Q1 2025 ON Semiconductor Corp Earnings Call
Good day and thank you for standing by. Welcome to the onsemi first quarter 2025 earnings conference call.
At this time, our participants are in a listen-only mode. [inaudible]
Speaker Change: After the speaker's presentation, there'll be a question and an intercession. To ask a question during the session, you'll need to press star 1-1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would like to hand the conference over to your speaker today, Parag Agarwal, please go ahead. Thank you.
Parag Agarwal: Thank you, Kevin. Good morning and thank you for joining onsemi's first quarter of 125
I'm joined today by Hassan Elkori, our president and CEO , and Thad Trent, our CFO .
Parag Agarwal: This call is being webcast on the Investulation Section of our website at www.onsemi.com
Parag Agarwal: In the plea of this webcast, along with our first quarter initially, we will be available on our website approximately one hour following this conference call and the recorded webcast will be available for approximately 30 days following this conference call.
Parag Agarwal: Additional information is posted on the Industrial Relations Section of our website.
Parag Agarwal: Our Unixelies and this presentation includes certain non-GAAP financial measures.
Parag Agarwal: Reconciliation of these non-care-function measures to the most directly comparable-care-function measures.
Parag Agarwal: And a discussion of certain limitations when using non-capitation measures are included in our
Parag Agarwal: which is posted separately on our website in the Investors' Salation section.
Parag Agarwal: During the course of this conference call, we'll make projections for other forward-looking statements regarding future events, the future financial performance of the company.
Parag Agarwal: We wish to caution that such statements are subject to risk and uncertainties that would cause actual events or results to deform materially from projections.
important factors, [inaudible]
Parag Agarwal: that can affect our business, including factors that could cause actual disaster, different materially, from our forward-looking statements, are described in our most recent form-tank use, and other filings with the Securities and Exchange Commission, and in our earnings plays for the first quarter.
Parag Agarwal: Our estimates, our other forward-looking statements might change and the company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other statements that may occur, except as required by law.
Parag Agarwal: Now, let me turn it over to Hassan. Hassan. Thank you, Parag. Good morning and thanks to everyone for joining us on the call. Despite a challenging macroeconomic landscape, we delivered Q1 revenue of $1.45 billion and non-GAAP earnings per share of 55 cents. Thank you for joining us on the call.
Hassane: Both exceeded the midpoint of our guidance, with non-gab gross margin of 40 percent.
Hassane: Our focus remains on streamlining our operations through our fab right approach and investing in R&D to deliver differentiated products to our customers.
Hassane: Both initiatives aim to deliver gross margin expansion as the market recovers.
Hassane: In an uncertain geopolitical environment, our manufacturing network is a source of competitive advantage, as we have proactively established a flexible and geographically diversified supply chain for our customers that not only enhances supply resilience, but also reduces our risk exposure. Thank you.
Hassane: With 19 front and back end facilities, in addition to our external network, we are well positioned to respond effectively to tear-free related concerns.
Hassane: Based on our understanding of current terror policies, our expectation is that there will be minimal direct impact to our business. At this time, we expect no major issues in servicing our global customer base and are assisting these customers to minimize their impact by optimizing our supply chains.
Hassane: Although we began to see early signs of stabilization with favorable booking trends towards the end of the first quarter in certain parts of the industrial market, inventory digestion persists and customers remain cautious as I described last quarter.
Hassane: While customers optimize their working capital and they've extended downturn, we have used pricing to defend or increase share in strategic areas over the long term and expect low single digit pricing declined in certain parts of our business. [inaudible]
Hassane: On the revenue side, following a strong Q4, our automotive revenue in the first quarter decline 26% sequentially in line with our expectations.
Hassane: Our industrial revenue was better than expected, decreasing only 4% sequentially.
Hassane: The traditional parts of the industrial market are starting to show signs of recovery.
Hassane: You'll recall this was the first part of industrial to show signs of weakness going into the downturn. Medical and aerospace and defense also increased sequentially and our AI data center revenue which we report as part of our other bucket more than doubled year over year in the first quarter.
Hassane: Our differentiated intelligent power and sensing solutions enable us to deliver the performance and power efficiency that our customers need to thrive in their space.
Hassane: Through the downturn, we continued investing to diversify our portfolio and deliver differentiation as the market landscape continues to evolve.
Hassane: In automotive, while inventory digestion persisted in the first quarter, leading OEMs are adopting our Silicon Carbide and their next platform architectures.
Hassane: We have extended our technology leadership with our fourth-generation elicic MOSFET devices based on trench architecture.
Hassane: We have already secured a new 750 volt plug-and-hybrid electric vehicle or PHEV designed with one of our major US automotive OEMs.
Hassane: The signals, the beginning of a transition from silicon to silicon to carbide, and new p-heve platforms to extend vehicle range and reach a broader customer base adding to our penetration in full battery electric vehicles or boughs where we continue to gain share over incumbents.
Hassane: Based on the latest electric vehicle launches in China, most of which were unveiled last week at the Shanghai Auto Show, we expect to have our silicon carbide nearly 50% of the new models.
Hassane: Most of these new models are set to ramp in late 2025, including a PHEV with our Silicon Parvide.
Hassane: broader adoption of sick and PHEVs is expected over the next few years as OEM's redesigned hybrid platforms to meet tightening global emission standards and capitalized on the performance offered by Silicon Carbide Technology to extend the range.
Hassane: We're also winning with our image sensors and automotive applications which continue to be the differentiator for onsemi. The superior performance of our technology makes onsemi the partner of choice for the top auto makers.
Hassane: In the first quarter, we began shipments of our eight megapixel image sensor to the leading OEM in China with a global footprint, where we expect to be designed into ADAS systems for their low mid and high end vehicles.
Hassane: Another OEM based in Asia has selected our 8 megapixel image sensor for the next generation 8S platform.
Hassane: In AI Data Center, we continue to make progress in our strategy by leveraging our strengths and intelligent power, silicon carbide and silicon power devices, anchor that strategy and our instrumental in every branch of the power treat.
Hassane: At the entry point of power into the data center, we are capitalizing on the transition to modular UPS systems with our elicic power module solutions, delivering higher efficiency and power density than traditional silicon solutions.
Hassane: We are shipping to the three largest UPS suppliers and with a new platform when that began ramping in Q1, we expect our revenue for UPS to grow between 40 and 50% for the full year over 2024.
Hassane: Within the power supply unit and the battery backup unit, our silicon car by J-Fat combined with our T10 trench fets to create a winning high power AC to DC solution.
Hassane: So, J-Fetz are essential in the transition from 3 kilowatt to 5 kilowatt PSUs required in the next-generation architecture, and only onsemi has a distinctive technology.
Hassane: Sig J. Fett is superior in these high-current solutions because it offers the lowest on-residence in a given footprint.
Hassane: Similarly, our T10 MOSFETs offer industry leading ultra-low RDS-on and reduce switching losses.
Hassane: We are ramping with a large U.S. hyperscaler securing the majority share in their PSU and B.B.U.
Hassane: We are expanding our portfolio of power solutions using a combination of FETs and power management ICs to address the intermediate bus conversion and V-core branch of the power treat.
Hassane: With the launch of our trade-op platform last November , we introduced our expanding portfolio, including voltage translators, LVOs, ultra-low power analog front-ends, ultrasonic sensors, multi-face controllers for client, and single pair Ethernet controllers for automotive zonal architecture applications.
Hassane: Advancements through the trail platform are enabling us to accelerate development and deliver innovative solutions to our customers across automotive, medical, industrial and AI data center markets at accrued of margins.
Hassane: As we look ahead, while the semiconductor industry is navigating complex macroeconomic factors there is an increasing need for semiconductor to improve power efficiency and sensing capabilities in rapidly evolving sectors like AI data centers, automotive and industrial. [inaudible]
Hassane: To this downturn, we have maintained our strategic direction, and we have continued to deliver value to our customer base on the performance of our technology.
Hassane: We are focused on operational excellence and are well positioned for recovery with gross margin expansion as we continue to realize the benefit of our Fabright initiatives.
Hassane: Let me now turn it over to Thad to give you more detail on our result and approach going into the second quarter of 2025.
Thanks a lot.
Hassane: While it was a challenging start to the year, continuing to focus on operational excellence has allowed us to drive cost out of our operations to focus on free cashflow generation. Thank you so much.
Hassane: We exceeded the midpoint of our guidance with revenue of $1.45 billion and non-GAAP brings for share of $0.55, while Q1 free cash flow increased 72% year-to-year.
Hassane: We increased our share of buyback to 66% of free cash flow, repurchasing $300 million of shares in the first quarter.
Hassane: With our large capital investment behind us, we are confident our liquidity and strong balance sheet and believe returning capital to shareholders is the best use of capital.
Hassane: For 2025, we intend to increase our share repurchase to 100% of free cash flow.
Hassane: As of today, there's approximately $1.5 billion remaining on our repurchase authorization and we expect free cash flow will remain strong with the cost control actions we have taken, aggressive working capital management and limited capital investments.
Hassane: Last quarter, I told you that we would be moving aggressively and with urgency in making structural changes to expand gross and operating margins and generate strong free cash flow in the future.
Hassane: In the first quarter, we took two significant steps to benefit the company in the long term and better position us for a market recovery.
Hassane: First, as part of our FABRID initiative, we reduced our internal FAB capacity by 12% through our manufacturing re-alignment program to lower our fixed cost structure.
Hassane: These actions for reduced are ongoing depreciation costs by approximately $22 million on an annualized basis, and we expect to see the benefit on the income statement in Q4 of this year.
Hassane: We'll continue to rationalize our manufacturing footprint, driving gross margin expansion towards our long-term target, and providing greater leverage in our business model as the market recovers.
Hassane: The second action in Q1 was a company wide restructuring initiative. We made the difficult decision to reduce our global workforce by 9% and further reduce our non-manufacturing sites driving sustainable efficiencies across the company.
Hassane: These actions are expected to generate approximately 25 million dollars of savings in Q2 versus Q1 with an additional 5 million dollars per quarter of savings realized in the second half of the year.
Hassane: These actions are structural rather than temporary and will drive incremental leverage in both growth and operating margin for the long term.
Hassane: Coupled with our lower capital intensity, we remain on track to our targeted 25-30% free capsule of margin for the year.
Hassane: Automotive revenue was $762 million, which decreased 26% sequentially, driven by weakness and euro in Europe and seasonality in Asia, mainly in China due to Chinese New Year.
Hassane: Revenue for the industrial was $400 million, down 4% sequentially while our medical and aerospace and defense businesses continue to grow traditional industrial remains stable.
Hassane: Outside of auto and industrial, our other businesses increased 1% quarter-requarter, mainly driven by client computing business offset by normal seasonality and wireless.
Hassane: Revenue for the analog and signal group, or AMG, was $566 million, a decrease of 7% quarter and a decrease of 19% year-over-year.
Hassane: Revenue for the Intelligence Sensing Group, or ISG, was $234 million, a 23% decreased quarter of a quarter, ISG Revenue decreased 20% over the same quarter last year.
Hassane: Turning to Gross Margin in the first quarter, Gap Gross Margin was 20.3% which includes restructuring charges as a part of our manufacturing realignment program.
Nongap Gross Margin was 40%
Hassane: Yalim, 530 basis points sequentially and 590 basis points from the quarter of a year ago. non-GAAP gross margin declined in line with guidance due to the lower revenue and under absorption with lower utilization levels over the last few quarters.
Hassane: Manufacturing Utilization, increased slightly from 59% in Q4 to 60%, which does not include any impact from our capacity reduction actions. Now, let me give you some additional numbers for your models.
Hassane: non-GAAP Operating Census worth $315 million compared to $314 million in the quarter of a year ago.
Hassane: Gap Operating Margin for the Quarter was negative 39.7% and non-GAAP Operating Margin was 18.3%. Our Gap Tax Rate was 13.5% and non-GAAP Tax Rate was 16%.
Hassane: Deluted gap earnings for share for the first quarter was a loss of $1.15 as compared to earnings of $1.04 in the quarter of a year ago. The first quarter was a loss of $1.15 as compared to the first quarter of a year ago.
Hassane: non-GAAP earnings per share was 55 cents as compared to a dollar eight in the Q1 of 2024.
Hassane: Gap Deluded Share Count was 421 million shares, and our non-GAAP Gap Deluded Share Count was 422 million shares.
Hassane: Turning to the ballot sheet, cash and short-term investments was $3 billion with total liquidity of $4.1 billion, including $1.1 billion and drawn on our revolver.
Hassane: Cash from Operations with $602 million in free cash flow increased 72% year-over-year to $455 million representing 31% of revenue.
Hassane: Inventory was down quarter over quarter on a dollar basis by $164 million and increased by three days to 219 days.
Hassane: This includes 100 days of bridge inventory to support fast transitions in silicon carbide.
Hassane: We expect this inventory to peak in the second quarter, excluding the strategic dose our base inventory is healthy at 119 days.
Hassane: Distribution inventory declined another $27 million with weeks of inventory increasing to 10.1 weeks versus 9.6 weeks in Q4. Our plan to support the mass market has continued to pay dividends, resulting in another 29% increase in customer count year over year.
Hassane: We did not expect a material change in the weeks of inventory over the near term.
Hassane: Looking forward, let me provide you the key elements of our non-GAAP guidance for the second quarter. As a reminder, today's press release contains the table detailing our gap and non-GAAP guidance.
Hassane: First, our guidance is inclusive of our current expectation that there is no material direct impact of terrorists announced as of today.
Hassane: Given our current visibility, we anticipate Q2 revenue will be in the range of $1.4 billion to $1.5 billion.
Hassane: Our non-GAAP gross margin is expected to be between 36.5 and 38.5 percent, which includes share-based compensation to $8 million.
Hassane: Our second quarter guide includes 900 basis points of non-cash under absorption charges, and we expect utilization to decline slightly in Q2.
Hassane: Approximately half of the sequential gross margin decline is from the increased underabsorption in Q2, and the remaining is a tribute to unfavorable pricing as we're seeing low single-digit price declines. [inaudible]
Hassane: Moving on to non-GAAP operating expenses, we expect off debt to be in the range of $285 million to $300 million including share-based compensation of $29 million.
Hassane: We expect our non-GAAP other income to be in that benefit of $11 million with our interest income exceeding interest expense.
Hassane: We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP deluded share count is expected to be approximately 419 million shares.
Hassane: This results in non-GAAP earnings per share to be in the range of 48 cents to 58 cents.
Hassane: We expect capital expenditures in the range of 70 to 90 million dollars.
Hassane: We took difficult steps in the first quarter to right-side and refocus the company on the key drivers to achieve our long-term ambitions.
Hassane: By continuing to lean into our Fabright Strategy and focus on higher value product lines, we are committing to building a solid foundation that will be a tailwind when the macro environment becomes more robust.
Hassane: In the meantime, we will remain cautious in our approach and position ourselves to capitalize in the future on strong customer relationships with our intelligent power and sensing platforms.
Kevin: With that, I'll turn the call back over to Kevin to open up the line for Q&A.
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, you are seeing with yourself from the queue. Please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster.
Thank you. Thank you. Thank you.
Ross Seymour: Our first question comes from Ross Seymore with Deutsche Bankerlein is open.
Ross Seymour: Hi guys, thanks for having me ask the question. I guess my first one on the revenue side of things. You guys have been consistent with your conservatism, but the flat guide...
Ross Seymour: It seems to be a bit below the kind of up low single to high single digit sequential growth that your peers are seeing. Is there anything structurally different at on that would keep you from experiencing the same sort of upturn that others have started to allude to? [inaudible]
Ross Seymour: Hey Ross, no it's not really structural, it's really depending on the end markets that we versus our peers are exposed to as you know we have a big. Thank God.
Ross Seymour: Focus on Automotive for EV specifically. EV outside of China is still, has not seen the recovery. China as I've mentioned, we've gotten a lot of the winds, that's where most of the ramp is happening in
Ross Seymour: It's second half of 2025. So, other than just within the markets, whether you're broad or more focused on sub-markets, like we are for the EV, that's the only thing I could point you.
Ross Seymour: The charge that you took, and then generally looking forward, what are the metrics we should use to think about gross margin? You've been very overt with your second quarter, but what do we think about, say, second half or relative to revenue growth? [inaudible]
Ross Seymour: How much of it is just utilization-based, absorption-based, or are there many idios that on has just any metrics to help us hone in on that would be great.
Ross Seymour: Yeah, so as I mentioned, we took about 12% of our capacity offline, and that was late in the first quarter. So you didn't really see much of an impact of that in the first quarter. [inaudible]
Ross Seymour: As we go forward with this new footprint, the incremental as utilization goes up for every point of utilization, it's now 25 to 30 basis points of gross margin improvement. Previously that was 20 to 25, so it's now increased because of taking that capacity offline.
Ross Seymour: As I mentioned, you know, there's about 22 million dollars of depreciation savings on an annualized basis. We'll start to see that hitting the T&L in Q4 just because of the lag with the inventory believed.
Hey everybody.
Thank you.
One moment for our next question.
Vivek Arya: Our next question comes from Vivek Arya with Bank of America, you're a lot of girls think.
Vivek Arya: Thanks for taking my question. I had a question on pricing. I think that in the past you had mentioned, you are pricing to value.
Vivek Arya: Right, and suggested that pricing could stay kind of more resilient. But now I think you're suggesting that pricing could be a headwind, that it could go down low single digit. And I'm curious, what has changed if anything is that a geographic issue, is it a product? [inaudible]
Vivek Arya: Is it a competitive headwind? What has changed on the pricing side? And how much of this flat Q2 sales is because of pricing? And then how much is pricing a headwind when we look at the back half of the year? [inaudible]
Vivek Arya: Yeah so what changed obviously we've been in this downturn it's a very extended downturn and we have to react to market condition or competitive threats that
Vivek Arya: You know, some of our competitors are using pricing, and we are going to use the pricing to defend and increase share in forward-looking programs.
Vivek Arya: So I don't see that as my comments as going back to the old pricing ways where it's the first quarter obviously then it's not in the first quarter for us as a second.
Vivek Arya: So it's not a plan that I can give you of what it is by quarter or what it is for the second half. We're using it as a tool. We have forward looking programs that are actually beneficial from a gross margin perspective that we will defend or even penetrate and increase share based on pricing decisions we make today. Thank you.
Vivek Arya: So we're going to take it as a tool, but it is a different environment we are operating in. It's not geographical, it is not specific to a product, it's really what I would call is more opportunistic approach to it.
Vivek Arya: From the revenue side, I wouldn't read any more into from the revenue in Q2, it's not the revenues specifically or top line is more on demand driven, it is not really on the pricing impact specifically.
Speaker Change: And then my follow-up question, I think Thad you mentioned something on gross margin.
When we look at Q2, the low end is 36.5 percent.
Speaker Change: And I think you mentioned that some of it was because of, you know, under absorption and some of it was pricing. So, if we start to hypothetically, you know, see sale grow from Q3 and Q4. [inaudible]
Speaker Change: What should be the new range of gross margins that we should be thinking about for the back half of the year? Like even a broad range I think would be useful in kind of aligning the models. Thank you.
Speaker Change: Yeah, so as I was saying earlier, you know, the impact of utilization is about a two quarter delay for it to hit the P&L, right? As you've got to burn through, you know, roughly 200 days of inventory to see that benefit. So it takes about two quarters for that to impact, given that we're expecting
Speaker Change: Q2 utilization to step down here slightly in Q2, that will be a little bit of a headwind.
Speaker Change: So if you think about the rest of this year, we're likely going to be kind of in the midpoint of our guidance kind of in this range. Again, we think that this is temporary, it's utilization driven.
Speaker Change: But for the remainder of this year, I think we're going to be kind of in this this kind of tight range here with improvement coming assuming that utilization does improve as the market recovers later in the second half. So I think there's a nice tailwind going forward.
Speaker Change: I think, you know, for the next couple quarters, we are kind of in this, let me call it 37 and a half, 38% range, just, you know, dependent on utilization.
Thank you.
One moment for our next question.
Thank you.
Speaker Change: Our next question comes from Chris Danely with City, Your Line is Open.
Chris Dainley: Hey, thanks guys, so given the pricing environment and you're saying you're using pricing to defend market share, can you just give us an update on that $350 to $400 million non-core business that you're going to exit?
Chris Dainley: Is that still the plan? Has the size of that changed how rapidly do you think you're going to exit that this year or will you, you know, try and defend your market share and use pricing on that business? Thanks.
Speaker Change: Yeah, so what I specifically on the pricing, we're still expecting to exit that what we've always said, this is a more market dependent than anything else.
Speaker Change: I do include some of the pricing in there, just to offset some of the utilization in the short term, but it is not on that specific what I would call the non-core exits that we are planning.
Speaker Change: We're not defending it to the point where we want to keep it. You can think about it as it helps with utilization. We'll modulate it in the short term, but our expectation remains.
Speaker Change: That $300 million is probably the likely number for the year. It will be market dependent. If we can hold margins on that in a favorable range, we will keep it. So, I think it's really going to be dependent on what the market plays out and the recovery plays out. [inaudible]
Speaker Change: Okay, great. And for my follow-up, it sounds like there's some nice momentum on silicon carbide exiting this year, any update on, I guess, the long-term growth rate you're expecting there, and then how about the gross margin range, do you still think you can get that business to 50 percent?
Speaker Change: Yeah, from a long-term rate, obviously, we're not guiding, we're still expecting growth, we're expecting to be the market share leader in that business based on the traction we've had today, and really the winds in the outlook of the winds, not just the ones we're ramping in 2025, you know, I mentioned some of the trends for going to the plugin hybrids, we're still looking carbide.
Speaker Change: We have been penetrating that which will ramp in the outer years.
Speaker Change: So the outlook remains unchanged. We're still very bullish about the prospects of our silicon carbide within that market and the position we will keep and gain.
Speaker Change: But from a standard margin perspective, we are still pricing on value and as we grow into the capacity that we installed, we still believe we have the best cost structure in the industry.
Okay, thanks, Hassane.
One number for our next question.
Speaker Change: Our next question comes from Joshua Buchalter with TD Cow and your line is open.
Speaker Change: Hey guys, thank you for taking my question. First of all, I kind of want to look backwards and be entering the year you guys called out that I think the man had gotten appreciably worse. It looked like the quarter of things tracked to where you were expecting, but your period, you know, didn't...
Speaker Change: We didn't really flag all that much of a demand deterioration in the quarter. Can you maybe look back and reflect on what's happened over the last few months in particular for onsemi, and in particular, was this in your view an inventory issue that you guys needed to clean up for, where there are legitimate pockets of the man that we can thank you.
Thank you.
Speaker Change: Yeah, look, the quarter played out pretty tightly, I mean, to what we expected, we were above the midpoint of our guidance. You know, the industrial was more favorable than we expected, automotive was right on to what we expected going into the quarter.
Speaker Change: and our other business, small piece of it.
12 pieces of the total. [inaudible]
Speaker Change: was favourable as well, being up 1%. So I think in terms of what we saw within the quarter, it pretty much came in line with what we expected. We did see some early finds of stabilisation in the industrial market, specifically like the traditional industrial side of that business. There are some pockets that are still down.
Speaker Change: We took that as a favorable sign coming out of the quarter. Now, there is uncertainty given the tariff situation, but there's some early signs of stabilization which gives us some hope.
Speaker Change: Okay, thank you. Then I was also hoping for a little more, you may be.
Speaker Change: Explain a bit of what's in the $283 million for structuring charge that was in Gross Margin. Was that primarily inventory right down? And can you speak to sort of how you're thinking about your on-book and channel inventory now? Thank you.
Speaker Change: Yeah, okay, there's a lot there. So on the restructuring, we did a restructuring, and then we also did a capacity reduction as well, so an impairment of some of our assets.
Speaker Change: What hit the gross margin line was, as a part of the manufacturing realignment program,
Speaker Change: We did take inventory out as we took capacity out in some of the areas that were defocusing there and as our manufacturing footprint changed. So we had some consumables and other inventory that we took as a part of that charge. Thank you very much.
Speaker Change: What hit the off-backed line obviously was re-structuring charges associated with more of the re-structuring activity rather than the fabric activity.
Speaker Change: on the distribution there's no change in our distribution obviously we're taking a very disciplined approach to channel inventory.
Speaker Change: Although the weeks are, you know, called it Flatish Run, the 10 which is the sweet spot of where we believe we're going to be long term, you know, we said between 9 and 11 weeks.
Speaker Change: We actually drain dollars out of the channel as we remain cautious on the outlook. Obviously for our distribution inventory we're always cautious not to ship in more than what we can see demand for. [inaudible]
Speaker Change: and will remain disciplined on that, so no change in the impact of this scene inventory. Yeah, and then on the inventory in the balance sheet, we have 219 days.
Speaker Change: It did go down by 164 million dollars. Part of that is the ride off that we took.
Speaker Change: as part of the restructuring activities, but if you look at our base inventory, exclude the fab transitions and silicon carbide, it's at 119 days, so it's healthy, our target has always been 100 to 120 days, so we're within that target.
Speaker Change: I expect inventory will be peaking here in the second quarter and we'll start to drain in Q3 and Q4 as the fab transitions continue to get executed and we stop buying from the divested fabs that we divested a few years ago. So inventory should be peaking here.
Okay, thank you. I apologize for my through for one question. Thank you.
One moment for our next question...
Speaker Change: Our next question comes from Blayne Curtis, which F. Reasier Light is open.
Speaker Change: Hi, this is Crawford Clark on for Blayne Curtis with Jeffries. Thanks for taking my question and congrats on the results. I wanted to ask about
Speaker Change: The industrial segment, I think you've talked a little bit about it thus far in response to some other questions, but it sounds like some of your competitors are talking about maybe a little bit more of a broad based.
Speaker Change: Recovery in their end markets, and then you mentioned some strength in aerospace and defense and medical, but was hoping you might be able to put a finer touch on some of the trends you're seeing outside of those two sub seconds. Thanks.
Speaker Change: Yeah, obviously I can only focus and comment on the markets or the submarkets and industrial where we're focusing on strategically and not as a broad base because we're not a broad base industrial supplier. So I would say outside of some of the energy infrastructures.
Speaker Change: Everything is up. So I would say broadly, it is starting to see signs of recovery. That's what Thad said, including some of what we call the consumer side of industrial. And if you recall, that was the first one that actually went into the downturn. [inaudible]
Speaker Change: Outside of that, we do see stabilization and we do see signs of that recovery. [inaudible]
Speaker Change: John , it very helpful. And then if you can just talk a little bit about your expectations for demand within the automotive segment by geography, people are calling out strength.
Speaker Change: In China, obviously, first quarter was a little bit tougher, given some trends related to Chinese New Year, but if you could talk again about your expectations for demand in auto, quite you.
Thanks
Speaker Change: We do see the models that we are in, the models that are going to production. We say we're about 50% of these new models that are rampant. [inaudible]
Speaker Change: We expect that to start ramping in the second half and therefore our automotive market, China specifically, other regions.
Speaker Change: You know, we'll see, but from a positive outlook, I would say China, Automotive and China EV is the focus, and we see that as remaining favorable.
Speaker Change: Yeah, and let me give a little more color to your first question on the guidance going forward.
Speaker Change: We expect industrial and the other bucket both to be up kind of mid to high single digits quarter and quarter. We think auto is going to be down again just as Sassan talked about kind of in that high single digit percentage as well. But dear point we're seeing industrial strength and we're seeing it continue in the second quarter. We're seeing it continue in the second quarter. We're seeing it continue in the second quarter.
Great, thanks, guys. One moment for our next question.
[inaudible]
Speaker Change: Our next question comes from Clint Bolton with Needed Economy Company. Your line is open.
Quinn Bolton: Cassidy actions you've taken. Are there new metrics you can give us sort of, you know, just help level set, you know, it's a man to recover zealizations, recover where gross margins could go over the next year or two.
Quinn Bolton: Well, yeah, I think I gave the data point earlier, you know, that every point of utilization is now 25 to 30 basis points of ...
Quinn Bolton: of course, margin improvement. So, if you think about us today, you know, roughly it's 60% stepping down slightly in the second quarter in terms of utilization, you know, you can do math getting back up to 85%. You know, I also gave the data point that
Quinn Bolton: where the gross margins in Q2 are expected to be negatively impacted by 900 basis points of underabsorption. So, as I said, the gross margin is going to be driven by utilization in the short term.
Speaker Change: Got it with the standard, I guess, then utilization or standard gross margin would be about 46 and a half, right? If I just take the midpoint of the range, add that 900.
Quinn Bolton: That's where you would sort of get back to is legalizations increase but is that legalization getting back to 65% 75% or should we just use the 25 to 30 beats at points? Yeah, point of legalization is the, you know, an assume that's pretty linear. Here.
Quinn Bolton: Yeah, that's right, that's right. So 25 to 30 basis points is the right move. The 900 basis points is assuming you give back to fully utilized, right? So that'll take us a while to get there, but your math is that
OK, great, thank you. Thank you.
One moment for our next question.
Quinn Bolton: Our next question comes from Gary Mobley with Loop Capital, Your Line is Open.
Okay, thanks for taking the question.
to sign you piloted a couple times.
Speaker Change: 50% win rate for certain carbide-based models introduced in the Shanghai Auto Show recently. It sounds very impressive, but maybe if you could just establish a little more context. Thank you very much.
Speaker Change: you know, in terms of what market share position you're coming from, obviously that's a huge market opportunity and just sort of size the dollar pack that that can eventually translate into. And did you have to concede on pricing against some of the China suppliers to win that business? [inaudible]
Speaker Change: Yeah, so first from a market share perspective, you know we do expect that 50% specifically in China if you notice it's the only really EV market that is growing with 800 volt focus 800 volt battery which heals to a 1200 volt Silicon carbide device.
Speaker Change: We do maintain the share there, we see that share increasing, obviously I'm not giving a guidance on the dollars.
Speaker Change: until the customers start ramping. We do see a big ramp in the second quarter already and that will continue through the second half of the year. So we do see those programs ramping. When I say, we see it in the backlog, we're starting to prep for those shipments. [inaudible]
Speaker Change: It's not really competing with the local, you know, you mentioned China for China or local vendors for self-incarbide, our competition in
Speaker Change: China specifically is really more with our standard peers, our global peers rather than the local.
Speaker Change: because we're still ahead on performance, I made the brief comment in the call.
Speaker Change: So, we have a very strong roadmap on silicon carbide. It is not specifically related to pricing. It is more on performance of the product, which ends up saving a ton of money for our customers on their system level side, whether slower batteries or smaller system cost.
Speaker Change: That's the reason we win, and like I said, we've maintained and increased our share in China, and we'll continue to do that. It's a big focus market for us.
Speaker Change: Thanks for the time. Dad, just a quick follow-up. It sounds like, incredibly wrong, that op-x could trend down maybe another $5 million per quarter off that $292.5 million base that you're getting to for the second quarter. [inaudible]
Speaker Change: Yeah, that's right. You'll get about 5 million per quarter in Q3 and Q4. [inaudible]
God, thank you.
One moment for our next question.
Thank you.
Speaker Change: Our next question comes from Vijay Rakesh with Mzuho, your last open.
Vijay Rakesh: Hi, Hansa and Thad, this is a quick question on the pricing side. Is that coming clear on pricing specific to on, or is that what you see in the industry, and if you give us some color on silicon versus silicon carbide, we will be receiving attention from you.
Thank you. May it follow.
Vijay Rakesh: Yeah, I don't believe the pricing is on specific. I think a lot of my peers have talked about it.
Vijay Rakesh: A lot of my peers I've talked about in the context of the annual price negotiations and so on. I talk about it a little differently.
Vijay Rakesh: I talk about it as a pocket of pricing in order to maintain or even increase our share.
Vijay Rakesh: especially in the outlook given where most of our customers are. So it's not something specific and it is not related to Silicon or Silicon
Vijay Rakesh: because we are using it as a tool. Now, one thing on the pricing as well, you know, a lot of people.
Vijay Rakesh: Failed to also look at, along with any of these low single digit pricing declines that we talked about.
Vijay Rakesh: We're working on cost improvements for our products as well, which are...
usually at that range or slightly above.
Vijay Rakesh: So forward-looking as we gain the share and we ramp we are expecting the offset most of the pricing declines with cost actions that's why we feel comfortable doing it in the in the short term to maintain and grow the share
Vijay Rakesh: But in the long run, we usually we've always offset any pricing discussions with cost actions and you've seen us do some of the cost actions today with the
Fabria Alignment, Torque Pasidy Realignment, Discussion that we've had. [inaudible]
Vijay Rakesh: We're going to continue to do that. I'm not seeing it as a concerning approach or concerning sign. It doesn't change our trajectory into gross margin. We still have very strong gross margin expansion opportunities ahead of us.
Vijay Rakesh: That's what we are setting up the company for, and as the market recover, you're going to start seeing all of us come through the PNF. [inaudible]
Vijay Rakesh: George, and just as we follow up on the other side, the highest usage is a person down sequentially, is that, so I received some headwinds from the auto-tarius or auto parts, can it give us some more color around there? Thanks.
Thank you.
Speaker Change: Yeah, look, we said we don't have a direct impact on the tariff for our business. That's the only thing I can comment on at this point because look, the tariff is one day yes, one day no, it's too soon to talk about any impact, indirect impact, meaning to us, therefore an impact to our customers.
Speaker Change: That's too soon to call that. That's where we, in our guide, we talked about, we remain cautious.
Speaker Change: Based on what we know today, there's no direct impact. However, there could be indirect impact, but that is a time-based question which I don't have an answer to. That's therefore the best thing I can give you is.
Art cautiousness in the guide in our outlook. [inaudible]
Speaker Change: We also haven't seen any material pull-ins or pushouts as it relates to tariffs. So, you know, as Sassan said, no direct impact indirect over long term we'll see what happens, but in the short term we haven't seen any.
any customer activity that would give us concern? [inaudible]
Thad Thins
One moment for our next question.
Thank you.
Harlan Sir: Our next question comes from Harlan Sur, which AP Morgan, your line is open [inaudible]
Good morning thanks for taking my question.
Speaker Change: Yeah, your shipments to direct customers were better for the second consecutive quarter, in fact. Thank you very much.
Speaker Change: Over the past two quarters, your direct business is up 3% versus your district business at down about 34%. Your direct customers have just have less access inventories and therefore maybe you guys are shipping more towards consumption trends. Any color under the large divergence would be helpful.
Speaker Change: No, not really anything to read into that. You know, a lot of our distribution business also or half of our distribution business is going to customers that we deal with directly. Thank you very much.
The other half of our distribution is more on fulfillment.
Speaker Change: I look at all of these overall as a single outlook or single indication to where the markets are, but not specifically Disney or direct.
Speaker Change: Oh, I appreciate that. And then part of the weaker dynamic back in 4Q was, you know, a lower book of terms business.
Speaker Change: You saw better booking trends towards the end of this particular quarter, or the reported March quarter. Did that include your turns business and within your guidance for this quarter, June quarter? Are you guys assuming similar, higher, lower turns percentage versus one key?
Speaker Change: Yeah, Harlan, I would say, you know, we saw strings, right? We saw strings late in the quarter in terms of order patterns, right? And specifically in the industrial side of the house.
Speaker Change: As we look into Q2, we still need turns, right? I mean, I think customers are booking at lead time, just given the uncertainty, but we still need turns, and I would say it's pretty consistent with how we entered the first quarter as well. No material change. Other than, you know, order patterns, I think have gotten a little more stable, a little more predictable.
Great, thank you.
one moment for our next question.
Thank you.
Speaker Change: Next question comes from Tore Svanberg, with Steve Fuller, your line is open.
Speaker Change: And you did talk about some design wins, just, you know, could you help us a little bit, you know, where are you getting these design wins? And, you know, could we start to see already some material revenue and trail next year? [inaudible]
Speaker Change: The beauty of the platform is it's very versatile as far as going from high performance analog to high power drivers and high power p-mix and so on.
Speaker Change: So overall we're very pleased with the traction. I talked about we remain on track to double the number of products year on year. That remains on track and a focus for the team.
Speaker Change: and more importantly, at more favorable margins. We talked about the margin profile for that Treyo platform being 60% to 70% that remains true as we start the ramp.
Speaker Change: and we'll continue as we expand. As far as material revenue in 2026, obviously it's going to be more material than it is this year, but material from a company you're still not going to see it at a company level given the scale of our other business and other business is ramping as well. [inaudible]
Speaker Change: But where we are today based on where we expect it to be, we're on track actually slightly ahead, but we're very excited about the promise of the franchise that we built. [inaudible]
Speaker Change: Yeah, thank you for that color. That's my follow-up for Thad, that you know, CapEx, 6% of revenue, this quarter, you know, with the new footprint, how should we think about CapEx for the second half of the year?
Speaker Change: Yeah, for the whole year, there's some oneness in terms of the capex just based on timing of equipment coming in, but most of our capex now is just maintenance capex. [inaudible]
Speaker Change: So, for the year, you should think about CAPEX as being in that mid-single digit percentage of revenue.
Speaker Change: You know, with the lower capital intensity, you know, this is what's given us confidence in the free cash flow and why we're increasing our five back to 100% of free cash flow.
Great. Thank you.
one moment for our next question.
Thank you, everyone. Thanks.
David Williams: Our next question comes from David Williams with the benchmark company. Your line is open.
David Williams: Foundation, just kind of given what you've taken out of this quarter. [inaudible]
Speaker Change: Look, I don't have a specific number as you think about it sitting here because it's going to depend on internal versus external.
Speaker Change: I think if you model the downside of kind of as capacity came out or utilization decreased, it's likely the same going up. So we manufacture about 70% of our products in house.
Speaker Change: But I think it's going to be very linear as revenue increases, but I don't have a top line because it depends on mix. If higher value products are ramping first, that will have a different impact than lower S.P. products.
Speaker Change: But I think from a modeling standpoint, you should just look at the upside and the upside is very somewhere.
Speaker Change: Thanks for the color there. And then just kind of secondly, and I think it's on you spoke to this earlier, but just wondering what you're seeing in terms of...
Speaker Change: the Silicon Carbide competitive dynamics within the domestic market in China. It sounds like we're seeing more of that, but just kind of curious how you're seeing that, obviously your performance is better. But how do you think this plays out over the next 12 to 18 months? Could we see that shift back into maybe the more domestic side given the terror situation? Thanks.
Speaker Change: Yeah, I don't think we are in the same bucket as some of the local, the local.
for the quiz.
Speaker Change: that would potentially use the local, yeah, but that's not really a focused market for us.
So where we play, which is really performance.
Speaker Change: especially as the automotive OEMs in China want to compete on a global scale which most of them do.
Speaker Change: They're going to be focusing really on performance, really on integration and a system level performance impact which is really us and we come in the lead. We're seeing that in my mention on the 50% penetration, just based on the Shanghai Auto Show from a few weeks ago.
Speaker Change: Peer, Global Peer, and versus the local vendors in China. So we're not signing still from an R&D as they develop their local solutions. We're going to maintain our technology leadership.
Speaker Change: It is not a question of tariff in this case because as you know our silicon carbide is manufactured outside of the US from a global footprint as well and our flexibility in our supply chain gives us a lot of options to serve the customers
Speaker Change: But most of the decision at a customer level is really made on technology and performance. That's how we've always won. That's how we continue to win.
Thank you one more for next question.
Thank you.
Speaker Change: Our next question comes from Christopher Rolland, Susquehanna, your line is open.
you were talking about flexibility in your footprint.
Speaker Change: Do you increase a fabulous relationship in country? I know you deal with Smith, I think. Do you increase that relationship?
Speaker Change: What is the kind of flexibility that you do have to address reciprocal tariffs in China, let's say?
Speaker Change: Yeah, so well, first I don't want to ponder on what the tariff could or could not be given that just the volatility of...
Speaker Change: The Terror situation, one day versus the other. I will give you what we are doing, which is what we control. First off, we are in China and we do have manufacturing in China. We have a couple of our sights, manufacturing sights are actually in China. We do have found relationships.
Speaker Change: So we are not looking at China from the outside. We're looking at China from the inside. So therefore for me, I'm not I'm not worried about the impact of it. We have a lot of. [inaudible]
19 factories total.
Speaker Change: Globally, it gives us full flexibility. Most of our products are qualified in more than one location, which means from servicing the customers, whether customers in China or customers in China that would export. We are very well positioned for it. Of course, we're always looking at our strategic footprint. [inaudible]
Speaker Change: whether we do something specifically in China or not, but there has to be a strategic need for it, not just in a reaction to a tariff that may or may not be there. I'm sorry, I'm sorry, I'm sorry
Speaker Change: So, we look at it from a technology perspective, we look at it from a competitive advantage perspective, we do feel very competitive with our existing footprint and we'll continue to address that.
Speaker Change: Thank you for that. As a second question, just as I look at...
Speaker Change: Disty Inmentory, this is the lowest level of Disty Inmentory you guys have had in...
Speaker Change: in quite some time. And so I'm just wondering, is there a change in strategy here, or is it just a reflection of the softer outlook?
Speaker Change: How do you guys know that this is the right level, and I would think, given the macro uncertainty,
Speaker Change: Your distis would also want more geographic based inventory and flexibility there. So why drain the channel at this point in time? And yeah, just, is this where we're going to hold these inventory levels? Okay, let's move on.
Speaker Change: No, so if you think about it from our weeks of inventory, we are where we want to be. That's our sweet spot. I said we're focused on 19, 11 weeks and we'll go up or down depending on if we have a ramp in the following quarter or not. So we were managed to business within that range. As far as the dollars, you know, we've always set. We maintain a very high discipline on this tea inventory. Thank you very much. Thank you very much.
Speaker Change: I'll tell you, distribution will take more inventory from us, but however what we are waiting on is a really sustainable recovery.
We've seen the starts of it.
So, as the top line revenue rose into the outlook,
Speaker Change: Then we will continue to feed the inventory and the channel to service the customer.
for us.
Speaker Change: So we don't see that as a call it a strategic drain of inventory but more of a management of the inventory without look that we see in the macro environment.
Speaker Change: from a dollar perspective that very well can change, as we see more sustainable signs of recovery. But you can expect the weeks of inventory to remain in that range that we've described. Thank you very much.
Thank you, Mr. Sir.
Speaker Change: Ladies and gentlemen, that's included the Q&A portion of today's conference. I'd like to turn the call back over to Hassane Elkary, president and CEO for any closing remarks.
Speaker Change: Thank you for joining us on the call this morning. As we navigate the rest of this year on behalf of the executive team, I'd like to express my gratitude to our global employees, our customers and our shareholders for the commitment and dedication to onsemi. Thank you.
Speaker Change: Little ladies and gentlemen, that's conclude today's presentation. You may now disconnect and have a wonderful day.