The operator introduces the onsemi Second Quarter 2024 Earnings Conference Call, and the CEO and CFO join to discuss the company's financial results. The call is being recorded and a replay will be available on the company's website. Non-GAAP financial measures will be discussed and caution is given about forward-looking statements.

In the second quarter, our business exceeded expectations and we saw some stabilization in demand in our core markets. Inventory digestion is still ongoing, but we expect some recovery in the second half of the year. Our focus remains on execution and we have made investments to build our strategic portfolio and improve our cost structure. This positions us well for growth and gross margin expansion in a potential recovery.

Onsemi's advantage lies in its diverse and innovative product portfolio, particularly in intelligent power and sensing solutions. The company continues to invest in sustaining its technology and market leadership, with recent acquisitions and developments in quantum-based technology for industrial and defense applications. Additionally, onsemi is expanding its product families in analog and mixed-signal development, with a focus on high-performance analog, integrated power, and low-power sensing in medical applications. This technology platform has already gained traction with lead customers and has been selected by Volkswagen Group for its next-generation traction inverter. This solution features silicon carbide-based technologies and can be scaled for use in all vehicle categories.

Onsemi is a leading provider of silicon carbide modules and other power semiconductors, which are used in next-generation platforms for major automotive brands like Volkswagen, Audi, Porsche, and Skoda. To meet the increasing demand for these products, onsemi is investing in a new manufacturing facility in the Czech Republic and has a strong presence in China, where they are designed into nearly 60% of BEV models. As the EV market continues to grow, onsemi expects silicon carbide to outpace the industry, with 22% of EVs currently using their products and all major OEMs driving adoption to improve vehicle range and cost.

The company's success with SiC in the automotive market has expanded to the industrial market, specifically in commercial HVAC applications. They are working with customers to integrate SiC into next-generation designs and expect to outgrow the SiC market by 2x in 2024. They also have a significant opportunity in the data center and AI market, with their latest generation of T10 PowerTrench and EliteSiC MOSFET being designed into various subsystems. These solutions offer superior efficiency and can reduce energy consumption by 10 terawatt hour annually. The company continues to invest in multi-phase controllers for efficient power delivery to CPUs and GPUs.

In the second quarter, the company's revenue exceeded expectations and showed resilience despite a challenging market environment. The company's focus on high-growth megatrends and investments in power and sensing technologies have proven successful. The company's Q2 results included revenue of $1.74 billion, non-GAAP gross margin of 45.3%, and non-GAAP operating margin of 27.5%. However, there was a decline in revenue of 7% sequentially and 17% from the same quarter last year, driven by an ongoing inventory correction in the automotive and industrial end markets. Despite this, the company's long-term outlook remains unchanged and they expect to resume growth as end-customer inventory levels normalize.

In the fourth quarter of 2020, the company shifted its focus to the automotive market, resulting in a nearly doubled automotive revenue. However, industrial revenue decreased by 2% sequentially and 23% compared to the same quarter in 2023. The Power Solutions Group, Analog and Mixed-Signal Group, and Intelligent Sensing Group all experienced decreases in revenue due to inventory burn in the Automotive and Industrial market. Despite this downturn, the company maintained a gross margin above 45% and executed restructuring actions to improve cost structure. They expect gross margins to increase once demand recovers and new products ramp up. GAAP operating expenses for the second quarter were $396 million.

In the second quarter, non-GAAP operating expenses were slightly lower than the previous year due to cost control and lower variable compensation. The GAAP operating margin was 22.4% and non-GAAP operating margin was 27.5%. GAAP tax rate was 15.8% and non-GAAP tax rate was 16%. Diluted GAAP earnings per share were $0.78 and non-GAAP earnings per share were $0.96. The company deployed $150 million for share repurchases and had a strong balance sheet with $2.7 billion in cash and short-term investments. Cash from operations was $362 million and free cash flow was $208 million. Inventory increased due to strategic builds for fab transitions and to support the mass market. The company expects to remain at or below their long-term target for inventory. For the third quarter, the company provided key elements of their non-GAAP guidance.

The press release provides guidance for the company's GAAP and non-GAAP revenue, gross margin, operating expenses, other income, tax rate, and earnings per share for the third quarter. It also mentions the acquisition of SWIR Vision Systems and the company's commitment to their long-term financial model, including investing in R&D and consolidating facilities. The company also remains committed to their capital allocation strategy, with a focus on returning free cash flow to shareholders through share repurchases.

The company has returned a significant amount of money to shareholders through their share repurchase program and remains committed to excellence. They have also published a sustainability report and are grateful for their employees' dedication. The company's strategy is working and they have steady growth drivers and strong relationships with customers and suppliers. The call was opened up for Q&A and the first question was about the third quarter guidance and any potential changes in the three segments. The company expects the end markets to remain consistent with their expectations, with automotive and industrial expected to be down.

The paragraph discusses the performance of the industrials sector and the stabilization seen in it. The conversation then shifts to the gross margin side, with Thad Trent explaining the impact of utilization, East Fishkill, and fab divestitures on gross margin. Utilization is expected to improve and drive gross margin expansion, while East Fishkill and fab divestitures will have a temporary negative impact before eventually contributing to gross margin improvement.

The speaker discusses the company's plans for ramping up new products with accretive gross margins, which will help them achieve their long-term gross margin target of 53%. They expect their biggest markets, automotive and industrial, to be flat to slightly up in the third quarter. The speaker also mentions that the silicon carbide market has seen a deceleration in battery-powered EV demand, but they are still on track to meet their projected absolute dollar amount for this year. They are more optimistic about the China EV market and their share in China is expected to be above the 35-40% share they anticipate globally.

Hassane expects the BEV market to remain healthy with some short-term fluctuations. He believes that the penetration of BEV and silicon carbide will continue to grow, with a 2x market growth in 2024. In China, their market share is over 60%, but this is due to starting in the biggest market earlier. The SiC business trended well in Q2 and is expected to continue in Q3, with a mix of business evolving by application and customer. The outlook for geo and application has changed in the past 90 days.

Hassane El-Khoury, CEO of ON Semiconductor, explains that the company will not provide quarterly updates on its silicon carbide revenue due to its lumpiness and the unpredictable timing of customer ramps. However, they will report on it annually and are trending at 2x the market. They are seeing growth in China and will begin to see ramps in Europe in the second half of the year. They are also diversifying their design with the recent announcement with VW Group. Thad Trent, CFO, adds that they exited the quarter with 8.9 weeks of inventory, in line with expectations, and they will continue to manage inventory levels in the channel.

The company is managing well despite market uncertainty and expects their backlog to remain steady at around 9 weeks. The silicon carbide backlog is healthy and the company is still seeing design-in activity for it, despite short-term softness in the EV market. The company believes in the long-term potential of silicon carbide and continues to invest in it for various platforms.

The company is focusing on controlling their design and capability in order to be in a better position when the market for electric vehicles starts to grow. They are also working on qualifying 8-inch substrates for silicon carbide and expect to see revenue from it next year. The energy business is expected to inflect in the second half, but the auto market has weakened. The company is sticking with their prediction of an L-shaped recovery.

Hassane El-Khoury, CEO of ON Semiconductor, discusses the company's outlook for the rest of the year. He notes that while there may be some green shoots and certain markets may fare better than others, he does not expect a full recovery. He also mentions the decline in the Intelligent Sensing Group due to a decrease in demand for ADAS in the automotive market. However, he anticipates an increase in revenue due to an uplift in ASPs and penetration rates as ADAS moves towards level 2+.

The speaker discusses the industrial side of their business and mentions that they have room for expansion in this market. They have introduced new products and made an acquisition that adds to their technology leadership. They have a similar strategy for growth in the imaging and sensing business. The speaker also addresses a question about the auto market, stating that their growth in the third quarter is below end demand due to inventory burn and it is difficult to compare to peers due to timing differences.

Hassane El-Khoury discusses the current state of the automotive market and how it is stabilizing rather than showing signs of recovery. He also mentions that inventory burn is directly related to demand and that the company is not intentionally managing to a specific number. He also provides a data point on the ex-market leader silicon carbide attach rate and mentions that it is still too early to predict the attach rate in 2025. However, he does mention that they have a high rate of design-wins in this market.

Hassane El-Khoury, CEO of ON Semiconductor, is pleased with the company's progress, particularly in relation to the Beijing Auto Show and the design-wins they have secured. He believes that as these cars ramp up and the market recovers, ON Semiconductor will see significant growth in 2025 and beyond. When asked about the timing of the ramp for their partnership with Volkswagen, El-Khoury cannot disclose details but states that it will not be an immediate process. Looking at the second half of the year, El-Khoury acknowledges that end-demand has not yet recovered, but believes that their L-shaped recovery is more reflective of end-demand rather than their revenue. He expects a snap back to consumption levels once inventory digestion is complete, leading to growth for ON Semiconductor.

The speaker discusses the company's inventory and revenue recovery, stating that the current L-shaped recovery is due to inventory digestion rather than demand. They anticipate a couple more quarters of inventory digestion but believe it will improve as demand picks up. The speaker also mentions that the company is now prioritizing the mass market after previously being supply-constrained during the pandemic.

The company expected a slight increase in new customer counts last quarter and strategically manages this by continuously replenishing the mass market. The company is managing inventory tightly in the channel and is currently below historical levels. There has been no volatility in pricing for silicon carbide and the company remains consistent in their approach to LTSAs.

The speaker discusses the stability of pricing for silicon carbide and its value in the market. They mention their transformation journey and their focus on pricing for value. They also mention the potential market opportunity for data center power using SiC, but do not provide specific numbers or market share expectations. They suggest that more information will be provided in the future as the market grows.

A question was asked about the trend of LTSAs and the response was that they are stable and provide strategic value. The next question was about the difference in performance between direct and disti customers, with direct customers showing a larger decline due to inventory issues.

In response to a question about order trends and inventory dynamics, Hassane El-Khoury, CEO of the company, explains that there has been a mix-shift between distribution and direct customers, with more industrial business going through distribution. He also mentions that things are stabilizing and that China is showing growth in both automotive and industrial markets, as well as energy infrastructure.

The speaker is asked about the sustainability of the market pickup in China and whether it is driven by government incentives. They believe that the demand is driven by end-market demand and not government incentives. They also mention their strong position in the market and their ability to quickly see the uptick in demand. The percentage of distribution sales in the quarter is not mentioned, but can be found on the company's website.

In response to a question from Harsh Kumar during a conference call, Hassane El-Khoury, the CEO of a company, addressed rumors about wafer quality and confirmed that their recent win at Volkswagen should put those rumors to rest. He also stated that their wins in silicon carbide are a result of their ability to make their own wafers and that they are the primary supplier for Volkswagen. When asked why the channel is not recovering quickly in the current cycle, El-Khoury could not provide a definitive answer.

Hassane El-Khoury, President and CEO of the company, is asked about the current inventory levels in the channel and whether they are planning to increase it. He explains that they have been managing the channel tightly in the past few years to avoid having excess inventory, which could delay recovery. They are currently focused on replenishing the mass market and closely monitoring inventory velocity and customer count. Inventory for top customers is demand-related and follows the trend. The Q&A session then concludes.

Hassane El-Khoury expresses pride in his company's ability to maintain operational excellence during the market correction and credits their resilience and prudent financial management. He also acknowledges the hard work put in during the downturn, resulting in a better-structured company. The presentation has now concluded.

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