, but maybe we can compare it to a few quarters ago. Has the increased volatility been, would you say, because of a meaningful change in the adoption curve across the industry at a broad base of customers, or is it because of pushouts or unit dynamics because of the early adopters that's driving the lower and more volatile forecast?
Joshua Louis Buchalter: Hey, guys. Thanks for squeezing me in.
Joshua Louis Buchalter: And taking my question I apologize for beating the Silicon carbide horse, but I understand there is a lot of volatility in that market and your reluctance to give granular market forecast right now, but maybe we compare it to a few quarters ago has the increased volatility been would you say because of a meaningful change in the adoption curve across.
Joshua Louis Buchalter: The industry at a broad base of customers or is it because of push outs.
Joshua Louis Buchalter: Our unit dynamics because of the early adopters that's driving.
Hassane El: Thank you.
Hassane El: So like, I can't I can't call out specific customers, you know, I think everybody can read what specific customers talk about and what their specific outlooks are. But what I would tell you is it's not a push out, meaning every design that we thought would go to production when we were sitting here in 2023 is still going to production. So it's not a push out on models. OEMs are not sacrificing the long-term view that they have on BEVs just because of the short-term volatility.
The lower and more volatile forecast. Thank you.
Speaker Change: So look again I can't call out specific costs.
Speaker Change: Everybody can read.
Speaker Change: Specific customers talk about and what their specific outlooks are but what I would tell you is it's not a pushout, meaning every design that we thought would go to production.
Speaker Change: When we were sitting here in 2023 is still going to production.
Speaker Change: So it's not a bush auto models Oems are not sacrificing the long term view that they have on bes.
Hassane El: So we are seeing the designs qualify, the designs ramp, with a plan to ramp up starting the second half of this year. What I called out, you know, Europe already. I talked about China as well. So it's not a push-out.
Speaker Change: Just because of the short term volatility. So we are seeing the designs qualified designers ramp with a plan to ramp and starting in the second half of this year, what I called out Europe already I talked about China as well.
Hassane El: What I would say the TAM is, my comment about the TAM is what those volumes are. So the volumes that were planned last year are different than they are planned this year given the environment, but the same models planned are still going to market. So it's a very important distinction because one is the longevity and the strategy of the OEMs, and the other one is just, you know, reacting to a macro environment that we're in today.
Speaker Change: So it's not a push out what I would say the <unk>.
Speaker Change: And my comment about the Tam is what those volumes are so the volumes that were planned last year are different than they are planned this year given the environment, but at the same models plant are still going to market.
Speaker Change: So it's a very important.
Speaker Change: Sanction because one is the longevity and the strategy of the Oems and the other one is just reacting to a macro environment that we're in today.
Thad Trent: Thank you. That's very helpful, Hassan. Maybe for Thad, you called out that over the last 12 months, you've returned over 100% of free cash flow to investors, which is more than your formal policy of 50%. Was it just because of some dislocation in the market you saw, and should we expect it to trend back towards 50%, or should we expect it to sort of remain elevated here in particular as you go through the period of peak capital spending? Thank you. Yeah, if you look at...
Speaker Change: Alright. Thank you that's helpful.
Speaker Change: Maybe for Thad.
Thad: You called out that over the last 12 months, you've returned over 100% of free cash flow to investors, which is more than your formal policy of 50%. It was just because of some dislocation in the market you saw and we should expect it to trend back towards 50% are should be expected sort of remain elevated here in particular as you go through the period of peak capital spend.
Speaker Change: Thank you.
Thad Trent: Yeah, if you look back over the last 12 months, in Q4, we bought back $300 million. That was, that was above our target there. And that was the dislocation, right? We've said our policy longer term is 50% over the long term, but we will take advantage and be opportunistic where it makes sense. Thank you.
Speaker Change: Yes, if you look at look back over the last 12 months in Q4, we bought back $300 million that was that was above.
Speaker Change: Our target there and that was the dislocation right. We've set our policies longer term is 50% over the long term, but we will take advantage and be opportunistic where it makes us.
Nathaniel Quinn Bolton: One moment for our next question. Our next question comes from Quinn Bolton with Needham. Your line is open.
Speaker Change: Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from Quinn Bolton with Needham Your line is open.
Hassane El: Hey guys, thanks for squeezing me in. I know you're not calling for a recovery yet in the second half of the market, but Hassane, your comments on the battery electric vehicle ramps in the second half of the year certainly imply that perhaps silicon carbide sees a better second half. So I'm wondering, what's the offset that would keep revenues sort of more stable in the second half, if I'm reading your comments about the battery electric vehicle ramps in the second half correctly?
Nathaniel Quinn Bolton: Hey, guys. Thanks for squeezing me in I know you are not calling for a recovery yet in the second half the market metrics on your comments on the battery electric vehicle ramps in the second half of the year, certainly imply that perhaps silicon carbide sees a better second half. So I'm wondering what's the offset that would keep revenues sort of more stable.
Nathaniel Quinn Bolton: The second half if I'm reading your comments about the battery electric vehicle ramps in the second half correctly.
Hassane El: Yeah, if you look at the, and again, we don't guide it, we guide only one quarter at a time. But the second half of the silicon carbide is higher than the first half of the silicon carbide.
Speaker Change: Yes, if you look at.
Speaker Change: And again, we don't guide we guide only one quarter at a time.
Speaker Change: But the second half silicon carbide is higher than the first half of Silicon carbide, that's absolutely correct and that's because of the ramp that.
Hassane El: That's absolutely correct. And that's because of the ramps that I called out. When I talk about stabilization, we go back to normalization. And you think of it as normal supply and demand, where demand is, that's what's going to be the offset or not for the second half. So it's too early to call whether demand is going to recover or not, but there's definitely a demand increase on silicon carbide specifically that we
Speaker Change: <unk> when I talk about stabilization.
Speaker Change: Go back to normalization.
Speaker Change: And you think about it as normal supply and demand where demand is that's what's going to be the offset or not for the second half. So it's too early to call is demand going to recover or not.
But there is definitely demand increase on silicon carbide, specifically that we can pinpoint too.
Hassane El: Got it, makes sense. I think you touched on it quickly in the prepared comments, but can you just give us the progress update on the 200mm substrates and manufacturing needs to look into next? Yep, still on track. You know, what we talked about was qualifying.
Speaker Change: Got it makes sense and then just I think you touched on it quickly.
Speaker Change: Her comments, but can you just give us the progress update on the 200 millimeter substrates in manufacturing as you look into next year.
Speaker Change: Yes still on track what we talked about is qualifying 24 ramp in 'twenty five and we're still on track to exactly that timeline. So no changes there, which is obviously a positive development of our silicon carbide efforts.
Hassane El: Yep, still on track. What we talked about was qualifying 24, ramping up to 25, and we're still on track to exactly that timeline.
Hassane El: Ladies and gentlemen, this concludes the Q&A portion of today's presentation. I'd now like to turn the call back over to Hassane El-Khoury, President and CEO, for any closing remarks.
Speaker Change: Perfect. Thank you.
Ladies and gentlemen, this does conclude the Q&A portion of today's presentation I would now like to turn the call back over to Hassan Al <unk>, President and CEO for any closing remarks.
Hassane El: Thanks to the tremendous effort of our global teams, we've transformed the company, improved our resiliency, and adapted to changing market conditions to deliver sustainable financial results. We remain dedicated to our customers, our financial commitments, and our strategy of enabling the sustainable ecosystem. Thanks to everyone on the call for joining and supporting ON SEMICONDUCTOR.
Hassane El: Thanks to the tremendous effort of our global teams, we've transformed the company improved our resiliency and adapted to changing market conditions to deliver sustainable financial results.
Hassane El: We remain dedicated to our customers, our financial commitments and our strategy of enabling the sustainable ecosystem. Thanks to everyone on the call for joining and supporting on time.
Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Speaker Change: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
[music].