ON Semiconductor Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day and thank you for standing by. Welcome to the onsemi First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded.
Thank you, Kevin. Good morning and thank you for joining onsemi's First Quarter 2024 Quarterly Results Conference Call. I'm joined today by Hassane El-Khoury, our President and CEO, and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with our 2024 first quarter earnings release, will be available on our website approximately 1 hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website.
Thank you, Parag. Good morning and thank you all for joining us on the call. In the first quarter, our worldwide team delivered revenue of $1.86 billion, non-GAAP gross margin of 45.9% and non-GAAP earnings per share of $1.08, all above the midpoint of our guidance. We have remained laser focused on our execution, driving new design win growth of 30% quarter-over-quarter, and gaining share in silicon and silicon carbide based on the strength of our technology.
Thanks, Hassane. Our teams have been relentless in their pursuit of operational excellence. Their focus on execution to drive more predictable and sustainable results once again delivered first quarter results that exceeded expectations. Our ability to respond to the current market environment and deliver better results than ever in a downturn demonstrates the resiliency we've built into the business over the last 3 years.
[Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank.
First question, Hassane, I just want to get into the linearity of demand you saw in the first quarter and thus far in the second quarter and maybe specifically what you're seeing in the silicon carbide side. I know you said that the market TAM is going to be slower, but you'll still grow 2x that. What's your estimation for what the market TAM is going to do?
Yes. Specifically, on the first quarter, we did see a slowdown through the quarter. Specifically, if I were to break it, you can think about it after Chinese New Year, typically, we would expect a slight recovery or back to linearity, and we didn't -- that's where we started to see some of the incremental softness that we talked about, specifically in auto.
I guess for my follow-up, Thad, from you -- one for you on the gross margin side of things. Congrats for holding the 45% floor. Can you just walk some of the idiosyncratic puts and tastes going forward? I know you said what the utilization impact will be when revenues and all of that go up. But East Fishkill, exiting fabs, all those sorts of things, what sort of -- what are the pluses and minuses as we think about gross margin through the year?
Sure, sure. So just starting with the utilization. So as I mentioned in the prepared remarks, 1 point of utilization is 15 to 20 basis points of gross margin improvement. So think about us being at the mid-60s. If we get back up into the low 80s, you can do the math on the tailwind there.
Our next question comes from Vivek Arya with Bank of America Securities.
Hassane, I'm trying to understand the message and the outlook for the second half that we get the -- weaker and the headwinds for Q2, but how should we think about the pace of recovery from here? Because I thought I heard Thad say that you plan to increase, I think, distribution inventory. That sounds like a positive message, but if things started to get weaker towards the end of Q1, that doesn't sound like a positive message.
Yes. I'll -- let me try to clarify here. First off, I'm not going to call the bottom. I was very clear last time, I'll call it when I'm sitting on the top on the other side. But what we are seeing -- we did see the slowdown -- that slowdown -- inventory digestion and demand. And I believe the 2 are related persistent in our outlook for Q2. But for the second half, we are starting to see stabilization in demand.
Okay. And then on the silicon carbide, just 1 or 2 near term and then kind of the longer term. On the near term, what did your silicon carbide sales do in Q1, either sequentially or year-on-year? And what's your China exposure?
Yes. So on the first question, we're not breaking up the silicon carbide on a quarterly -- last year, we annual and we talked about, for both competitive reasons, we're not breaking up the quarterly. What we have said is, it will obviously increase in 2024 from 2023, but we will update the annual year or the annual results for 2024 as we get towards the end of the year.
Our next question comes from Chris Danely with Citi.
Just another question on silicon carbide. So if you're not going to give us the quarterly revenue, what are gross margins doing? Are they stabilizing? Or are they going down? And then how about your pricing expectations for the rest of the year? Have your pricing expectations changed? And what revenue level do you need to get -- to that 50% gross margin target?
Yes. The -- I think the gross margin is -- for silicon carbide is stable. As we talked about last year, it will remain stable as we increase revenue, but we've also added capacity. So kind of the utilization and the growth will offset each other to give us that stability in the gross margin.
Great. And then for my follow-up, between your 2 big markets, auto and industrial, would it be fair to say that the industrial market appears to be stabilizing, but the automotive market is getting a little bit weaker? And is all of that weakness in silicon carbide? Or is there weakness in auto outside of silicon carbide?
Sorry, you blanked out the last [indiscernible] -- I didn't catch it.
Oh, okay. Yes. Can you guys hear me okay now?
Yes, we can hear you Chris.
Okay. Great. So just between the 2 big end markets, auto and industrial, is it fair to say that broadly speaking, the industrial market for you guys is stabilizing? And then on the automotive market, is it fair to say it's getting a little bit incrementally weaker? And is that incremental weakness all silicon carbide? Or is there weakness in the non-silicon carbide automotive business?
Yes. I think at a high level, between the market, your comment is true. I don't think from an overall -- from the automotive side, the second part of your question, I don't think it's only on the silicon carbide.
Our next question comes from Toshiya Hari with Goldman Sachs.
I had a question on the silicon carbide business as well. For this year, Hassane, what's the rough split between automotive and industrial? And more importantly, I was hoping you could speak to your diversification efforts. I think customer concentration has been a bit of an issue from an investor perspective. Your largest customer was significant last year. I think they'll continue to be significant this year, but how should we think about your customer base and your customer mix broadening, an SiC specifically, going forward?
Yes. So the first part of the question. It's been pretty consistent. You can think about it as 80-20, 80% auto, 20% industrial, give or take. Depending on the quarter and when the ramp happens, they're a little bit asynchronous ramps based on the end market.
Great. And as a follow-up, I feel like you talked about data center a little bit more than on prior calls. To level set us, can you speak to the exposure you have to AI or data center more broadly today? And how are you thinking about the growth profile there over the coming years given the focus on AI infrastructure spend across your end customers?
Yes. If you go back to our last Analyst Day where Sudhir, in his prepared comments, he talked about the power tree being very similar in automotive, industrial and cloud and data center. We've talked a lot about our penetration and our success in auto and industrial, and we've shifted our focus over the last 3 years to the cloud and data center.
Are you able to size it for us today? Is it low singles, mid-singles? Any hints there?
Not yet.
Our next question comes from Gary Mobley with Wells Fargo Securities.
Hassane, you probably realized this already, but most investors are worried about the ability for non-China silicon carbide suppliers to compete in the China market against local competition.
Yes. Look, I've always been very consistent on -- we compete on the value of our products. Because at the end of the day, if you don't have value in the product, somebody somewhere is willing to take a lower margin for just good enough. That's not the business we're in. Therefore, maintaining our investments and maintaining an aggressive road map that provides value for the customer.
As a follow-up, I wanted to ask about your design win metrics. You called out a 30% quarter-over-quarter increase in design wins. I presume that's lifetime value. But looking at it as a more long-term basis, what -- the trends you're seeing there, lifetime value on maybe a trailing 12-month basis, is that supportive of the 10% to 12% long-term revenue growth targets you guys have outlined?
That's right. We do see that. That's kind of based on the model. You're right, it is a lifetime revenue. But the way I look at it, to support the 10% to 12%, it is the, I guess, the overlaid annual revenue on top of the base, on top of the new products that continue to grow. If I put all of these together, our next outlook is supporting the 10% to 12%. So you take the base, you add the new products, and you add new design wins on top of it, and that layering effect gives us that 10% to 12% growth.
Our next question comes from Harsh Kumar with Piper Sandler.
Hassane, I had a quick question for you on distribution and OEM partner inventory. I guess the question is, which one for you is bigger? And then are you comfortable at this point with the inventory you're holding? Clearly, you mentioned that you're raising inventory at the disti, but would you give us some color on the inventory of the OEM partners? And also, this environment is a very good test of pricing. Are you seeing pricing generally hold up pretty well for your products?
Yes. Let me start with the pricing. Pricing is -- we've been saying pricing is stable. That's the power of the LTSA. A lot of the conversations we've had with customers on -- given the demand environment has been more on what do we do on the volumes rather than the pricing. That goes back to win-win. We invested in capacity. We will support customers in a softer market. But it has not been a pricing discussion, and we don't expect it to be a pricing discussion.
Got it. I had a sort of a multipart question on silicon carbide. You talked about 2x growth relative to the market based on design wins, bottoms-up approach. I guess, when you talk to your customers, what kind of growth are they implying?
I don't want to talk about wild possibility. Look, I can only comment on what we see and where the customers and the market is. Silicon carbide is going to grow in 2024. And it's -- and we are going to grow 2x. What I can say about the market is specifically what I commented on earlier, we know the platforms that are ramping this year. We know the platforms we are in. We know what products we are putting in those platforms because think about it by now, all the stuff is qualified and just shipping and ramping. So based on that, that's where the 2x comes in.
Our next question comes from Harlan Sur with JPMorgan.
With the view that dynamics in the second half are going to start to normalize or stabilize, are LTSA, customer calls to revised volumes, push out cancellations on the non-LTSA business, are these activity levels here starting to stabilize or decline ahead of the second half shipment stabilization? Or do these activity levels continue to remain at pretty high levels?
Yes. No, you're right in that comment. So they are -- they have slowed down, requests for pushouts, requests for changing volumes, and so on, which gives us that comfort to call out the second half stabilization that we talked about. But yes, it's basically just like the LTSAs have been a tool in the market softness, and seeing it earlier, that same tool for the slowdown in that discussion and the amendments that we're doing with customers gives us that other side of it.
And Harlan, I would add, if you look at the non-LTSA orders, the order pattern is getting stronger. So that's the stabilization we're seeing. We're seeing less cancellations, less pushouts than what we saw over the last couple of quarters.
Perfect. Then from a geographical perspective, Asia ex Japan, which is primarily China, has declined about 24%-dollar terms over the past 2 years versus the total company, which is down 4%. How much of the decline in China is just broad-based China weakness? How much of it is your lean distribution strategy? Or how much of it is just related to low-margin, commodity-focused China business, which you've been moving away from over the past several years?
Yes. I think -- yes, I don't have the breakdown. But a majority of it is the exits that we talked about because if you recall, a lot of those exits were in the non-auto and industrial. So if you, add it all up and you do it year-on-year, then those exits are targeting that market, which is where the demand has been. So that's expected on the industrial and automotive.
Our next question comes from Christopher Rolland with Susquehanna.
I guess my first one is on the image sensor business, primarily. If you could talk about kind of demand and sell-through there but also inventories and your plans on internalizing some of those wafers from foundry into GLOBFO as well.
Yes. So I think -- look, demand for -- we have a high market share in image sensors. So demand for image sensor overall demand follows the automotive. We do believe that inventory situation is getting better. I put that under the commentary I made about general automotive.
Great. And also just a couple of housekeeping. Did you guys give lead times, utilizations and then cumulative LTSAs and/or next 12-month LTSAs?
Yes. Chris, it's Thad. Let me get through that. So just starting in reverse order, the lifetime LTSA value is $15.7 billion over the next 12 months, the value of that is $4.7 billion. I think that's consistent with what you heard last quarter if you think about what rolled off in Q1.
And Thad, since I have you, do you have SiC LTSAs as well?
I don't have that.
Our next question comes from Joseph Moore with Morgan Stanley.
I wonder if you could talk to the opportunity in hybrid cars. As you sort of see some of the demand shifting from battery power to hybrid, what's the opportunity for ON? Is it silicon carbide? Is it IGBT opportunity? Can you just talk to that?
Yes. So the -- both the opportunity in, I would say, plug-in hybrid, parallel hybrid, or the non-BEV part of the electrification effort in mobility is both on IGBT. And some customers still are putting silicon carbide in there depending on the drivetrain. But the opportunity for us that I called out in prior quarters is about $350 worth of content for non-BEV. That's only in the powertrain. And then about $750 in a full BEV vehicle compared to $50 powertrain content in internal combustion. So those are kind of the ballpark numbers that we've talked about.
Great. And then in terms of the pricing conversation, LTSA pricing, you said, is holding up. When you have new agreements, new customers, new designs, do you see -- is the pricing for that any different than what you've seen in the past, the way -- what pricing is embedded in your current model?
No. I mean we don't see -- on a product-by-product basis, there -- if we say the value of the product is what we price on, value doesn't change, whether it's design to design. Where you do see pricing movement is new technologies that we want to introduce, where the customer gets a benefit but also, we get a benefit, whether it's moving to a much smaller die given the efficiency of our new model. Those are a normal course of the business, where it is incremental margin for us, but you may see an ASP delta. But it's a different product. But that's the way the industry runs.
And Joe, it's Thad. Just remember, we walked away from that $475 million of highly volatile price-sensitive market. So I think in this situation, you probably see some pricing pressure on that. Obviously, we're not seeing a [ beach ]. We don't have that business today.
Our next question comes from Joshua Buchalter with TD Cowen.
I apologize for beating the silicon carbide horse. But I understand there's a lot of volatility in that market, and you're reluctant to give a granular market forecast right now. But maybe we compare it to a few quarters ago, has the increased volatility been, would you say, because of a meaningful change in the adoption curve across the EV industry at a broad base of customers? Or is it because of pushouts or unit dynamics because of the early adopters that's driving the lower and more volatile forecast?
So I can't call out a specific customer. I think everybody can read what specific customers talk about and what their specific outlooks are. But what I would tell you is it's not a pushout, meaning every design that we thought would go to production when we were sitting here in 2023 is still going to production. So it's not a pushout of models. OEMs are not sacrificing the long-term view that they have on BEVs just because of the short-term volatility.
That's helpful, Hassane. And maybe for Thad. You called out that over the last 12 months, you've returned over 100% of free cash flow to investors, which is more than your formal policy of 50%. And was this because of some dislocation in the market you saw, and we should expect it to trend back towards 50%? Or should we expect it to sort of remain elevated here in particular as you go through the period of peak capital spending?
Yes. If you look back over the last 12 months, in Q4, we bought back $300 million. That was above our target there. And that was the dislocation, right? We've said our policy longer term is 50% over the long term, but we will take advantage and be opportunistic where it makes sense.
Our next question comes from Quinn Bolton with Needham.
I know you're not calling for a recovery yet in the second half of the market. But Hassane, your comments on the battery electric vehicle ramps in the second half of the year certainly imply that perhaps silicon carbide sees a better second half. So I'm wondering what's the offset that would keep revenue sort of more stable in the second half if I'm reading your comments about the battery electric vehicle ramps in the second half correctly.
Yes. If you look at the -- and again, we don't guide -- we guide only 1 quarter at a time. But the second half, silicon carbide is higher than the first half of silicon carbide. That's absolutely correct, and that's because of the ramps that I called out.
Got it. Makes sense. And then just -- I think you touched on it quickly in the prepared comments, but can you just give us the progress update on the 200-millimeter substrates and manufacturing needs to look into next year?
Yes. Still on track. What we talked about is qualifying '24 ramp in '25, and we're still on track to exactly that timeline. So no changes there, which is obviously a positive development of our silicon carbide efforts.
Ladies and gentlemen, this does conclude the Q&A portion of today's presentation. I'd now like to turn the call back over to Hassane El-Khoury, President and CEO, for any closing remarks.
Thanks to the tremendous effort of our global teams. We've transformed the company, improved our resiliency, and adapted to changing market conditions to deliver sustainable financial results. We remain dedicated to our customers, our financial commitments, and our strategy of enabling the sustainable ecosystem. Thanks to everyone on the call for joining and supporting onsemi.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.