Parag Agarwal:

Thank you, Kevin. Good morning, and thank you for joining onsemi's second 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 second quarter earnings release will be available on our website approximately one hour following this conference call and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to 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. 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. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ materially from our forward-looking statements are described in our most recent Form 10-K, Form 10-Qs, and other filings with the Securities and Exchange Commission and in our earnings release for the second quarter of 2024. Our estimates or other forward-looking statements might change and the company assumes no obligation to update forward-looking statements to reflect the actual results, change assumptions, or other events that may occur, except as required by law. Now, let me turn it over to Hassane. Hassane?

Thad Trent:

Thanks, Hassane. In the second quarter, our teams once again demonstrated remarkable resilience and adaptability in navigating a challenging market environment. Our Q2 results exceeded the midpoint of our guidance with revenue of $1.74 billion, non-GAAP gross margin of 45.3%, non-GAAP operating margin of 27.5%, and 12% free cash flow margin. We continue to deliver consistent gross margin performance against a challenging market and underutilization, once again demonstrating the structural improvements in our business model. Q2 revenue declined 7% sequentially and 17% from Q2 of 2023. This decline was driven by an ongoing inventory correction in the automotive and industrial end markets, which together contributed 79% of our revenue. While we are facing short-term demand uncertainty, our long-term outlook remains unchanged. We are at the forefront of the fastest-growing segments of the automotive, industrial, and AI data center markets and we expect to resume our growth trajectory as end-customer inventory levels normalize. In line with our expectations, automotive revenue declined 11% quarter-over-quarter to $907 million, a decline of 15% over the same quarter last year. From the time we embarked on our transformation in Q4, 2020, which included a strategic shift to focus on automotive, our automotive revenue has nearly doubled, largely driven by increasing content for vehicle electrification and ADAS. Our industrial revenue was $468 million, down 2% sequentially and 23% versus the second quarter of 2023. As we noted in our Q1 call, we are seeing pockets of stabilization in this market. Looking at the split between the business units, revenue for the Power Solutions Group, or PSG was $835 million, a decrease of 15% year-over-year. Revenue for the Analog and Mixed-Signal Group or AMG was $648 million, a decrease of 18% year-over-year. And revenue for the Intelligent Sensing Group or ISG was $252 million, a 22% decrease year-over-year. The revenue drop for all business groups was driven by ongoing inventory burn in the Automotive and Industrial market. GAAP gross margin was 45.2% and non-GAAP gross margin was 45.3% compared to 45.9% in Q1 and 47.4% in the quarter a year ago. We continue to maintain gross margins above 45% through this downturn, even as our utilization has reached a historical trough of 65%, which positions us well for a market recovery. For reference in previous downturns, our gross margin was approximately 30% at these utilization levels. We continue to deliver on our Fab Right strategy of driving efficiency across our global operations. In Q2, we executed additional restructuring actions to improve the cost structure of our manufacturing network to support our gross margin expansion plans. We expect our gross margins to benefit once demand begins to recover and we increase utilization back to normalized levels. This coupled with ramping of new products at accretive margins will allow us to achieve our long-term target of 53%. Now let me give you some additional numbers for your models. GAAP operating expenses for the second quarter were $396 million as compared to $319 million in the second quarter of 2023. Non-GAAP operating expenses were $308 million as compared to $306 million in the quarter a year ago. Non-GAAP operating expenses were lower than our guidance due to active cost control and lower variable compensation. GAAP operating margin for the quarter was 22.4% and non-GAAP operating margin was 27.5%. Our GAAP tax rate was 15.8% and non-GAAP tax rate was 16%. Diluted GAAP earnings per share for the second quarter was $0.78 as compared to $1.29 in the quarter a year ago. Non-GAAP earnings per share was $0.96 as compared to $1.33 in Q2 of 2023. GAAP-diluted share count was 433 million shares and our non-GAAP diluted share count was 429.5 million shares. In Q2, we deployed $150 million, or 72% of our free cash flow for share repurchases. Turning to the balance sheet. Cash and short-term investments was $2.7 billion and we had $1.1 billion undrawn on our revolver. Cash from operations was $362 million and free cash flow was $208 million, representing 12% of revenue. Capital expenditures during Q2 was $154 million, which equates to a capital intensity of 9%. We achieved our long-term target ahead of schedule due to higher efficiency resulting from the structural changes in our manufacturing footprint. We expect to remain at or below our long-term target of 11%, including the investments needed for the silicon carbide expansion in the Czech Republic. Inventory increased by $78 million sequentially and increased by 20 days to 214 days. This includes 97 days of bridge inventory to support fab transitions in the silicon carbide ramp. Excluding these strategic builds, our base inventory increased $6 million sequentially to 117 days, which is within our target range of 100 to 120 days. Distribution inventory increased as expected to 8.9 weeks versus 8 weeks in Q1 to support the mass market, which we have underserved for the last two years. Let me now provide you the key elements of our non-GAAP guidance for the third quarter. Today's press release contains a table detailing our GAAP and non-GAAP guidance. Given the current macro-environment and our demand visibility, we anticipate Q3 revenue will be in the range of $1.7 billion to $1.8 billion. We expect non-GAAP gross margin to be between 44.4% and 46.4% with utilization in the mid-60% range. This includes estimated share-based compensation of $7 million. We expect non-GAAP operating expenses of $305 million to $320 million, including estimated share-based compensation of $31 million. We anticipate our non-GAAP other income to be a net benefit of $12 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP diluted share count is expected to be approximately 429 million shares. This results in non-GAAP earnings per share to be in the range of $0.91 to $1.03. We expect capital expenditures in the range of $130 million to $170 million. And as we've previously highlighted, the acquisition of SWIR Vision Systems is not expected to have any meaningful impact on our near or mid-term financial outlook. Through this downturn, we have remained committed to our long-term financial model. We are allocating resources for future growth while continuing to execute on our strategies to enhance operational effectiveness throughout the company. During the second quarter, we announced the consolidation of many of our facilities to improve efficiencies and accelerate time-to-market by centralizing our efforts into fewer centers of excellence. We have continued to invest in R&D to drive long-term growth and capitalize on opportunities in Intelligent Power and Sensing despite the market downturn. We also remain committed to our capital allocation strategy. Over the last 12 months, we have deployed 78% of our free cash flow for share repurchases, significantly higher than our stated long-term target of returning 50%. Since initiating our $3 billion share repurchase program in February 2023, we have returned $814 million to our shareholders. Finally, at, onsemi we are driven to excellence. Guided by this principle, we hold ourselves accountable not only to our financial commitment but also to our environmental initiatives. This past quarter, we published our 2023 Sustainability Report, marking another pivotal step in our ongoing commitment to sustainability and highlighting the progress we have made in the past year. Wrapping up, I'd like to thank our employees for their dedication to excellence. Our strategy is working and we remain committed to unlocking shareholder value. We are a more resilient company with steady growth drivers, an innovation pipeline, and trusted relationships with our customers and suppliers around the world. With that, I'll turn the call back over to Kevin to open it up for Q&A.

Ross Seymore:

Hi, guys. Thanks for letting me ask a question. I guess for my first question, kind of two sneaky parts to it. But any pluses or minuses by your three segments for the third quarter guide? And then the bigger part is, Hassane, you talked about some stabilization on the Industrial side and even Energy Infrastructure potentially rising in the back half. Any sort of similar color on your Automotive business that dropped pretty significantly sequentially? You talked about some design wins in EVs, et cetera. How are you looking at that for the back half of the year?

Ross Seymore:

Yeah. And I guess for my follow-up question, then moving on to the gross margin side of things, Thad. You talked about some of the idiosyncratic drivers, the East Fishkill side of things as well as the fab divestitures in the past. Can you just walk us through any evolution of those? We get the utilization rate when that goes up, that's going to be beneficial. You laid that out clearly. But the 100 basis points from East Fishkill, that's a headwind this year, and then the fab divestitures, which I think is about a two-point tailwind when those kick in. Can you just walk us through how those unfold over the next kind of 6 months to 12 months?

Ross Seymore:

Thank you.

Vivek Arya:

Thanks for taking my question. I wanted to revisit the Q3 outlook question. I think at the midpoint, you're guiding is up a bit sequentially and I was hoping you could, Hassane maybe give us a sense of how you see your different end markets, especially automotive, do you expect that to be up, down, flat sequentially? Thank you.

Vivek Arya:

Okay. And then maybe as a follow-up, over the last few months, we have seen deceleration in battery-powered EV demand. And I'm curious if you look at your silicon carbide outlook for this year in absolute dollars or not versus the market. How do you think it has fared? Do you think -- what you thought in terms of absolute dollars for this year? Is it still on track for that or has that view changed? And then kind of B of that, I think you mentioned more optimism for the China EV market. Is your share in China EV above or below that 35% to 40% share that you think you will have globally for this year?

Vivek Arya:

Thank you, Hassane.

Toshiya Hari:

Hi, good morning. Thank you so much for taking the question. I wanted to follow up on the SiC business as well. To the extent you're willing to share Hassane, curious how that business trended in Q2, whether it be on a sequential basis or a year-over-year basis? And what your expectations are for Q3? And then I guess for the full year, I'm guessing that the mix of your business, whether it be by application or customer has evolved over the past 90 days. Yeah, what's your outlook there by geo and application today versus 90 days ago?

Toshiya Hari:

Got it. Thank you. And then as a quick follow-up, just on distribution inventory, it went up a little bit sequentially at the end of June. Curious what's embedded or what's assumed in your Q3 guidance? And as you think about the next couple of quarters, several quarters, what's your plan in terms of managing that inventory? You sound relatively still muted as it pertains to the cycle. You know, should we expect weeks to stay generally flat, or do you feel like that can go up just given how much you had underserviced that business over the past couple of years? Thank you.

Toshiya Hari:

Very helpful. Thanks, guys.

Vijay Rakesh:

Yes. Hi. Just a quick question on the -- in the prior quarters, you've given your order of backlog. If you could give us some thoughts, color on what the semi -- silicon carbide backlog looks like. Thanks.

Hassane El-Khoury:

Yes, if you look at design-in activity, whatever we feel in the market in the short term, and I call it short-term, given the trend for silicon carbide, not just in BEV, by the way, we talk about silicon carbide in industrial, proliferating further because of the benefit that it brings and even silicon carbide making its way into the power stages of the AI data center. So when we talk about silicon carbide, we're talking about a long-term multi-year megatrend. That's why we're participating in it. So in the short term, of course, we all see what the market shows. But nevertheless, customers are still investing in silicon carbide for their platforms, whether it be a car, industrial, or AI data center, as I mentioned. This is what we can control is our design and capability on our new products, which means that as the market starts to go uptick the other way and BEV starts to proliferate further, we are in a much better position than otherwise we would be if we weren't winning today. The VW Group announcement is an example of such a large deployment of silicon carbide in a electrification platform. So if you talk about backlog as that, that's exactly what we can't control and we're working on. That same story happens in industrial, that same story happens in the AI. We're designed in. Now the ramps will support our growth.

Hassane El-Khoury:

Yes, still on track to what we said we will qualify 8-inch this year, that's when I talk about qualifying, it's substrates all the way through fabs. So that will be qualified this year, starting revenue next year in line with our expectations that I outlined last year. So no change to that. Obviously, we look at the 8-inch as a -- what we've talked about earlier, 8-inch for us is a capacity expansion. So once it's qualified, we sample and we start seeing revenue. We will start increasing the share of 8-inch internal versus 6-inch as we confer -- convert our furnaces and so on in order to support the ramp. But from a capability 8-inch, I'm very happy with where 8-inch is, and therefore, we're right on track.

Operator:

[Operator Instructions] The next question comes from Blayne Curtis with Jefferies. Your line is open.

Hassane El-Khoury:

Yes. I mean, L, I would say flat. So, Blayne, I have no reason to call a recovery. Now look, is there going to be some green shoots here and there, some markets within our automotive and industrial that will fare better than others? Probably, I don't have a crystal ball. That's why I can manage to what we can see and I can guide to what we can see. But what I would put it in perspective is we're not planning or seeing a -- what I would call a recovery, which is a big deviation from kind of flattish. So some recovery in certain areas that will change the course. We don't guide in the out quarters, but that's kind of my view of the market today.

Hassane El-Khoury:

Yes. Yes. I mean we have the difference with image sensing, we do have a big market share in that -- in that market in the ADAS automotive market. So that's more on the recovery of the market itself. But like you mentioned, there is an ASP uplift that will increase our revenue disproportional from just the unit growth and also a penetration rate that as ADAS gets to more level 2+, you got more units within the base of the SAR that we're targeting. So you can think about it as SAR plus the content uplift, both ASPs and units. Now importantly also, I do want to talk about the industrial side of that business where we don't have the same market share as we do in automotive. So there's more expansion we can do. We've had a slew of new products that we've introduced in the industrial market. The SWIR acquisition we've made adds yet another layer of that differentiation and the technology leadership for our image sensing group, that goes specifically in the industrial and the defense market. So again, same strategy of regional and application proliferation that we're doing in the power, you're seeing that kind of parallel in the imaging or the sensing business.

Operator:

[Operator Instructions] Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

Hassane El-Khoury:

Yes, let me start with the last part. We believe it's below end demand as I talk about the inventory burn. But as far as quarter-on-quarter guide and it's hard and I'll give you a piece of advice. It's hard to compare to peers because it's all a timing. In the short term, when I call it within a 90 day plus 90 days, minus 90 days, it's really a timing discussion of how much inventory was there, how far ahead or below end demand. At the end of the day, you have to look at it from an end-demand. End demand is exactly what I -- what I mentioned. We don't see signs of recovery, but we do see signs of stabilization. Over a multi-quarter period, it's all going to stabilize and everybody who ships into auto is going to converge to an auto number plus their content specifically to the company. So I don't look at it as a delta to peers or a delta to our customers. It's literally a -- where do we believe the automotive market is. Some of our Tier-1s have more inventory than others, so it will take them longer. But inventory burn is directly related to demand. Demand accelerates, inventory burns accelerate. Demand doesn't, inventory burn takes longer to achieve. So I would call it just a timing thing. There's nothing, I guess, intentional in managing to a number here.

Hassane El-Khoury:

Yes, look, I mean we still see a growth in silicon carbide as a market driven, of course, by the auto, industrial and AI that I talked about. So it's a broad proliferation. I think it's too early to talk about 2025. We'll have to see how 2024 exit rate is and really what the market does in 2025. If you look at a lot of the reports that are out there and talked to a lot of the customers that have reported already, it's a very broad range of what 2025 is going to look like. So it's too early to talk about 2025. What I can talk about is the rate of design-wins that we have, because that I can't measure, that I can't control and that I can provide where we are. I'm very happy with that progress. We talked about China, and we talked about the Beijing Auto Show where literally we went through every car that got announced in the show and I can tell you exactly that we are designed into it. As those cars ramp and as those cars become successful and the market recovers for, both in China beyond what it is and outside of China, those are the design-wins that are going to ramp for us and dictate what 2025, 2026 and beyond are going to be. So I will tell you, from a design-win perspective and a market relation perspective, we are firing on all cylinders here, or I guess I shouldn't say cylinders. We're firing on all motors today.

Operator:

[Operator Instructions] Our next question comes from Quinn Bolton with Needham and Company. Your line is open.

Hassane El-Khoury:

Typically, well, that's a question for them really. I can't disclose their plan for a ramp. But it's not an on-off switch. I guess, I can say that.

Thad Trent:

Yes, this is Thad. You nailed it, right. When we talk about the L-shaped recovery, it's really our revenue, right. We believe right now, we're still under shipping natural demand as there is an inventory digestion going on. As that inventory is got off, we think our revenue over time will increase again. But yeah, the L-shape is not demand, it's more of our revenue just given the inventory out in the channel.

Thad Trent:

Well, I think it depends on demand as Hassane said, right. I mean, if demand picks up, the inventories bled faster. If demand slows, it takes a little bit longer. But look, for what we can see for the remainder of this year, that's why we're saying L-shaped. If you look at Q3, we're up almost 1%, we'll see what Q4 does.

Operator:

[Operator Instructions] Our next question comes from Chris Danely with Citi. Your line is open.

Hassane El-Khoury:

Yes. Sure. If you recall in our last -- this is Hassane. If you recall on our last call, we talked about the mass market. So it's not really the top customers or the named customers that we have, it's more of the tail of customers that we really ourselves have starved and I've mentioned it multiple times and during the call it, the pandemic where we didn't have a lot of -- we were supply-constrained. We prioritized all of our lead customers at the expense of the broad market or mass market. Right now, we talked about how we're starting to replenish and address the mass market. We started last quarter, so we expected that slight uptick. So it is driven strategically by us. Obviously, the metric for -- just to give you a little insights of how I look at it and why it's important for us. I look at it as new customer counts that we are adding. And that's again mass market thousands of customers. As that remains on an upward trajectory, even today, we will continue to replenish the mass market. So strategically, that's a closed-loop approach that we -- that I look at operationally to manage this.

Chris Danely:

Thanks, guys. That's really helpful. And then for my follow-up on silicon carbide. I know you're not given any numbers or anything, but if we look at your backlog and pricing for the year for next year, was there any volatility? Has that changed in the last three months? Any sort of changes in your own like 2024, 2025 backlog, or pricing assumptions?

Chris Danely:

Great. Thanks, Hassane.

Christopher Rolland:

Hey guys, thanks for the question. Just given some of your announcements mid-quarter on data center power using SiC, I was wondering if you guys could size that opportunity. It sounded like AI in 2025 was at least $0.5 billion opportunity, just running some rough numbers there. But if you could size the opportunity to talk about kind of your expected market share, or any other details that would be terrific.

Thad Trent:

And Chris, if you go back to our Analyst Day last year, we talked about the data center growing at 22% over a multi-year period. I think with AI and data center ramping, you can think about that over a multi-year period. It's probably being higher than that.

Thad Trent:

Yes, Chris, I would say it's pretty stable. So the lifetime value of our LTSAs are $14.7 billion. If you look at what's shippable over the next 12 months, it's about $4.4 billion, so about 30% of that. Pretty consistent with the -- with what we've been seeing as you ship LTSAs. And I think as we've said, the LTSAs, pricing is stable, it gives us that call on demand changes and why we've seen many of the market shifts prior to many of our peers. So I think the LTSAs are strategic in the way that they're actually proving value in how we manage our business.

Christopher Rolland:

Thank you, guys. Very helpful.

Harlan Sur:

Yes. Good morning. Thanks for taking my question. Your direct customer business was down about 18% sequentially in the June quarter versus your disti business, which was up 5%. So it seems that most of the inventory-related issues are with your direct customers. And given that orders are probably the best indicator of inventory dynamics at your direct customers since you don't monitor the sell-through. Did the order trends in direct start to stabilize in Q2? And has that stabilization continued so far quarter-to-date?

Harlan Sur:

Great. Thanks for that. And then other of your peers in the analog and power markets have seen a pickup in China. I know in the first quarter, you had not seen the seasonal pickup post-Chinese New Year as you move through the second quarter. It looks like Asia, which includes China, you did see slight sequential revenue growth. So have the order trends also started to stabilize and improve in this region? And is it broad-based or biased more towards industrial and/or automotive?

Harlan Sur:

Great color. Thank you.

Tristan Gerra:

Hi, good morning. Thanks for letting me in. Just a follow-up on China. How sustainable do you believe this is? How would you categorize inventories in China specifically? Are you seeing any type of government incentives? Or is it just that there's a rebound after several quarters of weakness?

Tristan Gerra:

Okay, great. Very useful. And then as my follow-up. Maybe I missed it. What was the point-of-sales for disti in Q2 sequentially? And what was the percentage of disti of your total revenue in the quarter?

Tristan Gerra:

Great. Thank you.

Harsh Kumar:

Yes. Hey, thanks, guys. I guess congratulations on weathering the storm reasonably well in this cycle, gentlemen. Hassane, one for you. Is it fair to say that your win at Volkswagen should put all the wafer quality rumors, guzzle, conjecture, whatever you want to call it that's been going on in the last year that should be put to rest now that you've got a major win like Volkswagen? And then the second part to that question is, is there still -- is your -- are your wins in silicon carbide still a function of wafer availability, the fact that you are -- you can make your own wafer? And did you say that you're the lead at Volkswagen for this particular set of wins?

Harsh Kumar:

Appreciate it, Hassane. And for my follow-up. In the past cycles, Hassane, we've seen the channel recover fast, particularly when it's been starved in this manner. I guess, I'm going to put you in a theoretical spot here. Why do you think the channel is not spiking up? Is it because there is still plenty of inventory out there and they don't feel like they need to load up just yet and it's going to come or is something shifted in the way they're thinking about stocking product?

Harsh Kumar:

Got it. Thank you, gentlemen.

Hassane El-Khoury:

We continue to prioritize operational excellence through the market correction and demonstrate the resilience of our business. We're very proud of our global teams for executing through the current demand environment with prudent financial management. We are a better-structured company because of the work we put in during the downturn. Thank you all for joining us today.

Hassane El-Khoury:

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.

Thad Trent:

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:

[Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank.

Hassane El-Khoury:

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.

Thad Trent:

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.

Operator:

Our next question comes from Vivek Arya with Bank of America Securities.

Christopher Danely:

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?

Hassane El-Khoury:

Sorry, you blanked out the last [indiscernible] -- I didn't catch it.

Thad Trent:

Yes, we can hear you Chris.

Hassane El-Khoury:

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.

Operator:

Our next question comes from Toshiya Hari with Goldman Sachs.

Hassane El-Khoury:

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.

Hassane El-Khoury:

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.

Hassane El-Khoury:

Not yet.

Gary Mobley:

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.

Hassane El-Khoury:

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.

Hassane El-Khoury:

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.

Harsh Kumar:

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?

Harsh Kumar:

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?

Hassane El-Khoury:

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.

Harlan Sur:

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?

Thad Trent:

And Harlan, I would add, if you look at the non-LTSA orders, the order pattern is getting stronger. So that's the stabilization we're seeing. We're seeing less cancellations, less pushouts than what we saw over the last couple of quarters.

Hassane El-Khoury:

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.

Christopher Rolland:

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.

Christopher Rolland:

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?

Thad Trent:

I don't have that.

Joseph Moore:

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?

Joseph Moore:

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?

Thad Trent:

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.

Joshua Buchalter:

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?

Joshua Buchalter:

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?

Operator:

Our next question comes from Quinn Bolton with Needham.

Hassane El-Khoury:

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.

Quinn Bolton:

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?

Operator:

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.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Parag Agarwal:

Thank you, Liz. Good morning, and thank you for joining onsemi's fourth quarter 2023 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 2023 fourth 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. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliation 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. During the course of this conference call, we will make projections or other forward-looking statements regarding the future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ materially from our forward-looking statements are described in our most recent Form 10-K, Form 10-Qs and other filings with Securities and Exchange Commission and in our earnings release for the fourth quarter of 2023. Our estimates or other forward-looking statements will change and the company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other events that may occur except as required by law. Now, let me turn it over to Hassane. Hassane?

Thad Trent:

Thanks, Hassane. Our ongoing transformation in 2023 delivered significant improvement towards our long-term financial model. Our ability to proactively navigate through the current cycle while delivering better results than ever in a downturn is a testament to the work our teams have accomplished over the last three years. Today, onsemi is a different and more resilient company, having achieved 2023 non-GAAP gross margin of 47.1%, which is 1,440 basis points higher than 2020, the last year in which utilization was at comparable levels. We maintained revenue of $8.3 billion for the year, non-GAAP operating margin of 32.3% and delivered $5.16 of non-GAAP earnings per share. For the year, we returned 140% of free cash flow to our shareholders through share repurchases and we have $2.4 billion remaining on the buyback authorization we announced a year ago. For the fourth quarter, we reported revenue of $2.02 billion, non-GAAP gross margin of 46.7% and non-GAAP earnings per share of $1.25, all above the midpoint of our guidance. Looking at the fourth quarter breakdown by end market, our Automotive business of $1.1 billion grew 13% as compared to the quarter a year ago and declined 4% quarter-over-quarter, in line with our expectations. Still, vehicle electrification and advanced safety features are driving upside as demonstrated by our record automotive revenue for image sensors in 2023. Our revenue for Industrial was $497 million, down 10% versus Q4 2022 and down 19% sequentially as anticipated. All segments have been impacted by macroeconomic factors and slowdown in industrial activity. Our automotive and industrial revenue accounted for 80% of our business in 2023 as compared to 68% in 2022, following our strategy to shift to high growth megatrends for the sustainable ecosystem. In Q4, we exited another $30 million of non-core business and for the full year, we exited $180 million. While we expected customers to find alternative options, the remaining non-core portions of our business are now healthy nearing corporate gross margins and demonstrating the power of our portfolio. Looking at the split between the operating units, revenue for the Power Solutions Group, or PSG was $1.1 billion an increase of 4% year-over-year due to an increase in silicon carbide revenue for auto and energy infrastructure. Revenue for the Advanced Solutions Group, or ASG was $625 million, a 11% decline year-over-year, driven by softness in compute and mobile end markets. Revenue for the Intelligent Sensing Group, or ISG was $308 million, a 13% decrease year-over-year due to a decline in compute and industrial. In the fourth quarter, our GAAP and non-GAAP gross margin of 46.7% was above the midpoint of our guidance. Our gross margin exceeded expectations despite total utilization decreasing to 66% from 72% in Q3, further validating the structural changes we have implemented over the last three years. We should see the full impact of the decline in utilization materialized in Q1. At East Fishkill, we have already made progress by improving the overall cost structure of the fab making it 50 basis points less dilutive than expected in the fourth quarter. Based on our current outlook, we expect to hold our gross margin above the mid-40% floor with utilization in the mid-60% range. Silicon carbide gross margin also remained above 40% with high profit fall through and we expect to maintain these levels through 2024. Now let me give you some additional numbers for your models. GAAP operating expenses for the fourth quarter were $330 million as compared to $316 million in the fourth quarter of 2022. Non-GAAP operating expenses were $306 million as compared to $300 million in the quarter a year ago. GAAP operating margin for the quarter was 30.3%, and non-GAAP operating margin was 31.6%. Our GAAP tax rate was 7.8%, and our non-GAAP tax rate was 15.4%. GAAP earnings per diluted share for the fourth quarter was $1.28 as compared to $1.35 in the quarter a year ago. Non-GAAP earnings per share was above the midpoint of our guidance at $1.25 as compared to $1.32 in Q4 of 2022. Our GAAP diluted share count was 440 million shares, and our non-GAAP diluted share count was 434 million shares. In Q4, we were aggressive with our share repurchases and returned 136% of free cash flow to shareholders through $300 million of buybacks. Turning to the balance sheet. Cash and cash equivalents was $2.5 billion, and we had $1.1 billion undrawn on our revolver. Cash from operations was $611 million, and free cash flow was $221 million or approximately 11% of revenue. Capital expenditures during Q4 were $391 million, which equates to a capital intensity of 19%. We expect 2024 capital intensity to be in the low-teens for the full year ahead of our original plan and driven by our improved silicon carbide manufacturing output on 150 millimeters. Inventory increased by $27 million sequentially and days increased by 13 days to 179. This includes approximately 74 days of bridge inventory to support fab transitions in the silicon carbide ramp. Excluding these strategic builds, our base inventory decreased $52 million sequentially with days of inventory at 105 days. We continue to proactively manage distribution inventory. Thus the (ph) inventory was down $11 million sequentially with weeks of inventory at 7.2 weeks versus 6.9 weeks in Q3. We have been underserving the mass market through this channel, while we focused on our LTSA commitments. We expect to replenish the channel in 2024 to service the long tail of customers and expect inventory to start to normalize with increase in inventory levels between seven and nine weeks over the next few quarters. Now let me provide you the key elements of our non-GAAP guidance for the first quarter. A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our fourth quarter results. Given the current macro environment and our demand visibility, we anticipate Q1 revenue will be in the range of $1.8 billion to $1.9 billion with softness across all end markets. We expect non-GAAP gross margin to be between 44.5% and 46.5%, primarily due to lower factory utilization and continued EFK headwinds. Our Q1 non-GAAP gross margin includes share-based compensation of $5 million. We expect non-GAAP operating expenses of $305 million to $320 million, including share-based compensation of $27 million. We anticipate our non-GAAP other income to be a net benefit of $8 million with our interest income exceeding interest expense. This benefit is a result of the debt restructuring activities we have completed over the last two years, reducing a significant historical drag on the P&L. We expect our non-GAAP tax rate to be in the range of 15.5% to 16.5% and our non-GAAP diluted share count for the first quarter is expected to be approximately 433 million shares. This results in non-GAAP earnings per share to be in the range of $0.98 to $1.10. We expect capital expenditures of $310 million to $340 million in brownfield investments primarily in silicon carbide and EFK. As we navigate through 2024, we will focus on operational excellence without losing sight of our long-term commitments to our customers and our shareholders. We remain perfectly positioned in the markets where we focus and continue to engage in long-term supply agreements with our strategic customers. We remain confident in our 53% long-term gross margin target as we execute our fab right strategy to optimize factory utilization and drive operational efficiencies across the company. With that, I'd like to start the Q&A. So I'll turn it over to Liz to open the line.

Ross Seymore:

Hi, guys. Can you hear me?

Ross Seymore:

Great. First question is on the automotive side of things. I guess, kind of two parts to it. The silicon carbide side, it sounds like there's a little bit of a difference between the third-party estimates and what you're seeing from OEMs. And then last quarter, you talked about some weakness emerging in the Tier 1 guys in Europe. Can you just give us an update on what you've seen on kind of that side of the business as well?

Ross Seymore:

Thanks for that. And I guess my follow-up for that. On the gross margin side, it looks like you're going to hold the 45 floor you talked about before. Can you just walk us through the puts and takes as the year progresses? And perhaps how big of a headwind is the utilization of 65% is going to be the floor on the utilization side approximately how much of an impact is that versus kind of the long-term target of getting back to 53%? Thank you.

Ross Seymore:

Thank you.

Operator:

Our next question comes from the line of Vivek Arya with Bank of America.

Hassane El-Khoury:

Yeah, Vivek. Thanks for that question. Look, if you think about what helped us navigate better than a lot of our peers given the guide of companies that guided already. And like you mentioned, 20%, 30% is really the fact that we talked about the LTSAs. We talked about how, at a minimum, the LTSAs are going to provide us a phone call when things start getting softer. Those phone calls started happening in industrial before anyone talked about industrial softness. I'm talking six quarters ago, that's when we started taking utilization down, that's when we time even more what we ship into the channel to be way closely tied to what we believe the demand is at that point in time. The other thing in automotive, we talked about it in our Q3 earnings over 90 days ago when we talked about we started to see signs because we started getting the calls about the LTSAs and customers wanting to get some relief on the volume. So those are the tools that we have implemented over the last few years in order to give us that visibility. But it's not -- the LTSAs are not going to solve a demand problem. What LTSAs have done has allowed us to prepare what we do in response to a softer demand environment. And you've seen we put a tight management on [indiscernible] inventory. It didn't bubble up. We've actually reduced our utilization. We've reduced our base inventory in dollars. All of these are signs of the resiliency we have in our model, which, by the way, all of them will be tailwinds on the other side of that. Now as far as do we -- what we believe the trough is Q1 or not. Look, I'm smart enough not to call a bottom until I'm standing on top of the hill looking back at it. So I'll let you know when that happens.

Hassane El-Khoury:

Yeah. So I'll first cover on -- in Q4, our revenue for silicon carbide went up as we discussed in the Q3 call and as we expected, so it came in line with our expectation. Again, it grew from Q3 to Q4. So that shows both the diversification and the strength in that business that will also remain in 2024 with the growth we're going to see in 2024. Now the reason we don’t talk about absolute numbers, it is a ramping business, and it is – the lumpiness of a very new ramping business is going to be in silicon carbide like it is with any ramping business that is tied to adoption. That’s the reason we went to 2x market. And by the way, it is what we pecked you at our Analyst Day. So we didn’t really change what we do. We change the short term more on the long term. We’ve always said we’re going to outgrow the market. We’re going to be 2x the market. That is our trajectory for the next five years that we discussed at Analyst Day. And my comments are, we will remain committed to that trajectory based on the design-ins we have. And as I mentioned on Ross’s question, all the design-ins are done. All the shipments have been made for the ramp to start with a very broad range of customers. The question remains what is end demand going to do. And if end demand is better than what we are forecasting, we’re going to grow better than what we forecast at 2x the market. That’s where I would leave kind of the – I’m going to call it, the short term, which is 2024.

Operator:

Our next question comes from the line of Chris Danley with Citi.

Hassane El-Khoury:

Hello. Hi, Chris.

Hassane El-Khoury:

Let me cover the pricing, one, because it's easier. Pricing has not changed as we've always discussed, our pricing is tied to the LTSAs, although we will discuss with customers on volume changes depending on ramps or end market, as I discussed earlier. Pricing is consistent. Therefore, I'm not seeing any of the pricing impact other than the efficiencies that we get in our -- as we improve yields as we transfer technologies, et cetera. Those are very tied to technology advancements that actually enhance our gross margin. So that's on that. As far as customer concentration, we will remain with a few handful of lead customers. That's not going to be any different from 2023. However, as a percent, we're going to see more diversification. As we ramp more customers across the worldwide, both in Asia and North America, and you're going to start seeing Europe ramp up in the second half of the year from design wins we've done over the last couple of years. So we will remain with a profile of having key customers. I won't discuss the percentage of revenue for each, but it will just keep diversifying as we predicted in the Q3 call.

Thad Trent:

Or lack thereof?

Thad Trent:

And Chris, to give you a little more color on the Q1 for auto and industrial. We expect both of those end markets to be down kind of high single digits quarter-on-quarter in Q1. So we're not seeing a recovery of either one of them yet.

Operator:

Our next question comes from the line of Toshiya Hari with Goldman Sachs.

Hassane El-Khoury:

Yeah.

Hassane El-Khoury:

Yeah. Look, the business, given that the business is tied to auto and industrial, over 90% of our revenue in image sensor is auto and industrial. That has been a very active really transition over the last few years, moving our capacity to auto and industrial, where a lot of the growth has been away from the consumer and the web cams and all of that. So that transition is behind us. Therefore, what I'm seeing from a financial performance, the margin performance is much better than it's ever been. It's higher than the corporate average. So it is actually accretive. And profitability is in, I would say, around the corporate. As we maintain OpEx in that business and invest in innovation like the 8 megapixels and the Fab transfers. As far as the mix change from outside to inside, that's more of a longer term. We sampled our products out of East Fishkill, but until that ramps and becomes a meaningful percent of revenue, you're not going to see an impact on margin from a mix change to an internal sourcing. But that will be part of our call it, outlook as we get to the 53% margin model for the company. That will be a contributor.

Thad Trent:

Yeah, Toshi. It's Thad. Look, I don't think the march to the 53% gross margin is revenue dependent. Clearly, we've got a tailwind as we crank up utilization as the market normalizes and recovers in the outer years. But we don't look at it, given our current manufacturing footprint, we don't look at that as the primary driver being revenue. You nailed it, right? It's the utilization, it's the EFK getting that cost under control. It's the monetization of the divested Fabs that we divested in 2022. And then it's the ramping of these new products that are accretive to gross margins. All of that will give us the tailwind that gets us there. Clearly, we've got to have some growth from here, but we don't need to have the growth that you talked about. So we look at it much more as internally controlled, but what we can execute to versus a demand-driven, revenue-driven number.

Operator:

Our next question will come from the line of Gary Mobley with Wells Fargo.

Thad Trent:

Yeah.

Thad Trent:

No. Look, I think Hassane answered that earlier. We're not calling a bottom here. In terms of utilization, we think we're going to be in this kind of mid-60% range until we normalize -- the market normalizes and starts to return to the levels that we saw earlier in the year and in 2022. So utilization will kind of stay at this level. In terms of inventory, if you look at what we've been doing, we've actually been growing what we call our strategic inventory, silicon carbide and the Fab transition. If you look at the inventory, what I call our working inventory or base inventory, it was actually down $52 million sequentially. Days were up just because the COGS number was a lower number. But we've been managing that very effectively and kind of in a good tight range here. I expect as we go through the year, we'll build a little bit more of the strategic inventory in terms of dollars. But we'll burn that off over a multiyear period that's always been in our plan as we exit those Fabs and start to bring that production into our internal Fabs. So we're actually -- in terms of base inventory, we're happy where we are.

Hassane El-Khoury:

Yes. So look, the fact that I'm highlighting in my prepared remarks tells you how excited I am about the progress that we've made with a brand-new platform. So as far as technology development, technology development is actually on track, a little bit ahead of schedule as far as products are concerned. We've already taped out a few of our lead products. We will be sampling here in early '24. And then obviously, there's a design cycle before you get to revenue. So from all leading indicators of, one, the competitiveness of the platform; and two, the competitiveness of the products and the adoptions that I see from -- early adoption that I see from customers, all of those are at or ahead where we thought that technology will get us. You'll hear more about it as we get through 2024 about what that technology platform is. But I will tell you, it is the most competitive mixed-signal analog platform that exists in the market today, and it will carry with it products that are highly synergistic with what we do on the power side of it. So very complementary drivers, controllers as Sudhir mentioned in Analyst Day. So we remain on track. I'm more bullish than I was when we did Analyst Day, given the progress, and we will continue to push forward through 2024.

Operator:

Thank you. Our next question will come from the line of Josh Buchalter with TD Cowen.

Hassane El-Khoury:

Yeah. From a supply, if you look at a lot of the Fabs and the capacity that the whole industry has talked about versus a trajectory of growth for electrification in general, I do believe that technology will remain constrained. Now of course, in the short term, capacity for 2024 to a first order is put in place. So it is a demand driven. But that goes back to the lumpiness of the ramp that we've always talked about. So I don't see that as additional capacity or overcapacity given that it is temporary in nature and the growth is going to remain. The way we are managing it, of course, is -- a lot of it is internally driven. Majority of our -- substrate majority of our supply is generated internally and we modulate that as we convert to 8-inch. We talked about taking utilization down in the last quarter's earning -- utilization -- sorry, the capacity. Capital intensity will be down in 2024 and that's because we've been performing better on our 6-inch and therefore, we're able to ramp 8-inch faster than we originally expected. So we're going to modulate this internal-external supply in order to tag on to what we see as a demand signal. So we don't see a underloading the above and beyond what you see in the company, and we'll manage it that way because revenue is going to recover. EVs are going to keep growing, whether it's 20 to 30, 30 to 40, it doesn't matter. It's going to grow, and it's a multi-decade growth, given that the penetration of silicon carbide and EVs is still below 25% and EVs in general, are below 25%. A lot of upside in that business, it does not change our outlook for the mega trend, and we will continue to invest in the long term.

Joshua Buchalter:

Got it. Thank you. There's a lot of helpful context there. As my follow-up, I believe in the prepared remarks, you mentioned that at some point in 2024, you were going to look to refill the channel. Could you maybe provide some context of what signals you would need to see to go ahead and do that. I know you mentioned you're not planning on a recovery, but is a recovery needed to get you to refill the channel? And I guess how much of a revenue tailwind would you expect that to be? Thank you.

Joshua Buchalter:

Thank you, Thad.

Christopher Rolland:

Hey, guys. Thanks for the question. Can you guys talk about your overall levels of LTSAs. And then if you can, double clicking the SiC LTSAs, I think you've given industrial in the past as well. Anything there -- and then the update on the SiC customer from last quarter, did they come back? And did you fill them this quarter or what are your expectations there? Thank you.

Hassane El-Khoury:

Yeah. As far as -- look, I don't want to comment about specific customers, but it came exactly as we guided last quarter. And overall, it came higher than Q3. So -- we said last time that we'll keep ramping, we'll keep ramping through '24, and that's coming in exactly as we expected. So that temporary, I would say, demand signal that impacted Q4 is behind us, and we're moving forward with the ramp.

Thad Trent:

Yeah, Chris. When we rolled this out, we thought we would exit somewhere between $800 million and $900 million over a multiyear period. And as you know, we've overcalled this for a couple of years now. I think that gives you an indication of the value that we bring to these customers. So for the year, we exited $180 million, think about over the multiyear period, it's about $475 million. What's remaining is good, healthy business at the corporate average. So as we've said, at this point, if our customers haven't found another source, we're just going to consider this good business as long as we don't need that capacity. So we'll continue to support those customers. Those customers are valuing that and valuing our ability to support them because we provide them many products, not just these products we're talking about. So we're not going to talk about exits any further, I'd just be in our baseline.

Operator:

Our next question will come from the line of Quinn Bolton with Needham .

Hassane El-Khoury:

Yeah. We're -- actually, our position in China is -- we're very well positioned. I think last quarter, we talked about having LTSAs with four of the top five China OEM, both qualified and ramping revenue. But again, it's tied to the end demand commentary I put before. So all are ducks in a row as far as the platforms, the qualification on these platforms, the early ramps on these platforms. That's both SiC and IGBT, as I mentioned, both are seeing the growth on electrification in general, all flavors of electrification. But we feel pretty good about our success and our exposure in China for EV. And that's, by the way, I would extend that to the industrial side of it with energy storage is the same commentary with our engagement with the OEMs, a lot of them are based in China.

Thad Trent:

Yeah. It's exactly that. I mean we get visibility through the LTSAs, but more importantly, as we've been managing that base inventory. It's down at a working level. We have an over shipped to our Distis (ph). We've kept our working base inventory at optimal levels here. And so as we look forward in the current market dynamics, we feel like we can hold that mid-60 just because of where we are in an inventory position. We don't need to take it lower because we're not over inventoried anywhere. And the fact that we've got to start shipping into the channel to support that mass market we're going to have to build some products for that as well. And that's that broad-based product line, not something specific to silicon carbide. So that's what gives us the confidence of where we are here, given the current market dynamics.

Operator:

Thank you. Our next question will come from the line of Joseph Moore with Morgan Stanley.

Hassane El-Khoury:

I'm trying to tie all the -- so what we -- I guess, in general, if you take out silicon carbide, the silicon business declined. I guess that's the -- at a high level, the silicon business decline. If we look at the amount of decline, it declined with what the expected market decline based on the early reports that I'm starting to see in general. So I don't think our business is an outlier from the market. It may be an outlier for what some of our peers and some -- what others have said. But for us, we're tied more to market because we've been taking a very disciplined approach about what to ship based on the LTSAs and the discussions we've had with the customers that have been ongoing. So I think we feel pretty good about our response to demand signals being pretty quick as far as taking utilization down in response to it and making sure we don't build inventory in the channel in response to it or at the direct customers as a matter of fact. So between these two, I think automotive came in line, except a few of the strength in pockets, like we talked about in image sensor, which is a content growth and an ASP growth approach here.

Operator:

Thank you. Our next question will come from the line of Harsh Kumar with Piper Sandler.

Hassane El-Khoury:

Yeah. Look, I'll cover the first one and then a little bit on the second question. Look, it's not a matter of did we cut it off and did we do enough (ph). It's -- we are guiding based on our level of visibility and based on our very close engagement with the customers. Where we guided is where we believe and based on the quarter progression where we believe the customers need from us. So it is a demand-driven signal. Now the difference between our smaller reduction in the first quarter versus some of the larger reductions from some of our peers is historical. We've been tapering down a lot of our -- what we ship to customers. And we believe we've been closer and more in line with demand that our customers need versus some of our peers that don't have that same visibility levels with whatever construct they have on whether LTSAs or similar program. We believe the LTSAs gave us that visibility. We have been engaged with customers earlier than most of our peers, and we believe we have been closer to what a real demand signal is and therefore, changes to demand signals are not as drastic as with some of our peers. So when we talk about our guide is better than some of our peers, I think our business and where we are with our business, we put ourselves in a much better position than some of our peers. And you can see that, by the way, not just on the revenue, you can see that on our utilization. You can see that on our base inventory. You can see that on our channel inventory. All of these are better and show better discipline than some of our peers that had a much larger correction. So we don't see this as a correction, what we see it is a view and a transparent view of what we believe demand is going to do in the first quarter.

Harsh Kumar:

Understood, guys. Very helpful. And then as my follow-up, Hassane, should I think of your silicon carbide business as having a starting point of about $1 billion in 2024 because that capacity, I believe, that came on, the $200 million was, from my understanding, reallocated to other customers. And then part two of the question is you made a very subtle, but I think important comment that something to the tune of you're already running 200 millimeter silicon carbide in the Fabs or maybe on [indiscernible]. Could you just expand on that?

Harsh Kumar:

Very helpful, guys. Thank you.

Hassane El-Khoury:

Through the structural changes we've made over the last three years, we built the resilience required in our business to navigate a dynamic macro environment. We remain close to our customers. We are committed to our financial target model with our strategy of enabling the sustainable ecosystem. Again, we’d like to thank our worldwide teams for their continued tenacity and ongoing contributions to the company’s success, and thank you for joining our call today.

Parag Agarwal :

Thank you, Kevin. Good morning, and thank you for joining onsemi's Third Quarter 2023 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 2023 third 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. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation 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. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual results or events to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ materially from our forward-looking statements, are described in our most recent Form 10-K, Form 10-Qs, our other filings with the Securities and Exchange Commission and in our earnings release for the third quarter of 2023. Our estimates for other forward-looking statements will change, and the company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other events that may occur except as required by law. Now let me turn it over to Hassane. Hassane?

Thad Trent :

Thanks, Hassane. At the start of our transformation, we committed to delivering intelligent power and sensing technologies for the sustainable ecosystem. This meant tailoring our investments, our portfolio, our manufacturing footprint and our resources to focus on the high-growth megatrends in automotive and industrial, such as electric vehicles, ADAS and energy infrastructure. This has become our winning formula, allowing us to deliver the greatest value for all our stakeholders. Combined, intelligent power and intelligent sensing now account for 72% of our business, as compared to 68% in the quarter a year ago. In the third quarter, our financial results exceeded the midpoint of our guidance, demonstrating the resilience in our business in a challenging market environment. Revenue of $2.18 billion increased 4% sequentially, and non-GAAP operating margin was 32.6%. Revenue from intelligent power and intelligent sensing combined increased 5% year-over-year. As for the end markets they serve, we had another quarter of record automotive revenue with nearly $1.2 billion in Q3, increasing 9% sequentially and 33% year-over-year, driven by silicon as well as silicon carbide as the need for electrification and advanced features and vehicles continues to rise. In industrial, our record revenue of $616 million increased 1% sequentially and was up slightly year-over-year with continued strength in energy, infrastructure and medical. The rest of our businesses decreased 4% sequentially and 42% year-over-year as we exited $46 million of noncore business, which was below our expectations and is highlighting the resiliency of this business and the value of our full portfolio delivers for these customers. As always, we'll continue to be opportunistic in these noncore markets where margins are favorable and engagements are strategic with our customers. Looking at the split between operating units. Revenue for Power Solutions Group, or PSG, was $1.2 billion, an increase of 10% year-over-year, with more than 60% increase in auto and 50% increase in energy infrastructure. Revenue for the Advanced Solutions Group, or ASG, was $622 million, a 15% decline over Q3 '22, driven by deliberate exits and continued softness in noncore markets. Revenue for the Intelligent Sensing Group, or ISG, was $329 million, a 4% decrease year-over-year due to lower revenue in industrial applications. Our GAAP and non-GAAP gross margin of 47.3% was down 10 basis points sequentially and 200 basis points as compared to non-GAAP gross margin in Q3 '22, primarily due to headwinds from our East Fishkill fab and factory utilization, offset by strong manufacturing performance in silicon carbide. Total utilization increased slightly to 72% as silicon carbide utilization improved, while silicon utilization trended lower as planned. For the next few quarters, we expect to proactively lower utilization to the mid- to high-60% range while maintaining our gross margin above mid-40%. This is a direct result of our fab-liter strategy of divesting 4 fabs in 2022, which is reducing our fixed cost footprint while we continue to consolidate operations in larger, more efficient fabs. As we move to our Fab Right strategy to optimize and drive efficiencies across our manufacturing network, we expect to generate incremental cost savings over the next few years. We continue to identify opportunities to drive operational efficiencies and remain committed to our long-term gross margin trajectory. Turning to silicon carbide. As Hassane mentioned, our silicon carbide manufacturing output is exceeding our internal expectations. And thanks to the tremendous efforts of our team around the world, we have accelerated our gross and operating margin trajectory. Our Q3 gross margin for silicon carbide was greater than 40% with strong fall-through on a fully loaded basis, including all start-up costs. And as we previously highlighted, we expect our silicon carbide business to be at the corporate gross margin in Q4. Further, the yield improvement learnings we're getting from our 150-millimeter wafer production ramp is increasing our confidence in our 200-millimeter capability and validating our strategy of driving cost savings through brownfield investments. This incredible execution and improved manufacturing output on 150 millimeters enables us to slow our capacity expansion and lower 2024 capital intensity from the high teens to the low teens percentage points ahead of our original plan and closing in on our long-term model. Now let me give you some additional numbers for your models. GAAP operating expenses for the third quarter were $344 million as compared to $634 million in the third quarter of 2022. Non-GAAP operating expenses were $322 million as compared to $304 million in the quarter a year ago. The increase in operating expenses is attributable to a reserve against the receivable balance with a manufacturing partner. GAAP operating margin for the quarter was 31.5%, and non-GAAP operating margin was 32.6%. Our GAAP tax rate was 16.4%, and our non-GAAP tax rate was 15.6%. GAAP earnings per diluted share for the third quarter was $1.29 as compared to $0.70 in the quarter a year ago. Non-GAAP earnings per diluted share was near the high end of our guidance at $1.39 as compared to $1.45 in Q3 of 2022. Our GAAP diluted share count was 451 million shares, and our non-GAAP diluted share count was 439 million shares. In Q3, we returned 75% of our free cash flow through $100 million of share repurchases, and we remain committed to our long-term strategy of returning 50% of free cash flow to our shareholders. Turning to the balance sheet. Cash and cash equivalents was $2.7 billion, and we had $1.1 billion undrawn on our revolver. Cash from operations was $567 million, and free cash flow was $134 million, or 6.1% of revenue. Capital expenditures during Q3 were $433 million, which equates to a capital intensity of 19.9%. As we indicated previously, we are directing a significant portion of our capital expenditures towards silicon carbide and enabling our 300-millimeter capabilities at EFK. Accounts receivable of $958 million increased by $14 million, and DSO was 40 days, down 1 day from the second quarter. Inventory increased by $120 million sequentially, and days of inventory increased by 3 days to 166 days. This includes approximately 64 days of bridge inventory to support fab transitions and the silicon carbide ramp. Excluding these strategic builds, our base inventory declined 7 days quarter-over-quarter to 102 days. We continue to proactively manage distribution inventory. Disti inventory declined $25 million sequentially with weeks of inventory at 6.9 weeks versus 7.7 in Q2. Total debt remained flat at $3.5 billion, and net leverage is 0.25x. As we look forward, I'd like to highlight that onsemi today is a completely transformed company as compared to ON Semiconductor of the past. The structural changes in our business model have eliminated the historical volatility in the margins and earnings of the company. We remain fully committed to delivering strong operational and financial performance for our shareholders in all market conditions. Now let me provide you the key elements of our non-GAAP guidance for the fourth quarter. A table detailing our GAAP and non-GAAP guidance was provided in the press release related to our third quarter results. Given the current macro environment, we are taking a cautious stance in our guidance. We anticipate Q4 revenue to be in the range of $1.95 billion to $2.05 billion. We expect a mid-single-digit decline in automotive given the softness in Europe that Hassane described, with greater sequential declines in industrial and other end markets. We expect non-GAAP gross margin to be between 45.5% and 47.5%, primarily due to lower factory utilization and continued EFK headwind. Our Q4 non-GAAP gross margin includes share-based compensation of $4.3 million. We expect our non-GAAP operating expenses of $300 million to $315 million, including share-based compensation of $28.5 million. We anticipate our non-GAAP other income to be a net benefit of $4 million, with our interest income exceeding interest expense. This benefit is a result of the debt restructuring activities we completed over the last 2 years, reducing a historical drag on the P&L while effectively eliminating exposure to elevated rates going forward. We expect our non-GAAP tax rate to be in the range of 15.5% to 16.5% and our non-GAAP diluted share count for the fourth quarter is expected to be approximately 438 million shares. This results in non-GAAP earnings per share to be in the range of $1.13 to $1.27. We expect capital expenditures of $425 million to $465 million in brownfield investments, primarily in silicon carbide and EFK. On a final note, given the market uncertainty, we are taking a cautious approach as we exit 2023 and plan for 2024. We are taking proactive actions to set ourselves up for success, and we remain focused on our execution. The structural changes we have brought to our business have already proven effective in these market conditions. We have been exiting volatile businesses, lowering utilization, managing channel inventory, controlling wafer starts, and we plan to continue to seek opportunities to improve our efficiencies as we navigate through the current market conditions. With that, I'd like to turn the call back over to Kevin to open up for Q&A.

Ross Seymore :

Hassane, I want to ask about two questions on the automotive side. The first one that you talked about Europe being weaker, burning inventory. Can you give a little bit more color? Is that just Europe? Are you worried at all about that spreading to other regions? And any more color? Is it just inventory? Is it true demand? Any details would be helpful.

Ross Seymore :

I guess as my follow-up also within automotive, but on the SiC side, specifically. You lowered the bar from $1 billion roughly to over $800 million. I think you mentioned 1 customer. I don't expect you to name that one customer, but again, is that inventory? Are you worried at all about any secular changes? Obviously, the EVs cost more on average than ICE vehicles. So some of the dynamics, I would assume, impacting Europe in general would impact the EV side. But any sort of change in your secular belief on the silicon carbide side?

Operator:

[Operator Instructions] Our next question comes from Vivek Arya with BofA Securities.

Hassane El-Khoury:

Yes. Silicon carbide is -- what we are looking at is silicon carbide in '24, basically growing about 2x the market. So it's still on track to the target that we've put out in Analyst Day of growing 2x the market, that we still have that visibility in '24. On the silicon side, we see flat, slightly down. Again, depending on what you believe, the market. We are not planning nor are we looking at a first half of '24 recovery. As I said on the last quarter, we see '24 as kind of going sideways with growth in silicon carbide for us. As far as the exit, by the end of this year, whatever we didn't exit is going to stay with us as a business. So we are not going to see us talking about this, the exits on the legacy business any longer in 2024. I put that all into the silicon outlook that I put out there.

Thad Trent :

Vivek, it's Thad. As you know, we guide one quarter at a time. I think given the macro uncertainty, we're not going to try and forecast 2024 at this point. We feel really good about our pipeline, our design pipeline and our LTSAs at this point. But I think it's too early to provide guidance on '24.

Chris Danely :

So another question on silicon carbide. Can you tell us how much of the weakness in Q4 is silicon carbide versus, I guess, just regular semis? And then you say that you still expect silicon carbide to grow 2x the market in 2024. Has your silicon carbide, I guess, market expectations, have those moved downward over the last 3 months for '24?

Chris Danely :

Great. And then for my follow-up, I know you're not commenting on next year, but I think you said your gross margin should hold mid-40s. So if we look at your peers that have started to see the downturn, they're generally forecasting like three quarters in a row of declining sales. If you guys do have Q1, Q2 revenue down sequentially like your peers that are feeling this, can you still hold gross margins in the mid-40s, would you have to lower utilization rates further? Or I guess would that depend on just how much is silicon carbide versus how much is semis?

Operator:

[Operator Instructions] Our next question comes from Harsh Kumar with Piper Sandler.

Hassane El-Khoury:

Sure. I mean at a high level, it's end demand, if you think about it, and end demand is driven by -- you can call it two things. One is the financial, which is the higher interest rates that have been with us, and now they're taking a toll on end demand. But also, in all honesty, the uncertainty, the macro uncertainty that as consumers, people are starting to feel. Between these two, we look at it and we look at the inventory levels across the board. We look at inventory levels internally that we have. And we've -- you've always seen us operating with a very proactive approach. So our decisions and our outlook is driven by that cautious outlook on what we can control, which is our execution. That talks about taking our utilization down because we don't want to bridge it by keep building inventory. You've seen us take down a lot more on the channel, which sets us up very nicely should that turn the other way. So all of these are proactive decisions that we have taken in the short term but set us up much better in the long run.

Hassane El-Khoury:

Look, I think from an automotive, I would say it's a broader stroke as far as the inventory comment I made specifically with Tier 1s in Europe. As far as the EV, yes, it is a single customer. I wouldn't say it is broad as far as in this immediate quarter. But we still expect it to grow in Q4. So it is not a -- I don't want to paint it as any decline or any issue in demand for EVs. EV demand is going to grow. It's going to grow in the fourth quarter, and it's going to grow in 2024. It just didn't grow as much as we expected it to. And that's demand-driven. Whether it's short-term demand or anything different, we'll have to wait until we get closer to '24.

Operator:

[Operator Instructions] Our next question comes from Gary Mobley with Wells Fargo Securities.

Hassane El-Khoury:

Well, it depends on what the Yole is. But yes, we are expecting a 2x market.

Hassane El-Khoury:

It's more -- yes, it's seeing sell-through in the mix that we are expecting. So we have -- look, there's no one KPI. Thad and I look at about 30 pages of KPIs that try to triangulate the health of the business and the sell-through because what we don't want is shipping into the distribution because we -- there's demand or there's backlog, but the sell-through happens at a different mix. So you end up with what we call sludge in the channel. We've been managing this very, very tightly. We have a very robust process that gets us and has maintained very tight control over the distribution inventory. And like Thad said, last quarter, in Q3, we actually reduced the dollars and the weeks, putting ourselves up very nicely for a Q4 mix shift or even getting ready for 2024. So all of these KPIs are what lead us to making these decisions. So we're going to look at our metrics and make the decision as we see it.

Operator:

[Operator Instructions] Our next question comes from Joshua Buchalter with TD Cowen.

Hassane El-Khoury:

Sure. So it is all -- I guess all of our '24 by now. For the '24, we have visibility on exactly what program, what voltage, what volume and what mix we need. As far as the inventory, Thad talks about ramping strategic inventory for silicon carbide, we stage inventory primarily in, I would say, in two spots. One is blank wafers or substrate, wafer substrate, which is fully fungible across any customer, any platform with any volume. And as we get closer, we stage inventory at Epi, which is when we, I guess, partitioned with the voltage levels of the product. So this is where we maintain inventory to give us full flexibility should the shift change. Because we've always said, when we would have one or two platforms at a customer, if one vehicle sells better than the other, the customer would want to shift while still using onsemi. So we give that flexibility to be able to shift on between platforms at a similar OEM or between OEMs. So the best place to keep that inventory is blank wafers and/or Epi.

Hassane El-Khoury:

Yes, I believe so. It will be from our...

Hassane El-Khoury:

Yes. So strategic inventory for fab transition usually are committed backlog. We call it no change, no return. So we build the bridge inventory given that the customer needs that bridge between the old fab and the new fab. So we see this as a very low risk and will work itself down over a few quarters as we shut down the old fab. And before we start on the new fab, we will bleed inventory to a level, and then we'll ramp it back up into other fabs. So we don't see this as inventory jeopardy, which -- which allows us to be a little bit more comfortable with the elevated levels of inventory. But one thing also Thad mentioned is the base inventory, actually, we drove that down, which is the one that you're more referring to would be at risk of demand. That's the one we've been managing down. That's the one we'll keep managing down with the lower utilization that Thad talked about.

Operator:

[Operator Instructions] The next question comes from Joseph Moore with Morgan Stanley.

Hassane El-Khoury:

No, none of the outlook or the cautionary outlook that we've had has anything related to pricing. Our pricing is stable. It's locked into the LTSAs. The conversations we have had with customers regarding outlook, regarding inventory, regarding LTSA has all been around demand. Therefore, it's just following. So we feel pretty good about our price position.

Thad Trent :

Yes. So we exited in $46 million in Q3, it was below our expectations. And coming back to your pricing question, we're just not seeing pricing decline enough that customers are exiting that business. We are looking -- as we look into Q4, we think there's about another $125 million that we would exit. That brings the year up to somewhere around $275 million, below what we originally forecasted. Just as a point of reference, the businesses now that we're talking about exiting are at about a 45% gross margin. So it's not a bad business, assuming the pricing does hold up. The fact is, customers -- this is all customer-driven, customers aren't leaving as fast as we expected. I believe that at the end of this year, whatever is left, we're going to say is good business, and we're going to continue to manage if customers don't leave through the softness.

Christopher Rolland :

I think the discussion for most broad-based guys are returning to the balance between bookings and backlog coverage going into a quarter and the turns business that is needed in the quarter. So I was wondering if you could perhaps talk about this for -- what's in your guide backlog coverage versus turns? And how should we be thinking about that for next year? If you can break it down into sub-segments too, that would be great as well.

Christopher Rolland :

Okay. Great. Just maybe a quick follow-up there. are you seeing push-outs and cancellations or pushouts in those LTSAs? Is that why that number is lower? Just wondering why we had that sequential decrease in December. Maybe the Street was just mismodeling? And then my other question is around -- you had some comments around industrial and solar in particular. I think we've seen guides like Enphase and SolarEdge missed pretty huge. It sounded like you had some very product-specific drivers there, but I was just wondering why you are so optimistic around that business when it's falling generally so fast.

Hassane El-Khoury:

As far as industrial demand, you're right, I called out the renewable energy or energy storage. Those are all mega trends. The companies you referred to are more impacted by the residential, which obviously, is expected given the interest rates, given the consumer spending sentiment that I referred to earlier. The business we are targeting is the energy storage. A lot of it is larger-scale energy storage, which drives a lot more content. And it's not typically impacted by the residential specifically. That business has remained strong, and we expect that business to remain strong on a forward-looking basis.

Quinn Bolton :

Just a clarification in response to one of the earlier questions, I think you said you were not looking for growth in the first half of the next year. Just wasn't sure if that was a sort of a sequential comment or a year-over-year comment, if you could clarify. And then I've got a follow-up on the silicon carbide business.

Hassane El-Khoury:

Yes. My comment was more, I don't see a recovery, a market recovery. So it was more of a macro commentary.

Thad Trent:

Yes, that's a good question. So the utilization for silicon carbide in Q3 was up, where silicon was down, and that pulled the total up. As we look forward, we don't see the silicon carbide utilization decreasing. We will be bringing on additional capacity next year to support '25 and beyond. But I don't expect that utilization to decline. I think it's the silicon that will actually decline, that gets us down into that 65% to -- mid-60% to high-60% range.

Vijay Rakesh :

Just a quick question on your commentary on softer demand with higher inventory, I guess. Is that more -- is that pretty -- what are you seeing across the board in both combustion engine and EV? Or can you characterize that a little better?

Vijay Rakesh :

Got it. And then as you look at your silicon carbide road map, you talked about 2024 might be a transition to 200-millimeter. Is that still something that you see? And what's your expectation on what mix would be on 200 millimeter, let's say, exiting '24?

Vijay Rakesh :

Got it. And last question, when you look at silicon carbide, when do you start to see it getting accretive to the corporate margins, I guess?

Operator:

[Operator Instructions] Our next question comes from Timothy Arcuri with UBS.

Hassane El-Khoury:

So obviously, I'm not going to comment on specific customer details, specifically on programs. But I will comment on the LTSAs. So the LTSAs are legally binding. Therefore, for us to agree or even acknowledge that push out or even the demand in general outside of silicon carbide in Q4, there has to have been, which there is, a win-win for us and the customer. We've always said, if anything, the LTSAs get us a phone call. We get the phone call way ahead of time in certain areas when the customer knows that it's coming. And we're able to manage with the customer for a win-win, whether that win-win is a quarter later or a year later or a longer term that depends on case by case. So we manage it with the customer because what we don't want is, of course, enforce the LTSA at the expense of just shipping inventory if demand is lower. So we take it very cautiously. We have -- it has to be a win for us, but also a win for the customer, and that's what keeps the strategic customers engaging.

Hassane El-Khoury:

We're not commenting on that. What I have commented is, obviously, if you take the growth rate that I described in 2024, and you can compare it to where we were before. So no change in our outlook.

Tristan Gerra :

I just wanted to expand a little bit on the coverage for next year for LTSA. Obviously, I'm guessing that you don't have full year coverage like you did entering this year, but could you talk about maybe percentage-wise? Or when is the average LTA expiring next year? Just wanted to kind of look at the transition for LTSA into notably the second half of next year.

Tristan Gerra :

Okay. And what's the average duration? And how should we look at how some of those are unwinding later next year or even in '25?

Operator:

[Operator Instructions] Our next question comes from Chris Caso with Wolfe Research.

Hassane El-Khoury:

Yes. So the -- I guess, I would say the one comment that I believe you got wrong is Q4 in silicon carbide is not down. Q4 silicon carbide is growth from Q3. It is just not at the level that we expected. That's what drove the mix. So it is not silicon carbide going backwards. With that correction and the ramps that we're starting -- we have in Q3 and will continue to ramp in Q4, plus the breadth of customers that I described, those are going to drive sequential growth through 2024. So silicon carbide is not down quarter -- will not be down quarter-on-quarter. Q3, Q4, it will be up, and it will continue to be up in subsequent quarters through Q4.

Thad Trent :

Yes. Chris, in my prepared remarks, I noted that because of our strong performance in silicon carbide being ahead of our internal plans and our confidence in moving into 200-millimeter that we're actually taking our capital intensity in 2024 down. We had expected the high-teens for 2024. I'm now saying it's low-teens, and it's quickly closing in on that long-term target. So we will continue to make investments, but not at the rate that we needed to just because of the performance across the entire manufacturing chain is ahead of schedule and exceeding our expectations.

William Stein :

I'm hoping you can discuss the dynamics in the industrial end market. This is where we're seeing more weakness from other semi companies and similar component manufacturers over the last quarter. The call has been very focused on the change in outlook in silicon carbide, but I'd love for you to discuss trends more broadly in the industrial end market and your expectations as we progress into next year.

Operator:

Thank you. Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back over to Hassane El-Khoury for any closing remarks.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Parag Agarwal:

Thank you, Liz. Good morning, and thank you for joining onsemi's second quarter 2023 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 2023 second quarter’s earnings release will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and the GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements are described in our most recent Form 10-K, Form 10-Qs and other filings with the Securities and Exchange Commission and in our earnings release for the second quarter of 2023. Our estimates or other forward-looking statements may change and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. Now, let me turn it over to Hassane. Hassane?

Thad Trent:

Thanks, Hassane. We're pleased to report another stellar quarter for onsemi. Our Q2 results and our Q3 outlook clearly demonstrate our consistent execution, outpacing the industry while navigating the soft macro environment. We are uniquely positioned as our business has been powered by multiple secular growth drivers in the fastest growing end-markets of Automotive and Industrial. All our Q2 financial metrics exceeded the midpoint of our guidance. We grew revenue 7% sequentially, expanded gross margin by 60 basis points to 47.4%, and delivered a 12% quarter-over-quarter increase in earnings per share to $1.33, which exceeded our guidance range. Our global teams have transformed the business to deliver predictable and sustainable performance with above industry growth at attractive margins. Revenue for the second quarter was $2.09 billion, roughly flat compared to the second quarter of 2022 and increased 7% over Q1. The sequential increase was driven by growth in the Automotive and Industrial end markets, with accelerating demand for electrification and renewable energy. Even without silicon carbide, our revenue increased at an impressive pace sequentially. Turning to silicon carbide. Hassane mentioned our continued execution and increasing number of LTSAs with automotive and energy infrastructure customers. We are ramping our silicon carbide production to support the increasing demand and remained ahead of our internal plans. Over the past two years, we have made strategic brownfield investments to expand capacity and ramp production much faster by leveraging our existing manufacturing footprint and expertise. These industry leading ROIC investments are now contributing to our financial results. In the second quarter, our silicon carbide business nearly doubled gross margins sequentially. And I'm proud to report our silicon carbide business achieved its first profitable quarter, delivering high-teen operating margin on a fully loaded basis, which includes all start-up cost. I'd like to take this opportunity to thank the 33,000 onsemi employees across the globe for their commitment to success and delivering outstanding results quarter-after-quarter. Turning to end-markets. Our Automotive revenue hit a new record of over $1 billion in Q2, growing 8% quarter-over-quarter and 35% year-over-year, driven by the accelerating adoption of electrification and the continued need for sensing in vehicles. In Q2, Industrial revenue grew 5% year-over-year and 10% sequentially, with continued strength in EV charging, medical applications, as well as energy infrastructure, which increased nearly 70% year-over-year and is now a meaningful part of our overall revenue. We continue to exit volatile non-core businesses, which included another $57 million in Q2 revenue, bringing our total year-to-date of exited revenue to more than $100 million and nearly $400 million since the start of our transformation. We will continue to be opportunistic in non-core markets, where margins are favorable and engagements are strategic with our customers. We now expect to exit $350 million to $400 million in 2023. Looking at the split between operating units, revenue for the Power Solutions Group or PSG was $1.12 billion, an increase of 6% year-over-year, with more than 60% year-over-year increase in auto and nearly 70% year-over-year increase in energy infrastructure. Revenue for the Advanced Solutions Group or ASG was $650 million, a 9% decline over Q2 '22, driven by deliberate exits and continued softness in non-core markets, offset by strength in Automotive and Industrial. Revenue for the Intelligent Sensing Group or ISG was $325 million, a 4% increase year-over-year, primarily due to the Automotive shift to higher value sensors in our portfolio, such as eight megapixel image sensors. Our GAAP and non-GAAP gross margin of 47.4% improved 60 basis points quarter-over-quarter driven by silicon carbide and despite the significant headwinds from EFK we disclosed last quarter. We continue to improve the cost structure of the fab, but we expect EFK to be dilutive to gross margins by approximately 250 basis points for the next several quarters. We remain committed to maintaining our long-term gross margin trajectory as we execute our Fab Right strategy of driving efficiencies and further consolidation in our internal, as well as our external manufacturing network. Now, let me give you some additional numbers for your models. GAAP operating expenses for the second quarter were $318.7 million as compared to $453.1 million in the second quarter of 2022. Non-GAAP operating expenses were $305.5 million as compared to $317.7 million in the quarter a year ago. GAAP operating margin for the quarter was 32.2% and non-GAAP operating margin was 32.8%. Non-GAAP operating margin increased 60 basis points quarter-over-quarter. Our GAAP tax rate was 15.3% and our non-GAAP tax rate was 15.8%. GAAP earnings per share for the first quarter was $1.29 as compared to $1.02 in the quarter a year ago. Non-GAAP earnings per diluted share was $1.33, flat year-over-year and above the high end of our guidance. Our GAAP diluted share count was 448.7 million shares, and our non-GAAP diluted share count was 438.7 million shares. In Q2, we repurchased $60 million of shares at an average price of $86.49 per share. And we remained committed to our long-term strategy of returning 50% of free cash flow to our shareholders. Turning to the balance sheet. Cash and cash equivalents was $2.6 billion and we had $1.1 billion undrawn on our revolver. In Q2, we proactively downsized our revolver by $500 million to $1.5 billion and extended the maturity to 2028 to align to our long-term needs and projected cash flow. Cash from operations was $390.8 million and free cash flow was negative at $39.8 million due to timing of investments in capital expenditures and growth in strategic inventory in the second quarter. We expect free cash flow to return to positive for the remainder of the year. Capital expenditures during Q2 were $430.6 million, which equates to a capital intensity of 20.6%. As we indicated previously, we are directing a significant portion of our capital expenditures towards silicon carbide and enabling our 300 millimeter capabilities at EFK and expect our capital intensity to be in the mid to high teen percentage range for the next several quarters. Accounts receivable of $944.4 million, increased by $63.5 million, and DSO was 41 days, consistent with the first quarter. Inventory increased by $149.5 million sequentially and days of inventory increased by four days to 163 days. This includes approximately 54 days of bridged inventory to support fab transition and the silicon carbide ramp. Excluding these strategic builds, our base inventory declined seven days quarter-over-quarter. We continue to proactively manage distribution inventory. Distribution inventory increased $20 million sequentially with weeks of inventory at 7.7 weeks in Q2 versus seven weeks in Q1. Total debt remained flat at $3.5 billion and net leverage is 0.27. Let me now provide you key elements of our non-GAAP guidance for the third quarter. A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our second quarter results. Our business continues to strengthen with improved visibility, and we expect to recognize approximately $6.4 billion of committed revenue from our LTSAs over the next 12 months in addition to our non-cancelable and non-returnable orders. Given the soft macro environment, we are taking a cautious stance in our guidance. We anticipate Q3 revenue will be in the range of $2.095 billion to $2.195 billion. We expect Automotive and Industrial to increase quarter-over-quarter with other markets down mid to high-single digits, as we plan further exits in our non-core markets. We expect non-GAAP gross margin to be between 46% and 48% due to lower factory utilization, EFK headwinds and the dilutive impact of silicon carbide, which remains ahead of plan. This also includes share-based compensation of $4.4 million. As we have previously stated, 2023 will be a transition year for our gross margin and we expect to maintain our trajectory as we manage these temporary headwinds. We expect non-GAAP operating expenses of $300 million to $315 million, including share-based compensation of $29 million. We anticipate our non-GAAP OIE will be negligible for the quarter. We expect our non-GAAP tax rate to be in the range of 15.5% to 16.5% and our non-GAAP diluted share count for the third quarter is expected to be approximately 439 million shares. This results in non-GAAP earnings per share to be in the range of $1.27 to $1.41. We expect capital expenditures of $440 million to $480 million, primarily in Brownfield investments in silicon carbide and EFK. To wrap up, the structural changes we've been implementing since the start of our transformation have improved the resiliency of our business and enabled us to better navigate the soft market environment. We have delivered another quarter with results above expectations, reinforcing that consistent, reliable execution is our path forward to achieving our long-term model. We have reduced the volatility in our financials and held to our commitments while navigating short-term market dynamics and we plan to continue to deliver for our shareholders one quarter at a time. With that, I'd like to turn the call back over to Liz to open for questions.

Unidentified Participant:

Hey. [indiscernible] here for Chris Danley. Sorry, you went dark for a second. Hey, guys. My first question is just on the overall cycle, Hassan, how would you compare taking silicon carbide out, just pure semis now versus three months ago. Would you say it's gotten a little better, a little worse? Any comments on visibility and just the overall semi cycle now versus last quarter at this point?

Unidentified Participant:

And how about non-auto industrial?

Thad Trent:

Yeah. And for [indiscernible] our non-auto and industrial was up slightly, but as Hassane said, we expect it to be down mid to high-single digits in Q3.

Thad Trent:

Yeah. On the lead times, if you look at our average lead time, it’s very consistent quarter-on-quarter. There’s been pockets where lead times have decreased a few pockets where they’ve increased. But on average, they’re relatively flat quarter-on-quarter.

Thad Trent:

Thanks.

Blake Friedman:

This is Blake Friedman on from Vivek Arya. Thanks for taking my question. So first, I just want to start off with that onsemi has signed a number of silicon carbide LTSAs. So I was hoping you could provide the mix of autos versus non-autos? And then looking further into the industrial market, your growth is up 5% year-on-year, which is certainly well above other peers down 10% to 20%. And I know silicon carbide is a partial contributor. But I was hoping you can describe maybe what you're seeing versus what peers aren't?

Blake Friedman:

Got it. And then as a follow-up, I was just hoping you can provide an update on the progress of in-sourcing silicon carbide substrates and your time line to be fully in-sourced. And I understand the strategy has been focusing on brownfield investments, but with industry silicon carbide supply expected to trail demand for the foreseeable future. Would management ever consider building its own greenfield facility down the road?

Blake Friedman:

Thank you.

Harsh Kumar:

Hey, guys. Can you hear me, okay?

Harsh Kumar:

Okay. Hey, guys. First all, congratulations. This is yet another fantastic quarter and guide from you guys, so congratulations. And I had two questions, Hassane. I'm seeing a little bit of a change in your business. I used to see sort of transactional business in silicon carbide, you get -- you’ll get orders, you get customers, but now we're seeing really large orders, really large customers, multiyear, multibillion-dollar deals. Is this happening because of the competitive environment recently or is this happening because you are much more comfortable taking on these orders? And if so, why are you more comfortable taking on these kind of orders? And then I know you've said that you never want to sell wafers, but I just want to clarify, are these orders strictly all 100% chips or is there a portion of wafers you're involved as well? And then I've got a follow-up.

Harsh Kumar:

Fantastic. And for my follow-up, I know investors always look forward and kind of want you to deliver on the next thing. So the question on 8-inch wafers. We hear a lot from investors about the cost disruption that, that might bring supposedly lower costs. Curious, if your customers bring this up with you at all at this point in time, and then I know you have plans for 8-inch wafer. Maybe you could update us on those while you're at it. And then Hassane, I also had a clarification on your previous question. Are you shooting for more than 50% internal by the end of the year for silicon carbide or the vast majority.

Harsh Kumar:

8-inch.

Harsh Kumar:

Congrats again, guys. Thank you.

Operator:

Our next question comes from the line of Gary Mobley with Wells Fargo.

Hassane El-Khoury:

Yeah.

Hassane El-Khoury:

Yeah. We're not going to guide for 2024, but you can basically, when we get to Q4, you can take the exit rate, which is going to be healthy and then project forward. But we're not projecting into 2024, it will be substantially higher.

Hassane El-Khoury:

Yeah. Look, we're engaged in all parties, not just in the U.S., but of course, in Europe and we have a big operation in Korea, which has their own or variant of the CHIPs Act. So we're engaged in all three. We've announced a $2 billion investment for an end-to-end silicon carbide manufacturing, which will be the only one in the world really from substrates all the way to wafers on the same site. And we're considering all three of these regions because we have brownfield capabilities in all three of these regions. We talked about a decision made between now and the end of the year of where it's going to be. And part of the decision is well, the main decision is purely economic and financial. Therefore, the funding from the government plays a big role in swinging it one way or another for depending on which site. We're in the process and the discussions of all of these, but that one is specifically related to silicon carbide to comment on your question. As far as in general, we have made comments on silicon carbide, specifically in the CHIPS Act, but that's really up to them to what they do with it and that's part of our decision-making progress. We're going to go where it makes sense to get the best ROIC for our investments, and that's how we create shareholder value. That remains the top of our priority and we're going to make that decision between now and the year of where it goes.

Operator:

Our next question comes from the line of Christopher Rolland with Susquehanna.

Hassane El-Khoury:

Yeah. Look, I will start at a very high level. One, what differentiate onsemi, we can afford our own investments because of the cash flow from operations. So we're not looking at funding as a way to help us grow the business and help us build capacity. You look at our balance sheet, you look at our cash position and you look at the cash from operations and our CapEx investments, all of them are able to be supported by our operations. So a very different posture when it comes to capacity expansion. Where it comes strategically from a customer is really, it's a win-win. It's the commitment. There is no higher commitment on an LTSA than one where the customer co-invest with us. And that co-investments have multiple scenarios with it, depending on the customer and what problem or what opportunity they look for. So it's not a haircut. It's basically, it's an offset of depreciation. It doesn't change our cost structure for the value that we provide. It just offsets depreciation, whether it's depreciation on our book or their book based on the ownership of the equipment and how we apply that investment. And again, those are strategic in nature, which means everyone is specific to what that specific customer is trying to solve for and we work constructively with all of these customers. But it is not a -- we must get that money for us to ramp. This is a -- we are able to ramp and those are strategic investments. So it's a very different field we're playing in.

Hassane El-Khoury:

And the reason for the delta in dollars that you see is, again, goes back to Brownfield versus Greenfield. We're investing in Brownfield, which Thad at Analyst Day (ph) talked about a 40% better CapEx than a Greenfield. So that gives you kind of the delta why we're able to ramp so quickly much higher in output for much lower cost.

Hassane El-Khoury:

Yeah. So on the revenue ramp for industrial, specifically on the energy infrastructure, the $1.95 billion is both silicon and silicon carbide. Remember that market is being serviced by a very unique value proposition we have. Simon talked about in the Analyst Day, the hybrid module, where we're able to put the best technology required into a single module to provide those customers. So that 1.95 is on both power technologies, IGBT or silicon and silicon carbide. As far as the ramp, look, they'll be ramping in tandem together. But the automotive number, given the TAM in automotive, we'll just ramp up to a higher number. But as far as percent ramp, they're both going to be a ramp. And if you recall, last year, we talked about how that business ramps 70% growth for the last two years. So it's pretty healthy growth. But from a dollar, of course, it's going to trail the automotive purely because of the TAM of the market that we're addressing. But both growth, both CAGR are very healthy and will remain healthy over the next five years as we execute those LTSAs.

Christopher Rolland:

Thanks, Thad. Congrats again, guys.

Operator:

Our next question comes from the line of Joshua Buchalter with TD Cowen.

Hassane El-Khoury:

Yeah. Look, we're not breaking up as what it is. You can take it as an aggregate totally mix adjusted is what the number is. And it's going to keep going up, of course, as that business absorbs the start-up costs because look, there's still start-up costs in that business. So as we scale that business, start-up costs will be more absorption and that is how we will be continuously improving the gross margin trajectory, which consequently will improve the operating margin. So that financial milestone that we have achieved is not the destination. It's just a milestone. We have always had line of sight to it, like Thad said, we achieved it earlier than we expected, but the ramp or the, call it, the slope of that improvement will just continue from here and we'll continue to improve on all financial metrics as that business scales and as that mix changes.

Thad Trent:

Yeah. I think if you go back to what we disclosed and what we announced last quarter, it's very consistent, right? We got a surprise in the cost structure there. We've now been spending six months really getting our arms around it and understanding what we need to get that cost structure back in line. Look, we've got a large manufacturing footprint, we know how to run fabs efficiently, we’ve benchmarked, we know exactly what we need to do. As I say, this is like locking and tackling of what we need to do to take the cost structure out, but it takes time. It’s hard to take cost out when you running a fab at full capacity. So the time horizon is little bit longer than we expected. It will be from the next several quarters. I think – you think about this has been probably a year maybe slightly more than a year of headwind for us as we continue to take the cost out. But we expect by the time we exit 24 we’ve got that fab at parity and running efficiently.

Joshua Buchalter:

Understood. Appreciate the color. Thank you.

Quinn Bolton:

Hi, Hassane and Thad, congratulations on the nice results. Thad, I guess I just wanted to see if you could give us a little bit more color on the gross margin. Revenues trending up, sounds like SiC margins are moving higher. So I'm just wondering, are there any particular headwinds in the third quarter for the 40 basis point decline in gross margin at the midpoint?

Quinn Bolton:

Great. And just a quick follow-up. Do you expect quarter-to-quarter the SiC margins to improve understanding they're still below corporate average?

Quinn Bolton:

Perfect. Okay. Thank you.

Timothy Arcuri:

Hi. Thanks. Do you have any update to the $4.5 billion LTSA from 2023 to 2025 and kind of anything to help us think about what silicon carbide could be next year and into '25?

Timothy Arcuri:

Great. And then, Hassane, how do you think about the captive versus external mix? You did say you're going to be more than 50% this year. But when you sort of lay this out longer term, how do you weigh where you want to take that number to longer term, given some of the investments that some others are making particularly in China. Is there like an upper range of where you want to push that 75% or how do you sort of think about balancing that? Thanks.

Timothy Arcuri:

Thank you, Hassane.

Unidentified Participant:

Yeah. Thank you. This is Jeremy (ph) on for Tore. I guess a couple of follow-ups on the earlier questions on the co-investments. Can you help us understand what the mechanics of this are, the impact potentially to gross margins, maybe cash flows? Just wondering how the $40 million or the $250 million co-investment can be played out in the financial statements? Thank you.

Unidentified Participant:

Great. Thank you. And just a quick follow-up to that. Is the -- so this is like a revenue prepayment. It's not any kind of ownership of the equipments and are there any limitations on maybe if it's specific to the equipment, it's not any limitation on use that for other customers?

Unidentified Participant:

Great. And one last question, if I could. With the slightly different free cash flow on results this quarter and the high-teens and the capital intensity that seems to be consistent, with your targets outlined at our Analyst Day. Is there any change to that in the very long term in the 2027 targets? Are you seeing anything in terms of higher costs and also maybe in terms of the ability to achieve the head count you need to ramp this capacity? It seems like that's been the problem with some of the other fab ramp-ups that we're seeing around the world? Is this something that is [indiscernible] to you guys at this point? Thank you.

Unidentified Participant:

Great. Thank you very much.

William Stein:

Hi. Great. Thank you for taking my question. Congrats on the great results and outlook. Hassane, at the Analyst Day, you discussed your emerging products in digital power control. I think that is likely related to servers that are focused on AI, maybe you can confirm that understanding and also remind us of your targets and traction towards that?

William Stein:

Great. And then a follow-up, if I can. You've reiterated many of the goals around the ramp of silicon carbide today, but there's one I'm not sure I heard you talk about yet, and that's the margin exiting the year, I think, in the past, you've said it will be neutral to the -- at the enterprise level. Is that ready for an update? Is it possible you could do better than that or any reason you're backing off that goal? Thank you.

William Stein:

Thank you.

Operator:

That concludes today's question-and-answer session. I'd like to turn the call back to Hassane El-Khoury for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Parag Agarwal:

Thank you, Kevin. Good morning, and thank you for joining ON Semi’s first quarter 2023 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 2023 first quarter earnings release, will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and the GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual results or events to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our most recent Form 10-Qs other filing with the Securities and Exchange Commission and in our earnings release for the first quarter of 2023. Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. Now let me turn it over to Hassane. Hassane?

Thad Trent:

Thanks, Hassane. As Hassane highlighted, we exceeded expectations in the first quarter, which is a testament to our employees around the globe, who are committed to operational excellence. Our ability to focus, invest and execute has provided benefits across all areas of the business and allowed us to maintain our financial targets, while navigating the market uncertainty. We continue to identify and extract operational efficiencies in our business groups and corporate functions, while identifying gross margin expansion opportunities. I'll start by diving into our results for the first quarter. Total revenue was $1.96 billion dollars above the midpoint of our guidance driven by strength in silicon carbide and energy infrastructure. In Q1, our silicon carbide manufacturing output was ahead of our internal plans and we nearly doubled our Q4 revenue, increasing our confidence in our past to the $1 billion year. Our automotive business now accounts for 50% of total revenue and at $986 million in Q1 it was flat sequentially, offset by a recovery in industrial revenue. Industrial revenue grew by 1% quarter-over-quarter, surpassing our original projections. We anticipate another stellar year for our Energy Infrastructure business with projected 50% growth over 2022 at accretive gross margins. Revenue for the Power Solutions Group or PSG was $1 billion dollars, an increase of 3% year-over-year and we saw sequential gross margin expansion as our silicon carbide ramp exceeded expectations on both revenue and margins. Revenue for the Advanced Solutions Group or ASG was $593 million, a decrease of 14% year-over-year and revenue for the Intelligent Sensing Group or ISG was up an impressive 32% year-over-year at a record of $354 million. ISG's impressive turnaround continues as Q1 was also their 11th quarter of gross margin expansion with record gross margin exceeding 50%. As a corporation, our consolidated gross margin held up nicely. GAAP and non-GAAP gross margin for the first quarter was 46.8% above the midpoint of our guidance, driven by higher than anticipated industrial revenue and improved manufacturing performance for silicon carbide output. We also exited an additional $47 million of revenue in the quarter at an average gross margin in the mid-40% range, bringing the total revenue to-date to $341 million of non-core business exits. Our non-GAAP gross margin declined by 160 basis points quarter-over-quarter as expected with the ramp up of silicon carbide and EFK headwinds and lower factory utilization of 71% as we continue to slow wafer starts. Q1 was our first quarter of operations since acquiring our 300 millimeter fab in East Fishkill. The current operating cost is much higher than we had anticipated. So the dilutive impact is greater than we previously expected. However, based on our current outlook, we are confident we can realign the cost structure of the fab and drive efficiencies to recover by early 2024. As demonstrated in Q1, we expect to maintain our gross margin trajectory for 2023. Our financial strategy remains unchanged as does our capital allocation strategy. In Q1, we returned more than 100% of our free cash flow to our shareholders with share repurchases of $104 million. This was the first repurchase from our new authorization, which allows us to repurchase up to $3 billion through 2025. Additionally, we issued $1.5 billion in convertible notes in Q1 with the proceeds used to repay our term loan. This was essentially leverage neutral and highly accretive as we swapped out a portion of our variable rate debt approaching 7% with a fixed rate convert with a coupon of 50 basis points. We also entered a call spread transaction increasing the effective strike price to $156.78 per share, providing significant dilution protection. Now let me give you some additional numbers for your models. GAAP operating expenses for the first quarter were $352.6 million, as compared to $314.1 million in the first quarter of 2022. Non-GAAP operating expenses were $286 million, as compared to $302.8 million in the quarter a year ago. Non-GAAP operating expenses were below our guidance as we manage discretionary spending across the company given the uncertain macro environment. We also initiated structural changes to ASG to improve operational efficiency by reallocating resources to high growth R&D initiatives, while improving our product development and time to market on industry-leading proprietary products. GAAP operating margin for the quarter was 28.8% and non-GAAP operating margin was 32.2%, a decrease of 190 basis points quarter-over-quarter. Our non-GAAP tax rate was 16.3%, GAAP earnings per diluted share for the first quarter was $1.03, as compared to $1.18 in the quarter a year ago. Non-GAAP earnings per share was $1.19 above the high end of our guidance. Our GAAP diluted share count was 448.5 million shares and our non GAAP diluted share count was 439.1 million shares. Turning to the balance sheet, cash and cash equivalents was $2.7 billion and we had $1.6 billion undrawn on our revolver. Cash from operations was $408.9 million and free cash flow was $87.4 million or $4.4 of revenue. Free cash flow was negatively impacted by timing of annual bonuses and CapEx payments. Capital expenditures during Q1 were $321.5 million, which equates to a capital intensity of 16.4% for the quarter. As we indicated previously, we are directing a significant portion of our capital expenditures toward silicon carbide and enabling our 300 millimeter capabilities at East Fishkill fab and expect our capital intensity to be in the mid to high teen percentage range for the next several quarters. Accounts receivable of $880.9 million increased by $38.6 million and DSO of 41-days increased by four days. Inventory increased by $198.1 million sequentially and days of inventory increased by 23 days to 159 days. This includes approximately 43 days of bridge inventory to support fab transitions and the impending silicon carbide ramp. We continue to proactively manage distribution inventory, decreasing inventory in the channel by $79 million sequentially and at historically low levels with weeks of inventory at 7 weeks, compared to 7.3 weeks in Q4. Total debt was $3.5 billion and net leverage is $0.25. In Q1, we accrued $41 million in balance sheet under property, plant and equipment related to the 25% investment tax credit for investments in our U.S. Factories. This will eventually flow through our income statement as lower depreciation and will receive the associated cash benefit in the future. Let me now provide you key elements of our non-GAAP guidance for the second quarter. The table detailing our GAAP and non-GAAP guidance is provided in press release related to our first quarter results. Our business continues to strengthen with total committed revenue under LTSAs of $17.6 billion, an increase of $1 billion quarter-over-quarter. We expect to recognize approximately $5.8 billion of committed revenue from our LTSAs in the next 12 months in addition to our non-cancelable non-returnable orders. Given the macro uncertainty, we are taking a cautious stance in our guidance. We anticipate Q2 revenue will be in the range of $1.975 billion to $2.075 billion. We expect automotive and industrial to increase quarter-over-quarter with other markets flat to down as we plan further exits in our non-strategic end markets. We expect non-GAAP gross margin to be between 45.5% and 47.5%, due to lower factory utilization, EFK headwinds and the dilutive impact of ramping silicon carbide, which remains ahead of plan. This also includes share-based compensation of $4.5 million. As we previously stated 2023 will be a transition year for our gross margins and we expect to maintain our trajectory as we manage these temporary headwinds. We expect non-GAAP operating expenses of $297 million to $312 million, including share-based compensation of $28.8 million. We anticipate our non-GAAP OIE will be $3 million to $5 million. We expect our non-GAAP tax rate to be in the range 15.5% to 16.5% and our non-GAAP diluted share count for the second quarter is expected to be approximately 440 million shares. This results in non-GAAP earnings per share to be in the range of $1.14 to $1.28. We expect capital expenditures of $420 million to $460 million, primarily in brownfield investments in silicon carbide and EFK, which are a more efficient use of capital than the greenfield alternative of building a fab from the ground up. We are very proud of our financial results through this transformation and will continue to deliver value for our shareholders. We are equally pleased with our cultural transformation. On Semi is a very different company today. We challenge the status quo and we hold ourselves accountable to our commitments. As many of you know, we'll be holding an Analyst Day in New York on May 16, and we look forward to sharing our future plans to accelerate value for our shareholders. We hope to see you there. With that, I'd like to turn the call back over to Kevin to open the line for questions.

Ross Seymore:

Hi guys. Thanks for letting me ask a question. Hassane, I want to ask about the auto side of your business. Investors are getting a little more concerned just about the -- that market given that it's of the few that hasn't cyclically adjusted. And you guys were flat sequentially versus what you thought would be up a bit and that's all despite the silicon carbide side, upsiding. So I guess could you just talk a little bit about what you're seeing there, inventory, demand and perhaps separate the silicon carbide side from the other parts of the business when you give that answer, please?

Ross Seymore:

Perfect. Thanks for that. And I guess moving from my follow-up over to Thad on the gross margin side of things. It seems like there were quite a few moving parts, especially the East Fishkill in the silicon carbide side, but the net of it all seems be right in line with your plan. Can you just talk a little bit about those moving parts? East Fishkill is more expensive, but silicon carbide is ahead of plan. Does that still net out to the same trajectory through the rest of the year? Just walk us through those puts and takes and maybe the utilization side as part of that as well, please?

Ross Seymore:

Thank you.

Vivek Arya:

Thanks for taking my question. Hassane, I wanted to ask about your plans for in-sourcing the material side for silicon carbide. Can you give us a progress on how that's going? I believe you said during the prepared remarks that you are targeting to be majority in-source? Is that a full-year comment? Is that an exiting Q4 comment? So just give us an update on where you are from an in-sourcing perspective? And let's say if you are majority in-sourced exiting the year, how does that help you on the gross margin side?

Vivek Arya:

Got it. And for my follow-up, Hassane, I think you mentioned that, so specific to autos, that you took the opportunities in Q1 to drain some of the inventory. How are you seeing the overall pricing environment as you look Q2 through Q4 versus what you thought earlier, are there any changes? There's a lot of macro across currents, but how is that impacting your automotive outlook, Q2 through Q4, especially on the pricing side? Are there any changes one way or another?

Vivek Arya:

Excellent. Thank you, Hassane.

Chris Danely:

Thanks, guys. I didn't know I went from a Jewish to Italian overnight. Anyway, can you just give us a little update and some color on the shortages and the lead time situation? I guess for Hassane, our shortage is pretty much exclusively in the automotive business or are they elsewhere? And then there any point in time this year where you think the shortages will go away?

Thad Trent:

Yes. And on the lead time. Lead times are relatively stable running, kind of, in that 41 to 43 week timeframe. Quarter-on-quarter, I think down a week to two weeks, but I would call it pretty much across the board lead times are stable.

Thad Trent:

Yes, well. I would start out by saying we're making big investments in silicon carbide and EFK as I've mentioned. Now as you think about our capital expansion and expansion in just capacity is to support the LTSAs that we have, right? So this is not a situation where we're building capacity hoping that we can fill it. So we're very comfortable that with our margin projections that we can absorb that additional depreciation. I would tell you in general, I wouldn't call it significant, but what you would see is offsetting revenue and gross margin to offset that depreciation.

Operator:

[Operator Instructions] Our next question comes from Toshiya Hari with Goldman Sachs. Your line is open.

Thad Trent:

Yes. So the impact of the $160 million, I'll start there. We expect to get that as we exit those fabs. We think that really starts to kick in in ‘24 and ‘25 it takes at least three years to exit a fab. So I think most of that starts to roll in ‘24 and ‘25. On the headwinds from silicon carbide and EFK, so the EFK has already hit us in Q1. You can think about that as being pretty consistent through the year. We think by early 2024, we can get that back in line and it isn't the headwind that we that we got surprised with. On silicon carbide, it's ahead of schedule, which is really great. It’s performing much better than we expected. There is a headwind there, we think it likely peaks, kind of, in that Q3 timeframe. And then we think by the time we get to ‘24, it’s -- those margins are at the corporate average, so that's behind us as well. EFK will be a little bit of a drag as we've talked about previously in ‘24 and ’25, as we continue to do that foundry business for global foundries, but we think we can get the cost structure back in line this year.

Hassane El-Khoury:

Well, I would say, must be present to win. I'll see you in -- at our Analyst Day on May 16 for that one.

Operator:

[Operator Instructions] Our next question comes from Harsh Kumar with Piper. Your line is open.

Hassane El-Khoury:

Yes, look, I mean, we all see the EV market in China. But the difference for us is China for us is a ramping market. And that's really going to be contributing to our ramp throughout the year. So even if the demand call it on the top demand is a little choppy, out of China. For us, it's incrementally favorable and we're going to continue to ramp there, so we don't see it. We're kind of disconnected from it given that for us, it's a ramp. It's not a mature market yet, and that puts us in a very good position.

Thad Trent:

Yes. So harsh, what we said is at scale, at once we fully ramped so it can carbide, those margins would be at or above the corporate average. As I said, we've got headwinds that we think peak in Q3. We think by the time we get to ‘24, that headwind is behind us. In terms of the magnitude of the headwind, we've said historically that the silicon carbide is 100 basis points to 200 basis points of a headwind. We're performing better than we expected. So you can think about that as not at the high end of that range, it’s somewhere in between there. But we're very confident in our outlook here based on our performance that, that we can continue to execute there and we feel very good. On EFK, as I said, we had the full impact in Q1. You can see we absorbed it and offset it with gross margin expansion in other areas. Historically, we've said that’s 40 basis points to 70 basis points, I've said it's significantly higher. You can think about it as being greater than 2 times, what our expectations were. Again, we think we can absorb that throughout the year. Our margin trajectory doesn't change and we're very comfortable with Street consensus on gross margin for the year. So I think it gives you -- our confidence in managing through this.

Hassane El-Khoury:

Yes.

Raji Gill:

Yes, thank you and congratulations as well on great results in a tough environment. Just a quick question on the automotive market, you mentioned Hassane, a modest inventory digestion in the end market and then you're also kind of reducing distribution inventory. Can you talk a little bit about the overall demand picture for automotive. I know it's hard to kind of separate the significant ramp that you're seeing in electric vehicles and in turn silicon carbide. But just curious if there's a softness in the demand market, if there's a shift away from high-end to mid-range, any kind of color on the automotive market will be appreciated?

Raji Gill:

All right. Very good. And from my follow-up on the LTSAs, you talked, Thad about $17.6 billion that was up $1 billion quarter-over-quarter. Was that all primarily related to silicon carbide incremental designs or other drivers? And just along those lines, you saw kind of significant growth in energy infrastructure, you're talking about it up 50% year-over-year. Can you describe what are some of the tailwinds in that market? Thank you.

Hassane El-Khoury:

And then on the alternative energy, the tailwind is going to be market-driven. We had a stellar year in ‘22 from ’21, and that's compounding now what we're going to see in ‘23 from ‘22 and that's all of it is market-driven, and that's primarily the big components here are silicon power and silicon carbide. But again, as Thad mentioned, we have a penetration with the whole bomb, bill of material. And if you recall most of that market for us is under LTSAs, we have LTSAs with eight of the top 10 energy vendors in the world and they're ramping given the demand and we're ramping with them given our content.

Operator:

[Operator Instructions] Our next question comes from Matt Ramsay with TD Cowen. Your line is open.

Hassane El-Khoury:

Yes. So look, as I mentioned, we're -- we've been increasing capacity. We started in 2022 in preparation for the ‘23 ramp and really the ‘24 ramp in this case where a lot of the focus, like you said, has been on substrate, because that's the first thing we have to ramp. But with increased capacity in our wafering and internal EPI, that gives us a very big cost advantage versus getting turnkey externally. And then following that is increase in our fab capacity, which also gives us a much better cost structure. Because the fab we are ramping is an existing power fab that's where we do really most of our IGBTs. And having a power fab at scale, gives us that edge one from a cost and two from the speed at which we can scale. So think about it this way, increasing capacity in an existing fab that already does power is way cheaper and way less risk than Brownfield and a power fab and silicon carbide. That has always given us the confidence in our ramp, has always given us the confidence in the slope of the ramp, which really exceeds everyone else out there and we're on track to achieving it, all of these give us one the cost, two the risk mitigation and three the confidence in our outlook.

Hassane El-Khoury:

Yes, look, when I say pockets again, I'll go back to my comment from prior about the technology. We remain constrained in technologies across all markets and there are areas primarily. You can think about it mostly on the consumer and compute where we've been -- one is cautiously monitoring specifically the disit inventory and that's why you've seen us even this quarter be very aggressive in draining the dollars in the channel. So although the weeks were 0.3 weeks down in the channel, but dollars are almost $80 million down. And that's a pretty steep decrease that we have been managing. And look, we've been managing it throughout the whole even the -- when supply was constrained across the board. So inventory for us is a big focal point not just internally, but externally. And until we get higher and higher confidence in what the second-half is going to bring, we're going to be cautiously optimistic and really holding back on what we ship out of the company unless we are seeing high confidence in its POS-ing. We're not going to have inventory just sitting around whether it's our distribution shelf or the customer shelf. And that really sets us up for a very nice recovery whenever that starts turning out to be.

Operator:

[Operator Instructions] Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Hassane El-Khoury:

Yes, look, obviously our competitive advantage across the board and image sensor is really on technology. We've talked about specific technology, I mentioned a few of them where it's the near infrared that helps with different lighting conditions, that of course applies in automotive and the examples I've given in my prepared remarks or start industrial, but it also applies in automotive where the high dynamic range whether it's very bright/light with sun or very dark at night. Those are all competitive advantage on the inherent in our technology that customers value and that we provide these solutions for. On the 8 megapixel, that's a new generation that we have launched across both auto and industrial. You're going to -- you can expect that to be forward-looking a mix shift as we ramp that. So today is very small. But the commentary I gave about ASP with of course also translates to improved margins that is on a forward-looking basis. Both Thad and I have always said our new products are at or ahead of our model, the 48% to 50% and as we ramp these products, you're going to see the margin expansion that will be contributed to by these products becoming a higher percent of revenue. So that's more of a forward-looking statement that again gives us the confidence in our margin trajectory and the fact that we've always said, it’s not -- the model is not the destination, it’s really a milestone.

Hassane El-Khoury:

Yes, look, so across the board, obviously, I think I'll comment on image sensors, image sensors is a foundry business for us. We're seeing some easing in the foundry, so we get a little bit more capacity allocated to us. And I mentioned in my prepared remarks, we used this opportunity to really bridge that supply to demand gap that we've had in the last couple of years and we're making progress into catching up. We're not caught up yet, but we're making progress, so that remains constrained obviously. On high power silicon, think about it as IGBT or silicon carbide really. We've always said we're sold out on silicon carbide, so improvements that we have contribute to our achieving our numbers. IGBT, as I mentioned, remains constrained, because of strength and not just automotive market, but also in the industrial. A lot of our energy storage systems are silicon and silicon carbide, but a lot of it remains still today on silicon. So that adds some of that constraint, so you can see it's really across the board not specifically on markets, but it's driven by megatrend growth that we are participating in. As far as M&A, look, you're right, our focus is on execution. We have a lot going on, a lot of it is great work that creates a ton of value for our shareholders. So execution is key and execution is our focal point. But we never look away from M&A, we're always looking, because those are opportunities that we will participate in. But as we sit here today, I can't tell you there is something we are missing in order to achieve our organic plans of value creation. So we'll be opportunistic, we'll always drive and participate in the M&A landscape, but there's nothing I would say we have to have, which is the best place to be, because we can be very disciplined in our approach of M&A.

Operator:

[Operator Instructions] Our next question comes from Gary Mobley with Wells Fargo. Your line is open.

Hassane El-Khoury:

Yes, look, in our -- just for China specifically in our non-strategic markets. Obviously, that's been down, both the market is down, but also that's not a strategic market for us, so we've been exiting and a lot of the exit is driven by the market in China for us. So that contributes, it's part of our plan, so that's not a surprise for us. It's actually what we anticipated and that's why we've been focusing on these exits, as far as protecting our margin and that's been our strategic plan all along. And we're starting to see it play out, which is not a surprise for us. On the EV, although there's some pause in EV or a little bit of redirection on the EV market in China for us, that market is actually net incremental. We are the ramping party in EV in China and therefore that will remain through the rest of the year even with the current outlook as a net favorable to our revenue growth. So we're -- I would say, no surprises, no changes to our outlook and no changes to our execution as we move forward this year.

Hassane El-Khoury:

Yes. Look, I'm not worried about the merchant supply. Obviously, our percent of internal is going to be incrementally going up throughout the year. We're going to be majority internal. But as far as derisking, we've done a very good job on having multiple sources that we are able to pull on. All sources, not internal, are qualified. And we're getting what we need. So therefore, think about it as a very good and already in the playbook risk mitigation strategy while we continue to execute greatly on our internal substrate.

Gary Mobley:

Thanks, again.

William Stein:

Great. Thank you. Hassane, at the silicon carbide event you hosted, I think it was perhaps about a year ago. You talked about the trend in supply and demand in silicon carbide likely remaining in the shortage situation for many years. Then we have this surprise -- certainly surprised to many people announcement from Tesla that on their next-gen vehicle, the so-called Robotaxi, they're going to be reducing silicon carbide usage meaningfully. I know it's only one customer. I know they're still small share of global auto production, but it's an important customer. It's an important data point. I wonder how that influences your view of supply and demand for silicon carbide longer term, not just the next year, but as we think about five years plus?

William Stein:

That's super helpful. One other, if I can? Perhaps, Thad, you talked about the product revenue and margin of the exits you did during the quarter. Can you remind us how much is left of that? What sort of duration you expect for the exits to last? And should we continue to expect sort of this mid-40s gross margin level on the exits going forward? Thank you.

William Stein:

Thank you.

Hassane El-Khoury:

Thank you again for joining our call. As Thad mentioned, we look forward to seeing many of you at our Analyst Day. Our future is bright, and we look forward to sharing with all of you what's next for On Semi. Thank you.

Parag Agarwal:

Thank you, Christa. Good morning, and thank you for joining onsemi's fourth quarter 2022 quarter 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 2022 fourth quarter earnings release, will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and the GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our most recent Form 10-K and Form 10-Qs in our filings with the Securities and Exchange Commission and in our earnings release for the fourth quarter of 2022. Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. Now let me turn it over to Hassane. Hassane?

Thad Trent :

Thanks, Hassane. Let me first start by going through our full year's performance, followed by results for the quarter and wrap up with guidance for the first quarter. As Hassane mentioned, our results have only been possible because of incredible effort of our worldwide teams. I want to thank our employees for embracing our fast-paced transformation and going above and beyond for our customers. A year where the macro environment and geopolitical uncertainties were front and center, we remained steadfast in our execution to achieve a record financial year for onsemi. Our 2022 revenue closed at $8.3 billion, an increase of 24% year-over-year, primarily driven by strength in our automotive and industrial businesses. Our non-GAAP gross margin of 49.2% increased 880 basis points year- over-year, achieving our target model of 48% to 50% for the full year. Our non-GAAP earnings per share was $5.33 compared to $2.95 in 2021, growing 3x faster than revenue. We just closed the eighth quarter since the beginning of our transformation, and our continued success is a direct result of the structural changes we've made to improve the resiliency of our business. The company's transformation has taken shape by optimizing three key areas of our business

Ross Seymore :

First question for either of you guys. In the first quarter, guiding down about 9% sequentially. I know you said auto is staying strong and everything else is kind of softening. Can you give a little bit more color on the puts and takes with exits, et cetera? And then perhaps more importantly, how those trend throughout the year between the end segments within that $5 billion of LTSAs you plan to represent?

Ross Seymore :

And then on the gross margin side of things, it seems like that's holding in well despite the utilization dropping and all the other headwinds. It doesn't seem like there's any surprises. Any sort of linearity about how the buckets work throughout the year, the exits being a positive, the silicon carbide side and the East Fishkill being negative? Is that something that peaks out in the headwinds in the beginning of the year and then lessen? Or is the shape a little more back-end loaded? Anything you could provide on color on that would be helpful.

Operator:

And our next question comes from Vivek Arya from Bank of America.

Hassane El-Khoury :

Yes. So, Vivek, two parts of your question. So first, yes, we're reconfirming the $1 billion revenue for '23. The increase of $0.5 billion in the same timeframe, the '23 to '25, obviously, we've always said we continue to engage with customers. Customer continue to value the performance of our products and the end-to-end capability, as I mentioned in my prepared remarks. So that obviously has maintained the strength of our business where customers are committing to long-term supply agreements, even in what I would call a shorter- term horizon, which is '23 to '25. So that's again a testament of where we stand with the technology and the supply. Now as far as your comments on internal substrate, we remain committed to our internal substrates. So of course, we have been -- through '22, we have ramped our capabilities for internal substrates. That ramp is going to keep increasing. And that ramp is as a plan to support our growth in the LTSA that we have from '23 to '25 and even beyond. And as far as yields are concerned, I know there's conversations about yield, none of which have been made by the company. So I'll use the opportunity to set the record straight. Any commentary about yields from unreliable sources, I'm not going to comment on. What I will tell you is our yields are coming in per plan. Our ramp is coming in per plan. And as shown in our margin in the fourth quarter and our guide in the first quarter, which all have come between that 100 basis points to 200 basis points. So our business is healthy, our ramp is on track, and we will continue to invest in browfield to support our customers.

Hassane El-Khoury :

Yes. Look, I think we're going to outgrow the market in automotive. We said that goal even back in our Analyst Day, and we've been outperforming our own goal. Outside of silicon carbide, the breadth of our portfolio is what is really highlighting the strength of that business. We've always said that our growth is going more pact content versus unit sold. Thad talked about the transformation we've had in our image sensing -- our Intelligent Sensing Group. That is content, both in number per vehicle, but also the ASPs with the higher resolution. That's driving growth in our business. A lot of the power, whether it's IGBT or support other medium and high-voltage fabs outside of silicon carbide, that's more content, both content and share gains. I can tell you, I am -- we are winning more share as others can't supply, and we're locking in that share gain in LTSAs to sustain the long term. So all of that is what is giving us the confidence in our ramp. And look, we still are oversubscribed as far as demand is concerned, which puts us in a very good buffer as far as whatever demand does and the macro does. We feel very strongly about the position in our automotive. And of course, other segments from ASG is the LED driver, ultrasonic sensing. All of these are macro trends that are happening in automotive driving our content in that business.

Christopher Danely :

Last quarter, you gave us an update on the shortage situation and lead times. I think you talked about lead times being 45 weeks, where they're normally 15. How have the shortage situation and lead times changed over the last three months?

Christopher Danely :

Sure. And then any comment on the Q2 outlook? It's been sort of flat, slightly up, slightly down over the last several years. How's Q2 looking? Can we expect this to spread into Q2?

Operator:

Our next question comes from Toshiya Hari from Goldman Sachs.

Hassane El-Khoury :

Yes. Look, obviously, our philosophy has not changed. The pricing is firm. The backdrop is the LTSAs are legally binding. We will engage with customers for the right reasons. Obviously, it's not in anybody's benefit to have inventory on their shelf or even inventory in the channel. So we've been managing the inventory in the channel. You've seen that consistently in our performance. So that philosophy is holding, and we will maintain that. Engagement with customers, it's not about price, but we will have a win-win situation with the customer, and that remains our philosophy.

Thad Trent :

Yes. So on the utilization rates, we expect that we'll be kind of in this range, maybe it's flat to down slightly in Q1. I think just given kind of the macro softness we're seeing here in the first half of the year, it's probably going to be -- remain in that range. And we'll see how the second half shapes up later. And what's the second part of the question? What was it? Can you repeat the second part?

Thad Trent :

Yes. Look, we remain confident in that 48% to 50%. I said that in my prepared remarks. We've also said that target is a milestone, not a destination, right? We're confident in our business. We have a lot of tailwinds after we get through '23. So stay tuned on that, but we remain committed to the 48% to 50%. And believe that is a milestone.

Harsh Kumar :

First of all, some great color on Tesla, Volkswagen, JLR, particularly the traction inverter win at Volkswagen. I think that's huge. I had a question on gross margins. You're basically guiding gross margin 400 basis points, but you are saying that the headwind from silicon carbide is between 100 and 200. Should we assume that it's closer to 200 at the beginning of the year? And could you give us some color on how that number will trend? Do you expect it to be gone by the end of this year? Will it continue into next year? And then any color on Fishkill that 50 bps to 70 bps of headwind as well would be helpful.

Harsh Kumar :

Okay. So it will be gone by the end of '23? And just curious about the softness in March. Have you seen any kind of noise cancellations in core industrial just outside of the consumer industrial? And a couple of the other companies have talked about cancellations in the auto business. I was curious if you've seen anything kind of strange over here in your auto business with increasing cancellations?

Operator:

[Operator Instructions] Our next question comes from Chris Caso from Credit Suisse.

Hassane El-Khoury :

Yes. Look, I think even last quarter, when we talked about the third quarter even, we talked about how some of the industrial markets that are closer to the consumer, like power tools and so on, those remain soft. We've seen softness in the broader market. Again, we believe this is more consumer and macro-driven, where we have been investing in industrial and alternative energy, that has actually been up, as I said, 75%, even ahead of our 60% growth target that we had. So that exceeded our expectation. That gives you the strength of the market that will continue through '23. And then pockets in the medical business that we focus on have seen a lot of growth, and we see that continuing in '23, obviously, offset by softness in other broader pockets of industrial. So no real change in the performance of that business or the outlook as we get into '23.

Hassane El-Khoury :

No, the pricing is holding up because -- just to clarify one thing. Our industrial business, where I highlighted the growth and where we have been focusing and where we want to keep investing, those are -- those remain under LTSA. So the LTSAs are not only for automotive, but they are for growth areas where we have been putting investments and we want that return on the investments to be solid. So that carved out a big portion of the growth in industrial and puts it on high confidence. Obviously, the NCNR, we are getting the renewed backlog in these, and the backlog comes in at the same rate as far as pricing is concerned. So we don't see any softness there as far as pricing, even on the NCNR.

Matthew Ramsay :

For my first question, I wanted to follow up on the last topic there that Chris brought up that you guys now have $16.5 billion something like that in LTSAs, only maybe 1/4 of that is from the silicon carbide business that gets a lot of attention. I wonder guys if you might spend a little bit more time on the rest of the business, LTSAs, where they're concentrated? I took note of the increase of $2.5 billion that you just announced from where the number was that you reported previously. So just where are you? Maybe a little bit more detail on the last answer of where you're seeing the strength in the market in order for a customer to be willing to sign up for those long-term agreements and other segments outside of silicon carbide?

Thad Trent :

Yes. And let me just add that the $4.5 billion of silicon carbide LTSA is through '25. So it's actually a much larger number that's included in the in $16.6 billion of total LTSAs. But as Hassane said, it's broad. The place that we are not doing LTSA, obviously, is the noncore business that we're trying to exit. So we are intentionally trying to get out of that business.

Hassane El-Khoury :

Yes. Look, that's a great question. So we've been obviously investing in brownfield. We've been very upfront about it. Given our manufacturing footprint and the optimization that we've been undergoing in the last couple of years, we're very well positioned to grow in there as we want. So let me give you some color. We have a large-scale manufacturing site in South Korea in Bucheon. That is an existing highly capable, high output power fab that today manufactures IGBT. What we've been able to do over the last few years is transfer that IGBT technology to East Fishkill converted to 12-inch. So there's benefit from that by itself, and then use an existing power fab with slightly fewer GAAP tools in order for us to run silicon carbide and start running silicon carbide in that fab. So that's what allowed us to ramp so quickly and with the CapEx efficiency that you've seen from us. That, for example, is on the front end. The same thing with the back-end. We have a very robust back-end footprint that is already leading in power and packaging for power semiconductors and modules. We've been able to retool those back-end factories in order to support our world-class modules that I mentioned in my prepared remarks for silicon carbide. So that's on the front-end and the back-end. Now right after the material that we've been talking about, there is, of course, capabilities of wafering and epi, and that's where we do it in the Czech Republic. We've been able to increase that capacity to match the output from our Hudson facility for substrates and to match the capabilities that our fab has been able to ramp to. So all of these three sites are what is increasing proportionately in order to support our not only the $1 billion, but you can imagine, we're investing in the '24 ramp and the '25 ramp based on those LTSAs. Those are coming in on track. Those are coming in on time. Obviously, equipment has been a challenge over the last few years, but we've been able to stay ahead of it given that we're utilizing our existing manufacturing footprint. So I'm very proud with what the team has done because it's not an easy task, but they have been able to do it, and that's obviously a testament of the capabilities of the team to run such a complex manufacturing. And we'll continue to invest in brownfield in order to support our long-term strategy.

Vijay Rakesh :

Hassane, great guide here, given all the concerns. On the inventory side, just a quick question. Your inventories were up only 3% sequentially, which is probably the lowest among all the analog guys. Just wondering if you can give us some color on how inventories look in the channel and at the OEM level?

Vijay Rakesh :

Got it. And then on the silicon -- sorry, go ahead.

Vijay Rakesh :

Yes. I know the silicon carbide side, just wondering what is -- if you can give us some color on what's driving the wins? Obviously, you compete with a lot of well-established suppliers on the silicon carbide side. What's driving the events and how defensible is it?

Operator:

Our next question comes from Joseph Moore from Morgan Stanley.

Hassane El-Khoury :

Yes. Look, I mean, in all fairness, let me just give you a little bit of a time-based questions. A lot of the ramps that are happening today are ramps that have been on, call it, three, maybe four years ago. Before onsemi was, call it, a credible and a focused player in silicon carbide, we talked about our strategy of doubling down on silicon carbide in 2021. So my focus and our strategy and a lot of the wins that we have are forward-looking. Obviously, they already started. They are ramping our -- for -- against that $1 billion we have in '23, but forward- looking. So how it's split, like I said, most of the platforms are single sourced. So I can tell you because the packaging is not like it's swappable. So most of them are single source. There are a few cases where we may share a platform, but majority of them are single sourced. And those will be ramping. Think about what we're winning now is in the '25, '26 and beyond. What we are ramping now has already been won a few years ago. So that gives you a little bit on the timing of what others have been disclosing, which is not a surprise to me, by the way.

Thad Trent :

Well, it's really a combination of both, right? In Q4, we exited $17 million. It was below our expectations than what we thought we would exit. In Q1, we're looking at $75 million. So I think it's a combination of that. We're definitely seeing slowness in the other noncore markets, right? Consumer and compute has been down. It continues to be down. As I said, our automotive, we expect to be up sequentially in Q1. And we think industrial has got some headwinds as well. But so -- I would look at it as a cautious guide, but it's kind of taken into account the exits as well as just the overall softness that we're seeing right now.

Rajvindra Gill :

Congrats on the silicon carbide ramp. Just a follow-up on the long-term supply agreements. I was wondering if you could maybe talk about any changes that you're seeing within those agreements? I know a couple of quarters ago, you talked about certain customers requesting more volume near term, some customers extending the agreements, some customers requesting higher volumes. So any kind of positive specific changes within those LTSAs that you would like to call out or noticeable?

Rajvindra Gill :

Appreciate that color. Just one follow-up in terms of the overall pricing environment. I know as part of your strategy, you talked about reducing the price to value discrepancy you after obviously have prices kind of locked in regarding the LTSAs. How do you think about the pricing environment, overall blended pricing this year as you see the benefits of those strategies, but then kind of offset by maybe the nonstrategic? So just kind of maybe talk -- walk me through the puts and takes on the pricing environment this year.

Operator:

This does conclude the question-and-answer session for today's conference. I'd now like to turn the call back over to Hassane El-Khoury, President and CEO, for any closing remarks.

Operator:

This concludes today's conclude call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Parag Agarwal:

Thank you, Liz. Good morning, and thank you for joining onsemi's third quarter 2022 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 2022 third 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 inspection of our website. Our earnings release and this presentation include certain non-GAAP financial measures. In consideration of these non-GAAP financial measures to the most directly comparable GAAP measures under GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we'll make projections or other forward-looking statements regarding future events or future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in most recent 10-K and Form 10-Qs, in our other filings with the Securities and Exchange Commission and in our earnings for the -- earnings release for the third quarter of 2022. Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other events that may occur except as required by law. Now let me turn it over to Hassane. Hassane?

Thad Trent:

Thanks, Hassane. Our third quarter results clearly demonstrate the success of our transformation strategy with record revenue, operating income and free cash flow. The tests we have taken to strengthen our operating model will not only enable us to get through short-term market volatility, but also propel us to scale in the long term. . Defining our primary areas of focus has enabled us to double down on intelligent power and sensing technologies and lead where we bring differentiation to the automotive and industrial markets. Our customers now choose onsemi as a strategic partner to enable their success in emerging in disruptive areas such as electric vehicles, ADAS, energy infrastructure and factory automation. Customers are entering new agreements with us, while others are expanding the scope and duration of their existing LTSAs to secure even longer supply. Revenue committed through our LTSAs increased $5.3 billion in the third quarter and now totals $14.1 billion with LTS revenue over multiple years and often includes hundreds of parts. As Hassane mentioned, we also made additional structural changes to improve the sustainability of margins by rationalizing our product portfolio and eliminating our exposure to price-sensitive non-differentiated products. So far, we have walked away from $277 million of revenue at an average gross margin of 25%. $39 million of this revenue was in the third quarter at gross margin of 35%. We continue to execute our fab-lighter strategy through the rationalization of our manufacturing footprint. Following the sale of Belgium and South Portland fabs in the first half of the year, we closed the sale of our 8-inch fab in Pocatello, Idaho in October, and we also entered into a definitive agreement to sell our 6-inch fab in Niigata, Japan. We expect the Niigata transaction to close in the fourth quarter. Exiting these four fabs will reduce our annual fixed cost by $160 million, exceeding our target of $125 million to $150 million. The full benefit of these divestitures will be realized over the next several years as we transition production to other fabs in our network further supporting our long-term gross margin expansion plans. Turning to results for the third quarter. As I mentioned, Q3 was another quarter of record results. Total revenue was $2.2 billion, an increase of 26% over the third quarter of 2021 and 5% quarter-over-quarter. We reported record revenue for our strategic end markets of automotive and industrial, which together accounted for 68% of revenue as compared to 61% in the quarter a year ago. Weakness persisted in our nonstrategic end markets of computing and consumer, offset by sequential growth in automotive and industrial of 11% and 5%, respectively. Revenue from both intelligent power and intelligent sensing is also at record levels. Intelligent power grew 35% year-over-year and intelligent sensing grew by 43% year-over-year. Additionally, all three business units reported record revenue in the third quarter. Revenue for the Power Solutions Group, or PSG, was $1.12 billion, an increase of 25% year-over-year. Revenue for the Advanced Solutions Group, or ASG, was $734 million, an increase of 20% year-over-year. And revenue for the Intelligent Sensing Group, or ISG, was $342 million, an increase of 45% year-over-year. Gross margin -- GAAP gross margin for the third quarter was 48.3% and non-GAAP gross margin was 49.3%. Our non-GAAP gross margin declined as expected by 40 basis points quarter-over-quarter, primarily due to an accelerating ramp in silicon carbide and lower factory utilization at 75% as we proactively slowed wafer starts by 20% from the beginning of the year. As indicated in previous conference calls, we expect silicon carbide start-up costs to be 100 to 200 basis points dilutive to gross margins during the initial revenue ramp. GAAP operating margin for the quarter was 19.4% and non-GAAP operating margin was a record of 35.4% and an increase of 90 basis points quarter-over-quarter and approximately 1,100 basis points year-over-year. GAAP earnings per diluted share for the third quarter was $0.70, flat as compared to the quarter a year ago. Non-GAAP earnings per diluted share was at a record high of $1.45 as compared to $0.87 in the third quarter of 2021. Now let me give you some additional numbers for your models. GAAP operating expenses for the third quarter were $634 million as compared to $322 million in the third quarter of 2021. Non-GAAP operating expenses were $304 million as compared to $296 million in the quarter a year ago. Non-GAAP operating expenses were below our guidance due to a pushout of certain programs into the fourth quarter, delayed hirings and proactive management of discretionary spending across the company. For the third quarter, our non-GAAP tax rate was 15.8%, and we expect to remain in the 15.5% to 16.5% range. Our GAAP diluted share count was 449 million shares, and our non-GAAP diluted share count was 441 million shares. We repurchased 1.2 million shares for $80.1 million in the third quarter. Please note that we have an updated reference table on the Investor Relations section of our website to assist you calculating our diluted share count and various share prices. Turning to the balance sheet. Cash and cash equivalents was $2.45 billion, and we had $1.5 billion undrawn on our revolver. Cash from operations was $1 billion, and free cash flow was $731 million at a record level of 21% of revenue on an LTM basis. Capital expenditures during the third quarter were $271 million, which equates to a capital intensity of 12.4%. As we indicated previously, we are directing a significant portion of our capital expenditures towards silicon carbide and enabling our 300-millimeter capability at the East Fishkill fab. Accounts receivable of $857 million declined by $281 million and DSO of 36 days declined by 14 days quarter-over-quarter. Days of inventory declined by 7 days to 129 days from 136 in Q2. This includes approximately 23 days rich inventory to support transitions in the intending silicon carbide ramp. Distribution weeks of inventory declined to 6.9 weeks, down from 7.0 in Q2 as we proactively manage inventory at historically low levels for our distribution partners. And total debt was $3.2 billion. Turning to the guidance for the fourth quarter. A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our third quarter results. Let me now provide you elements of our non-GAAP guidance for the fourth quarter. We continue to see strong demand from our automotive end markets, driven by electrification and ADAS. We are beginning to see softening in certain industrial applications, and we expect increased weakness in our nonstrategic end markets that we plan to exit as we continue our portfolio rationalization. Given the macro uncertainty, we are taking a cautious stance in our guidance for the fourth quarter. As such, we anticipate revenue will be in the range of $2.01 billion to $2.14 billion. We expect non-GAAP gross margin to be between 47% and 49% due to lower factory utilization and the dilutive impact of ramping silicon carbide. This also includes share-based compensation of $3 million. Due to the delayed hiring and project spending in the third quarter, we expect non-GAAP operating expenses to increase to $305 million to $320 million, including share-based compensation of $21 million. We anticipate our non-GAAP OIE will be $22 million to $26 million. We expect our non-GAAP tax rate to be in the range of 15.5% to 16.5% and our non-GAAP diluted share account for the fourth quarter is expected to be approximately 441 million shares. This results in non-GAAP per share to be in the range of $1.18 to $1.34. We expect capital expenditures of $300 million to $330 million in the fourth quarter as we continue to ramp our silicon carbide production and invest in 300-millimeter capability to support our long-term growth we expect our capital intensity to be in the mid- to high-teen percentage range. In summary, our transformation strategy is made onsemi a more resilient and sustainable company. We have recently been named to Investor Business Daily’s 100 Best ESG Companies for 2022 as we drive to net zero by 2040. We are well positioned to invest in our and deliver long-term financial performance for our shareholders while extending our competitive lead. With that, I'd like to turn the call over to Liz to open up for Q&A.

Ross Seymore :

I guess the first one Hassane is on the revenue side and the demand side of the equation. You mentioned uncertainties and then you talked about auto staying strong, but weakness in other places. Can you just talk a little bit about the linearity of demand and maybe dive a little bit deeper into what you're seeing in the industrial market? I think people understand your other segments have been weekend markets and aren't strategically a focus for you, but the industrial side is. So a little bit of color on those metrics would be helpful.

Ross Seymore :

Anything in the linearity side of the equation, just the back half of that question?

Ross Seymore :

And I guess as my follow-up, one for Thad, on the gross margin side of things. It's good that you guys are still sticking with the 1 to 2 percentage point headwind from the silicon carbide ramp, but we've heard a number of your competitors talk about the difficulty in that ramp. So can you give us a little bit more color on what gives you the confidence in maintaining that hit as you're ramping so significantly? And if the revenue side of the equation and the demand side is up as high as it is, doesn't the CapEx have to rise accordingly? If you're going to do over $1 billion in revenues, how is your capital intensity staying roughly the same, shouldn't those two lines move in sync?

Thad Trent :

Yes. Ross, on the capital intensity, as I said in my prepared remarks, we expect our capital intensity to go up to the mid- to high single -- mid- to high teens over the next several quarters. Clearly, we're having to place orders for equipment further out to support this revenue ramp, but we do expect our capital intensity to go up.

Christopher Danely :

So as part of this weakness, have your pricing expectations changed for 2023? And then do you expect the weakness to bleed over into the automotive end market as well?

Thad Trent :

And Chris, the one thing I would add is as we see input costs going up, we are passing that on to our customers, and we'll continue to do that as well. So the pricing environment is very stable.

Hassane El-Khoury :

Lead times is flat and is very consistent. As far as shortages, yes, we do have technologies that have our remaining in short supply versus the demand that we have. And we expect those technologies to remain supply constrained even through 2023. And those are the ones we're covered with LTSAs with our customers to make sure -- strategic customer to make sure we cover the whole BOM for our customers in order to sustain our ramps in new products next year.

Vivek Arya :

Hassane, I just wanted to follow up on the question, Chris also asked, which is on just the supply-demand balance on the automotive side. There is a concern that automotive could be kind of this next show to drop in this rolling correction in semis. What are you hearing from your auto customers about? Are they building inventory right now? What is the supply-demand balance when you look at OEMs and Tier 1s, especially towards the first half of next year?

Vivek Arya :

Got it. And for my follow-up, on gross margins. Thad, I think on the last call, you said you feel comfortable staying in this 48% to 50% range. So when I look at the Q4 outlook, you are at 48% already. How should we think about the puts and takes for -- from a calendar '23 perspective? Because you'll be taking on the East Fishkill fab, right, which you have outlined some headwinds from and then, of course, silicon carbide ramps. So there is some headwind and your utilization right now is 75%. So can you stay in this 48 -- plus kind of range for next year? Just what are kind of the puts and takes of gross margins for next year?

Operator:

Our next question comes from the line of Matt Ramsay with Cowen.

Thad Trent :

Yes, the uptick is to support the LTSA revenue that we continue to lock-in. I referred to the increase that we had in Q3. But clearly, we're locking up more and more open carbide wins and the ramp will go out for the years and that requirs additional capital. And that's the reason that we're -- we continue to make investments.

Joshua Buchalter :

I appreciate the color there. And then you sort of mentioned the issue at one of your competitors with the yields that we found out about last week. Since then, we've been getting a lot of questions on is there any read-through into your own internal substrate ambitions? Can you walk us through your thinking there? Is it sort of just a normal part of coming up the yield curve? Or was it from your view, some specific to design decisions that they made?

Operator:

Our next question comes from the line of Toshiya Hari with Goldman Sachs.

Thad Trent :

Yes. We've always said that the exit would be market driven. And the faster we could exit, the better off we'd be, we exited $35 million as you referred to. As we forward to Q4, we think we're going to exit somewhere between $65 million to $75 million in Q4. And for 2023, we still think we're on track and again this would be market dependent, but we think it will be in the neighborhood of 400 to 450 exits for next year as well. So we think we're on track for that. We think the softness in this market kind of supports this exit allows us to reallocate that capacity somewhere else that's more valuable to us. So those are the numbers that we have line of sight to right now.

Thad Trent :

Okay. So -- so look, when coming back, I'll start in reverse order here on the floor of what we think is the mid-40s in a downturn next year. Pricing remains very, very steady in terms of next year. We think the business is -- well, I'm not going to provide you guidance on that one, we'll let you guys figure out what that to be more market-driven. You guys will model it the way you model it. What was the first part of the question?

Thad Trent :

Yes. Thanks for the reminder. So Q2, we were at 77%. We dropped to 75% here in Q3. As we look forward into Q4, again, we'd assume incremental softness here. So we think it's flat to down slightly in Q4 as our assumption.

Rajvindra Gill :

Question on the guidance on the top line. Can you give us any kind of direction by the nonstrategic or strategic?

Rajvindra Gill :

Got it. So on the industrial being down mid-single and kind of seeing a deceleration in kind of the year-over-year growth rate, quarter-by-quarter, the growth rate has been decelerating. And obviously, we've heard commentary about softness in industrial from some competitors. I'm just curious if you think this softness in white goods is just kind of relegated to that particular market. And that seems to be -- even if it is relegated to that small segment of the market, it's still a relatively decent percentage of your industrial if you're seeing kind of a mid-single decline quarter-over-quarter. So just wondering if that's the case? Or are there other kind of indications that you're seeing with respect to your customers? Outside of alternative energy, are you seeing slower industrial production in medical or other different segments?

Rajvindra Gill :

And just for my follow-up, I appreciate that Hassane. Just that on the OpEx, it's been kind of bold quarter-by-quarter based on kind of pushouts programs. So 12.5 for Q4. As you kind of go into 2023, wondering how you're thinking about the OpEx ramp? Is there going to be continued investment in R&D? I'm just curious if there -- you obviously are managing an OpEx system that's going to be conducive if the demand environment slows down, same thing where you're managing inventory. Just curious how you're thinking about the OpEx controls into calendar 2023?

Operator:

Our next question comes from the line of Tore Svanberg with Stifel.

Thad Trent :

Can you repeat the first part of your question, you broke up a little bit?

Thad Trent - CFO:

Yes, absolutely. I mean our customers have been co-investing with us. We've been saying that for a while. That's -- that has to be prepayments, it can be on payments for capital. It could be co-investing in R&D, that's very typical.

Thad Trent :

No. They vary by agreement and duration. So I wouldn't want to try and put a number on it.

Hassane El-Khoury :

No, we're not giving quantitative because we're just passing whatever we get. So from the outlook and from our margin, you can think about it as being neutral. So as we get it, we pass it on.

Harlan Sur :

Your intelligent sensing group, primarily image sensor solutions, which is where you have quite a bit of the portfolio, which is outsourced as -- I remember it was capacity constrained back last year. This business has been outperforming this year. I think it's up like 41% for the first nine months. I assume you guys are getting better capacity allocation from your foundry partners. Is image sensor demand still tracking higher than supply and can you just give us an update on the in-sourcing initiatives?

Harlan Sur :

Great. Hassane, you also talked about this a little bit in your prepared remarks. Being a leader in power, you guys have a pretty broad portfolio of solutions, right? So in addition to the silicon carbide traction inverter for EV and onboard charging, like how successful has the team been in also pulling in, for example, the gate driver module, which uses your MOSFET portfolio, the front-wheel drive, IGBT traction inverters? This, I assume, is not included in the $4 billion pipeline, but it does sit alongside your silicon carbide solutions and represent sort of further content gain opportunity. So how successful has the team been in sort of attaching these other components, two-year silicon carbide pipeline?

Operator:

Our next question comes from the line of Timothy Arcuri with UBS.

Thad Trent :

Well, look, the way we're thinking about the market right now is we think it remains soft. I think utilization kind of stays in this level, maybe even goes backwards slightly as we go into Q1. So I don't expect that to improve just based on what we're all seeing in the news. In terms of the quantification, we said silicon carbide is 100 basis points to 200 basis points dilutive there. And the utilization is a factor in addition to that.

Thad Trent :

Yes. Look, as I said, customers are extending their LTSAs. They are coming back and increasing them as well. So I think that the aim here has been very consistent with our customers trying to lock up long-term supply. And just to clarify, our LTSA -- our committed revenue in LTSA over a multiyear period now is over $14 billion. It was up over $5 billion -- $5.3 billion in the third quarter. So you can see that this is customers locking in supply on silicon carbide, but beyond that as well across the entire portfolio. What we're not doing is we're not doing LTSAs on the business we're looking to exit, obviously, because -- we don't want to have a commitment there.

Tristan Gerra :

Just a follow-up on this. So in industry-wide in analog outside of LTSAs, we know that another companies had implemented earlier this year, noncancelable orders to. So are those holding into next year or at least into the first half of next year in terms of how you're dealing with or outside of your LTSAs?

Thad Trent :

Yes. Tristan, I would add that of our $14.1 billion of LTSA, it does not include the NCNR orders. So when you combine the two, we have very good visibility into our backlog and what we're truly.

Hassane El-Khoury :

Yes, I don't know where you're referring to, but we have 1,200 volts already in production and supplying to customers. So I'm very comfortable with our road map and the breadth of our portfolio, both in silicon and silicon carbide, but our 1, 200 volts is already in production, and it has been.