The operator introduces the Onsemi First Quarter 2024 Earnings Conference Call, and Parag Agarwal, Hassane El-Khoury, and Thad Trent are present. The call is being recorded and webcasted, with a replay and additional information available on the company's website. Non-GAAP financial measures and forward-looking statements will be discussed during the call.

In the first quarter, the company had strong financial results, with revenue, gross margin, and earnings per share all above expectations. They have focused on execution and gained market share in silicon and silicon carbide. They have also seen growth in new product revenue and expect to outgrow the market in automotive and industrial. The company's silicon carbide business is performing well and they have a vertically integrated supply chain that allows for rapid diversification of their customer base.

The company is confident in its growth and expansion in the Chinese market, with plans to ramp up production in 2024. The global silicon carbide market is expected to increase, driven by the production of EVs. There was some softness in the market in the first quarter, but the company remains cautious and expects stabilization in the second half. They are also investing in high-growth megatrends, including automotive, industrial, and cloud markets. The formation of the analog and mixed-signal group will help the company deliver industry-leading solutions for these markets. Electrification remains the biggest growth opportunity for the company.

The company offers a wide range of silicon carbide and IGBT solutions, as well as high-power packaging technologies, which has led to a 60% increase in revenue from xEVs. They are also seeing growth in the automotive sensing market with a shift towards higher resolution image sensors for ADAS systems. In the medical field, they are utilizing AI technology to improve the listening experience in hearing aids and have already been designed into over 50% of over-the-counter hearing aids. The company is focused on innovation and investing in new products and technologies to maintain a competitive advantage and drive revenue growth. They are also making progress towards 200 millimeter in silicon carbide and have already begun sampling new mixed-signal products. Additionally, their investment in cloud and data centers has allowed them to benefit from the growing demand for AI, with the next-generation AI server racks requiring high levels of power.

The company's suite of high-efficiency power solutions is driving content expansion opportunities as customers seek solutions for their power density problems in data centers. Despite the current market environment, the company's disciplined execution and customer-centric mindset have led to better-than-expected first-quarter results. Revenue for the automotive and industrial sectors declined quarter-over-quarter, but showed signs of stabilization in the traditional industrial business. The company's focus on high-growth megatrends has resulted in automotive and industrial revenue accounting for 80% of their business in the first quarter.

In the first quarter, revenue for the Power Solutions Group increased by 2% due to higher silicon carbide revenue, while revenue for the Analog and Mixed-Signal Group declined by 6%. The Intelligent Sensing Group also experienced a decrease in revenue. Gross margin exceeded expectations despite a slight decrease in utilization, and the company's Fab Right strategy is helping to improve operational efficiency and reduce costs. The ongoing foundry business with Global Foundries is expected to have a dilutive impact of approximately 100 basis points for the rest of the year.

In summary, the company has seen improvement in gross margin due to cost-reduction efforts and expects further improvement with utilization. They have also invested in their focus markets and maintained a strong balance sheet with cash and cash equivalents of $2.6 billion. In the first quarter, they have repurchased shares and returned free cash flow to shareholders. Cash from operations and free cash flow have both increased significantly year-over-year. Capital expenditures were $222 million and are expected to remain in the low teens for the full year. Inventory has increased and days have increased by 15 days due to support for fab transitions in the silicon carbide ramp.

The company's base inventory decreased by $31 million sequentially, with weeks of inventory at eight weeks as expected. They plan to replenish the channel in 2024 and expect inventory levels to normalize at nine weeks over the next few quarters. The company anticipates Q2 revenue to be in the range of $1.68 billion to $1.78 billion, with softness across all end markets. Non-GAAP gross margin is expected to be between 44.2% and 46.2%, and non-GAAP operating expenses are expected to be $313 million to $328 million. Other income is expected to be a net benefit of $12 million, and the non-GAAP tax rate is estimated at 16%. The company's financial strategy and long-term targets remain unchanged.

In the first quarter, the company saw a slowdown in demand after Chinese New Year, particularly in the auto market. However, they remain committed to their goal of 2x growth in the silicon carbide market. This is based on a vehicle-by-vehicle and socket-by-socket analysis, rather than an overall market estimate. The company also thanks their employees for their efforts during the transformation journey, which was recognized by the Wall Street Journal. The call was then opened for Q&A.

The main focus for the company currently is the sell-through of their vehicles, which will become clearer in the second half of the year. They have designed in more than 2x the sockets deployed this year. Thad Trent, in response to Ross Seymore's question, explains that one point of utilization equals 15-20 basis points of gross margin improvement. East Fishkill is expected to be 100 basis points dilutive this year, but the company has made progress in reducing costs and expects to see benefits from underutilization and divestitures in the future.

The company is ramping up new products, such as silicon carbide, which will be accretive to gross margins. The CEO mentioned that new product revenue is growing and will contribute to reaching their target. The message for the second half is mixed, with weaker conditions in Q2 but a potential increase in TAM and distribution inventory. The CEO is not calling the bottom, but is seeing stabilization in demand and a potential recovery in the future. Overall, they are cautiously optimistic about the second half, with a potential L-shaped recovery.

The speaker discusses the demand for silicon carbide and the company's outlook for the future. They mention that the company will not be breaking up quarterly sales for competitive reasons, but will update annual results. They also mention that the company's position will benefit regardless of the technology used by customers, and highlight the company's focus on increasing efficiency in silicon carbide. They also mention that the company has seen success with both silicon carbide and IGBT technology, particularly with low-cost EVs in China.

Onsemi's silicon carbide technology, combined with their packaging, provides customers with efficiency and cost savings. The company is seeing stable gross margins for silicon carbide and expects them to remain stable as they increase revenue and add capacity. As they ramp up internal substrates, they expect to reach a gross margin above 50% and eventually reach their long-term corporate-level model of 53%.

The company is making incremental improvements in efficiency, which allows them to service the same level of power with a smaller die. This, along with new products and growing capacity, will lead to incremental margin growth. The industrial market appears to be stabilizing while the automotive market is getting weaker, but this weakness is not just limited to the silicon carbide business.

The company's growth in silicon carbide is mainly due to gaining market share rather than overall market growth. They are on track to meet their 2024 goals and have seen some softness in the automotive sector. The split between automotive and industrial for this year is around 80-20. The company is focused on diversifying their customer base and expects to be more diversified by 2024, with ramps in automotive OEMs in Europe and further proliferation in the Chinese EV market. This will lead to further diversification across all geographies.

The speaker is asked about their exposure to AI and data centers, and they mention that they have been focusing on this area for the past three years and have an investment thesis for a 22% CAGR over the next five years. They have been introducing products in this area and are optimistic about their progress so far. However, they are not able to provide a specific size or growth rate for this market at this time.

Gary Mobley asks about Onsemi's ability to compete in the China market against local competition. Hassane El-Khoury explains that they compete on the value of their products and maintain an aggressive roadmap to provide value for customers. As long as they maintain their leadership on technology and have a strong financial structure, they are confident in their ability to continue gaining share in the market.

The speaker is discussing the company's design-win metrics and how they support the long-term revenue growth targets. They also mention the distribution and OEM partner inventory and how pricing has remained stable due to the LTSA.

The company has invested in capacity and will continue to support customers in a softer market without engaging in pricing discussions. They have been managing their inventory levels in the industrial and automotive sectors, and expect further stabilization in the second half of the year. The company has a disciplined approach to managing distribution inventory and expects it to increase in preparation for new product ramps in the second half.

Hassane El-Khoury, CEO of ON Semiconductor, discusses the company's disciplined approach to internal inventory and its growth in the silicon carbide market. He notes that the company expects to see 2x growth in 2024 based on design wins and its presence in key platforms. He also mentions that over 50% of their substrates are internal and they ship based on manufacturing needs, regardless of location.

The company's customers are not concerned with where the substrates come from, as it is the device that gets qualified at the customer level. There has been a slowdown in requests for volume changes and pushouts, indicating a stabilization in the market. Non-LTSA orders are getting stronger and there have been fewer cancellations and push-outs in recent quarters. The decline in Asia ex-Japan, primarily China, has been significant compared to the overall company, but it is unclear how much is due to general weakness in China.

The majority of Onsemi's recent decrease in demand can be attributed to the company's exits from non-auto and industrial markets, which were facing low demand. However, the company has seen share gains in the automotive and industrial sectors, particularly in China. The image sensor business has also been affected by the overall demand in the automotive market, but the company believes that the inventory situation is improving.

The company has seen growth in their 8-megapixel business due to a trend towards higher resolution cameras. They have partnerships with foundries for production and will continue to work with them. The lifetime LTSA value is $15.7 billion and over the next 12 months, it is $4.7 billion. Lead times are slightly down and utilization is at 65%. The company expects to maintain this utilization for the rest of the year. They do not have information on sick LTSAs.

The speaker discusses the opportunity for ON in the hybrid car market, mentioning both IGBT and silicon carbide as potential areas for growth. They also mention the potential content value for ON in non-BEV and BEV vehicles compared to internal combustion vehicles. The speaker also addresses pricing and notes that while LTSA pricing is holding up, new technologies may result in incremental margin and potentially some pricing pressure.

The speaker is addressing a question about the volatility in the silicon carbide market. They clarify that the volatility is not due to pushouts or changes in the adoption curve, but rather a reaction to the current macro-environment. They also mention that all planned designs are still going to market and the OEMs are not sacrificing their long-term strategy for BEVs.

In response to a question about returning cash flow to investors, the company's CEO explains that they have exceeded their target of 50% and have been opportunistic in buying back shares due to market dislocations. They also mention that the second half of the year will see higher revenue for silicon carbide due to battery-electric vehicle ramps, but the overall demand for the market is uncertain and will be the determining factor for revenue stabilization.

Hassane El-Khoury, President and CEO of Onsemi, discussed the progress of the company's 200-millimeter substrates in manufacturing during the Q&A portion of the presentation. He confirmed that they are on track to meet their timeline of qualifying in '24 and ramping in '25. El-Khoury also expressed gratitude to the company's global teams for their efforts in transforming the company and delivering sustainable financial results. He reiterated the company's dedication to customers, financial commitments, and strategy of enabling the sustainable ecosystem. The operator then concluded the call.

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