The operator introduces the ON Semiconductor Fourth Quarter 2023 Earnings Conference Call and explains the format of the call. Parag Agarwal, the Vice President of Corporate Development and Investor Relations, introduces the speakers and mentions that the call is being recorded and will be available for replay. He also mentions that non-GAAP financial measures will be discussed and that the company will make forward-looking statements, but cautions that these statements are subject to risks and uncertainties.

The speaker, Hassane El-Khoury, is reporting on the company's successful year in 2023, with significant accomplishments and growth in key areas such as Intelligent Power & Sensing Technologies and automotive revenue. Revenue from crude products increased by 40% and design win growth exceeded long-term targets. The company also achieved its first $1 billion revenue year for automotive image sensors and had a successful year in silicon carbide, with a 25% market share and over 600 customers.

Onsemi's top 10 customers are spread across APAC, with a majority in Korea, followed by the U.S. They plan to diversify their customer base in 2024 with the ramping up of production by European customers. Onsemi is making progress in transitioning to 200 millimeter and has announced the world's largest silicon carbide fab in South Korea. Market reports project a 20-30% growth for silicon carbide in 2024, but Onsemi still expects to grow at 2x the market rate due to their strong presence in the EV market. They have a broad portfolio of silicon carbide and IGBT, giving them an advantage in all levels of EVs. Onsemi has seen significant content gains in hybrid and electric vehicles, with a doubling of revenue in 2023. They are also a leader in image sensors, with a 12% revenue increase in 2023, driven by the shift to higher value 8 megapixel sensors for ADAS systems.

Infineon is a leader in automotive LED lighting, inductive and ultrasonic sensing, and plans to maintain their top position with their upcoming analog and mixed signal platform. They are also number one in solar and energy storage solutions in the industrial sector, with high demand for their hybrid modules. The company has seen significant growth in revenue for energy infrastructure, and the IEA predicts a continued increase in renewable energy. Infineon has also released a new suite of Elite sick power integrated modules for bidirectional charging in electric vehicles, with the highest charging capability in the industry. Their broad portfolio of products allows them to offer optimized solutions for customers, and they are well-positioned to support the transition to 48-volt systems in the automotive industry. Despite market uncertainty, Infineon has remained focused on execution.

The company has demonstrated operational excellence and financial sustainability in 2023, despite challenging market conditions. They have built a resilient business model and are now focusing on operational improvements to achieve their target financial model in 2024. Despite expected softness in all end markets, the company is confident in weathering 2024 with better financial performance than in previous downturns. They have achieved significant improvements towards their long-term financial model, with higher gross margins and non-GAAP operating margins. The company returned 140% of free cash flow to shareholders through share repurchases and still has a significant amount remaining on their buyback authorization.

In the fourth quarter, the company reported strong revenue, gross margin, and earnings per share, with growth in the Automotive segment and declines in the Industrial segment as expected. The company is focusing on high-growth megatrends and has successfully exited non-core businesses. The Power Solutions Group saw an increase in revenue, while the Advanced Solutions Group and Intelligent Sensing Group saw declines. Gross margin was above the midpoint of guidance.

The company's gross margin exceeded expectations in Q4, despite a decrease in utilization. They have implemented structural changes to improve their cost structure and expect to maintain a gross margin above 40%. Operating expenses and margins were in line with expectations, and the company aggressively repurchased shares. Cash and cash equivalents were at $2.5 billion and free cash flow was $221 million. Capital expenditures were $391 million.

The company expects its capital intensity to be in the low-teens for 2024, driven by improved silicon carbide manufacturing output. Inventory increased by $27 million and days increased by 13 days, with most of the increase due to strategic builds to support fab transitions. Excluding these builds, inventory decreased by $52 million. The company plans to replenish its distribution inventory in 2024 to service the mass market. The company expects Q1 revenue to be between $1.8 billion to $1.9 billion, with lower gross margin due to lower factory utilization and EFK headwinds. Non-GAAP operating expenses are expected to be $305 million to $320 million, and non-GAAP other income is expected to be a net benefit of $8 million.

The company has benefited from debt restructuring and expects a non-GAAP tax rate of 15.5% to 16.5% and a non-GAAP diluted share count of 433 million shares for the first quarter. They anticipate a range of $0.98 to $1.10 in non-GAAP earnings per share and plan to invest $310 million to $340 million in brownfield projects. The company remains confident in their 53% long-term gross margin target and is focused on operational excellence and long-term commitments to customers and shareholders. They are engaging in long-term supply agreements and are confident in their position in the market. The company is now taking questions from analysts, with the first question addressing the automotive side of the business. The company notes that third-party estimates for silicon carbide differ from their own observations of customer outlooks. They also mention that there has been some weakness in the Tier 1 market in Europe.

The company is confident in the demand for their platforms and is focused on managing inventory. They have seen softness in the automotive market, but are taking a cautious approach and managing utilization to match the outlook. They plan to hold the mid-40% gross margin floor and believe their Fab Liter strategy has been effective in driving cost efficiency. As they continue to execute Fab Right, they expect to see even more cost savings.

The speaker discusses how their company was able to avoid deeper corrections in their business compared to their peers, citing their LTSAs as a key factor. They also mention how they proactively took steps to manage their utilization and adjust their shipments to align with demand. This strategy has helped them navigate the current market conditions and they believe Q1 may be the trough of the cycle.

The company has implemented tools to give them visibility in the automotive sector and to prepare for a softer demand environment. However, these tools cannot solve a demand problem. The company has reduced their utilization and base inventory in response to the current situation, which will be beneficial in the future. The CEO is unable to predict when the market will hit its bottom. In regards to silicon carbide, the revenue in Q4 met expectations and showed growth from the previous quarter. The company expects this growth to continue in 2024.

The speaker explains that they do not disclose absolute numbers for their silicon carbide business due to its ramping nature and the lumpiness of new businesses. They have always aimed to outgrow the market and remain committed to that trajectory for the next five years. The design-ins have been completed and shipments have been made to a wide range of customers, but the end demand remains uncertain. If end demand is better than forecasted, they will grow better than their 2x market goal. The speaker clarifies that pricing for silicon carbide has not changed and is tied to long-term service agreements, but they may discuss volume changes with customers depending on ramps and end market.

The speaker explains that they do not expect any pricing impact and will continue to diversify their customer base. They also discuss the current state of the automotive and industrial markets and state that they will manage based on the current soft demand and inventory digestion. They do not expect any recovery in the near future, but will take advantage of any potential opportunities.

The speaker discusses the growth of their automotive image sensor business, with expectations of hitting or exceeding $1 billion in 2023 and a 50% increase in design wins. They also mention the profitability of the business, which is primarily tied to the auto and industrial markets.

The company has successfully transitioned its focus from consumer and webcams to auto and industrial, resulting in improved financial performance and higher margins. The shift to internal sourcing will also contribute to future margin growth, but this will take time to have a significant impact. The company is confident in achieving a 53% gross margin in the medium to long term, regardless of revenue levels, as they continue to improve utilization and benefit from market recovery.

The company does not see revenue as the primary driver for growth, but rather focuses on utilization, cost control, divestment of fabs, and ramping up new products. They do not expect Q1 to be the bottom for revenue for the fiscal year, but rather anticipate staying at mid-60% utilization until the market returns to pre-pandemic levels. Inventory has increased in days for four consecutive quarters, but this is due to strategic inventory growth and a lower COGS number.

Thad, the company's CEO, expects to build up strategic inventory over the year and then gradually decrease it as they transition production to their internal Fabs. Hassane, the company's president, is excited about the progress of their new analog and mixed signal platform, which is ahead of schedule and will be sampling in early 2024. The platform is highly competitive and will include complementary products for their power division.

The speaker is more optimistic about the future of the company than they were during Analyst Day. They will continue to push forward until 2024. A question is asked about the availability of silicon carbide and how they are managing investment levels. The speaker believes that silicon carbide will remain constrained due to the growth of electrification. The company is managing this by modulating their internal and external supply and ramping up 8-inch production faster than expected. They will adjust their supply based on demand signals.

The company does not expect to see a significant increase in demand for its products beyond what is currently being seen. They will continue to invest in the long term due to the expected growth in the EV market. The company is able to modulate its investments easily due to its capital-light strategy. They plan to start replenishing their channel in 2024 and will need to start filling it now in order to meet the demand in the mass market. The company has been supply constrained in the past and plans to address this issue by starting to fill the long tail.

In the paragraph, the speaker discusses the company's focus on their strategic LTSA customers and their plans to replenish inventory in the long tail market. They anticipate a gradual increase in inventory over several quarters and have a current LTSA value of $4.8 billion, with 80% in the auto sector and 17% in industrial. The speaker also mentions that the company met their expectations for the SiC customer from the previous quarter, with higher results in Q3.

The company is on track with their expected ramp up through 2024. They have exited non-core customers and are focusing on their core business. They have diversified their sulfate carbide business in Asia, specifically in Korea, the U.S., and Europe. They are also well positioned in China for battery electric vehicles and hybrids.

The company has entered into long-term agreements with four of the top five Chinese OEMs and is seeing growth in both SiC and IGBT products. The company is confident in maintaining utilization rates in the mid-60s due to visibility from the LTSAs and optimal inventory levels. The company will also need to build products to support the mass market, including both SiC and IGBT products.

The company is confident about its position in the market despite the current dynamics. They have seen a decline in their silicon business, but it is in line with the expected market decline. They have been taking a disciplined approach to shipping based on customer agreements and have been quick to respond to changes in demand. This has helped them avoid building up excess inventory.

The company is guiding their reduction in line with their level of visibility and close engagement with customers. They believe their smaller reduction is due to their historical practice of tapering down shipments to match customer demand, which is supported by their LTSAs.

The company has been closely engaged with customers and believes it has a better understanding of demand signals compared to its peers. This is reflected in its better utilization, base inventory, and channel inventory. The company does not see the current situation as a correction, but rather a transparent view of demand for the first quarter. The utilization has been managed effectively, with a soft landing in industrial demand. The company expects its silicon carbide business to reach $1 billion in 2024, with 200 millimeter silicon carbide already being produced in its fabs.

The speaker states that they will not provide a definitive guide on silicon carbide, but they feel comfortable with 2x the market based on their platforms and customers. They expect to grow at 2x the market, showing an aggressive ramp and share gains. They also mention their plans to qualify and ramp 200-millimeter in 2024 and 2025. The speaker thanks their teams and audience for their contributions and concludes the call.

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