Q4 2024 ON Semiconductor Corp Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to the ON SEMI fourth quarter 2024 earnings conference call. At this time all participants are in a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message device and your hand is raised.
Speaker Change: To withdraw your question, please press star 1 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today. Parag Agarwal, Vice President of Corporate Development and Investor Relations. Please go ahead.
Parag Agarwal: Thank you, Kevin. Good morning and thank you for joining our semi-sports quarter and full year 2024 results conference call.
Khoury, our President and CEO, and Thad Trent, our CFO.
Parag Agarwal: This call is being webcast on the Investor Relations section of our website at www.armswimming.com.
Parag Agarwal: A replay of this webcast, along with our fourth quarter and full year 2024 earnings release, will be available on our website approximately one hour following this conference call.
Parag Agarwal: and the recorded website will be available for approximately 30 days following this conference call.
Parag Agarwal: Additional information is posted on the investor relations section of our website.
Parag Agarwal: Our earnings release and this presentation includes certain non-GAAP financial measures.
Parag Agarwal: Pre-consideration of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain limitations when using non-GAAP financial measures are included in our earnings release which is posted separately on our website in the investor relations section.
Parag Agarwal: During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company.
Parag Agarwal: We wish to caution that such statements are subject to risk and uncertainties that could cause adverse events or results to differ materially from projections.
Important factors that can affect our business.
Parag Agarwal: including factors that could cause actual results to differ materially from our forward-looking statements are described in our most recent Form 10-K.
Parag Agarwal: and other firings with the Securities and Exchange Commission and in our earnings release for the fourth quarter and full year 2024.
Our estimates or other forward-looking statements might change.
Parag Agarwal: and the company assumes no obligation to update forward-looking statements to reflect actual results, change the assumptions, or other events that may occur, except as required by law. Now, let me turn it over to Hassane.
Hassane: Thank you, Parag. Good morning, everyone, and thank you for joining us on the call.
Hassane: 2024 marked the fourth year of our transformation journey. Transformation that began by focusing our efforts where we add value. Intelligent power and sensing technologies.
Hassane: We've invested in differentiated products to win with disruptive innovation and the high-growth megatrends of automotive, industrial, and AI data centers.
Hassane: We've streamlined manufacturing through our FabRite strategy, and we've improved operational efficiencies in doing so.
Hassane: Market conditions aside, and I'll get to those, I am proud of the hard work our worldwide teams continue to put in, and I want to thank everyone for their tenacity amid what continues to be a very difficult environment.
Hassane: We remain committed to our winning formula, and we have demonstrated the resilience in our business model, delivering non-GAAP gross margin of 45.5% against revenue of $7.1 billion for the full year.
Hassane: As for the market environment, demand declined late in the quarter and continued into January, resulting in fourth quarter revenue of $1.72 billion, non-GAAP gross margin of 45.3 percent, and non-GAAP earnings per share of 95 cents.
Hassane: Regional revenues declined sequentially except North America, which remains flat, with Japan seeing the sharpest decline.
Quarter-on-quarter declines were driven primarily by our non-core market segments.
Thad Trent, Hassane El
Hassane: Amid a backdrop of end market softness and geopolitical uncertainty, inventory digestion persists across our key end markets.
Hassane: Our stance has not changed. We are prioritizing value, and we will not play in highly volatile, price-sensitive markets.
Hassane: We are maintaining the integrity of our value proposition and positioning ourselves for profitable growth in the future.
Hassane: Our fourth quarter automotive revenue increased 8% sequentially driven by China followed by North America.
Results were driven by share gains and new customer ramps.
Hassane: China grew 18% quarter over quarter, and while Q4 was up, an early Chinese New Year and extended shutdown period has already impacted January EV deliveries from the top China-based automakers.
Hassane: Demand from all other regions weakened towards the end of the fourth quarter, which continued into Q1.
Hassane: In the U.S., Tier 1s have been impacted by lower global auto demand than expected in the fourth quarter, along with slower EV ramp than anticipated.
Hassane: Entering Q1, we expect persisting volatility due to the geopolitical uncertainty across all geographies as our customers assess their manufacturing footprints and the impact of tariffs.
Hassane: We are monitoring the demand signals of EV adoption given the uncertainty around EV tax credits and slowing infrastructure deployment. In Europe, EV demand weakened in Q4, with new vehicle registrations dropping 10% month over month in December.
Hassane: Our industrial revenue decreased 5% sequentially with weakness in the traditional parts of the business.
Hassane: The PMI across all major regions remained weak, and the slowdown in manufacturing activity is further compounded by ongoing inventory digestion, and we expect the weakness to persist into 2025.
Thank you.
Hassane: Smaller but growing parts of the business that we don't break out are AI Data Center and Aerospace and Defense, where revenue grew more than 40% and 50% respectively in 2024 over 2023.
Hassane: In silicon carbide, our fourth quarter revenue increased sequentially, resulting in a 22% increase for the second half over the first half of 2024. For the full year, revenue declined slightly from 2023, as programs did not ramp at the expected levels.
Hassane: We remain focused on executing our strategy. We have delivered on our 200 millimeter technology development and sampled customers. We are balancing our internal versus external substrate supply and we are winning with the market movers by pushing the boundaries of innovation.
Hassane: The performance of our silicon carbide enables us to deliver an optimized system performance while lowering the total cost of ownership to our customers without eroding the value of our solutions.
Hassane: In China, we continue to win based on performance and we expect to gain share in the silicon carbide TAM as the transition to 800 volt batteries continues.
Hassane: Furthering our strategy of delivering the complete power tree for automotive, industrial, and AI data center, we closed the acquisition of Corvo silicon carbide junction field effect transistor business.
Hassane: The SICK JFET portfolio complements our elite SICK power solutions and is the most competitive technology to get the energy efficiency and power density in power supply units for AI data centers.
Hassane: It is a high voltage play in AI data centers, and as power levels in these systems are nearly doubling, AC to DC conversion for UPS and PSUs is transitioning from silicon solutions to silicon carbide.
Hassane: We expect JFET to continue to replace the incumbent superjunction technologies and PSUs as the need for smaller footprint, better performance, and lower costs continues to increase.
Hassane: In terms of silicon carbide, revenue growth, and AI, design wins for the hyperscaler started to ramp in the fourth quarter and we expect our SIC JFET and SIC MOSFET revenue to continue to grow in 2025.
Hassane: The acquisition of this highly capable team and technology also accelerates our readiness for emerging markets such as EV battery disconnects and solid state circuit breakers.
Hassane: We expect this portfolio to unlock a $1.3 billion TAM opportunity with a 30% revenue CAGR through 2030.
Hassane: Despite the current environment, we remain committed to our long-term strategic goals and we continue to invest in disruptive innovation to drive profitable growth and to emerge stronger from this downturn.
Hassane: In November, we introduced the most advanced analog and mixed signal platform for intelligent power and sensing solutions.
Hassane: Our new TREO platform, built on leading-edge BCD 65 nanometer technology for high performance and advanced features, supports the industry's widest voltage range of 1 to 90 volts for unmatched integration.
Hassane: The Trail platform embodies our strategy of prioritizing high-value products and will accelerate our portfolio proliferation to unlock a $36 billion TAM opportunity at up to 70% gross margins.
Hassane: The modular architecture of the platform is enabling us to sample products faster.
Hassane: This year, we will start to reap the benefits of the investments we've already made in the technology and capacity at our East Fishkill Fab as we ramp up revenue and double the number of products available on the market.
Customer reaction has been very positive.
Hassane: They are taking advantage of the level of integration and accelerated time-to-market for applications such as Ethernet for automotive zonal architecture, ultrasonic sensing for ADAS Park Assist, and high-efficiency power management for AI data centers, and they are actively designing trail-based devices into their next-generation platforms.
Hassane: As we look ahead to 2025, visibility is very limited and customers are taking a wait-and-see approach in a backdrop of geopolitical uncertainty.
We will continue to focus on what we can control.
Hassane: We are taking this opportunity to review our portfolio and further rationalize based on the value we bring. We will optimize our manufacturing footprint to improve our cost structure, and we will control spending by focusing on efficiency through automation while we continue to invest in R&D to support our long-term growth.
Hassane: Our actions will position us to better benefit from a market recovery while supporting our long-term strategy.
Hassane: Let me now turn it over to Thad to give you more detail on our results and approach going into 2025.
Speaker Change: As Hassane mentioned, despite the downturn, our 2024 results demonstrate our team's relentless pursuit of operational excellence to drive cost efficiencies in a weak market environment.
Speaker Change: Their efforts allow us to maintain gross margin at 45.5% against revenue of $7.1 billion and to generate $1.2 billion of free cash flow, a 3x increase year over year.
Speaker Change: Our proactive approach to prudent cost management and capacity planning has proven to be the right strategy to deliver better results than the company has ever achieved in similar market conditions.
Speaker Change: Looking to 2025 and beyond, we believe rightsizing the organization will benefit the company in the long term.
Speaker Change: These structural changes should position us to expand gross and operating margins and generate strong cash flow in the future.
Speaker Change: We are moving aggressively and with urgency on the following actions.
Speaker Change: We plan to further rationalize our manufacturing footprint and reduce excess capacity through our FabRite strategy.
Speaker Change: These actions will reduce our underutilization absorption as we lower our fixed cost structure.
Speaker Change: We expect to see the results of these actions to positively impact the income statement in late 2025 and continue driving margin expansion towards our long-term target by providing greater leverage in our business model as the market recovers.
Speaker Change: We will make structural changes across the company to reduce our operating expenses.
Speaker Change: We are exploring a number of options, including rationalization of our product portfolio, headcount reductions, and potential site closures.
Speaker Change: We expect to see a meaningful impact of these actions as early as the second quarter.
Speaker Change: We will continue R&D investments in differentiated, high-margin products to support our long-term growth.
Speaker Change: And, we will focus on free cash flow generation in 2025 as we manage working capital tightly and reduce capital spending to our revised intensity target of mid-single-digit percentage range in 2025.
Speaker Change: This includes $200 million of share repurchases in the fourth quarter, and there is approximately $1.7 billion remaining on our repurchase authorization.
Speaker Change: Turning to revenue for the fourth quarter, a slowdown in demand across all in-markets resulted in revenue of $1.72 billion.
Speaker Change: Automotive and industrial accounted for 84% of revenue in the fourth quarter.
Speaker Change: Automotive revenue was $1.03 billion, which increased 8% sequentially, driven by programs that ramped in silicon carbide.
Speaker Change: Revenue for industrial was 417 million dollars down 5% sequentially. Inventory digestion persists and we saw further degradation in the traditional parts of industrial offset by pockets of growth in medical.
Speaker Change: Outside of auto and industrial, our other business declined 24% quarter over quarter and more than was seasonally expected.
Speaker Change: We have seen early signs of pricing pressures in pockets of these non-core end markets, which we will not pursue and exit over time if the volatility returns to historical levels.
Speaker Change: Looking at the fourth quarter split by the business units, revenue for the Power Solutions Group, or PSG, was $809 million, a decrease of 2% quarter-over-quarter and 16% year-over-year.
Speaker Change: Revenue for the Intelligent Sensing Group, or ISG, was $303 million and 9% increase quarter-over-quarter. ISG revenue decreased 2% over the same quarter last year.
Speaker Change: Turning to gross margin in the fourth quarter, gap gross margin was 45.2% and non-gap gross margin was 45.3%, down 20 basis points sequentially and 140 basis points from the quarter a year ago.
Speaker Change: Manufacturing utilization decreased to 59% in Q4 as we aggressively took action late in the quarter to match our demand visibility.
Speaker Change: Now let me give you some additional numbers for your models.
Speaker Change: Non-GAAP operating expenses were $321 million compared to $306 million in the quarter a year ago. Non-GAAP operating expenses increased sequentially due to the timing of R&D project expenses.
Speaker Change: Gap operating margin for the quarter was 23.7% and non-gap operating margin was 26.7%.
Speaker Change: Our GAAP tax rate was 14.2% and our non-GAAP tax rate was 16%.
Speaker Change: Diluted GAAP earnings per share for the fourth quarter was $0.88, as compared to $1.28 in the quarter a year ago.
Speaker Change: Non-GAAP earnings per share was $0.95 as compared to $1.25 in Q4 of 2023.
Speaker Change: Gap diluted share count was 430 million shares and our non-gap diluted share count was 426 million shares.
Speaker Change: Turning to the balance sheet, cash in short-term investments was $3 billion with total liquidity of $4.1 billion, including $1.1 billion undrawn on a revolver.
Speaker Change: Cash from operations was $580 million and free cash flow increased 39% sequentially to $422 million, representing 25% of revenue.
Speaker Change: For the year, we generated almost $1.2 billion of free cash flow.
Speaker Change: Inventory was flat quarter over quarter on a dollar basis and increased by three days to 216 days. This includes 100 days of bridge inventory to support fab transitions and silicon carbide.
Speaker Change: We are nearing the completion of these strategic builds and expect this inventory to peak in the first half of 2025 as we ship and convert the inventory to cash.
Speaker Change: Excluding the strategic builds, our base inventory is at 116 days which continues to be within our target range of 100 to 120 days.
Speaker Change: Distribution inventory declined $55 million with weeks of inventory remaining relatively flat at 9.6 versus 9.7 weeks in Q3.
Speaker Change: Our plan to change the mix in the channel to support the mass market has resulted in an 18% increase in customer count year-over-year. We expect distribution weeks of inventory to be plus or minus 10 weeks going forward.
Speaker Change: Looking forward, let me provide you the key elements of our non-GAAP guidance for the first quarter. As a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance.
Speaker Change: Given our visibility, we anticipate Q1 revenue will be in the range of $1.35 billion to $1.45 billion.
Speaker Change: We expect non-GAAP gross margin to be between 39% and 41%, with utilization declining to mid-50% in Q1. This includes share-based compensation of $7 million.
Speaker Change: At the midpoint of our guidance, approximately half of the quarter-on-quarter change in gross margin is attributable to the drop in revenue as the underabsorption is calculated on a lower revenue number.
Speaker Change: An additional 100 basis points is due to unfavorable product mix.
Speaker Change: and the remainder is driven by lower utilization which now drives a 20 to 25 basis points change in gross margins for every 100 basis points of utilization at these lower utilization levels.
Speaker Change: This change is due to the higher fixed cost as a portion of total factory cost.
Speaker Change: As the market recovers and utilization improves, we will see significant leverage in our gross margin as these costs dissipate and we recognize the benefit of our Fabrite cost reductions.
Speaker Change: Moving on to non-GAAP operating expenses, we expect OpEx to be in the range of $313 million to $328 million, including share-based compensation of $31 million.
Speaker Change: We anticipate our non-GAAP other income to be a net benefit of $14 million with our interest income exceeding interest expense.
Speaker Change: We expect our non-GAAP tax rate to be approximately 16 percent, and our non-GAAP diluted share count is expected to be approximately 425 million shares.
Speaker Change: This results in non-GAAP earnings per share to be in the range of 45 cents to 55 cents.
Speaker Change: We expect capital expenditures in the range of $110 to $150 million.
Speaker Change: We believe electrification, AI data center, and renewable energy are still the major growth drivers for our industry over the next decade. And we remain confident our technology and innovations in these markets will allow us to capitalize on those trends.
Kevin: With that, I'll turn the call back over to Kevin to open it up for questions.
Speaker Change: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1 1 on your telephone. If your question has been answered and you wish to unmute yourself from the queue, please press star 1 1 again. We'll pause for a moment while we compile our Q&A roster.
Speaker Change: Our first question comes from Ross Seymour with Deutsche Bank. Your line is open.
Ross Seymour: Hi guys, thanks for asking question. First question, I wanted to get into the structural versus cyclical side. You guys have been conservative for quite some time on a cyclical basis, probably one of the first ones.
Ross Seymour: But yet the magnitude of this drop is very, very significant. Hassane, I know you talked about late in the quarter, things kind of fell apart from a demand perspective. But how much of this do you believe to be on specific versus the end market? And just from a revenue basis.
Ross Seymour: Are you at all concerned that the structural end market portfolio, or product portfolio, needs larger adjustment and isn't going to be as resilient as you hoped?
No, look...
Ross Seymour: I think that the big change in the precipice, the one thing I can say that is unspecific is the non-core business that has seen the largest decline and we've been very consistent not to play in that volatility. If you recall when we started the transformation
We had a big portion.
Ross Seymour: Call it $800-$900 million of non-core business where we said we would exit. We only exited about half of that.
Ross Seymour: And we're seeing, with that extended downturn, we're seeing more and more volatility in that pricing, but we remain consistent with our strategy that we're not going to play in this highly volatile.
Ross Seymour: And we're going to maintain the value of our core products, which is where we're investing. You know, think Treo, think silicon carbide, think into medical and so on.
Ross Seymour: All of these are where the growth is going to come from, and in the short term, as we see the volatility, we're not going to participate, yet we will choose to rationalize our portfolio further and match our capacity accordingly.
Ross Seymour: And, Ross, I would add just the size of that business that Hassane is talking about, the non-core.
Ross Seymour: It's, you know, roughly $350 to $400 million that, you know, is more volatile that as this downturn extends, that is, you know, we will exit over time, just to put a sizing to it.
Speaker Change: Thanks for that, Thad. And then, I guess, along the lines of the sizing side of things, you talked about some of the structural actions you are going to take on the cost front as soon as 2Q and then some of the benefits potentially on the COG side coming into the back half. Any sort of color as far as putting magnitudes around those?
Speaker Change: No, not at this point. We're still working on the plans. We'll give updates throughout the quarter as we solidify those plans. So expect some updates as we go.
Thank you. Thank you. One moment for our 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. Just first kind of a few clarifications. So Q1, what are you expecting for the sequential segment trends in automotive, industrial and other?
Vivek Arya: and I think you mentioned something unfavorable in the mix. And then any early look at Q2 seasonality because, Hassane, what everyone is obviously trying to guess is what is the path of recovery for on from here?
Hassane: Yeah, so by end market, Vivek, automotive is gonna be down the most. We think that's gonna be probably 25% or more down sequentially. When you look at industrial and other, we think it's going to be down mid to high single digit sequentially.
Hassane: And look, it's too, you know, on the visibility side, you know, we're sticking with visibility of about a quarter. Of course, we have we have some looks into Q2, but it's too early to talk about seasonality in Q2, given really the volatility and backdrop of between geopolitical and tariffs.
Hassane: as early as over the weekend. So we're not going to be talking about Q2 yet as we get more and more visibility, we'll update then.
But as far as recovery, look, I think
Hassane: I know what others have said. It's a lot of the, everybody's, you know, talking about, oh, the second half would be better than the first half and so on. It's the same string that everybody's pulling that they did in 2024.
Hassane: I don't subscribe to that. I subscribe to the data I see, and we're going to manage the company to the data we see.
because getting it at this point
will just be upside for us as the market recovers.
Hassane: and I'd rather have that and be right in that aspect versus hope for a recovery run the company and if the recovery doesn't come Now you have a headwind I'd rather all of that work that we do now like that set not standing still to be tailwind for us Whether there's a recovery or not
Speaker Change: And for my follow-up, Hassane, so if I look at Q1 automotive, I think you mentioned down 25%, so let's say 70-ish million or so, it is sort of reset back to mid-22 levels.
Speaker Change: What is the right baseline that we should have when we start to think about automotive business for long periods of time? Because we have seen industrial businesses get reset back to much lower levels, but automotive is still above.
Speaker Change: the 2019 level. It's closer to 22 level. So how do you think about
Speaker Change: what is that right baseline? When was automotive at the right baseline level for us to project it? What have been the effects of LTSA, spicing, content, EV, silicon carbide, et cetera, that'll help us project what your automotive business can be over the next several years as you start to normalize.
Thank you.
Speaker Change: Yeah, look, I think from looking for- It's hard to talk about a baseline given all the changes that we've done to our portfolio, and you mentioned some of them, you know, the growth in silicon carbide, which is not just a growth in silicon carbide, but a mix shift, even on the ASP side. You know, a silicon carbide module is a much higher dollar content than some, for example, the discreets we used to ship more of prior.
Speaker Change: So from a unit, you can expect, you know, unit decline, but revenue went up. So it's hard to get a baseline given how drastic our portfolio has shifted over the last even two to three years.
Speaker Change: But moving forward, you know, our long-term view, which remains consistent, you know, outside of the market environment today, our long-term view remains consistent, which is
Saar, plus, call it, uh, uh, uh, high.
Speaker Change: to low teens, or sorry, from high single digit to low teens, that's the range over SAR.
Speaker Change: both a makeshift into higher-value products, especially as, for example, we start introducing Treo, which comes with a margin expansion as well towards our long-term target.
Speaker Change: So, moving forward, that's how you can think about it, but it's hard to go backwards and talk about a baseline just because of the shift that we've done over the last few years.
Thank you. One moment for our next question.
Thank you.
Speaker Change: Our next question comes from Toshihari with Goldman Sachs, your line is open.
Thank you. Bye-bye.
Speaker Change: Hi, good morning. Thank you so much for taking the question. Hassane, I wanted to go back to the automotive outlook for Q1, you know, down, call it 25% sequentially. You know, this outlook is much worse than many of your peers. I'm just curious what's driving the delta there. Is it pricing? Is there a non-core component within automotive? Any additional context or color there would be really helpful. Thank you.
Speaker Change: Yeah, so of course there's a non-core business component to it, as I mentioned. So that's built into the horse quarter, but some of it is the silicon carbide. You know, we've always said silicon carbide quarter-on-quarter is lumpy. We've had a great second half.
However, it's all driven by China.
Speaker Change: China today is looking at the softer Q1. I think that's temporary. You know as it digests the inventory that they've built. It's not our inventory, but I'm talking about the vehicle inventory.
Speaker Change: We're monitoring that. You have an early Chinese New Year. Some of the Chinese customers have done an extended shutdown in order to absorb that inventory. So, at net-net, I don't worry about that quarter-on-quarter lumpiness as I look at it over a multi-quarter period.
Speaker Change: That's helpful, thank you. And then maybe one for Thad, you talked about rationalizing your portfolio, you talked about reviewing your manufacturing footprint. As you draw up your forward strategy and your plans, is the aspiration to kind of hold onto the 2027 model that you guys shared with us a couple of years ago, i.e. gross margins of 53%, operating
Speaker Change: Thank you. No, look, we still remain committed to that 53% target. If you look at the gross margin, in the short term, it's all impacted by utilization, right? I talked about the moving pieces, but utilization is the largest headwind that we have right now.
Speaker Change: Assuming the market recovers and you know we we continue to execute on our fab right, we will right size our manufacturing to fit the size of the company here.
Speaker Change: and we don't need that top-line revenue that was in that original target, but we do remain committed to that 53% gross margin target.
Speaker Change: If you look at the gross margin actions that we're taking now...
Speaker Change: It's primarily a lot of non-cash actions, if you think about it, and it'll generate strong free cash flows as we think about this year and in 26, and then obviously as we go into 27 and hit that target.
Speaker Change: in 2025 for the year. We achieved it in Q4 of 24 with a 25% free cash flow margin and we believe we'll continue to generate strong free cash flow going forward.
Thank you so much. One moment for our next question.
Speaker Change: Our next question comes from Christopher Dainley with Citi. Your line is open.
Christopher Dainley: Hey, thanks guys. I guess for the rest of the year, how would you expect the auto versus the industrial growth to trend? Do you expect auto to recover after Q1 or no visibility at all?
Speaker Change: It's too early to talk about the rest of the year, to be honest with you.
Speaker Change: We know what designs we have. We know what designs we're ramping. At this point, the shares have been gained. The designs have been qualified. It's purely an on-market demand right now.
Speaker Change: Yeah, and we do believe that we're still under shipping natural demand. So at some point you got to come back to that that level It's just a matter of when
Speaker Change: That's fair. And then a question on silicon carbide. With this decline, are you guys reassessing your long-term targets in silicon carbide as far as growth or margin scale?
Speaker Change: No, not on the margin, because you can think about it, it's a demand. So as far as growth is concerned, you know, outside of the short-term lumpiness and volatility and really the EV.
Speaker Change: Our long-term growth, we aim to be the leaders in the market from a market share perspective and we aim to run the highest profitability.
Speaker Change: Silicon Carbide business we have given the innovations that we believe we bring to the customer. So that remains unchanged. There will be some strategic reviews of the capacity.
Speaker Change: but overall we're focused on on that market and that will remain a tailwind for us both on growth and margin.
Thanks guys. One moment for our next question.
Speaker Change: Our next question comes from Blaine Curtis with Jeffries. Your line is open.
Speaker Change: I wanted to go back to the non-strategic business. You said 350 or 400. Just how much of that, in terms of the guidance for March, are you planning on some of that delta coming out in March, or is that something that would be on top of what you're seeing in March?
Speaker Change: and we'll come out further in the year if you make those decisions.
Thank you for your attention.
Speaker Change: We think that if we do lose that business because of pricing, it'll happen over a multi-quarter period. So, it's not all baked into Q1, it's further out into the year. And like I said, that will really be market dependent at that point. We'll keep that business if it's good margin, like it has been historically.
Speaker Change: If the pricing continues to drop, we'll just let it wither away over time.
Speaker Change: gotcha and then I want to ask the auto demand by geography you would you actually you know we're up in December a lot of people saw China's strength I think you call that out I'm just kind of curious if you can just talk about March demand by geography and auto
Speaker Change: Yeah, I think in general, we expect it to be down. I don't think we can call out, you know, relatively speaking, there are some regions that are better than others. But the growth that we've had was China, as I spoke about in my prepared remarks.
Speaker Change: and getting into Q1, you know, I highlighted the early Chinese year and they said to shut down.
Speaker Change: inventory, sell through, they welcome replenished, and we will see the orders recover. So that is the uncertainty because it is purely a consumer confidence endgame. As we get better visibility after the Chinese New Year, we will be able to get more clarity on how the rest of the year will be.
Thanks. One moment for our next question.
Speaker Change: Our next question comes from Joshua Buckhalter with TD Cowell and your line is open.
Joshua Buckhalter: Hey guys, thanks for taking my question. I also wanted to ask about the first quarter gross margin.
Speaker Change: So you walk through the 100 basis points of unfavorable mix, and then the new rule of thumb, you know, adding probably 100, 150 basis points, headwind as well.
Speaker Change: Can you sort of, I guess, provide more details on the remaining part of the sequential decline? And also, any more details you can give on what specifically is driving the unfavorable mix, given, you know, it sounds like you're walking away from business as is? Thank you.
Speaker Change: Yeah, so starting with the gross margin, if you do the walk from Q4 to the midpoint of our guidance in Q1, and I said this in our prepared statement here.
Speaker Change: The the half of it, roughly half of that decline is a calculation change in the under absorption. So if you think about the under absorption on a lower revenue number, that's driving half of that margin delta right there.
Speaker Change: There's a hundred basis points from the unfavorable product mix and then there's you know, you do the math it's roughly about a hundred and fifty basis points from the The underutilization as we drop utilization down further
Speaker Change: The mix is just purely a product mix, you know, if you think about the long tail of customers that we talk about in some of these businesses, you know, that's what is remaining soft. Some of this industrial is soft, so it's purely just a product mix unfavorability kind of in the short term here.
Speaker Change: We believe that over the long term that will come back as well.
Speaker Change: So if you think about, you know, whenever there's a recovery and revenue comes back, you will get that half of that delta just with a revenue increase because it's a pure calculation.
Speaker Change: Does that make sense, Josh? Yeah, thank you, Thad. And then for my follow-up...
Speaker Change: you mentioned sort of inventory levels coming down at your auto tier one customers, any metrics you can give us on on how much inventory you expect to be able to strip out downstream at your tier ones and
wear levels, I guess.
Speaker Change: are now and where you expect them to be exiting the first quarter. Thank you.
Speaker Change: Yeah, look, it's not really an industry response because every Tier 1, depending on their financial and the strength of their balance sheet, are taking a different approach to inventory.
Speaker Change: It's hard to get 100% visibility there. I mean, we work with customers. As we see orders, our priority is depleting. So we're not pushing inventory out. That's why Thad mentioned, we believe we are well under shipping demand. At some point that will recover.
Speaker Change: However, the inventory levels at our customer is really directly correlated to what the demand is. And as demand deteriorated, you know, inventory looks elevated and they will keep taking action. So it's kind of a moving target.
Speaker Change: But it is not industry specific. You know, we have some tier ones we work with that have already achieved it. So we're already shipping through demand. But in general, there's still a lot of inventory digestion across the industry.
Thank you. One moment for our next question.
Speaker Change: Our next question comes from Vijay Rakesh with Mizzou Hull. Your line is open.
Thank you. Thank you. Thank you.
Speaker Change: Well, look, utilization is all going to be demand-driven, right? We said that in Q1, our utilization will drop to the mid-50% range from 59% here in Q4, so we've already taken that action.
Speaker Change: for what we can see right now. We'll kind of be running in that range plus or minus until we see demand recovery. Once we see the demand recovering, utilization will go up and then there's, you know, the the natural latency until you see gross margin improvement. That'll happen when we see the market recover.
Speaker Change: Got it and in terms of the silicon carbide outlook, I think you said it might be up year-on-year, I just wondering if any color around that and the backlog how that's trending there as well.
Thanks. Bye-bye.
Speaker Change: The only comment I made is we're designed in. We gained the share. We saw that in the strength getting into the second half of 24. At this moment, 2025 is purely a demand. We're gaining share across all major customers.
Speaker Change: But at this point in time, it is what they will end up achieving from, call it vehicle, EV vehicle sales, we will ramp accordingly. But we're in a very good position with the customers. It's purely an end-demand commentary.
One moment for our next question.
Speaker Change: Our next question comes from Christopher Rowland with Susquehanna. Your line is open.
Christopher Rowland: Hey, thanks for the question guys. Some others look like they're starting to see stabilization.
Christopher Rowland: and so I'm wondering about the Delta there. Could this have been related to your emphasis on LTSAs?
Christopher Rowland: So, do you think part of this kind of delayed response is around LTSAs? And then secondly, should we expect them to be renegotiated moving forward here?
Christopher Rowland: Yeah, we don't believe so because our stance has been very consistent across even the last couple of years that we've been negotiating LTSAs. We've been negotiating LTSAs to match demand as closely as the visibility of the time. Some LTSAs have been negotiated multiple times.
Christopher Rowland: It's not something new that we're doing in Q1 of 25 as a response. That's been a consistent and continuous effort that we have with the customer on really landing onto what I call the win-win.
So I don't believe that those two are related.
Christopher Rowland: I don't think the LTSA call it amendment or negotiation has accelerated. We've been consistent throughout 2024 as we are with the customers trying to land to what the real
the main environment is.
Christopher Rowland: because what we did, and again I've been very consistent with that, we're not going to overship demand just to adhere to the LTSAs.
Speaker Change: So your comment, you know, are customers abiding by the LTSAs?
Speaker Change: They are, but they're a change in the LTSAs over the last few quarters, call it, just to be able to land where they believe and we believe a healthy inventory digestion happens in order for us to get back to what the natural demand is.
Speaker Change: That's been our approach for the last few years. That remains our approach even into 2025.
Speaker Change: Excellent and and there was not a lot of discussion around image sensor.
Speaker Change: I'm just wondering how much of that auto weakness is related to image sensor. Is there anything to note in terms of pricing or competition or internalization in China? How would you classify image sensor overall?
Speaker Change: I think image sensor has been, call it more stable. I don't think, I wouldn't call anything up or down.
Speaker Change: Our approach for image sensors has been the same for the last few years.
Speaker Change: We've been, call it trimming our portfolio. We're not aiming to be number one market share with atrocious profits. Well, we've used shortages in the last few years because you remember all that business is outsourced.
Speaker Change: What we've done over the last few years is refocus our efforts and refocus our image sensing business to what we call machine vision, where the quality of the image sensor is where the value comes in because it's really processed directly by a machine versus an LCD.
Speaker Change: that's been ongoing. We're happy with the consistency of that business. We are ramping the 8 megapixel as the market shifts.
Speaker Change: I would call it more stable. We do see competition and we're attacking it as we see fit. But again, just like I mentioned on overall portfolio, we are focusing where we add value, not where we can just ship units.
Thanks, Hassane.
One moment for our next question.
Speaker Change: Our next question comes from Gary Mobley with Loop Capital. Your line is open.
Speaker Change: Hey guys, thanks for taking my question. You're clear on your messaging with respect to non-core products and the pricing pressures in that particular product group, but maybe if you could talk about pricing trends for some of the core products. I presume you just went through annual price negotiations.
Speaker Change: perhaps you can give us an update on pricing trends there for the vast majority of your business.
Speaker Change: Yeah, look, I think what people refer to the annual price negotiation, which is a Q4 negotiation with an impact in Q1.
Speaker Change: We're not seeing that. Are there benefits and efficiencies that we have done in our product? You know, we've talked about our FabRite. We've talked about taking costs out of the products.
Speaker Change: Of course, as we do that, customers see some of that benefit as our margin expands from a call it standard margin. If I take out the underutilization that Thad walked you through, I focus really when I talk about value of the products.
Speaker Change: I focus on our standard margin taking out the manufacturing underutilization in the short term.
Speaker Change: If I look at that, that's been very consistent because we are offsetting whatever discussions we have with the customer, we're offsetting it with efficiencies of our own internally.
Those, I wouldn't call it pricing negotiation.
Speaker Change: Those are efficiencies because the typical pricing negotiation that you're referring to, look, there's no demand out there. So you give the price reduction just for the heck of it. Then you end up with a gross margin headwind and no additional demand.
Speaker Change: There is no demand elasticity based on proprietary products, which is where our focus has been. But from an efficiency perspective, of course, we are working with customers to support their transition to our new products as we gain those efficiencies. But net-net, it's good for margin and good for the customer.
Okay, that's my follow-up I wanted to ask about.
Speaker Change: Silicon carbide wafer sourcing. The market overall for devices, you know, clearly underperformed expectations in 2024 and there seems to be more adequate supply of raw wafers coming from China. So any update on your internal sourcing of raw and epi wafers?
whether that be internal or external.
No, we've been, well, we do...
Speaker Change: both internal and external. We have a lot of sources qualified externally, and we will manage the transition internal-external. As far as mixed,
Speaker Change: You know, there's the first, what you have to think about is the certainty of supply in a backdrop of geopolitical uncertainty.
Speaker Change: We are basically balancing our internal and external. We have qualified both internal and external. As I mentioned in my prepared remarks, we've also qualified 200 millimeter, but we've qualified the 350 micron thick substrates, which is state-of-the-art today from a silicon carbide wafer thickness.
Speaker Change: And those are running in the fab and we sampled customers so from an execution perspective
We're on track.
Speaker Change: From a mixed perspective, we have full flexibility. We believe we're in the best of both worlds where we can do internal and external, and we will continue to refine the mix between internal and external as we proceed through 2025 and as we get some stability and clarity in the geopolitical environment.
Thanks for the time.
One moment for our next question.
Speaker Change: Our next question comes from Joe Quattrochi with Wells Fargo. Your line is open.
Joe Quattrochi: Thanks for taking the question. On the $350 to $400 million price sensitive revenue that you're thinking, you know, this year, are there any end markets or geographies in particular that we should think about as being, you know, more price sensitive or more aggressive there?
Joe Quattrochi: No, I think it's more of a product rather than a region. What I mean by that is more market products. Now, it could be that some of these markets are more skewed to a region, but we don't look at it as a region. We don't have local pricing practices based on region. We look at it as a product and markets. So that's kind of how I look at the non-core revenue.
Joe Quattrochi: Got it. It's helpful. And then I think in your deck you talked about AI, data center revenue growing more than 40% in 2024. Just wondering how you're thinking about the growth opportunity in 2025 with the potential acceleration from the JFS business.
Joe Quattrochi: We expect that business to continue to grow as we, you know, we've had some penetration in the second half of 24. Of course that will continue to grow on an annual basis.
Joe Quattrochi: We do have some platforms that we are designed in, and those will start adding up to the 2025. So we're on beat with the design cycle in that market.
Joe Quattrochi: with our new products and looking forward our trail platform with fast time-to-market and really the integration will start getting us a faster beat so we can do more and more aggressive portfolio introductions for that.
Joe Quattrochi: But we're in a good spot today. That growth will continue in 2025.
Thanks.
One moment for our next question.
Speaker Change: Yes, thank you. I had a question about gross margin and you know when the recovery comes
Speaker Change: Should we still think about the 20 to 25 basis points in improvement per
Speaker Change: per increase in utilization. And Thad, I assume that that's sort of a comment prior to some of these site changes that you are considering.
Speaker Change: Yeah, that's right. And you should think about the 20 to 25 as this, you know, from here, you know, up to low 60, right? After that, go back to the 15 to 20 basis points, right, as you just get the scale there.
So the change there was the fact that
Speaker Change: ograms. Our fixed costs are becoming a larger percent of the overall factory costs. You can only cut so much variable costs. And so we're kind of getting down. When you're stepping down into the 50 percent range,
Speaker Change: you know you're kind of hitting up against that. So you'll get to a point where you get you start to get some scale and then we go back to the 15 to 20 basis points.
Speaker Change: similar to the numbers we've given you in the past, but yes that is all based on current capacity.
Speaker Change: Great, that's very helpful. And as my follow-up on TRIO, how should we sort of track the financial success of that business? Are you going to be, you know, perhaps sharing with us the revenue associated to that business or the impact of gross margin in any given quarter? Just trying to understand financially how, you know, we should track the success of TRIO.
Speaker Change: Now the intent for me is to give you kind of the updates as we as we report on call it the early milestone because those are the leading indicators so what you'd expect is
you know, product introductions.
confirmation of the margin profile.
Speaker Change: And, you know, maybe at some point, depending on the customer and their willingness, is a joint announcement with customers as they design it in. We have customers, as I mentioned, that are starting, will start to ramp in 2025, so first revenue is actually going to happen, but don't expect to update, you know, on a quarterly beat or on an annual beat at that level of granularity.
That's helpful. Take care, Hassane.
One moment for our next question.
Speaker Change: Our next question comes from Harsha Kumar with Piper Stanley. Your line is open.
Harsha Kumar: Yeah, Hassane and Thad, I had two qualitative ones for you. I think earlier you mentioned that you're still under shipping relative to your true demand. So I was curious if you could give us an idea.
Harsha Kumar: you know starting off with the guide that you gave for the March quarter if you were just to kind of give us an idea of what your true demand estimate is in other words how much are you under shipping or what is the market able to take for your business if you were not to under ship
Harsha Kumar: That's a hard one, because unless you have 100% visibility of what the inventory is by customer.
but also demand is a moving target.
Harsha Kumar: Demand has not stabilized, as we've talked about, and I think some of my peers have talked about. Different peers talk about different end markets, but.
Harsha Kumar: I think what's consistent across the board is demand has not really landed and stabilized. So as that's a moving target, inventory remains or inventory levels that the customers would like to achieve remains a moving target.
Harsha Kumar: that's why when we talk about you know at some point it has to snap back and we'll see that when when we get there but today we're just managing to what we can see at while while making sure while we're making sure we don't over ship
Harsha Kumar: But you know, back to the LTSA question, which is a reason we keep negotiating the LTSAs, we want to make sure we are at or below demand in order to accelerate to the extent we can the inventory burn so we do get to a normalized view soon.
Speaker Change: I got it. Okay. And then I wanted to ask you about
Speaker Change: one of your neighboring companies and based in Arizona also they supposedly had some of the worst inventory problems and their guide wasn't as bad as
Speaker Change: perhaps yours. I mean neither the automotive nor the total guide and I was curious what the puts that I'm not asking you to comment on their business but I'm trying to understand
Speaker Change: I guess what I'm trying to say is, are you trying to pad for some level of decline that you're building in based on your judgment, or are you strictly giving us a guide based on what you're seeing?
Speaker Change: It's purely based on what I can see. I don't give a guide and I'm not running the company based on what peers have done. Of course, I look at what peers have done across
Speaker Change: from a, however, what I would say is from an inventory, and the inventory I can't control, from an internal inventory and this the inventory.
Speaker Change: our internal inventory you know, clicked up in days, but in dollars, consistent, so we have been
Speaker Change: very disciplined about maintaining and not letting our inventory get out of line.
Speaker Change: so that's point number one where our discipline comes in. From a DISTE, you've also seen us be very consistent on our DISTE. Actually, the distribution inventory in Q4 dropped
Speaker Change: $55 million. So we drained as we saw the softness in Q4, toward the end of Q4 we took decisive action and we reduced this the inventory by 55 million in the quarter
Speaker Change: So, the inventory that we have visibility and the ones we control, we are very disciplined. Again, so when we see a recovery happen, we turn on manufacturing, utilization goes up, revenue goes up, and margin will go up accordingly.
Speaker Change: That's what we're running the company to achieve, and that's what we'll continue to focus on, the stuff that we can control.
That's fair. Thank you, guys.
Speaker Change: Ladies and gentlemen, this concludes the Q&A portion of today's conference call. I'd like to turn the call back over to Hassane El Khoury, President and CEO, for any further remarks.
Speaker Change: Thank you all for joining us on the call this morning and I want to thank our worldwide employees again for the perseverance through this downturn.
Speaker Change: Remaining focus on operational excellence and innovation will enable us to continue to drive value for our customers and shareholders and emerge stronger than we were going into this. We intend to provide additional information on our progress at a future date. Thank you.
Speaker Change: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.