Q3 2024 ON Semiconductor Corp Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to the OnSemi 3rd Quarter 2020 for earnings conference call. At this time, I'll participate so I don't listen only mode.
Speaker Change: After the Speaker's presentation, there will be a question and answer session.
Speaker Change: 2. Ask a question during this session, you will need to press star 1-1 on your telephone.
Speaker Change: You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the call over to Parag Agarwal. Vice President of the Investor Relations and Corporate Development, please go ahead.
Parag Agarwal: Thank you, Daniel. Good morning and thank you for joining. Hassane El, Thad Cotter 2024, Quarterly Reserves, Consumptal.
Speaker Change: I am John today by Hassan El Corri, Paragalian and CEO and Patrean, our CEO.
Speaker Change: This call is being webcast on the Investigation section of our website at www.ouncecm.com
Speaker Change: A replete of this aircraft along with our 2024 third quarters earnings series will be available on our website After us in the team one hour following the scouts and the recorded webcast will be available for approximately 30 days following the scouts scouts
Speaker Change: A Dixline formation is posted on the investor's description section of our website.
Speaker Change: [inaudible]
Speaker Change: and this presentation includes certain non-gapsed financial measures.
Speaker Change: The constellation of this non-cap financial measures.
Speaker Change: with the most directly comfortable gapment financial measures.
Speaker Change: and the discussion of certain limitations when using not-gap financial measures are included in our unisolate which is posted separately on our website in the investor relations section.
Speaker Change: During the course of this conference call, we will make projections, or other former looking statements regarding future events or the future financial performance of the company.
Speaker Change: 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.
Speaker Change: In important factors, there can affect our business, including factors that could cause factors that are still differently from our forward-looking statements are described in our most recent form tank use and other findings with the city it is an exchange commission.
Speaker Change: and in our annucily for the third quarter of 2024.
Speaker Change: Our estimate or other fallable looking statements might change and the company
Speaker Change: As you know, obligation to update forward looking statements to reflect the actual results, change assumptions or other events that may occur except as you cry by love.
Speaker Change: Now, let me turn it over to Hassan. Thank you, Parag. Good morning and thanks to everyone for joining us on the call. Our third quarter results once again demonstrated the structural changes we have made to the business with revenue, gross margin and earnings per share all above the midpoint of our guidance.
Speaker Change: With a short focus on execution and operational excellence, we have delivered on our commitments, and it continued softness in the market.
Speaker Change: Over the last hour of our quarter, we've talked about an al-Shayp recovery and has expected the demand environment remains muted with ongoing inventory digestion and slow and demand.
Speaker Change: Our outlook for all markets remains unchanged as uncertain key persist among our customers.
Speaker Change: Automotive continues to be soft with slowing EV self-rupt, industrial which slowed first has not broadly recovered except for pockets and utility scale solar in aerospace and defense.
Speaker Change: Regionweed, China and Japan are recovering with strengths and XEVs, but North America and Europe remain soft in both automotive and industrial.
Speaker Change: Despite the current slowdown, we are confident in our strategy.
Speaker Change: We are in the markets that matter the fastest growing segments of the automotive industrial an AI data center that will continue to outpace the growth of the semiconductor market overall and we are committed to delivering value to our customers through product and system level innovation.
Speaker Change: The breadth and performance of our portfolio continues to be differentiator enabling us to optimize energy efficiency for our customers' applications as a one-stop source for intelligent power and sensing solutions.
Speaker Change: In Q3, our Silicon carbide revenue increased sequentially, driven by utility scale solar and share gains in China BAPS.
Speaker Change: Outside of China, although programs went into production, the cell through is expected to be below our forecast for the second half of this year.
Speaker Change: We will continue to cautiously monitor and demand to avoid building inventory on our customer's shelves that would impact 2025.
Speaker Change: For the full year 2024, we don't expect meaningful market growth as third party reports which suggest we expect ourselves in carbide revenue to be in the low to mid-single digit growth over 2023.
Speaker Change: On the technology development front, we have qualified our 200mm M3 silicon carbide ahead of schedule.
Speaker Change: Our 8 inch wafer are running in the fab at 350 micron sickness and yields are equivalent to those on our 6 inch wafer.
Speaker Change: We are sampling from both internal and external sources for substrates.
Speaker Change: We remain very deliberate with our Silicon Carbite strategy. We are focused on vertically integrating up where our advanced packaging solutions deliver system optimization for our customers.
Speaker Change: We will participate where we are differentiated and where our margin levels match the value we provide to our customers.
Speaker Change: In automotive, China is driving the pace of innovation and leading the transition to 800 volt architectures where silicon carbide is critical to enabling faster charging, extended range and better energy efficiency in vehicles.
Speaker Change: are 1200 volts M3E silicon carbide is well positioned to be used in China's extended range electric vehicles as they transition to 800 volt architectures where a small internal combustion engine can recharge the battery.
Speaker Change: We expect to exit the year with approximately 50% of China's best-seilicking carbide market share based on our design win activity as we continue to broaden our penetration with the top OEMS.
Speaker Change: In industrial, we lead the market with our silicon carbide portfolio. Our industrial sick customer count over the last four quarters, increase 17% as compared to the previous four quarters.
Speaker Change: Beyond Selikon Carby, we have been investing in the performance of our Power Force volume to address emerging trends in renewable energy.
Speaker Change: Global Solar Insolations are expected to reach 552 gigawatts in 2024 versus 433 gigawatts in 2023 at a 27% year-on-year increase and global energy storage system installation are expected to reach 178 gigawatts.
Speaker Change: with a year over year increase of 69%.
Speaker Change: We continue to gain momentum in these markets based on the leading performance and power density, realize using our high density F5 BP, IGBT and hybrid 6 and IGBT modules we announce in the quarter.
Speaker Change: We are designed in with the four of the top five utility scale manufacturers with our latest generation of PLSTOP-7 modules, delivering application optimized solutions that increase power density and efficiency with voltages ranging from 650 to 1200 volts.
Speaker Change: Our Intelligent Sensing Business grew 11% quarter over quarter, with strength and ADS and industrial imaging across a range of applications such as machine vision, robotics, and scanning.
Speaker Change: We are proliferating our portfolio to access new industrial applications, enabling our customers to select and optimize and feature set for their needs.
Speaker Change: Over the last year we have released 10 new image sensors across four product families. And we are getting traction and applications that include medical imaging, biometrics, autonomous mobile robots, and an automated guided vehicles to name a few.
Speaker Change: R5 and 8 megapixel hyperlux LP image sensors, for example, are at an excellent choice for entry-level 4K video surveillance camera with industry leading low power, low light sensitivity and way con motion.
Speaker Change: In 2025, we plan to introduce a new family or image sensors to further broaden our offering.
Speaker Change: We've also received positive feedback from our customers and channel partners on the Sphere Technology we acquired last quarter. This differentiated technology enables us to expand our industrial offering into agriculture, medical imaging, inspection, and aerospace and defense applications.
Speaker Change: In data centers, we have a tremendous opportunity as we expect the power delivery market for enterprise, cloud and AI servers to double from $2.2 billion in 2024 to $4.4 billion by 2028.
Speaker Change: As power requirements in racks continue to scale from 40 kilowatts to 120 kilowatts, we expect our addressable content per rack to continue to increase.
Speaker Change: We have invested in this space through the downturn delivering a silicon and silicon carbide portfolio capable of meeting the ever-increasing demands of AI data centers across the entire power trees.
Speaker Change: We have released multi-phase controllers which combine with our industry leading smart power stages to deliver full V-core solutions to power in video and arm-based CPUs.
Speaker Change: We continue to gain traction with our key 10 power trench MOSFETs, EFU's point of load and vehicle products securing design winds with three of the top four hyperscalors in North America which are expected to contribute to revenue in 2025.
Speaker Change: We have also been investing to broaden our portfolio of analogs, make signal products and we look forward to electronic on next month when we plan to share more detail about our new portfolio
Speaker Change: Let me now turn it over to Thad to give you more details on our results.
Speaker Change: Thanks, sir.
Speaker Change: Our team focus on execution and operational excellence in the face of ongoing market challenges, delivered another quarter of revenue gross margin and earnings per share, or above the midpoint of our guidance.
Speaker Change: Q3, free cash flow, increased 41% sequentially, as we achieved our caffix target ahead of schedule. With our capacity expansion largely behind this.
Speaker Change: The consistency of our results demonstrate the resilience we've built in our business model.
Speaker Change: We are main focus on high growth megatrons, optimizing our manufacturing footprint, and we are investing to lead the market where we can add value for our customers.
Speaker Change: The structural improvements continue to what's a better result than the company was able to achieve in prior downturns.
Speaker Change: If we dive into revenue for the third quarter, we saw broad-based softness offset by Silicon Carbide Growth, which resulted in a 2% sequential increase to $1.76 billion.
Speaker Change: As Hassane mentioned, inventory digestion persists across our business groups in automotive and industrial, which accounted for 79% of our revenue.
Speaker Change: Automotive revenue was $951 million which increased 5% sequentially driven by Silicon carbide and ADF image sensors.
Speaker Change: We continue to see softness and in demand, but content gains driven by so-called carbide in China, are driving our growth in this market.
Speaker Change: As compared to the third quarter of 2023, automotive revenue was down 18%.
Speaker Change: Revenue for industrial was $440 million dollars down to 6% sequentially and 29% year over year. We saw pockets of growth in utility scale solar and our aerospace and defense business while the traditional industrial remained relatively stable in the third quarter.
Speaker Change: We have recently received trusted foundry accreditation at our East Phil Schabb, which will allow us to expand our aerospace and defense business.
Speaker Change: Looking at the split between the business units, revenue for the power solution screw for PSG was $829 million, a decrease of 1% quarter of a quarter and 23% year over year.
Speaker Change: Revenue for the analog and mixed signal group, or AMG with $654 million and increase the 1% quarter of a quarter and a decrease of 16% year over year.
Speaker Change: Revenue for the intelligent, intelligent sensing group, or ISG, was $279 million, and 11% increase quarter of a quarter, driven by ADF. ISG Revenue decreased 15% of the same quarter last year.
Speaker Change: Gapgroce Margin was 45.4% and non-gapgroce Margin was 45.5% compared to 45.3% in Q2 and 47.3% in the quarter a year ago.
Speaker Change: We have maintained our gross margin of above the mid 40% and improved it by 20 basis points over Q2 with utilization remaining flat at 65%.
Speaker Change: As a reminder, in prior downtrends, our gross margin had been around 30% at the usualization levels.
Speaker Change: As we continue to drive efficiencies across the company through our FABRITE strategies, we are well positioned to benefit from gross margin expansion once the market begins to recover.
Speaker Change: As I mentioned earlier, our investments in capacity expansion are largely behind us.
Speaker Change: We now expect our capital and density target to be in the mid-singual digit percentage range for 2025 and beyond as compared to a previous target of 11%.
Speaker Change: This is the result of the excellent work, our manufacturing teams, have done to improve our efficiencies across our network.
Speaker Change: This new CapEx target includes the Brownfield investments in the Czech Republic we anticipate making over a multi-year period.
Speaker Change: Lawing our capital intensity will increase free cash flow margin towards our targeted 25-30%.
Speaker Change: We also remain committed to our long-term target of returning 50% of free cash voter shareholders.
Speaker Change: Over the last 12 months, we have returned 75% of free cash flow with $200 million in share 5x in the third quarter.
Speaker Change: Since initiating our $3 billion share, repurchased program in February of 2023, we have returned just over $1 billion to our shareholders.
Speaker Change: Now let me give you some numbers for your models.
Speaker Change: Gap Operant expenses for the third quarter worth $350,000,000 as compared to $344,000,000 in the third quarter of 2023.
Speaker Change: Non-Gap operating expenses were $304 million compared to $322 million in the quarter a year ago.
Speaker Change: Non-gap operating expenses were lower than the midpoint of our guidance due to active cost control and lower lower variable compensation.
Speaker Change: Gap operating margin for the quarter was 25.3% and non-gap operating margin was 28.2%.
Speaker Change: Our Gap Tax Rate was 11.5% and non-Gap Tax Rate was 16%.
Speaker Change: Deluded Gap earnings per share for the second quarter was 93 cents as compared to a dollar 29 in the quarter a year ago. Non-Gap earnings per share was 99 cents as compared to a dollar 39 in the quarter a year of 2023.
Speaker Change: and Gap to Literature Count was 432 million shares in our non-Gap to Literature Count was 428 million shares.
Speaker Change: Turning to the balance sheet, Gaston Short Term Investments was $2.8 billion with total liquidity of $3.9 billion, including $1.1 billion under on our revolver.
Speaker Change: Cash from Operations was $466 million and free cash flow increased 41% sequentially to $294 million representing 17% of revenue.
Speaker Change: Capital expenditures during Q3 were $172 million which equates to a capital intensity of 10%.
Speaker Change: Inventory increased by $18 million sequentially and decreased by one day to 213 days.
Speaker Change: This includes 100 days of bridge inventory to support 5 transitions in the Silicon Carbide ramp.
Speaker Change: Excluding these strategic bills are based inventory decreased sequentially by $32 million or four days to 113 days, which continues to be within our target range of 100 to 120 days.
Speaker Change: Our mass market customer count grew 15% year over year in the third quarter as we have been increasing inventory in the distribution channel to support this growth.
Speaker Change: Distribution Weeks of Immentory, we're 9.7 versus 8.9 weeks in Q2 and we expect distribution of inventory to increase to 10 weeks plus or minus in Q4 as we continue to feed this long sale of high margin customers.
Speaker Change: [inaudible]
Speaker Change: Looking forward, let me give you some key elements of our non-gap guidance for the fourth quarter.
Speaker Change: Given the current macro environment and our demand is a ability, we anticipate Q4 revenue will be in the range of $1.71 billion to $1.81 billion.
Speaker Change: We expect non-gap growth margin to be between 44 and 46% with flat to slightly down utilization. This includes share-based compensation of $7 million.
Speaker Change: We expect non-gap operating expenses of 300 million, that's $315 million, including share-based compensation of $31 million.
Speaker Change: We anticipate our non-gap other income to be a net benefit of $12 million with our interest income exceeding interest expense.
Speaker Change: We expect our non-gap tax rate to be approximately 16% and our non-gap deleted share count is expected to be approximately 427 million shares.
Speaker Change: This results in non-gap earnings per share to be in the range of 92 cents to a dollar and four cents.
Speaker Change: We expect capital expenditures in the range of 130 to 170 million dollars.
Speaker Change: And as a reminder today's press release contains a table of decently in her gap and non-gap guidance.
Speaker Change: While we were cautious about the near-term macro, we remained committed to our long-term strategy.
Speaker Change: We've remained disciplined and continue to invest for the future, both in new generations of intelligent power and sensing products and to position the company to scale efficiently for a market recovery.
Speaker Change: To wrap up, we are investing in the fastest growing segments of the industry as the world shifts towards renewable energy, electrification, automation and AI.
Speaker Change: The breath and performance of our portfolio address the growing need for energy efficiency and the proliferation of sensor driven ecosystems.
Speaker Change: Our employees continue to be the foundation of the resiliency of OnSamy and I want to acknowledge the hard work of our team's across the globe as we remain committed to unlocking our own family.
Speaker Change: With that, I'd like to turn the call back over to Tonya to open the call for Q&A.
Tonya: Certainly as a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
Tonya: and one moment for our first question.
Speaker Change: Our first question will come from Ross Seymour of Don't You Bank Your Line is Open.
Ross Seymour: Hi guys, thanks for letting me ask a question. I guess the first one is on the Silicon carbide business. I know it's not the huge part of your total revenues, but strategically it's incredibly important.
Speaker Change: When Hassane, you talked about that being upload amid single digits, do you believe that that is just evidence of a cyclical weakness or something started to, secularly change as people have gotten a little more concerned on not only the pace of EV growth but competition coming in and commodization in those sorts of dynamics.
Hassane El: We do still believe it's cyclical. Therefore, that's why I made the comment that the long-term trend for electrification and EV in general has not changed.
Hassane El: and very important to note.
Hassane El: Designs or the models that we expected to ramp did go in the production that just didn't ramp to the level that we expected, which says that it's a short-term demand. But back to the lumpiness of EV adoption and not a change in strategy or a mega-trend type otherwise.
Hassane El: You know those models would have been canceled or not even launched.
Hassane El: So, customers did launch the cell through as we expected and you saw during the quarter is not coming as expected from the OEMs and therefore we're cautiously monitoring Q4 for that.
Hassane El: But nothing changes in our long term, nothing changes in the strategic importance of sick and importance of plays in EVs as EVs in China followed by US and Europe will continue to.
Speaker Change: Kuviy Adha.
Speaker Change: Thanks for that and I guess for my follow up on foot that on the gross margin side of things.
Speaker Change: has anything changed in your ability to hold the 45% obviously in your quarter and guided. But as you look forward, you said utilization is going to be flat to down on one hand. You also talked about demand continuing to be weak.
Speaker Change: But the Kappax is also coming down. So lots of moving parts it seems. The net conclusion anything different than what you've said before, I'm both the 45% floor and the 53% peak.
Speaker Change: No, I think if you look at where our utilization is today, you know, it's 65% plus or minus, you know, that's where historically we've been at a low point and holding that mid 40%
Speaker Change: Marginus is an major initiative for us. As we look forward, you're obviously getting some mix in Q4, which why our guidance is slightly lower. But no, as we look forward.
Speaker Change: We're optimizing that manufacturing footprint. We're focused on fabric. We're continuing to take costs out. So at these levels we can hold.
Speaker Change: Thank you.
Speaker Change: to
Speaker Change: Thank you. In our next question, we'll come from the big area.
Speaker Change: of Bank of America's Securities, Your Line is Ok.
Speaker Change: and I'm going to ask you a question.
Speaker Change: My question is if we look forward to Q1 as when you tend to have some of these pricing discussions with their customers.
Speaker Change: and I imagine at some point right some of the benefits of long-term supply agreements tailored. So, Hassane El Curious, what kind of your early preview on how these pricing discussions will take place?
Speaker Change: I just hope we should think about Q1 seasonality given all the comments you made about the macro environment.
Hassane El: Yeah, look, we don't guide two quarters out, but let me give you kind of our strategy and how we approach this because...
Speaker Change: First off, the industry is not going back to, in my view, a Q1 kind of cliff. Negotiations happen throughout ramps happen, you know, any quarter and new design winds, which is where you set pricing happen during any quarter.
Speaker Change: I don't believe a Q1 as you have always seen it historically is kind of a pricing click. Having said that, our approach and we've been very consistent with that since we started four years ago is we're going to price on value.
Speaker Change: We're now going to Chase after the market. We actually went a walk away from a lot of that business.
Speaker Change: We will continue to price on value and we will continue to pursue opportunities where we provide value.
Speaker Change: which means that as soon as an opportunity is a pricing discussion, meaning the lowest price wins. That is not strategically a business we want to win in.
Speaker Change: which means our focus on getting to that 53% margin model that we iterated in the prior comment.
Speaker Change: is a strategic focus for us and we will continue to create products that differentiate at value to the customer and therefore hold the margin and not get into this quarterly or even annual price negotiations level.
Speaker Change: that
Speaker Change: and from my follow up, if the macro environment is softer wise on deciding to expand.
Speaker Change: and the distribution inventory. I thought the prior thinking was that you would keep inventory, I think around 9 weeks of below.
Speaker Change: 9 weeks, but it is going up in Q3 and the function is that it goes up in Q4. So what's the thinking and the trend behind that and can that create an overhang as we go into the first half of next year?
Speaker Change: Yes, so that's a very good question. So a few quarters ago we mentioned that we're going to start seating the Disney inventory which we really have starved over the last few years servicing the high volume customers or a lot of the fee customers for us.
Speaker Change: and the strategy behind that is to expand the mass market customers and expand the mass market in general that we have starved and that's typically a high margin business.
Speaker Change: So while we've done two quarters ago as we started putting very strategic products into the channel and the customer count, the mass market customer count.
Speaker Change: has been very favorable. Therefore our strategy has really been executed properly and yielded the results we wanted, which is
Speaker Change: Mathmarket, Higher Customer Account, and Higher margin mix into that channel. So we will continue to do that. What we monitor is of course the faithful level, meaning products that we put in are they POSing out.
Speaker Change: and over how many quarters are they p.o.s.ing out, which means we're not building inventory in this city that just stays there and creates that overhang.
Speaker Change: So we have a very tight process.
Speaker Change: We started that strategy with the intent of growing that mass market customers. We have done that and therefore we have a pretty good recipe to be able to do that while not building the overhang that typically you would see in distribution inventory in a slow market environment.
Speaker Change: Yeah, in fact, the mass market customer account has been up 15% year over year so you can see that the strategy of moving that inventory and there is working. For that customer base, you just need inventory and the discounted shelves.
Speaker Change: Artisties would still take more inventory than we're willing to ship them, but we are controlling it tightly.
Speaker Change: Thank you.
Speaker Change: And our next question will come from Tishiahari, of Goldman Sachs, your line is open.
Tishiahari: Hi, I did morning. Thanks so much for taking the question. Hassane, I guess my first question is on the Silicon Carbide Business and I'm curious, you know, what your, you know, application mix or customer mix looks like today and going into 2025.
Tishiahari: versus what it looked like a year ago. I think a year ago, it was something like 80% auto-20% industrial. Within auto, you were very overindexed to one North American customer. I think I'm prior calls you had talked about that mixed broadening out to companies in Europe and customers in China, particularly on the automotive side. I'm curious what that looks like today and more importantly, how to broaden it into 25.
Speaker Change: So, the mix overall between Auto and Industrial is about the same. You can think about 80, 20, you know, give or take on depending on the quarter and the ramps that we talked about.
Speaker Change: and...
Speaker Change: So that we don't expect that to change.
Speaker Change: Because look the industrial softness and the automotive softness both kind of
Speaker Change: Happened.
Speaker Change: which means there's not a strenuous, strenuous, and one market or over softness in the other to change that mix in a quarter or even a year or a year. So we expect that to be the same by 80-20 which matches the total, the term of that market. So we're indexed to the market mix as it stands.
Speaker Change: As far as diversification, yes, I talked about Ramston China EV which is really the strength that we've seen in Silicon Carbide with scene share gains.
Speaker Change: and Peacaw Summers already. We always talked about penetration and gaining share within those accounts. That's been happening.
Speaker Change: I talked about Europe ramping in the second half that also did happen.
Speaker Change: The difference is the end-dvolume is not what we expected. So from share gains from design wins that are actually going to production, everything is happening on schedule and we're in these sockets.
Speaker Change: But the end unit is not where we expect it to be, which goes back to, you know, Ross' question earlier.
Speaker Change: When the market does recover and that volume goes up again, we're going to see that benefit on the upside because we're already all in these sockets and it's qualified. So that's what we have to look forward to and that's what we're staging for.
Speaker Change: Thank you. As my follow up on capital intensity and maybe this one's for Thad. So medium to long term, your target is now mid-single digits, percentage of revenue versus 11%, which I think is a pretty big change. You talked about some of the reasons and capacity expansion being behind you and you guys being able to identify some productivity gains. Has there been any changes in how you think about, for example, an SIC internal substrates versus external silicon broadly, you know, found reverse internal, whether it be way for processing or packaging in test. Any structural changes in how you think about your footprint?
Speaker Change: Yeah, and especially just to be clear, the 5% is now our new long-term target, right? So we've achieved our target, our original target was 11% we achieved that. And we talked about that last quarter coming down below.
Speaker Change: The fact is, our manufacturing footprint is just getting optimized here, right? So now we've moved into a phase where we're still going to invest in the Czech Republic.
Speaker Change: But a lot of this now starts to become maintenance capital on the footprint that we have as we continue to focus on the fabric strategy. So I wouldn't say there's a structural change here as much as the performances exceeded our expectations. Yeah, I'm the Silicon Carbide. You know, we obviously were going to keep expecting the growth on Silicon Carbide as the market kind of recovers and goes on the optic as I mentioned in my prior comments.
Speaker Change: [inaudible]
Speaker Change: a large shift of capacity is going to be going from that six to eight inch where you're going to get more output with an already installed capex on the six inch as we convert it with a very capex light you know it's purely a conversion we're not building new furnaces or new sites as you convert from six to eight you're going to get a boost in capacity just from the number of die
Speaker Change: Thad Trent, Parag Agarwal
Speaker Change: The mix will change as we go over time, based on our CAPEX and our internal expansion. And our 8-inch internally has been performing very well already at 350 micron going into fab, which is basically best in class today.
Speaker Change: So, we expect that to continue with the CapEx level that Thad mentioned. So, very efficient, forward-looking expansion to support a revenue growth. So, you're going to see a lot of it going to the bottom line.
Speaker Change: Great, thank you.
Speaker Change: And one moment for our next question.
Speaker Change: Our next question will be coming from Chris Dinelli of Citi. Your line is open.
Speaker Change: Hey guys, I think that's me, Chris Dainley. Maybe I should put on my soprano's accent again.
Chris Dainley: A couple longer term questions, so Thad you mentioned that CapEx is peaking and going down, can you just talk about depreciation for 25 versus 24 and then what you expect depreciation to do for the next several years as it tails off?
Speaker Change: Yeah, it's really consistent with where we are today. You know, if you think about what we're bringing on and what we've brought on in the last few years, it's already hitting the P&L, right? And then you've got some roll-off as we continue to bring on that capacity in the Czech Republic.
Speaker Change: So it's it's roughly in line to where it's going to be as we look into 25 I don't see it as a headwind, you know, it's it's roughly kind of in that 7% of revenue range And I don't expect that changing for 25 or 26
Speaker Change: Wouldn't depreciation go down with the Lord?
Speaker Change: Yeah, eventually it will. Right, but you still got some capacity that's coming on this year, right? So I don't think that has. But when you look out into into 26, yeah it should start coming down.
Speaker Change: Okay, great. And then for my follow-up, another longer-term question on just silicon carbide.
Speaker Change: So if the market is, if growth is slowing and the market's flattening out a little bit, what about all this bridge inventory you guys have? Is there any risk of like pricing or anything like that? Or how do we get rid of that bridge inventory? And then where do we expect that to go over the next four quarters?
Speaker Change: Yeah, so there's no concern in pricing. When we talk about the bridge and the strategic inventory build on silicon carbide, we're talking about substrates only.
Speaker Change: Bye.
Speaker Change: So we can basically build it to whatever customer demand comes in.
Speaker Change: So we hold it purely in substrates.
Speaker Change: Most of it doesn't even have EPI in it, so voltage is not even defined yet. So it is at the most common denominator of our whole customer, whether it's auto or industrial.
Speaker Change: and launching from that is where we create the finished goods.
Speaker Change: So, there's no risk to obsolescence, no risk to pricing, we will build to demand based on when we get it and based on the outlook, and that's why we don't add value to that inventory and hold it anywhere closer to finished good, just to keep that optionality.
Speaker Change: Thanks Hassan, very helpful.
Speaker Change: And one moment for our next question.
Speaker Change: And our next question will be coming from Blaine Curtis of Jeffries. Your line is open.
Blaine Curtis: Hey, thanks for taking my question. I just want to drill into the auto segment. I thought I heard you say that the growth sequentially in auto was driven by sodium carbide. I just want to kind of double click on the...
Speaker Change: What you're seeing by geography, I mean, there's been this expectation that China is going to gain share in EVs. Can you just talk about what geography drove that strength and to the extent that...
Speaker Change: Yeah, so the the strengths obviously for us an auto and in silicon carbide Was driven by China and the share gains we've had in China specifically
Speaker Change: When I talk about design wins or to share based on design wins, you know, I refer also to my comment, I think last quarter about the Beijing auto show and 800 volt kind of platforms that we're in, where.
Speaker Change: It's I would say it's it's further from design when it's actually in vehicles today So as these vehicles ramp, which they started now and they will ramp into 25 that should start seeing extended strength
Speaker Change: But we did see the strength in China, both from a total market and our penetration in that market with the designs that we already have. We expect that to continue in 2025.
Speaker Change: Thanks, and I'm just curious, you mentioned the data center, can you just wrap some maybe timing around that in terms of when you could see kind of first revenue and in terms of, you said you've been working on it for a long time here, you know, what's the right time frame to think about getting design wins for them?
Speaker Change: Yes, so look, we already have design wins. We already have revenue in that segment. Obviously, it's early time revenue, but there is revenue.
Speaker Change: The products that we have launched now, you expect revenue in 2025 as products get qualified on the customer's ramp.
Speaker Change: For example, we announced the T10 TrenchFed last quarter. We already have design wins on that being qualified at the hyperscalers.
Speaker Change: We expect revenue from these products that I talked about in 2025 but we already have product or revenue on existing products already this year.
Speaker Change: So, we're in the markets, we're working on new platforms, we're working on new designs, and with our new product introduction, that's really going to boost the portfolio that we are able to offer customers.
Speaker Change: Thanks for that.
Speaker Change: And one moment for our next question.
Speaker Change: Our next question will be coming from Quinn Bolton of Needham & Company. Your line is open.
Speaker Change: I just wanted to follow up on the AI data center that you just mentioned. I think you said you had WINS at three of the four hyperscalers for multi-phase controllers and individual voltage regs. I just want to, one, clarify,
Speaker Change: And two, if that's the case, is that more for CPU power, or does it also include GPU or...
Speaker Change: AI Accelerator, and then I got a follow-up.
Speaker Change: Yeah, we didn't, we're not specifying exactly which.
Speaker Change: product specifically. I rattled off the portfolio because when you go into an account and we target the power tree
Speaker Change: You need to be able to show coherent or cohesive power distribution from the beginning to the end. That's why we started with SIC, with the PSU all the way to the cores. That really is the general approach that we have, both for the NVIDIA and the ARM.
Speaker Change: And then for Thad, I think East Fishkill was expected to be about 100 basis point headwind to margins Q3, Q4, and then sort of taper off into next year. Just want to make sure that's still the right way to think about the East Fishkill overhang.
Speaker Change: Yeah, that's correct. It's still about 100 basis points dilutive to the corporate gross margin. We'll continue to be that way in Q4.
Speaker Change: When we look into 25, it'll be, you know, you can think about it as being fairly linear in terms of improvement, you know, and by the end of the year, most of that 100 basis points will be off the company at that point, as we exited that business for global foundries.
Speaker Change: Perfect, thank you.
Speaker Change: And one moment for our next question.
Speaker Change: Our next question will be coming from Josh Buckhalter of TD Cohen. Your line is open.
Josh Buckhalter: Hey guys, thanks for taking my question. Good morning.
Josh Buckhalter: It was helpful walking through some of the auto versus non-auto and then commentary on your lead customer. Can you give us any details on what each of those buckets are growing? Because I'm trying to reconcile the ongoing share gains in China with what looks like a stabilized market.
Josh Buckhalter: outlook at your lead customer with the low single-digit growth. Thank you.
Speaker Change: So, look, we're not breaking out growth by industrial and auto in general. We talked about the diversification as we get more and more of designs, both regional diversification and within a customer diversification as we get into more platforms within the customer to offset the lumpiness that you see model to model.
Speaker Change: North America is up for us and that's based on commentary I made before both on ramp and share gain.
Speaker Change: I will leave the guide and outlook to our customers' earnings and our customers' commentary. But North America for us was up, China was up.
Speaker Change: So you can see, everything was up as expected, just not at the level that we expected it for the second half of the year due to end demand, which is very well publicized by the OEMs themselves. But being up...
Speaker Change: regionally gives you a little indication of where the shares are as far as design wins and ramp and the penetration within these accounts.
Speaker Change: Got it. Thank you. And following up kind of on that, one of your large peers talked about their China auto business up 20% sequentially this quarter. I'm guessing you won't give us a metric there, but maybe you could talk about what you're seeing in that vertical specifically, because since the earnings, we've gotten a little bit of concern that there might be some pull-in or idiosyncrasies going on with that market. So I'd be curious to hear you expand on what you're seeing in the China auto market a bit.
Speaker Change: Thank you.
Speaker Change: Yeah, I think I know who you're referring to because I think there's only one that did earnings already.
Speaker Change: So we're not in the same buckets for us. Electrification, when I refer to electrification, is really the drivetrain, which is where silicon carbide plays.
Speaker Change: not necessarily in general. So it may be a mixed thing only, which is a discrepancy, but our China business did grow as well. We're not breaking out regional growth from the overall growth.
Speaker Change: But China did grow an automotive and it grows specifically with the strengthened EVs driven by silicon carbide
Speaker Change: Thanks everyone. Bye.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: And our next question will be coming from Christopher Rowland of Susquehanna. Your line is open.
Christopher Rowland: Hey, thanks for the question. I guess my first is, can you break down automotive geographically for us, just into some larger buckets between, you know,
Speaker Change: Europe, Japan, and China for us.
Speaker Change: So I'm trying to think.
Speaker Change: Well, China's strong. I think it's China's strong. Yeah, you know, if I just walk. No, no, no. I mean, just as a percent as a percent of revenue. Sorry. No, we're not breaking down markets by regional percentages.
Speaker Change: Aware!
Speaker Change: Because there's a lot of it, does it ship through or and leave the country? It gets too lumpy and too confusing. So we look at it as a market by region indication, whether it was it up or how it behaved, just to give you a strength of where the strength is coming from as we get through this L shape.
Speaker Change: If you can't provide that, that's okay. I guess for my second question, you know, guys like TI are going back to consumer customers.
Speaker Change: Yeah, I will eat rice, but are you a little more open?
Speaker Change: Yeah, I wouldn't, I wouldn't talk about, you know, open to consumer market or not, you know, our focus is value when we put the, you know, when we, I talk about the mass market and.
Speaker Change: As long as, you know, the margin is provided on the value that those products provide.
Speaker Change: But, I will be very, very clear on the call. Our strategy of chasing other markets at the expense of margin just to get top line or utilization is not and no longer part of our strategy. So we're not going to get into this trap.
Speaker Change: Let's go, you know, maybe squint a little bit on pricing to get what we need on utilization and revenue. We're actually focusing on value. We are not going to dilute our value and we will maintain the product value whether it's going through mass market or not.
Speaker Change: Thank you.
Speaker Change: Thank you, it was fun.
Speaker Change: And one moment for our next question.
Speaker Change: Our next question will be coming from Vijay Rakesh of Mizzouho. Your line is open.
Vijay Rakesh: Hi, thanks for letting me ask the question. Hassane and Thad, just a quick question on the inventory side, when you look at VISTI and OEM inventory, can you talk to where those levels should be existing, let's say December versus what normal levels are? And then I follow up.
Speaker Change: Yeah, hey, look, on the DISTI side, you know, I said it in my prepared remarks, we expect the weeks of inventory and DISTI to increase slightly, you know, 10 weeks plus or minus.
Speaker Change: You know, as we focus on that mass market, when you talk about in customers like that, that's really hard. It's hard for us to monitor. Right. You know, there's definitely inventory out there. We think the inventory digestion is ongoing.
Speaker Change: But, you know, a lot of that is going to depend on in-demand. If in-demand picks up, that inventory burns through quicker.
Speaker Change: Low, very low inventory. We're talking about a couple of weeks and then you have others that have
Speaker Change: So it's not an industry commentary where we can say it's, you know, inventory is everywhere. And that's more related to, if you look at the Tier 1 and you listen to their earnings, they're stating their inventory position and what they're trying to get it to.
Speaker Change: The OEMs have finished good inventory, that's also very well publicized. From our side, we're able to triangulate a lot of that, and obviously we're into the accounts with the OEMs directly, trying to get the end demand.
Speaker Change: So that's why it's I wouldn't say as a it's a industry wide It's a customer by customer. So it's hard to say, you know, how many weeks do we believe or how long does it take to drain?
Speaker Change: Sorry, and one last question, when you look at the, good to hear the 200 mm silicon carbide is ramping well, but as you, let's say, looking out, exiting 2025, let's say, what would be a mix of internal 200 mm silicon carbide?
Speaker Change: [inaudible]
Speaker Change: Well, we are actually driving to about 80-20 or 70-30. Even if we are able to do more internally, we are managing the mix because we would like to always have a external feed into our factories just to keep the lines and really the quality baseline fresh across all sources.
Speaker Change: So, we don't expect that outlook to change.
Speaker Change: It's a 17-tonne load, internal.
Speaker Change: Okay, thank you.
Speaker Change: And one moment for our next question.
Speaker Change: Thank you. Bye-bye.
Speaker Change: Our next question will be coming from Taurus Vanburg of Stiefel. Your line is open.
Taurus Vanburg: Yes, thank you. Hassan, I had a question on the share gain in China EV for 800 volt. I think last quarter, I think you said approaching 60%. I think now you said 50%. Is that just a technicality or did something change quarter over quarter?
Speaker Change #100: No, nothing changed. Nothing changed. It's the same design wins, same everything. As you ramp actual design, you're going to start getting that
Speaker Change #100: The uptake from it.
Speaker Change #101: Perfect, just wanted to clarify that. Second question is on the mass market and the staging of inventory.
Speaker Change #101: So, how far will you go?
Speaker Change #102: Is 10 weeks sort of the highest we should expect in the next few quarters, or would it go beyond that as you continue that staging?
Speaker Change #103: Yeah, look, I think our new target range as we think about kind of a normalized market is a 9 to 11 weeks, right? So that 10 weeks plus or minus is right in the sweet spot, but I don't think you're gonna see us go north of 11.
Speaker Change #104: Great, thank you, Thad.
Speaker Change #105: One moment for our next question.
Speaker Change #106: And our next question will be coming from Chris Castle of Wolf Research. Your line is open.
Chris Castle: Moving lower, but you know, I guess is there anything structural in that that we should be contemplating?
Chris Castle: Or is this just a function of where utilization is right now and the fact that you can grow revenue into the existing capacity? And perhaps with that, given where the utilization levels are right now, is there a particular...
Chris Castle: you know sort of revenue capacity that you could grow into without increasing the capex very much.
Speaker Change #108: Yeah, Chris, it's Thad. So, look, we've made big investments over the last several years and those investments went primarily to silicon carbide and EFK, right? So both of those investments are now behind us.
Speaker Change #108: and you know obviously it's 65% utilized. We have a lot of capacity so there isn't a need to bring capacity on other than for the strategic nature of silicon carbide. The rest of this will be primarily maintenance.
Speaker Change #108: And I wouldn't, yeah, and I wouldn't think about, you know, our capex level as hindering any growth, future growth at all. As I mentioned in my prior answer, silicon carbide.
Speaker Change #108: volume or capacity is going to grow just by very low capex conversion from six to eight will give you a boost in capacity.
Speaker Change #108: you know, our analog mixed signal new products will be landing in East Fishkill, which is again, a new fab that's going to support the growth. So we're very comfortable with where our footprint is and we'll continue to look at optimizing our brownfield investment.
Speaker Change #109: Got it, thank you.
Speaker Change #110: I guess as a follow-up, I'll ask you another question on silicon carbide.
Speaker Change #111: you know, interested in your view on, you know, where this market goes into next year. And I recognize that, you know, where volume goes is a tough question at this point. But, you know, the other part of silicon carbide is penetration, because silicon carbide, you know, the penetration rate is still relatively low. And you've got some visibility there on design wins. So I guess the first part of the question is, you know, where do you think you can grow this business next year? And then secondly, you know, how much of that growth, potential growth.
Speaker Change #111: you know comes from from penetration versus just EV units.
Speaker Change #112: Yeah, look, in general,
Speaker Change #113: I agree with the statement that our view or long-term view of silicon carbide or electrification market remains unchanged. You know, that was what we started the call with, with Ross's question of does that cause us to change any of our outlook? The answer is no.
Speaker Change #113: because of exactly the two points you brought up. EVs are going to continue to grow. You know, the rate of growth year on year will be lumpy, but it is still growth.
Speaker Change #113: And then you have, on top of that, you got silicon carbide penetration within the EVs. As you mentioned, today, we're only, if I take out the market, North American market leader, we're about 6% as an industry, silicon carbide penetrated into EVs.
Speaker Change #113: If you refer to my comments last quarter about the Beijing Auto Show,
Speaker Change #113: most if not all of the new model that were introduced specifically in China were 800 volt driven with silicon carbide. So that penetration of silicon carbide into EV will continue to grow into 2025.
Speaker Change #113: And then the market will define how much of the unit volume of EVs will grow into 25. For us, we expect silicon carbide to also grow in 2025 given those two trends that I mentioned.
Speaker Change #114: Got it. Thank you.
Speaker Change #115: And our next question will be coming from Jed Dorsheimer of William Blair. Your line is open.
Jed Dorsheimer: Hi, thanks for taking my question and putting me in. I guess first question, Hassan,
Jed Dorsheimer: I was wondering if you might be able to elaborate on the value proposition that your customers are asking you about in the power tree.
Jed Dorsheimer: Data Center specifically. Do you see it, how does that relate to the efficiency and the shift to modules in EVs and you know what gives you confidence that silicon carbide versus gallium nitride is going to be the the solution there? And then I have a follow-up.
Speaker Change #117: Okay there's just a couple of things that I will try to reiterate just to make sure I get the question and I give you the right answer. So from the AI in general, the power tree is efficiency.
Speaker Change #117: You know, you can have the most efficient conversion at the GPU, and then you can lose most of it from, call it the PSU, all the way in. So efficiency of the power tree is important.
Speaker Change #117: That's becoming more and more important, not to the module or the server maker, but more for the hyperscaler. One percent efficiency loss on a power tree, think about that loss on a rack, think about that utility bill that they would otherwise not be getting by getting the one percent efficiency.
Speaker Change #117: That's the benefit that we're seeing.
Speaker Change #117: Your next question is about silicon carbide versus GAN. Those are two different things. Silicon carbide, when we talk about silicon carbide and the product that we announced last quarter at 650 volts, that's more closer to the grid.
Speaker Change #117: in the power tree. If I think the power tree grid all the way to GPU, that's more in the PSU, high voltage PSU conversion. As you get closer, you get silicon and GaN. As you get closer, higher frequency, lower voltage, where you want the efficiency.
Speaker Change #117: That's where, for example, you have silicon products that are as efficient, which are T10 trench fed, and that's what's gaining wins.
Speaker Change #117: So it's not about silicon carbide versus GaN versus silicon. It's really a different branches in that power tree is where the most optimal technology needs to fit.
Speaker Change #117: and our ability to provide all of these, give us that portfolio and that competitive advantage of the customer. So that's how we look at it. And by the way, to your comment on electrification or EVs, same concept in EVs.
Speaker Change #118: Thad Trent, Parag Agarwal
Speaker Change #119: Got it. That's helpful. I'll jump back in queue. Thank you.
Speaker Change #120: One moment for our next question.
Speaker Change #121: And our next question will be coming from Harsh Kumar of Piper Sandler. Your line is open.
Harsh Kumar: Yeah, hey guys, thanks for squeezing me in. Fellows, good job controlling what you can control in this tough environment.
Harsh Kumar: Thad, I have one for you. Your guiding revenue is sort of flattish. Should I assume the mix between the two key end markets, automotive and industrial, to be kind of the same flattish, just basically what it was last quarter? Or is there some puts and takes that I can think about?
Speaker Change #123: Now, we think automotive is going to be up, you know, low to mid-single digits, just with the silicon carbide continuing to ramp.
Speaker Change #124: Industrial is kind of flattish, maybe slightly down. The other bucket will likely be down, but we think auto will outgrow the overall total.
Speaker Change #125: Great, thank you for that color. And then maybe one for Hassan. Hassan, when you talk to, I'm curious, want to get some visibility on what kind of conversations you have with your customers.
Speaker Change #126: It seems like there's excess inventory, seems like there's lackluster end demand, seems like it's both.
Speaker Change #126: So when you talk to your customers, when do they envision a turn to happen or they simply don't know? And is interest rate a factor here at all as it starts to kick in into the economy? And then my last part of the question separate was, one of your competitors got
Speaker Change #126: Basically a lot of ChIPAC money, much more than I would have thought. I was curious of where you guys stand in that spectrum.
Speaker Change #126: Sure.
Speaker Change #127: So, first, on the dialogue with the customers.
Speaker Change #128: Look, the conversation with the customer, nobody's got a better crystal ball than the other. So, the conversation with customers is really around how are we both going to get ready for a recovery in demand.
Speaker Change #128: you know I was in Europe for example last week where the dialogue was I would say 50% about that the other 50% is new designs.
Speaker Change #128: So the design in activity at the OEMs
Speaker Change #128: driven by the OEMs into the Tier 1 also has not slowed down which tells you that nobody's taking this as a change in a long-term strategy, you know electrification and so on.
Speaker Change #128: So, everybody remains committed to their plans. Everybody acknowledges that there's lumpiness in demand. It could be helped by interest rates, absolutely, because it's consumer confidence and consumer spend.
Speaker Change #128: but when is it going to play its way through the economy? That's the knee in the curve that we're awaiting. But what we can do now is making sure we're ready. You know, we talked about strategic inventory bills on the silicon carbides for us to react quicker.
Speaker Change #128: These are things we can do, along with our customers, to be ready.
Speaker Change #128: As far as
Speaker Change #128: you know, CHIPS money. I won't comment on...
Speaker Change #128: where we are specifically, we've always said we're going to do what we need to do for us as a company and the support from the CHIPS Act is very welcome to offset some of the investment we have to make in North America.
Speaker Change #128: We're not going after it just to build new fabs and build new capacity that we otherwise will not need Because you may get funding, but you'll pay for it on the on the back end once you have the building running
Speaker Change #128: We're not going to be going down that path. You heard that about our Investments and our CapEx and our new model. We're going to work within these parameters
Speaker Change #128: As far as what I would call the preliminary terms that one of our competitors got, you know, I wish him luck. I think the struggles were not related to funding. The struggles were related to operational, but I wish him luck.
Speaker Change #129: Thanks Hassan, thanks Thad, thanks Parag.
Speaker Change #130: And this concludes our Q&A session. I would now like to turn the call back over to Hassane El Khoury, President and CEO, for closing remarks.
Speaker Change #131: Thank you for joining us on the call this morning. And I want to thank all our employees for pushing through this prolonged period of uncertainty. We'll continue to navigate the market environment and deliver value to our stakeholders by focusing on our execution and operational excellence. Thank you.
Speaker Change #132: And this concludes today's conference call. Thank you for participating. You may now disconnect.