The operator welcomes participants to the onsemi Third Quarter 2023 Earnings Conference Call and introduces the speakers. The call is being recorded and a replay will be available on the company's website. The speakers will discuss non-GAAP financial measures and caution that forward-looking statements are subject to risks and uncertainties.

The company is reporting strong financial results for the third quarter, with record revenue in the Automotive and Industrial segments. However, they are taking a cautious approach due to potential softness in the market and are focused on maintaining operational excellence. The company's transformation has allowed them to navigate a dynamic macro environment and their commitment to customers remains a top priority. The success of their silicon carbide production is highlighted as an example of their strong execution.

The acquisition of GTAT two years ago has allowed the company to produce its own substrates and become a leader in the silicon carbide market. They have exceeded expectations in manufacturing output and have completed the expansion of the world's largest silicon carbide fab. Due to a reduction in demand from one automotive OEM, they now expect to ship $800 million of silicon carbide in 2023. However, they expect the growth of their silicon carbide business to double the market growth in 2024. The company has shipped to over 500 customers and has design wins and LTSAs with leading automotive players, including NIO.

In the third quarter, onsemi solidified their position as the leading silicon carbide supplier and signed a long-term supply agreement with a leading OEM for their EV traction inverters. The energy infrastructure and medical markets also saw growth, with onsemi maintaining a strong presence in these areas. Additionally, the company's design activity for image sensing has surpassed 2022 levels, indicating potential growth in this market.

Thad Trent, the CFO of the company, discusses the company's commitment to delivering intelligent power and sensing technologies for sustainable growth. The company's focus on high-growth megatrends in automotive and industrial markets has led to 72% of their business coming from these sectors. In the third quarter, the company's revenue exceeded expectations and saw a 4% increase from the previous quarter. Automotive revenue was at a record high, driven by the need for electrification and advanced features in vehicles. Industrial revenue also saw growth, particularly in energy, infrastructure, and medical sectors.

In the last quarter, the company's overall business decreased by 4% and 42% compared to the previous quarter and the same period last year, respectively. This was due to the company's decision to exit $46 million of noncore business. However, the Power Solutions Group saw a 10% increase in revenue, while the Advanced Solutions Group saw a decline of 15%. The company's gross margin decreased by 10 basis points sequentially and 200 basis points compared to the previous quarter, mainly due to headwinds from their East Fishkill fab and lower utilization. The company plans to proactively lower utilization in the next few quarters while maintaining a gross margin above mid-40%. This is a result of their fab-liter strategy of divesting 4 fabs in 2022 and consolidating operations in larger and more efficient fabs. The company expects to generate cost savings in the next few years through their Fab Right strategy.

The company is focused on driving operational efficiencies and improving gross margins, particularly in their silicon carbide business. They have exceeded expectations and expect to reach corporate gross margin in Q4. Their yield improvement learnings have allowed them to slow capacity expansion and lower their 2024 capital intensity. Operating expenses increased due to a reserve against a receivable balance. GAAP operating margin was 31.5% and non-GAAP operating margin was 32.6%. GAAP tax rate was 16.4% and non-GAAP tax rate was 15.6%. GAAP earnings per diluted share was $1.29 and non-GAAP earnings per diluted share was $1.39.

In the third quarter, ON Semiconductor's GAAP diluted share count was 451 million shares and non-GAAP diluted share count was 439 million shares. The company returned 75% of its free cash flow through share repurchases and plans to continue returning 50% of free cash flow to shareholders. The company's cash and cash equivalents were $2.7 billion and they had $1.1 billion available on their credit line. Cash from operations was $567 million and free cash flow was $134 million. They are investing in silicon carbide and expanding their capabilities at EFK. Accounts receivable increased by $14 million and inventory increased by $120 million, including 64 days of bridge inventory. Excluding this strategic build, base inventory declined by 7 days to 102 days. Distribution inventory also decreased. Total debt remained flat and net leverage is 0.25x. ON Semiconductor is now a transformed company, with a more stable business model. They are committed to delivering strong performance for shareholders. Their non-GAAP guidance for the fourth quarter will be provided.

In the press release for our third quarter results, we provided a table with our GAAP and non-GAAP guidance. Our Q4 revenue is expected to be between $1.95 billion and $2.05 billion, with a mid-single-digit decline in automotive due to softness in Europe. Non-GAAP gross margin is expected to be between 45.5% and 47.5%, with share-based compensation of $4.3 million. Operating expenses are expected to be $300 million to $315 million, including share-based compensation of $28.5 million. Other income is expected to be a net benefit of $4 million, with a non-GAAP tax rate of 15.5% to 16.5%. Non-GAAP diluted share count is expected to be 438 million shares, resulting in earnings per share of $1.13 to $1.27. We anticipate capital expenditures of $425 million to $465 million, primarily in silicon carbide and EFK. We are taking a cautious approach as we exit 2023 and plan for 2024, and remain focused on execution and making proactive changes to set ourselves up for success in uncertain market conditions.

The company is taking measures to improve efficiency and navigate through current market conditions, such as exiting volatile businesses, managing inventory, and controlling wafer starts. The CEO also addressed concerns about weaker demand and inventory burn in the automotive sector, particularly in Europe, but stated that they are proactively managing the situation and maintaining inventory levels. They also mentioned lowering their revenue forecast for SiC due to one customer and potential changes in the EV market.

Hassane El-Khoury, CEO of a company, is discussing the impact of dynamics on the electric vehicle (EV) market in Europe. He states that while there may be changes in the short-term, the long-term trend for EVs is still positive. The company is still expecting growth in the fourth quarter, just not at the rate they originally anticipated. In terms of their outlook for 2024, they expect silicon carbide to grow 2x the market, while silicon will remain flat or slightly down. They are not planning for a recovery in the first half of 2024.

In the paragraph, Thad Trent and Vivek Arya discuss ON's growth in silicon carbide and other areas for the next year. They mention that the company will not be talking about exits on legacy businesses in 2024 and that they feel good about their pipeline and LTSAs. They also mention that they do not have guidance for 2024 yet due to macro uncertainty. Chris Danely asks about the weakness in Q4 and if their expectations for silicon carbide have changed for 2024, to which Hassane El-Khoury responds that the majority of the weakness in Q4 is due to silicon carbide and that their expectations for 2024 have not changed.

The company's outlook for the silicon carbide market and the EV market remains unchanged, and they are making long-term investments to secure a leadership position. They expect to maintain a gross margin in the mid-40s, even with a decline in revenue over the next several quarters. They attribute this to structural changes and optimization efforts. The company is being cautious and plans to reduce utilization, but remains confident in their ability to hold the mid-40s gross margin floor.

Hassane El-Khoury, CEO of a company, is asked about the various factors affecting the marketplace, such as the strike, China's economy, and Europe. He explains that the main driver is the decline in end demand, caused by both financial factors and macro uncertainty. The company has taken proactive measures to manage inventory levels and is cautious in its outlook. When asked about silicon carbide, he confirms that it is mostly driven by one customer and there is broad-based weakness in the EV market. This weakness is also tied to the company's European operations.

Hassane El-Khoury, CEO of ON Semiconductor, discusses the company's inventory levels and market forecast for silicon carbide. He clarifies that the softness in demand for electric vehicles is due to one customer and expects growth in the fourth quarter and 2024. The company is expecting to grow their silicon carbide revenue by 2x the market next year. They are monitoring sell-through and product mix before increasing distribution inventory levels.

The company is closely monitoring KPIs to ensure tight control over distribution inventory and prepare for a mix shift in Q4 or even 2024. They have been managing inventory in the 7-8 week range and will likely continue to do so due to uncertainty. The company's '24 guidance is based on market growth, but there may be constraints in silicon carbide supply. All of the '24 revenue is currently tied to specific programs, but there may be flexibility in supply if there are changes in customer mix.

The company has visibility on the program, voltage, volume, and mix needed for the '24. They stage inventory in blank wafers and Epi to maintain flexibility for shifts in demand. SiC will likely remain constrained through '24. Strategic inventory for fab transitions is committed backlog and will be worked down over a few quarters.

The company does not see their elevated inventory levels as a risk to their business. They have been managing down their base inventory and have good visibility on their inventory for fab transitions. The focus is on driving down base inventory, and they feel good about their pricing stability. The company has not provided a specific number for how much business they will be exiting in the current quarter.

In the paragraph, Thad Trent discusses the company's exit from certain businesses and the impact of pricing and customer retention on this decision. He also mentions the expected amount to be exited in Q4 and the current gross margin of the remaining businesses. The next question from Christopher Rolland focuses on the balance between bookings and backlog coverage, as well as the turns business for the upcoming quarter and next year. Hassane El-Khoury clarifies that the outlook for Q4 is not related to returning to turns business, and that they have full visibility on revenue and backlog coverage.

The company is discussing the power of LTSAs and how they negotiate win-win situations with customers when their consumption is lower than expected. There have been some cancellations and push-outs in the past, but those trends have flattened out. The company remains optimistic about their industrial and solar business, despite seeing some product-specific drivers and a general decline in the industry.

Hassane El-Khoury and Thad Trent discuss the impact of macro trends on industrial demand, with a focus on renewable energy and energy storage. They note that the companies they work with are more affected by residential demand, which has been impacted by interest rates and consumer spending sentiment. They expect the energy storage business to remain strong, as it is not as affected by residential demand. In response to a question, Trent clarifies that they are cautiously looking at the first half of next year and expect a sequential decline in Q1. El-Khoury adds that they do not see a market recovery in the near future. They also mention that the silicon carbide business is managing utilization rates at 68% to manage inventory, but it is likely to be immune from the lower rates due to the continued growth of electric vehicles.

The speaker confirms that the utilization for silicon carbide is high and is expected to remain so in the future. They also mention that additional capacity will be brought on next year to support 2025 and beyond. However, the demand for general purpose automotive parts is softer, but this is not due to constraints in silicon carbide or other EV-specific components. The speaker also confirms that the company is on track to transition to 200-millimeter wafers by 2024 and expects them to make up a significant portion of their production by that time.

The company is confident about its 200-millimeter silicon carbide business and plans to start ramping up revenue in 2025. They expect the silicon carbide business to become accretive to corporate margins in 2023. However, the company recently announced a reduction in its 2023 silicon carbide revenue forecast from $1 billion to $800 million. This could be due to changes in a specific customer program, but the LTSAs (long-term supply agreements) are still legally binding.

The company is cautious about agreeing to push out or change LTSA commitments outside of silicon carbide in Q4, as it must be a win-win for both the company and the customer. They manage these situations on a case-by-case basis and are committed to maintaining a growth rate in 2024. For next year, they have $5.7 billion in LTSA commitments, with an average duration that is not specified.

The speaker corrects a previous statement that silicon carbide will be down in Q4, stating that it will actually see growth but not at the expected level. The company expects sequential growth in silicon carbide through 2024 due to customer ramps and a wide range of customers.

William Stein asks about the dynamics in the industrial end market and Cree's expectations for next year. Hassane El-Khoury responds by saying that they have seen weakness in industrial, but they have also seen strength in two specific areas. Due to their strong performance in silicon carbide, they have lowered their capital intensity for 2024.

The company is performing well in renewable energy and medical industries due to specific trends. They do not expect a big change in recovery for 2024 and are committed to delivering shareholder value. The team is dedicated to solving complex problems for customers.

This summary was generated with AI and may contain some inaccuracies.