The paragraph is an introduction to the ON Semiconductor Corporation's fourth quarter and full year 2024 earnings conference call. The operator welcomes participants and outlines the procedure for asking questions. Parag Agarwal, Vice President of Core Development and Investor Relations, takes over, introducing the company's President and CEO, Hassane El-Khoury, and CFO, Thad Trent. The call is being webcast on the company's website, with replays and additional materials available online. The discussion includes non-GAAP financial measures, with reconciliations and limitations noted in their earnings release. The call will feature projections and forward-looking statements about the company's future performance.

The paragraph outlines a caution about the uncertainty of forward-looking statements and highlights the company's efforts and achievements in 2024. Despite challenging market conditions, the company focused on developing intelligent power and sensing technologies, particularly for automotive, industrial, and AI data centers, improving manufacturing efficiency through the Fabrite strategy. It successfully delivered a non-GAAP gross margin of 45.5% and generated $7.1 billion in revenue for the year. However, there was a decline in demand late in the fourth quarter, resulting in $1.72 billion in revenue, a 45.3% non-GAAP gross margin, and $0.95 non-GAAP earnings per share.

In the report, regional revenues declined except in North America, which remained flat, with Japan experiencing the sharpest drop. The declines were mainly due to challenges in non-core market segments, influenced by end-market softness and geopolitical uncertainties. The company maintains its focus on value, avoiding volatile markets, and aims for future profitable growth. Automotive revenue grew 8% in the fourth quarter, led by gains in China and North America, but the early Chinese New Year affected January EV deliveries. Other regions saw weakened demand toward the end of Q4, and this trend continued into Q1. In the U.S., tier ones faced lower global auto demand than expected and slower EV uptake. Forecasting ongoing volatility due to geopolitical uncertainties and tariff impacts, the company watches EV adoption carefully, particularly amid uncertainty around tax credits and slowed infrastructure expansion. In Europe, Q4 saw a 10% monthly drop in new EV registrations in December. The industrial sector experienced a 5% revenue decrease due to traditional business weaknesses, with global PMI remaining weak and a manufacturing slowdown likely to persist into 2025.

The article discusses the growth in AI data center and aerospace and defense revenue, which increased by over 40% and 50%, respectively. Silicon carbide revenue grew by 22% in the second half of 2024 but declined slightly overall from 2023 due to slower program ramp-ups. The company focuses on its strategy, balancing substrate supply, and pushing innovation. In China, they aim to increase market share amid the transition to 800-volt batteries. They also acquired Corbus Silicon Carbide's junction field-effect transistor business, enhancing their power solutions for automotive, industrial, and AI data centers. With rising power levels in AI data centers, they expect silicon carbide to replace traditional silicon solutions in power supply units due to its performance benefits.

The paragraph discusses the company's growth and strategy in silicon carbide technology, anticipating revenue expansion in 2025, particularly in emerging markets such as EV battery disconnects and solid-state circuit breakers. They project a $1.3 billion total addressable market (TAM) with a 30% revenue compound annual growth rate (CAGR) through 2030. Despite current challenges, the company is investing in innovation for long-term growth. They introduced the advanced Treo platform, based on BCD 65-nanometer technology, supporting a wide voltage range and offering significant integration advantages. This platform is expected to unlock a $36 billion TAM at up to 70% gross margins. The modular Treo architecture allows faster product sampling and positive customer reception, aiding next-gen platform development in various applications like automotive zonal architecture and AI data centers.

The company is preparing for 2025 in a challenging geopolitical environment by focusing on controllable factors. They aim to optimize their portfolio, manufacturing footprint, and cost structure, and emphasize efficiency through automation while investing in R&D for long-term growth. Despite a downturn, their 2024 results showed strong margins and cash flow due to cost efficiencies. Looking ahead, they plan to restructure further, reduce excess capacity, and adopt a Fabrite strategy to enhance margins and cash flow.

The company anticipates positive impacts on its income statement by late 2025, driven by structural changes to reduce operating expenses and focus on high-margin products. Efforts include headcount reductions, potential site closures, and tight management of working capital to enhance free cash flow, which reached $422 million in Q4. In 2024, the company exceeded its target by returning 54% of free cash flow to shareholders. Q4 revenue was $1.72 billion, with automotive and industrial making up 84%. Automotive revenue increased by 8%, while industrial revenue fell by 5% due to inventory issues. Other business revenue declined 24%, more than expected.

In the fourth quarter, the company saw early signs of pricing pressures in non-core markets and plans to exit these if volatility returns. Revenue for the Power Solutions Group was $809 million, down 2% quarter over quarter and 16% year over year. The Analog and Mixed Signal Group saw a 7% decrease in quarterly revenue to $611 million, an 18% decline year over year. The Intelligent Sensing Group had a 9% quarterly increase with $303 million, though down 2% year over year. The GAAP gross margin was 45.2% and non-GAAP gross margin was 45.3%, both down from prior periods. Manufacturing utilization fell to 59% as actions were taken to align with demand. Operating expenses were $371 million, with non-GAAP operating expenses at $321 million due to R&D project timings. GAAP operating margin stood at 23.7% and non-GAAP at 26.7%. The GAAP tax rate was 14.2%, while non-GAAP was 16%. Diluted GAAP EPS was $0.88 and non-GAAP EPS was $0.95, both down from the previous year. The company maintained $3 billion in cash and short-term investments, with total liquidity of $4.1 billion, including a $1.1 billion undrawn revolver.

The paragraph discusses the company's financial performance and projections. In Q4, cash from operations was $580 million, with free cash flow rising 39% sequentially to $422 million, accounting for 25% of revenue. Annual free cash flow was nearly $1.2 billion. Capital expenditures were $157 million, resulting in a 9% capital intensity. Inventory remained stable but increased to 216 days, including 100 days for fab transitions in silicon carbide, which is expected to peak by early 2025. Base inventory is at 115 days, within the target range of 100 to 120 days. Distribution inventory decreased by $55 million, staying steady at 9.6 weeks. The channel mix change for the mass market led to an 18% increase in inventory count annually. For Q1, the company expects revenue between $1.35 billion to $1.45 billion and a non-GAAP gross margin of 39% to 41%, with utilization dropping to the mid-50% range. The anticipated gross margin change is due to lower revenue, unfavorable product mix, and reduced utilization.

The paragraph discusses several financial and strategic expectations of a company. It highlights that an increase in fixed costs has impacted gross margins, but improvements are expected as market conditions recover. The company projects non-GAAP operating expenses between $313 million and $328 million, including $31 million for share-based compensation, and anticipates other income to contribute a net benefit of $14 million. With a non-GAAP tax rate of 16% and a diluted share count of 425 million, the expected non-GAAP earnings per share range is $0.45 to $0.55. Capital expenditures are projected to be between $110 million and $150 million. The company is focused on structural adaptations to swiftly respond to market changes and believes that areas like electrification, AI data centers, and renewable energy will drive growth in the next decade. The statement concludes with an invitation for questions, with Ross Seymore from Deutsche Bank posing the first one.

In the paragraph, Hassane El-Khoury discusses a significant decline in demand impacting ON Semiconductor Corporation, emphasizing that the drop is largely due to the company's strategy of exiting non-core business areas. This non-core segment, initially valued at $800 to $900 million, has experienced the most volatility, and the company has consistently opted out of this market to focus on core growth areas like silicon carbide and medical applications. Thad Trent adds that the current volatile non-core business is approximately $350 to $400 million, which the company plans to phase out over time as part of its strategic transformation.

In the paragraph, Thad Trent and Hassane El-Khoury discuss the financial outlook and visibility for ON Semiconductor Corporation. Trent states that the automotive segment is expected to decline significantly, by 25% or more, while the industrial and other segments are projected to see a mid to high single-digit sequential decrease in Q1. El-Khoury adds that the company maintains visibility for about a quarter ahead and is not yet discussing Q2 seasonality due to geopolitical and tariff-related uncertainties. He notes that while there's a general industry expectation of a better second half of the year, it's similar to sentiments expressed in 2024.

The speaker emphasizes the importance of managing the company based on current data rather than hoping for an economic recovery. They mention that while their Q1 automotive revenue is down 25% and reset to mid-2022 levels, it's still above pre-COVID figures. The conversation revolves around determining the appropriate baseline for projecting the automotive business's future, considering factors like long-term supply agreements, pricing, and the growth of electric vehicles and silicon carbide technology. However, due to changes in their portfolio, including a shift towards higher-value products like silicon carbide modules, identifying a clear baseline is challenging.

The paragraph discusses the company's difficulty in establishing a baseline for their portfolio due to significant changes over the past few years. However, moving forward, their long-term view remains consistent, aiming for a growth range of high single-digit to low teens over SAR. This involves a shift towards higher-value products, exemplified by the introduction of Treo, which could lead to margin expansion. In response to Toshiya Hari from Goldman Sachs, Hassane El-Khoury explains that the company's Q1 automotive outlook, which is down by about 25% sequentially, is influenced by non-core business components and the volatility of silicon carbide, particularly in China. He notes that China is experiencing a temporary softer Q1 as it deals with vehicle inventory, influenced by factors like an early Chinese New Year.

The paragraph discusses the company's approach to managing inventory and market share in China and Europe, noting some fluctuations in quarterly performance. Despite slower than anticipated growth, the company is still progressing and anticipates improvement by the second half of 2024. Thad Trent addresses questions about the company's long-term financial targets, confirming their commitment to a 53% gross margin despite current challenges, primarily due to utilization rates. The company focuses on adjusting its manufacturing operations and reassessing its portfolio to align with these targets, indicating that current measures largely involve non-cash actions.

The paragraph discusses the company's expectations for free cash flow and market performance, particularly in the auto and industrial sectors. The company anticipates meeting a free cash flow margin target of 25% to 30% for 2025, having already achieved a 25% margin in Q4 of 2024. However, there is uncertainty about auto sector recovery for the rest of the year, as it depends on end-market demand. The company also remains confident in its long-term goals for silicon carbide, aiming to maintain market leadership and profitability despite short-term demand fluctuations.

The paragraph discusses a company's strategic review of its business capacity, emphasizing a focus on growth and margins. It addresses questions from Blayne Curtis of Jefferies regarding non-strategic business and auto demand by geography. Thad Trent explains that potential losses in non-strategic business due to pricing would occur over multiple quarters, not immediately, and are market-dependent. Hassane El-Khoury notes that auto demand is expected to decrease overall, though China showed strength in December. The decrease in demand is attributed to factors like the early Chinese New Year and extended shutdowns, impacting the sell-through of cars rather than the company's inventory with customers.

In the paragraph, the discussion focuses on the factors affecting the first-quarter gross margin, highlighting a sequential decline. Thad Trent explains that approximately half of the margin decrease is due to a calculation change related to under absorption caused by lower revenues. Additionally, unfavorable product mix accounts for 100 basis points of the decline, while underutilization contributes around 150 basis points. The unfavorable mix is attributed to lingering softness in certain industrial sectors and long-tail customers, but there is optimism that these issues will resolve over the long term.

The paragraph is part of a conversation during an earnings call. Thad discusses how, when revenue recovers, half of the difference will be gained from the revenue increase due to its straightforward calculation. Joshua asks about inventory levels at auto tier one customers, seeking metrics on expected inventory reduction downstream. Hassane responds that inventory levels vary by tier one customers based on their financial situations and demand, making it hard to have complete visibility. He states they are not pushing inventory and are currently under-shipping demand. Some tier one customers have adjusted their inventory levels, but generally, the industry's inventory is still being digested. Vijay then asks about fab utilization trends in the following quarters, to which Thad indicates that utilization will be driven by demand.

In the paragraph, the speaker discusses their company's current utilization rates, which have dropped from 59% in Q4 to the mid-50% range in Q1, due to decreased demand. They expect these levels to remain until demand recovers, at which point utilization and gross margins will improve. They also talk about the silicon carbide market, noting that they've gained market share and are well-positioned with major customers, but future growth depends on demand, especially from EV vehicle sales. Later, the conversation shifts to Long-Term Supply Agreements (LTSAs), with the speaker indicating that these agreements have been aligned with demand expectations and are not a factor in delayed responses to market stabilization. They do not expect renegotiations of these agreements.

The paragraph discusses the ongoing efforts in negotiating long-term supply agreements (LTSAs) with customers, emphasizing that this has been a consistent practice, not a new initiative for Q1 2025. The company aims to align with actual demand and maintain healthy inventory levels without overshipping. It also touches on the stability of the image sensor market, noting that the company has been refining its product portfolio and focusing on machine vision, rather than pursuing large market share with low profits. This strategy remains unchanged over the past few years, despite the challenges and changes in the market.

The paragraph discusses pricing trends for core products and emphasizes that the company is not experiencing significant annual price negotiations that typically occur in Q4 with effects in Q1. Instead, the company focuses on improving internal efficiencies and reducing costs, such as through their Fabrite process, which benefits customers by enhancing margins without involving traditional pricing negotiations. The company remains consistent in maintaining standard margins, excluding short-term manufacturing underutilization impacts, and offsets customer discussions with its own internal efficiencies.

The paragraph discusses the company's approach to managing pricing negotiations and silicon carbide wafer sourcing. Despite low demand, they emphasize not reducing prices unnecessarily to avoid impacting gross margins. Instead, they focus on transitioning customers to new proprietary products to improve efficiencies and margins. On wafer sourcing, they balance between internal and external sources, prioritizing supply certainty amidst geopolitical uncertainties. They have qualified both 200-millimeter wafers and 350-micron thick silicon carbide substrates, ensuring flexibility and adapting their sourcing strategy as needed while progressing towards 2025.

The paragraph features a Q&A session during a call, where Joe Moore from Wells Fargo asks about price-sensitive revenue estimates and specific market considerations, as well as growth opportunities in the AI data center revenue. Hassane El-Khoury responds that the focus is more on products rather than regions and confirms that the AI data center revenue is expected to grow more than 40% in 2024, with continued growth in 2025 due to new product platforms like the Treo. Later, Tore Svanberg with Stifel inquires about gross margin improvements during a recovery, specifically the expected basis points improvement per increase in utilization.

In the paragraph, Thad Trent discusses expected changes in site costs, indicating that fixed costs are becoming a larger percentage of overall factory costs, which limits the ability to reduce variable costs further. He notes that as operations scale, costs will return to previous levels. Tore Svanberg asks about tracking the financial success of the business segment Treo. Hassane El-Khoury explains that updates will focus on early milestones, such as product introductions and margin profiles, rather than detailed quarterly or annual financial reports. El-Khoury also mentions that Treo customers will start ramping up in 2025, with initial revenue to follow.

In the paragraph, Harsh Kumar asks about the company's current under-shipping status relative to true demand, seeking an estimate of actual market demand without under-shipping constraints. Hassane El-Khoury responds, explaining that accurately determining true demand is challenging due to the lack of visibility on customer inventory and the fluctuating nature of demand across markets. He mentions the company's efforts to manage inventory without over-shipping and highlights negotiations on Long-Term Supply Agreements (LTSA) as a strategy to align supply with demand and facilitate inventory normalization. Kumar then inquires about neighboring Arizona companies facing similar inventory issues, hinting at broader industry challenges.

In the paragraph, Hassane El-Khoury discusses how ON Semiconductor Corporation bases its guidance purely on its own observations and not on peer actions, highlighting the company's disciplined inventory management strategy. The internal inventory levels in dollars remain consistent despite a slight increase in days, ensuring that the margins are genuine and not affected by inventory build-up. Additionally, the company took strategic actions to reduce distribution inventory by $55 million in Q4, reflecting its proactive approach to managing inventory amid market softness. El-Khoury emphasizes the company's focus on controllable factors to improve manufacturing utilization, revenue, and margins as the market recovers.

In the paragraph, Hassane El-Khoury, the President and CEO, thanks the worldwide employees for their perseverance during difficult times and emphasizes the company's commitment to operational excellence and innovation to create value for customers and shareholders. He mentions that more information on the company's progress will be provided in the future, and the operator concludes the presentation.

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