The paragraph is an introduction to onsemi's Third Quarter 2024 Earnings Conference Call. The operator announces that the call is in listen-only mode and will include a Q&A session. Parag Agarwal, Vice President of Investor Relations and Corporate Development, takes over and mentions that the call includes onsemi's President and CEO Hassane El-Khoury, and CFO Thad Trent. The call is being webcast on the company's website, and a replay will be available for 30 days. The earnings release includes non-GAAP financial measures, with reconciliations provided online. The call will also feature forward-looking statements, with a caution about risks and uncertainties that may lead to different actual outcomes.

The paragraph discusses factors that could impact the company's business and the potential for differences between actual results and forward-looking statements. The company, led by Hassane El-Khoury, reports strong third-quarter results, exceeding guidance in revenue, gross margin, and earnings per share despite a sluggish market. The business maintains its focus on operational excellence amid an L-shaped recovery and muted demand, attributed to inventory digestion and slow end-demand. The outlook for all markets remains unchanged due to continued uncertainty. Automotive sales, especially EVs, are slowing, while the industrial sector shows limited recovery, except in utility-scale solar and aerospace and defense. Regionally, China and Japan are recovering, but North America and Europe remain weak. Despite these challenges, the company remains confident in its strategy.

The paragraph discusses the company's focus on the fastest-growing segments in automotive, industrial, and AI data centers, which are outpacing overall semiconductor market growth. They emphasize delivering value through innovation and their diverse product portfolio, which enhances energy efficiency and provides comprehensive power and sensing solutions. Silicon carbide revenue has increased, largely due to solar and electric vehicle market gains in China, though global demand is expected to be lower than forecasted. The company is cautious about inventory management and anticipates modest silicon carbide revenue growth in 2024. They have advanced their technology by qualifying new 200mm silicon carbide wafers and are integrating vertically in areas where they can differentiate and maintain profitable margins. China is noted for driving automotive innovation, especially in transitioning to advanced vehicle architectures where silicon carbide plays a crucial role.

The paragraph highlights the company's strong position in the silicon carbide (SiC) market, particularly in China's electric vehicle and industrial sectors, where they expect to hold about 50% market share. The company has seen a 17% increase in industrial SiC customers and is investing in its power portfolio to tap into renewable energy trends. Global solar and energy storage installations are projected to grow significantly in 2024. The company also sees growth and opportunities in intelligent sensing, with an 11% increase in business driven by applications such as machine vision and robotics, broadening their portfolio for new industrial uses.

Over the past year, the company has launched 10 new image sensors across four product families, finding applications in areas like medical imaging, biometrics, and robotics. Their Hyperlux LP sensors, suitable for entry-level 4K video surveillance, boast low power and light sensitivity. Plans are underway to introduce a new family of image sensors in 2025. The acquired SWIR technology has received positive feedback, expanding their industrial offerings into sectors like agriculture and aerospace. In the data center market, they anticipate significant growth in power delivery needs, with expectations to double the market size from $2.2 billion in 2024 to $4.4 billion by 2028. The company has developed a silicon and silicon carbide portfolio for AI data centers, gaining success with their power solutions and securing design wins with top North American hyperscalers, contributing to revenue in 2025. They are also expanding their analog mixed signal product portfolio, with more details to be revealed at the upcoming Electronica event.

In this paragraph, Thad Trent highlights the company's strong performance despite market challenges, achieving revenue, gross margin, and earnings per share above guidance. The Q3 free cash flow increased by 41% sequentially, partly due to achieving the CapEx target early. The company focuses on high-growth trends and optimizing its manufacturing footprint. Revenue for the third quarter increased by 2% to $1.76 billion, with automotive and industrial sectors accounting for 79% of it. Automotive revenue grew by 5% sequentially, aided by silicon carbide, while industrial revenue fell. Growth in utility-scale solar, aerospace, and defense sectors was noted, and the company received trusted foundry accreditation to bolster its aerospace and defense business.

The paragraph details the financial performance of various groups within a company, noting a decrease in year-over-year revenue for the Power Solutions Group (PSG) and the Analog and Mixed Signal Group (AMG), but a quarter-over-quarter revenue increase for the Intelligent Sensing Group (ISG). The gross margin remained stable above the mid-40% range, with slight improvement over the previous quarter, and the company continued to implement its Fab Right strategy to drive efficiency. Capital intensity targets have been reduced to mid-single-digit percentages for 2025 and beyond, and the company aims to increase free cash flow margin to 25%-30%. Additionally, the company has returned a significant portion of free cash flow to shareholders through share buybacks, exceeding its target by returning 75% of free cash flow over the past 12 months.

In the third quarter, GAAP operating expenses were $354 million, an increase from the previous year, while non-GAAP operating expenses decreased to $304 million due to cost controls. The GAAP operating margin was 25.3%, compared to the non-GAAP margin of 28.2%. The GAAP tax rate stood at 11.5% and the non-GAAP rate at 16%. GAAP diluted earnings per share dropped to $0.93, with a non-GAAP figure at $0.99. The GAAP diluted share count was 432 million compared to 428 million non-GAAP. The company held $2.8 billion in cash and short-term investments, with total liquidity of $3.9 billion. Operating cash totaled $466 million, and free cash flow increased by 41% to $294 million, representing 17% of revenue. Capital expenditures were $172 million. Inventory increased by $18 million, with a base inventory decrease of $32 million. The mass market customer count grew 15% year-over-year, and distribution inventory weeks increased, with projections to rise further in the fourth quarter.

The paragraph provides the company's non-GAAP guidance for the fourth quarter, anticipating revenue between $1.71 billion and $1.81 billion, with a non-GAAP gross margin of 44% to 46% and operating expenses ranging from $300 million to $315 million. The company expects a non-GAAP tax rate of approximately 16% and diluted share count of about 427 million shares, resulting in earnings per share between $0.92 and $1.04. Capital expenditures are projected to be between $130 million and $170 million. The company remains committed to its long-term strategy, despite the challenging macro environment, by investing in innovative technologies and sectors like renewable energy and AI to drive energy efficiency. The employees are acknowledged for their contributions, and the company reiterates its focus on unlocking shareholder value. Finally, the call is turned over for a Q&A session.

In the article paragraph, Ross Seymore from Deutsche Bank asks about the performance and future of a company's silicon carbide (SiC) business, particularly in relation to the electric vehicle (EV) market. Hassane El-Khoury responds by indicating that the current underperformance is due to cyclical demand rather than a fundamental change in long-term trends. He emphasizes that the strategic importance of SiC remains unaffected, as models expected to start production did so, even if they didn't meet expected ramp levels. El-Khoury remains optimistic about the continued adoption of EVs globally. Seymore then asks Thad about the company's ability to maintain a 45% gross margin, considering flat to down utilization, weak demand, and reduced CapEx.

The paragraph features a discussion about the company's strategy for maintaining its margins and pricing policies moving forward. Thad Trent talks about optimizing the manufacturing process and focusing on costs to maintain a mid-40% margin despite current low utilization rates. Vivek Arya from Bank of America Securities then asks about pricing discussions for Q1. Hassane El-Khoury responds that the company does not strictly follow a seasonal pricing strategy, emphasizing that negotiations and design wins can occur throughout the year. El-Khoury reiterates the company's commitment to value-based pricing rather than chasing market trends, a strategy they've adhered to for four years, even walking away from unprofitable business.

In the paragraph, the speaker discusses a strategic focus on maintaining a 53% margin by prioritizing value over competing on price, aiming to create differentiated products without engaging in frequent price negotiations. Despite a softer macro environment, they are increasing distribution inventory to service high-volume and key customers, especially in the mass market, which is typically high-margin. This strategy, initiated a few quarters ago, involves placing strategic products into channels to expand mass market customer count, successfully yielding favorable results, including higher margins and increased customer count. They are monitoring inventory levels to ensure product sell-through remains aligned with their strategy.

The paragraph discusses the strategy of managing inventory for mass-market customers, noting a 15% increase in customer count year-over-year. The strategy involves tightly controlling inventory to avoid overhang in distribution, especially in a slow market. Thad Trent and Vivek Arya outline this approach, ensuring inventory is strategically placed on distributor shelves, despite distributors wanting more inventory than the company is willing to supply. The conversation then shifts to a question from Toshiya Hari of Goldman Sachs about the silicon carbide business, specifically its customer and application mix. Hassane El-Khoury responds that the mix remains about 80% automotive and 20% industrial, with no expected changes in the near future, while emphasizing efforts to diversify the automotive customer base beyond a single North American client to include companies in Europe and China.

The paragraph discusses the current state and market expectations for industrial and automotive sectors, highlighting that there isn't a significant disparity in market strength or weakness. The anticipated market mix remains steady at 80%-20%, reflecting the total addressable market. The speaker mentions growth in the China EV market and gains in silicon carbide, although actual end-unit volumes have fallen short of expectations, impacting overall results. An increase in market activity is expected to benefit them due to existing qualifications. The conversation then shifts to capital intensity, targeting a reduction in revenue percentage and considering changes in operations, such as internal versus external manufacturing processes, but specific structural changes aren't detailed.

The paragraph discusses the company's new long-term target of 5% after achieving their original 11% target. The manufacturing process is being optimized, focusing on maintaining existing capital investments, particularly in the Czech Republic. The company is boosting capacity in silicon carbide by converting existing 6-inch to 8-inch production, which is a cost-effective process. This capacity increase is expected to drive growth, supported by both internal production and external procurement, with the internal 8-inch production performing exceptionally well. The strategy aims for efficient expansion to facilitate revenue growth, benefiting the bottom line.

In a discussion about financial and operational strategies, Chris Danely asks Thad Trent about depreciation trends given the peaking and decline of capital expenditures (CapEx). Thad explains that depreciation will remain consistent with current levels through 2025 and 2026, despite new capacity being brought online, and should decrease by 2026. Danely then inquires about potential risks with excess silicon carbide inventory due to market flattening. Hassane El-Khoury clarifies that the company strategically holds only substrates, minimizing pricing concerns and retaining flexibility to meet customer demand.

In the paragraph, Hassane El-Khoury discusses the growth in the automotive segment, highlighting that it was driven by silicon carbide, particularly in China. He notes that China's increasing share in the electric vehicle (EV) market has contributed to this strength, with specific gains coming from designs already implemented in vehicles. El-Khoury mentions their presence in 800-volt platforms showcased at the Beijing Auto Show, indicating that these designs are beyond the conceptual stage and are currently in production. He expects this growth in the Chinese market to continue into 2025.

In the paragraph, Hassane El-Khoury discusses the company's progress in the data center market. He mentions that they already have design wins and are generating early revenue in this segment. They expect more significant revenue from new products in 2025, as these products get qualified and customers increase their orders. El-Khoury highlights a recent product launch, the T10 Trench Pad, which is being qualified by hyperscalers, and affirms their presence in the market with ongoing developments of new platforms and designs. Quinn Bolton from Needham & Company asks for clarification on AI data center wins regarding multi-phase controllers and voltage rigs. El-Khoury responds by emphasizing the importance of offering a comprehensive power distribution portfolio rather than specifying particular products.

In the paragraph, several individuals discuss the financial and operational outlooks for their company. Quinn Bolton asks about the impact of East Fishkill on margins, and Thad Trent confirms that it will persist as a 100 basis point headwind to corporate gross margin into Q4, with improvements expected through 2025 when most of the impact will dissipate. Subsequently, Joshua Buchalter inquires about low single-digit growth guidance in the context of silicon carbide. Hassane El-Khoury responds by stating that the company does not break down growth by industrial and automotive sectors, but they emphasize diversification in design and regional markets. El-Khoury notes growth in North America attributed to ramp-up and share gains, aiming to offset model-specific variability.

The paragraph details the performance of a company in various regions, particularly regarding their automotive market. North America and China showed growth, although not as high as anticipated due to OEM publicized end-demand issues. A significant focus is placed on China's automotive market, specifically in the EV sector driven by silicon carbide, though the company does not provide a detailed regional breakdown. There's a mention of a peer whose China auto business grew 20% sequentially. Finally, a request is made for a geographic breakdown of the automotive market across Europe, Japan, and China.

In the paragraph, Hassane El-Khoury and Thad Trent discuss their company's market strategies, particularly regarding China and other consumer markets. They emphasize that they do not break down their revenue by regional percentages due to complexity and instead assess market performance more broadly. El-Khoury states that their strategy is focused on value rather than chasing markets at the cost of margins. They are open to mass markets but maintain a focus on ensuring products are profitable and available, avoiding price reductions simply for revenue or utilization gains.

The paragraph discusses the state of inventory levels in the distribution (Disti) and original equipment manufacturer (OEM) sectors, emphasizing that these levels vary significantly across different customers. Thad Trent mentions expecting a slight increase in weeks of inventory in the Disti segment as they focus on the mass market. Hassane El-Khoury notes that inventory levels are not uniform across the industry; some customers have very low inventory, while others have much higher levels, making it difficult to predict how long it will take for inventory to decrease. This variation is influenced by end-demand, which can hasten inventory depletion when it increases.

In the conversation, Vijay Rakesh asks about the internal versus external mix of 200-millimeter silicon carbide production projected for 2025, to which Hassane El-Khoury responds that they aim for an 80-20 or 70-30 split. They want to maintain external sourcing to keep quality standards high, and they do not expect this strategy to change. Tore Svanberg from Stifel asks about a change in share gain figures for China EV 800 volt systems and is assured by Hassane El-Khoury that there was no change, just a clarification as design ramps up. Tore also inquires about inventory staging for the mass market, and Thad Trent confirms their target range is nine to 11 weeks, with expectations not to exceed 11 weeks.

The paragraph features a discussion between Chris Caso from Wolfe Research and company executives Thad Trent and Hassane El-Khoury regarding the company's capital intensity and capacity for future growth. The company has completed significant investments in silicon carbide and EFK over recent years, and while there are more investments planned in silicon carbide, they are spread over several years. Thad emphasizes that the company is optimizing its manufacturing footprint to increase efficiency without needing additional capacity, as current utilization is at 65%. Hassane assures that the current CapEx level will not impede future growth, with capacity growth in silicon carbide expected through low-cost conversions and support from a new fab in East Fishkill for analog mixed signal products.

In the discussion, Chris Caso inquires about the future of the silicon carbide market, particularly its growth and penetration in electric vehicles (EVs). Hassane El-Khoury expresses confidence in the continued growth of the electrification market and silicon carbide penetration in EVs, despite year-on-year fluctuations. Currently, silicon carbide penetration in the EV industry is about 6% in North America. El-Khoury mentions that many new models, especially in China, are adopting 800-volt systems with silicon carbide, indicating expected growth in penetration and overall market volume into 2025.

In the paragraph, Jed Dorsheimer of William Blair asks Hassane El-Khoury about the value proposition of their power tree data center, particularly in the context of efficiency and the shift to modules in electric vehicles. El-Khoury emphasizes the importance of efficiency in the power tree, especially for hyperscalers, as even a 1% efficiency loss can significantly impact utility bills. He explains that silicon carbide and gallium nitride (GaN) serve different functions in the power tree: silicon carbide is used closer to the grid for high-voltage power supply unit (PSU) conversion, while GaN and silicon are used closer to the GPU, in lower voltage and higher frequency applications, where efficiency is crucial. He concludes that it's not about choosing between silicon carbide, GaN, or silicon, but rather using each where it fits best in the power tree.

The paragraph is a transcript of a conversation between financial analysts and company executives discussing the company's approach to technology integration in various sectors, particularly automotive electrification and industrial sectors. The company aims to find the most optimal technology to fit within different branches of a "power tree," providing a portfolio that offers a competitive advantage. The discussion also covers expectations for revenue distribution between automotive and industrial markets, predicting growth in automotive due to silicon carbide advancements, while industrial might remain flat or slightly down. Additionally, the executives address conversations with customers about current challenges, like excess inventory and weak end demand, indicating uncertainty about when a market turnaround might occur.

Hassane El-Khoury discusses the importance of maintaining strong customer relationships and strategic planning to prepare for potential demand recovery, despite uncertainties in the market influenced by factors such as interest rates. He highlights ongoing activity in new designs and electrification as evidence of the industry's commitment to long-term strategies. El-Khoury also mentions that while his company welcomes support from the CHIPS Act to help with investments in North America, he refrains from specifying their exact position in comparison to competitors. In Europe, recent discussions with customers focused on readiness for potential rapid recovery and strategic inventory preparation.

The paragraph discusses a company's strategy of not expanding manufacturing capacity unnecessarily despite potential funding opportunities, as this could lead to future costs. The speaker mentions that one competitor's challenges are operational rather than funding-related and wishes them luck. The company's President and CEO, Hassane El-Khoury, thanks the employees for their efforts during uncertain times and emphasizes the company's focus on execution and operational excellence. The paragraph concludes with the end of the Q&A session and the conference call.

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