Ladies and gentlemen, thank you for standing by, and welcome to the ON Semiconductor First Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Parag Agarwal. You may begin..

Thank you, Doranda. Good morning, and thank you for joining ON Semiconductor Corporation’s first quarter 2020 quarterly results conference call. I’m joined today by Keith Jackson, our President and CEO; and Bernard Gutmann, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com.

A replay of this broadcast, along with our 2020 first quarter earnings release, will be available on our website approximately one hour following this conference call. And the recorded broadcast will be available for approximately 30 days following this conference call.

The script for today’s conference call and additional information related to our end markets, business segments, geographies, channels, share count and 2020 fiscal calendar are also posted on our website. Our earnings release and this presentation include certain non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release, which is posted separately on our website in the Investor Relations section.

During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections.

Important factors, which can affect our business, including factors that could cause actual results to differ from our forward-looking statements are described in our Form 10-K, Form 10-Qs and other filings with Securities and Exchange Commission. Additional factors are described in our earnings release for first quarter of 2020.

Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors, except as required by law.

Given the current restrictions on travel and gatherings due to COVID-19 pandemic, the previously announced Strategic Business Update scheduled for August 18 in New York has been postponed. We will provide you a new date and location for the event as we get further clarity.

Now, let me turn it over to Bernard Gutmann, who will provide an overview of our first quarter 2020 results.

Bernard?.

Thank you, Parag, and thank you, everyone, for joining us today. As is the case with most of our peers, our results for the first quarter of 2020 and outlook for the second quarter have been meaningfully impacted by COVID-19.

Although our near-term results have been impacted by the pandemic, we believe that long-term drivers of our business remain intact. We expect to show progress towards our target financial model as global macroeconomic environment recovers and we continue to implement structural changes to drive margin expansion and higher free cash flow.

In the face of challenging business conditions, we have taken measures that should strengthen our balance sheet and free cash flow. These steps include the drawdown of approximately $1.17 billion from our revolving line of credit.

This step was taken out of abundance of caution to ensure that we have adequate level of liquidity, should the global macroeconomic conditions unexpectedly and sharply deteriorate due to the COVID-19 pandemic.

Further, we have taken certain tactical and temporary actions, which should result in cost savings of approximately $50 million throughout the rest of the year.

These measures include a reduction in executive salaries and compensation for board members, the suspension of our 401(k) company match program in the US, deferral of merit salary and wage increases and staggered furloughs of certain employees for three weeks during the year.

The cost savings of $50 million throughout the rest of 2020 are in addition to those from our $115 million restructuring programs announced earlier. We anticipate that our capital expenditures for 2020 will be largely focused on enabling our 300-millimeter fab in East Fishkill.

At this time, we expect capital expenditure of approximately $425 million, in 2020. Furthermore, to preserve our balance sheet strength, we do not intend to buy back our shares until business conditions improve. Now, let me provide you additional details on our first quarter 2020 results.

Total revenue for the first quarter of 2020 was $1.278 billion, a decrease of 8% as compared to revenue of $1.387 billion in the first quarter of 2019.

The year-over-year decline in revenue was primarily driven by slowdown in macroeconomic activity and supply constraints resulting from COVID - government-related mandated lockdown measures around the world. We drastically curtailed operations at few of our factories to ensure the safety of our employees and to comply with local regulations.

GAAP net loss for the first quarter was $0.03 per diluted share as compared to a net income of $0.27 per diluted share in the first quarter of 2019. Non-GAAP net income for first quarter of 2020 was $0.10 per diluted share as compared to $0.43 per diluted share in the first quarter of 2019.

GAAP and non-GAAP gross margin for the first quarter of 2020 was 31.5% as compared to 37% in the first quarter of 2019. The year-over-year decline in gross margin was primarily driven by lower revenue and significantly lower level of factory utilization, as mentioned earlier.

As required by GAAP, we recorded a period charge of approximately $19 million due to the significant underutilization of our factory network in the first quarter. This charge also includes the impact of a short strike at our Belgium fab. This strike was related to our announced plan to divest the fab.

As utilization of our factory network improves with expected improvement in business conditions, potentially, in the second half of the year, we will not be required to take underutilization-related period charges. As a result, we could see a step-function increase in our gross margin.

First quarter of 2020 gross margin was further impacted by approximately $3 million of charges as a result of higher logistics and freight costs. Our GAAP operating margin for the first quarter of 2020 was 1.5% as compared to 12.9% in the first quarter of 2019.

Our non-GAAP operating margin for the first quarter of 2020 was 6.6% as compared to 15.5% in the first quarter of 2019. The year-over-year decline in operating margin was largely driven by lower revenue and gross margin. GAAP operating expenses for the first quarter were $384 million as compared to $334 million in the first quarter of 2019.

First quarter GAAP operating expenses include approximately $31 million associated with restructuring programs announced earlier. Non-GAAP operating expenses for the first quarter were $319 million as compared to $290 (sic) [$299] million in the first quarter of 2019.

The year-over-year increase in non-GAAP operating expenses was primarily due to the acquisition of Quantenna. First quarter free cash flow was $34 million, and operating cash flow was $166 million. During the first quarter, we used approximately $65 million to repurchase 3.6 million shares of our common stock.

Capital expenditures during the first quarter were $132 million, which equate to a capital intensity of 10.3%. Given our - the current macroeconomic environment, we are directing most of our capital expenditures towards enabling our 300-millimeter East Fishkill - fab at East Fishkill.

As indicated earlier, we expect capital expenditures for 2020 to be approximately $425 million. We exited the first quarter of 2020 with cash and cash equivalents of $1.982 billion as compared to $894 million at the end of the fourth quarter of 2019.

At this time, with cash balance of approximately $2 billion, we are very comfortable with our liquidity position. At the end of the first quarter, days of inventory on hand were 131 days, up by 8 days as compared to 123 days in the fourth quarter of 2019. The increase in days of inventory was driven primarily by a lower expected revenue.

Distribution inventory increased slightly in terms of weeks of inventory due to lower resales. In terms of dollars, distribution inventory declined quarter-over-quarter. Now, let me provide you an update on the performance of our business units, starting with Power Solutions Group, or PSG. Revenue for PSG for the first quarter of 2020 was $624 million.

Revenue for the Advanced Solutions Group, previously known as Analog Solutions Group, for the first quarter was $467 million. And revenue for our Intelligent Sensing Group was $187 million. Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment.

Keith?.

Thanks, Bernard. At the outset, I thank all of our employees for their dedication in supporting our first responders and customers in the face of very challenging conditions. Our employees went well beyond what is required of them to ensure supply of critical components for ventilators and other medical equipment.

In countries where governments instituted lockdown measures to control the spread of the virus, many of our manufacturing and support teams stayed at the factories to ensure supply of critical components to our customers. Safety of our employees is of paramount importance to us.

Consistent with that commitment, we have suspended all non-essential travel. Globally, the teams are working remotely in compliance with local rules and are following strict social distancing guidelines in case they are required to visit a work facility.

Our IT organization has done an outstanding job of enabling thousands of our employees to work remotely. We are actively supporting local communities by donating medical supplies and personal protective equipment and matching employee donations. We continue to step up on short notice.

When the state of California requested one of our customers for a quick turnaround on ventilators, our supply chain and manufacturing teams responded with extreme urgency to provide critical components immediately. These teams, like many others in ON Semiconductor, exemplify the spirit of collaboration and being a good corporate citizen.

Despite the current challenges, key secular megatrends and long-term drivers of our business remain intact. In automotive, we expect the key secular trends, such as ADAS, vehicle electrification and fuel efficiency, will continue along a steep upward trajectory.

In industrial, we expect to see acceleration in factory and warehouse automation, robotics, energy efficiency and personal medical devices.

In cloud-power, along with growth in data-centric applications, we expect to see increased spending on servers and communications infrastructure as companies put in place a robust infrastructure to enable a remote and distributed workforce. We believe that the global community should be able to overcome the current health crisis in a timely manner.

And we expect business activity to improve soon thereafter. While we are taking measures to mitigate the impact of soft business conditions, our long-term goals and strategy remain unchanged. We are aggressively working to enable our 300-millimeter manufacturing capability.

Our product development programs and customer engagement on key strategic projects are continuing as planned. We continue to strengthen our leadership in - by investing in the fastest-growing segments of automotive, industrial and cloud-power end markets.

We expect that our [ph] contact in these will continue to grow at a healthy pace, despite the current crisis. Along with continued execution on our key strategic initiatives, we are making structural and tactical changes to align our business with current conditions and to drive long-term growth in profitability and free cash flow.

Our business realignment programs remain on track. We have taken actions to complete the previously announced restructuring programs. These programs should result in the cost savings of approximately $115 million a year. As announced earlier, we should be able to achieve these savings by the fourth quarter of 2020 on a run rate basis.

We believe that, with these actions, the company is well positioned for accelerated progress towards our target model as the global macroeconomic environment recovers from the COVID-19 pandemic.

As mentioned during the previous results conference call, we are making strong progress towards ramping production at our 300-millimeter fab at East Fishkill. At this point, we are tracking significantly ahead of schedule, and we now expect to begin initial production in the middle of 2020.

The results and yields of initial wafer runs have been spectacular. Based on our experience thus far with the East Fishkill fab, we are even more confident that transition of production to this fab will be a major inflection point for our manufacturing cost structure as we consolidate our front-end network.

Let me now comment on the current business environment. On the demand front, it is a mixed picture. Demand from automotive end market has been impacted severely due to the closure of manufacturing plants and extremely challenging global macroeconomic conditions.

We expect the automotive weakness to continue till automotive manufacturing plants reopen and global production restarts at least at a moderate pace. We are seeing good strength in a few end markets in the second quarter. Most notably, activity in the industrial end market appears to be strong across most geographies.

Server and 5G infrastructure-related demand continues to grow at a healthy pace. Demand from smartphone and consumer end markets continues to be soft due to massive slowdown in global macroeconomic activity. From a geographic perspective, after slowdown early in the first quarter, demand from China has improved meaningfully.

Japan is another area of moderate strength. Demand from the US and Europe has significantly softened due to pause in most economic activities because of government-mandated quarantines and other regulatory action, aimed at reducing the spread of COVID-19. Both in the US and Europe, automotive is an area of conspicuous weakness.

It appears that customers are preparing for a recovery in the second half and are placing orders to ensure supply. At this time, we are seeing significantly higher order activity for the second half of the year as compared to that in the first half of the year. The orders are broad-based in terms of end markets, geographies and channels.

During the first quarter, the COVID-19 pandemic significantly affected our operations and impacted our ability to supply products to many of our customers. These disruptions have continued into the current quarter. And we expect to resolve them by the end of this week.

Early in the first quarter, our manufacturing facilities in China were closed for longer than planned for Lunar New Year holidays in compliance with government mandates. Following the extended shutdown, our China factories resumed production and are now running at close to full utilization.

Subsequently, in March, our facilities in Malaysia and Philippines, where a sizeable part of our back-end operations are located, were severely impacted due to lockdown mandates by various governments. Our Malaysia and Philippines manufacturing plants ran significantly below capacity for most of March.

Underutilization of these facilities continued in April and into May. Most of our facilities worldwide are expected to be running at required level of utilization by the end of this week. Now, I’ll provide details of the progress in our various end markets for the first quarter of 2020.

Revenue for the automotive market in the first quarter was $439 million and represented 34% of our revenue in the first quarter. First quarter automotive revenue declined 6% year-over-year.

The year-over-year decline in automotive market was primarily driven by closure of automotive production factories in various parts of the world and supply constraints driven by reduced level of operations at our partners’ manufacturing facilities.

We saw weakness in China automotive and industrial markets earlier in the first quarter, but business activity has since picked up as factories have reopened in China. Currently, we are seeing significant weakness in the US and European automotive markets due to closure of automotive factories.

Based on comments by major automakers, it appears that many European factories are now gradually restarting. In the US, automakers are planning to reopen factories starting in the latter half of May. Based on third-party reports, we expect global light vehicle production units to decline by approximately 20% to 25% year-over-year in 2020.

Despite a massive decline in light vehicle production units, we expect semiconductor content in automotive applications to continue to increase at a healthy pace. Key secular megatrends driving increased semiconductor content in automotive applications, such as vehicle electrification, ADAS, fuel efficiency and LED lighting, remain intact.

And we are well positioned through our technology leadership and customer relationships to capitalize on these trends. During the first quarter, we secured a major design win for ADAS image sensors with a Japanese OEM. This OEM is one of the largest automakers in the world.

This win underscores our global leadership in ADAS image sensors and highlights customer confidence in our technology in a high safety critical application. Our momentum for Silicon Carbide and silicon power products for electric vehicles continues to increase at a rapid pace.

With a solid product portfolio of Silicon Carbide devices and modules, we are seeing a strong growth in revenue from electric vehicles. At the same time, the breadth and depth of our engagement with leading participants in the electric vehicle ecosystem is expanding very significantly.

We expect to see strong revenue growth in our IGBT modules for EV traction inverters as our design wins ramp in China this year. Extension of subsidies for electric vehicles in China till 2022 is likely to be a significant boost for our Silicon Carbide and IGBT business in China. Our power products continue to grow in many automotive applications.

Electrification of various vehicle systems to conserve energy and to improve performance is a key driver of increasing content of power devices in vehicles. During the first quarter, we also secured a major design win for our mid-voltage MOSFETs for 48-volt systems.

Revenue in the second quarter of 2020 for the automotive end market is expected to be down steeply quarter-over-quarter due to closure of most US and European automotive factories for a significant part of the quarter. The Industrial end market, which includes military, aerospace and medical, contributed revenue of $315 million in the first quarter.

The industrial end market represented 25% of our revenue in the first quarter. Year-over-year, our first quarter industrial revenue declined 12%. This decline was driven by a swift and sharp decline in global industrial activity and supply constraints due to the COVID-19 pandemic.

Despite challenging macroeconomic conditions, we continue to make progress towards our key strategic initiatives. In industrial power segment, momentum for our Silicon Carbide and silicon devices remained robust. We are seeing strong customer interest for our Silicon Carbide devices for fast-charging stations for electric vehicles.

During the first quarter, we secured an important design win for our high-voltage super-junction MOSFETs for electric vehicle charging stations. On the medical front, our teams are working very hard to support the medical community in the fight against COVID-19.

The entire organization is focused on supporting increased demand for components for critical medical equipment such as ventilators, infusion pumps, patient monitoring systems, cardiac assist systems and medical imaging equipment.

Our engagement with e-commerce customers is growing at a rapid pace, and we expect e-commerce related applications will be a strong driver of our industrial image sensor business. We believe that growth in our e-commerce related business will be driven by increasing e-commerce volumes, increasing warehouse automation and adoption of delivery robots.

Through our early engagement with industry leaders in e-commerce, we have built a strong design win pipeline for our CMOS image sensors for warehouse automation and delivery robots. Revenue in the second quarter of 2020 for the industrial end market is expected to be up quarter-over-quarter, driven by strong recovery in the demand from all regions.

The communications end market, which includes both networking and wireless, contributed revenue of $254 million in the first quarter and represented 20% of our revenue during the first quarter. First quarter communications revenue declined 1% year-over-year. The decline was primarily due to weakness in our smartphone-related business.

We saw solid year-over-year growth in our infrastructure business, driven largely by 5G. We further solidified our position in the 5G infrastructure market by winning new designs for medium-voltage MOSFETs.

Revenue in the second quarter of 2020 for the communications end market is expected to be down quarter-over-quarter, primarily due to softness in the smartphone market. We expect our 5G infrastructure to grow at a robust pace quarter-over-quarter in the second quarter. The computing end market contributed revenue of $136 million in the first quarter.

The computing end market represented 11% of our revenue in the first quarter. First quarter computing revenue declined 7% year-over-year, primarily due to our selective participation in the client-related business. Our server business grew at a very impressive rate year-over-year.

We experienced better-than-expected results in our server business as corporations rushed to augment their IT infrastructure to support a remote workforce. Our power management products for server processors and IGBTs for uninterruptable power supplies were key drivers of strength in our server business.

Revenue in the second quarter of 2020 for the computing end market is expected to be up quarter-over-quarter. We expect growth in both server and client parts of our computing business. The consumer end market contributed revenue of $134 million in the first quarter. The consumer end market represented 10% of our revenue in the first quarter.

First quarter consumer revenue declined by 17% year-over-year, and the year-over-year decline was due to broad-based weakness in consumer electronics market due to the COVID-19 pandemic and our selective participation in this market. Revenue in the second quarter of 2020 for the consumer end market is expected to be down quarter-over-quarter.

In summary, COVID-19 has had a sizable impact on both demand for our products and our ability to supply. We expect that, during the second quarter, by the end of this week, our supply capabilities will improve significantly.

Based on order patterns, it appears that our customers are planning for a recovery in the second half of the year, and we are encouraged by gradual resumption of global - activity globally. Despite current challenges due to COVID-19 pandemic, our long-term goals and strategy remains unchanged.

We have taken previously announced restructuring actions to optimize our investments and cost structure, and we are well positioned to make accelerated progress towards our target model as the global macroeconomic environment recovers.

We continue to work aggressively to enable our 300-millimeter fab in East Fishkill, and we remain on track to start our 300-millimeter production by the middle of this year. Despite the current macroeconomic disruptions, key secular megatrends driving our business remain intact, and we are upbeat about our medium- to long-term prospects.

We are focused on the fastest growing end markets of the semiconductor industry. And with our design wins, we expect that our content in automotive, industrial and cloud-power applications will continue to grow. Now, I’d like to turn it back over to Bernard for forward-looking guidance.

Bernard?.

Thank you, Keith. Before I get into the details, let me highlight the key drivers of the guidance for the second quarter. Our guidance for the second quarter is based on the assumption that the global macroeconomic environment will not further deteriorate due to the COVID-19 pandemic.

We will likely continue to face operational and logistical challenges due to government mandates. Also, this is a period of extreme uncertainty and volatility, and future results of our business will not only depend on the course of the pandemic, but also on government actions and the pace of recovery in global macroeconomic activity.

Therefore, our ability to forecast our business performance is limited. And the range of our guidance for various financial metrics for the second quarter is wider than what we have provided historically.

Based on product booking trends, backlog levels and estimated turn levels, we anticipate the total ON Semiconductor revenue is expected to be in the range of $1.1 billion to $1.26 billion in the second quarter of 2020.

As noted earlier, we will likely continue to face operational and logistical challenges due to government mandates in the second quarter. For the second quarter of 2020, we expect GAAP and non-GAAP gross margin between 29% and 31%.

Lower revenue in the second quarter as compared to that of the first quarter is the primary driver of the quarter-over-quarter decline in gross margin for the second quarter. We expect to record marginally lower period underutilization charge in the second quarter as compared to that of the first quarter.

We expect total GAAP operating expenses of $340 million to $360 million. Our GAAP operating expenses include amortization of intangibles, restructuring, asset impairments and other charges which are expected to be between $43 million and $47 million. We expect total non-GAAP operating expenses of $297 million to $313 million in the second quarter.

We anticipate second quarter of 2020 GAAP net other income and expenses including interest expense will be in the $42 million to $45 million which includes non-cash interest expense of $9 million to $10 million. We anticipate our non-GAAP net other income and expenses including interest expense will be $33 million to $35 million.

Net cash paid for income taxes in the second quarter of 2020 is expected to be $10 million to $13 million. For 2020, we expect cash paid for taxes to be in the range of $50 million to $60 million. We expect total capital expenditures of $80 million to $100 million in the second quarter of 2020.

We are currently targeting an overwhelming proportion of our CapEx for enabling our 300-millimeter fab at an accelerated pace. For 2020, we expect total capital expenditures of approximately $425 million.

We also expect share-based compensation of $19 million to $21 million in the second quarter of 2020, of which approximately $2 million is expected to be in cost of goods sold and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial results.

Our GAAP diluted share count for the second quarter of 2020 is expected to be 413 million shares based on our current stock price. Further details on share count and earnings per share calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K, respectively. With that, I would like to start the Q&A session.

Thank you. And, Doranda, please open up the line for questions..

[Operator Instructions] Our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is open..

Hi, guys. Thanks for letting me ask a question.

I guess, first, on the revenue side of things, can I get a little more color on what you’re seeing in the near-term bookings and how you’re guiding versus that? Because, I guess, the impression I have from your script is more of that you’re not seeing as much strength as some of your peers in the very near term but you’re more confident in the back half of the year.

And it seems like a bit of a dichotomy where they’re guiding well below currently strong bookings for fear that the macro economy is actually going to weaken further, where your guidance seems to take the opposite tact..

Yeah, interesting comparison. I think the two things that impact that, one, when we’re talking about the revenue strength, the impact that we have in the Philippines and Malaysia is perhaps more significant than much of our competition. And so, you’re hearing us talk about supply constraints in the near term.

On the demand side, the automotive piece is very significant for us, but it is picking back up for Q3. And so, again, I don’t have any specific comparatives other than to say that what we’ve seen is more demand than we can service in the second quarter. And the rate of that pace is going up significantly in the third quarter.

But we think we’ll be able to have all of the supply constraints behind us..

Thanks for that. And then, I guess, my second question would be on the gross margin side of things. It continues to be a source of headwind. I think, directionally, everybody understands why. But the magnitude is bigger than I even thought. So, I guess, kind of, two points on that.

Weren’t there a number of one-time issues that hit you in the fourth quarter and first quarter that should have been a bit of a tailwind in the second quarter? And then, as we think about that second half trajectory on gross margin, are there some structural changes that are going to kick in? Or what’s the stair step you’re talking about? Is it just utilization popping up?.

Thank you, Ross. So, you’re correct, we did have some one-time items that affected us in Q4. And basically, those have been resolved. We don’t see those anymore, same with the OSA that will go away in Q2.

Definitely, as Keith mentioned earlier, we were substantially affected by the abnormally low utilization for the periods in which we had lockdowns in our factories and that caused us to get - to book the abnormal one-time $19 million hit to our gross margin, which we expect will continue maybe a little bit marginally lower, but will continue throughout Q2.

Once that goes away, we’re back to eliminating that and gross margin should step up nicely if, obviously, the markets continue behaving. And our fall-through should be pretty nice as we go back to doing that. So, it is primarily the fact that we have had the significant hit to our operations to the supply constraints..

Thank you..

Thank you. Our next question comes from the line of Chris Danely with Citigroup. Your line is open..

Hey. Thanks, guys. Just to follow up on Ross’ question.

So, if the revenue levels don’t get back to 2019 levels for quite some time, what’s the plan to drive to the gross margin target, especially considering the manufacturing capacity you have right now?.

Well, we have already announced the intended sale of our Belgium fab, and we will continue doing that fab. And if things continue getting worse, there will be other actions that would be along the same line.

We continue to focus on cash and we also - not that much on the gross margin but across the spectrum, we took some temporary actions to shore up our numbers. We had announced the $115 million previously of permanent restructuring actions. And then, we announced this time another $50 million of various tactical actions that will shore up the cash.

If conditions continue worsening, we’ll be ready to take more actions..

Thanks, Bernard.

And then, as my follow-up, just to go along with the restructuring actions, can you give us a sense of how these things are supposed to trend in terms of OpEx versus cost of goods for the rest of this year? And then, will there still be some savings next year? Or will you realize all the savings by the end of this year?.

For the $115 million that we announced earlier, we expect to achieve the [ph] exiting diversity in Q4. It is primarily OpEx driven. There is a little bit - a small piece of it that goes to comps, but most of it is OpEx driven.

The $50 million of temporary actions is by nature of being temporary is just between now and the end of the year is about close to $50 million. Heavier focused on OpEx, but there is still a good participation of COGS that will help us..

Okay. Great. Thanks, guys..

Thank you. Our next question comes from the line of Chris Caso with Raymond James. Your line is open..

Yeah. Thanks. Good morning. Just a question on the supply disruptions and you talked about that was pretty severe in the second quarter.

What’s - one, what’s the status of that - I’m sorry, as you go into the second quarter, what’s the status of those supply disruptions? What’s the percentage of your capacity that’s back online? And then, naturally, when you have those supply disruptions, there’s some incentive on the part of customers to layer in some orders they might not necessarily need.

What’s your visibility on that? I know it’s always something difficult to judge.

But how are you, I guess, judging down the orders that you have to avoid the potential of double ordering?.

Yeah. So, the supply disruptions have improved as we got into May. They were still quite severe in April, and we don’t expect to be at full capacity until the end of this week. So, a very sizable part of the second quarter has already been impacted.

Relative to the demand things, I will just tell you that the orders we have make sense based on the end market data that we’re getting. We don’t see anything that’s abnormal relative to what’s going on in the end market.

So, the areas that are weak are weak in our backlog and the areas that have picked up primarily due to China coming back online are the ones that have picked up..

Okay. Thank you. As a follow-up, with regard to CapEx - and I understand there’s some elevated CapEx right now because of what you’re doing with the Fishkill facility.

Can you talk about how long that continues? At what point is the spending on Fishkill over? And then, once that’s the case, what’s a more normalized level of CapEx spending that we should expect when Fishkill is over and presumably as we go into 2021?.

So, basically, we have said, once we made the acquisition of this Fishkill that our long-term goal is 6% to 7% on CapEx. We will be moving towards that target as time goes by. I’m not sure it will be exactly at the beginning of 2021, but we’ll be moving towards that as we go in time..

Thank you. Our next question comes from the line of Raji Gill with Needham & Company. Your line is open..

Yes. Thank you. A question on the - this comment about the gross margin stepping up significantly in the third quarter. How are you stepping up? Wanted to kind of discuss that in a little bit more detail, obviously, the underutilization charges will go away.

But what else would drive that step-up function? Are you expecting a better mix shift in the third quarter, if auto comes back online? Any other details in terms of what you think will be the drivers for the step-up in margins in the back half of the year?.

So, as Keith mentioned earlier, we are seeing better demands for the back half. So, we expect the help from incremental revenue and the fall-through should be pretty nice. We also should be seeing mix as our markets that drive better gross margin should be coming back up particularly [ph] on holding..

And in terms of the end markets, you had mentioned that Europe and the US are starting to bring back manufacturing online. This is based on the commentary from those companies that you cited.

In terms of tangible evidence, from your perspective, on the automotive side, how would you characterize the orders in automotive as we go into kind of - if you look at the third quarter? And then, also, have there been any delays of more advanced ADAS programs because of the drop in demand? Any thoughts there in terms of the current ADAS programs or the EV programs that are on track?.

Yeah. We saw a very steep decline in demand from automotive, as we got through the first quarter and into the first part of the second quarter. That free fall, if you will, has levelled off and is no longer declining. So, that’s certainly a good sign.

And then, we have specific requests from our large OEMS, letting us know that they are expecting to have more demand in the second half. And we need to be ready. From demand on things like ADAS and electrification, those continued quite on track.

And what we’re seeing is that some companies are using this dislocation in the market to kind of reposition themselves upscale with both their electric vehicles and their ADAS content. So, we’re actually seeing potentially an accelerator in those two parts of automotive, as it recovers..

And just last question on the smartphone side. You mentioned the drop in smartphones going to be offset partially by 5G infrastructure. There’s been an indication that smartphones are recovering in China.

I just wanted to get your thoughts on your - maybe your dollar content opportunity in smartphones, any view there in terms of how we think about the second half..

So, dollar content is around $9 for smartphone. We have indeed seen a pickup in China, but only with the China brands at this stage. But we are expecting to see global brands launching new models in the second half. So, our expectation is that the second half will be much better for smartphones than the first half..

Thank you..

Thank you. Our next question comes from the line of Vijay Rakesh with Mizuho. Your line is open. [ph] Checking to see if you’re on mute, sir..

Hi. Sorry about that. I know you guys mentioned some long lead orders that came in for the second half. Just wondering if it’s slanted disproportionately due to automotive or industrial or how you’re seeing that..

Yeah. It’s very broad in the second half. Demand there is looking good. We just mentioned smartphones look like they’re going to be up. Automotive is up from a very low number so it’s - I don’t want to get too excited. But the industrial piece continues to build. And our server and cloud business continues to show great strength..

Got it. And on the 5G side, I think you mentioned it’s growing sequentially into the second quarter. Is that infrastructure [ph] or base station growth coming from China? Or is it - or do you see a second half pickup in the US, Europe, et cetera? Thanks..

So, China is certainly the strongest pickup there. But we really never saw much of a decline outside of China. So, it continues to be healthy..

Thanks..

Thank you. Our next question comes from the line of Christopher Rolland with Susquehanna International. Your line is open..

Hi, guys. I know we might be a ways away from M&A, but it’s been a focus of yours in the past. And you guys have previously talked about doing something more strategic or higher gross margin.

But given the underutilizations and growing footprint that you guys have, have you shifted at all towards a belief that you need more volume across your infrastructure? And maybe if you can talk about any other levers you can pull there in terms of underutilization. You’ve talked about reducing your older footprint.

But how about bringing more external internal, for example? Is that [indiscernible]? Thanks.

So, I guess, two questions on that. From an M&A perspective, we’re not sure this is a prudent time. And so, really nothing new to report there. And as far as utilizing the network, we clearly are looking at bringing more manufacturing inside. Those are actions that are underway and should help us in the second half of this year..

Got it. And then, on to Fishkill, that was some nice commentary you guys had around ramping yields there.

I guess, since things are ramping a little bit better than expected, how does this compare to your original expectation? Are there any changes to the model positively? And then, secondly, what’s going to be your strategy since yields are so good in terms of bringing bulk volume from other fabs? Are you going to bring them immediately and leave those other fabs somewhat empty? Or is it going to be more of a controlled process in which you’re doing it one fab at a time? Thank you..

Yes. So, a couple of commentary, one, the products we’re putting into EFK first are the power products supporting most of our automotive and cloud-power type applications. And so, the good news is those volumes continue to grow. And so, we feel pretty good about that.

We have intended to ramp that and not empty other factories, and we continue to think that we’ll be able to keep our factories full while ramping EFK.

And from on track or ahead of schedule perspective, it’s roughly looking like we’re about six months in advance somewhere we thought we would be and we work with customers that are specifically growing power content with us to qualify those factories and start running here in a matter of weeks..

Thanks, Keith..

Thank you. Our next question comes from the line of Craig Ellis with B. Riley. Your line is open..

Yeah. Thanks for that. And I’ll just ask a follow-up to the last question.

So, if you’re getting good engagement with customers on East Fishkill, Keith, what would you expect the percent of ON’s production to be out of that facility exiting this year? And if you have another six quarters under the belt exiting calendar 2021, what’s the percent of total sales that could come out of East Fishkill with its lower cost footprint than what you have elsewhere?.

So, I don’t actually have prepared quarter-by-quarter breakdown for you, Craig. We talked about having the ability to do about $2 billion of revenue from the factory. That won’t happen in 2020 or even 2021. But by the time we get to 2023, we should be able to do that..

Okay. That’s helpful. And then, auto obviously has been a big focus on this call as it has many others, given the impact to units this year. As we look at auto, I think we’re probably in the second quarter going to be tracking about $120-ish million below prior highs.

How much of that volume can be made up with increased content over the next year or two, Keith? And how much of what had been automotive volumes in the factory network will need to be absorbed by things like cloud power or other growth initiatives or areas where you’ve got secular content in? Thank you..

Yeah. So, the - I mentioned before the things we’re watching carefully are the electric vehicle ramps in China. They put back incentives to focus there. The content, as you know, is several hundred dollars higher in electric vehicle.

And so, the simple answer is, if they really ramp mostly electric as we go forward in China, there’s a substantial opportunity to overcome any unit losses. And then, ADAS, similar kinds of situation there. They’re becoming - consumers are more safety conscious. And so, we’re seeing the contents there go up $20, $30 a car at a time.

And so, I think the question will be, as we come out of this downturn, what the strategy is going to be? And right now, at least, we’re looking at more electric vehicles and more focus on safety. So, we think most of that, if not all of that, will be offset as we exit this year..

Thank you..

Thank you. Our next question comes from the line of Ambrish Srivastava with BMO. Your line is open..

Thanks very much. Thanks for taking my question. I just wanted to come back to the gross margin side, Bernard. And I’m sorry you were cutting out when you were answering the question, at least for me. I wanted to understand the bridge between Q1 and Q2.

So, how much of the costs would go away? How much of it is one-time in nature? And then, kind of, related to the recovery part is you talked about fall-through and you’re also talking about a step-function increase and then there’s a third factor coming in which is your 300-millimeter fab.

So, what’s the right way to think about fall-through as margins recover as a result of revenues coming back? That would be helpful. So, A, just kind of help us bridge the gap; and, B, how should we think about fall-through? Thank you..

So, the fall - the bridge for Q1 to Q2 is pretty straightforward. It’s mostly the decremental fall-through of 50% on the revenue going from $1.278 billion to $1.180 billion at the midpoint. The one-off period charges that we saw in Q1 will continue in Q2.

Keith mentioned the fact that we had during the month of April continued shelter-in-place mandates, government mandates in most of our locations. And then, we expect to be getting close to being out of that by the end of this week.

So, it has had a significant effect in this quarter, which is going to be similar in nature - maybe a tad bit less, but similar in nature to what we had in Q1. That’s the one that when we go into Q3, assuming that there is - that the - all these supplier issues, i.e.

the mandates from the government have - would have been eliminated, that approximately $20 million goes away completely as we go into Q3. And then, we have the normal fall-through on whatever revenue comes through. That’s the high level....

And how does fall-through change because 300-millimeter should be helping you? And this is not a question for this year. Obviously, you’re just starting to ramp it.

But steady state, how should 300-millimeter have a positive impact for margins?.

We definitely see that the unit costs of - for [indiscernible] will be better [ph] in this year. Obviously, it will be depending on the speed of the qualification from our customers and - as we go into that and it’s more a longer-term 2021, 2022 timeframe [indiscernible] expect any significant direct impact in 2020 as it relates to gross margin.

And we’re also relying a lot on what we’re seeing others have done as they go into 300-millimeter and we expect that we’ll have something similar in nature..

Okay. Thank you. And my quick follow-up, Keith, sorry, on your comment about Q-over-Q increase for the second quarter, I was a little bit surprised about industrials, especially given the macro backdrop. Is that primarily related to China recovery or sell in? Just - can you please expand on that, please? Thank you..

Yeah. China is certainly the biggest driver of the increase there. As you remember, in the end of last year, it had been severely curtailed in China. It was very, very weak. And so, that has been recovering. We also have the medical business in that industrial category, and they’ve certainly seen an uptick globally.

And so, those are kind of the big ones there..

Okay. Thank you very much..

Thank you. Our next question comes from the line of Matt Ramsay with Cowen. Your line is open..

Yes. Thank you very much. Good morning. I just wanted to follow up, Keith, on a couple of other questions that folks asked about assumptions for manufacturing at East Fishkill.

Just assuming, given what’s going on in the macro, that revenue levels for the industry and the whole company will be maybe lower exiting when you take - coming into the point where you take over full ownership of the facility, are you guys basically kind of saying that, through different optimizations of the rest of your factory network and a little bit more insourcing, that the overall volume and dollar content of what you might put through Fishkill at the point that you take over ownership, we should just assume it’s roughly what it was when you signed the agreement? Or are there any sort of big picture changes to those assumptions that we should think about, given all that’s going on? Thank you..

Well, the way we look at things is kind of twofold. One, the amount of power that we’ve got as a percentage of the company, we expect to continue to expand for all the reasons we’ve been explaining. And so, when we take over in 2023, we would certainly expect that power piece of the business to have grown substantially.

We don’t think COVID is with us forever. And then, secondly, from a factory perspective, I mean, we did do an expansion, frankly, because our outlook for the growth in electric vehicles and the growth in the 5G infrastructure and the cloud-power was going to be such that specific set of technology nodes would need to have expansion.

So, really nothing has changed on that perspective from the 2023 look, but certainly has had a major interruption here in 2020..

Got it. That’s clear and helpful. Just wanted to follow up, obviously, on - Bernard, on the OpEx side. There’s some actions you guys have laid out.

Anything in particular to call out in R&D that might be changes to different programs that we should pay attention to? Or is it no real change to what you guys announced last quarter and just some, obviously, additional belt tightening, given what’s going on globally? Thank you..

So, no additional from what we announced last quarter. We did - we aligned some of our investments to make sure we are targeting the highest growth markets and the ones we think about. But most of these additional actions we built are more tactical in nature and therefore don’t change our view of R&D..

Thank you. Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is open..

Hey, guys. Thanks for squeezing me in. In the interest of time, I’ll post both of my question now. I know, in the past, you were planning on becoming more vertically integrated in power devices with some Silicon Carbide materials. I wonder if that’s still in the cards for you guys.

And, Bernard, could you give us some, I guess, benchmark on what the OpEx run rate can be as we exit the year? Is $290 million in that fourth quarter the right number to think about?.

Okay. On the continued vertical integration, we continue to be on track there, and we will have a network, as I mentioned before, of internal supply and external supply for the wafering as we do with silicon today. And so, we’ll continue to invest in that and are making good progress..

And on the OpEx question, we do intend to continue reducing our OpEx in absolute dollars throughout the year from our current levels and from our Q2 midpoint of $305 million. So, the - with the actions - the temporary impairment actions that we’re talking about, $290 million seems to be an appropriate number..

Thanks, guys..

Thank you. Our next question comes from the line of Harlan Sur with JPMorgan. Your line is open..

Good morning. Thanks for taking my question. The operational and logistic challenges in Southeast Asia are certainly impacting your lead times. [ph] I seem to recall that normalized lead times for the team is around 8 to 12 weeks, but you guys seem to have very good order visibility for Q3 and second half. So, it does look like lead times are higher.

Can you guys just give us a sense on where the average lead times are today? Just wanted to see how much order and backlog visibility you guys actually have for the second half..

Yeah. So, it’s around 14 weeks. But what you see from an order pattern perspective is our industrial and automotive customers and even the cellphone customers, our handset customers will give us a much longer look and actually much longer orders, particularly as they see they’re planning on ramping in the second half.

So, a piece of it is lead times and a piece of it is just the nature of the customers we serve..

Great. Thanks for the insights there, Keith.

And then, on the lower underutilization charges this quarter, just given the better second half order book, manufacturing lead times, are you guys actually starting to [ph] take up wafer starts in your fab now? Or do you have enough [indiscernible] supply and just hope to supply the better demand initially from an improvement in the back-end operations?.

Yeah. Most of the increase - I mean, all of the increase has really been in the dye supply - for our inventories have been the dye supply here in the first quarter and as we go into the second quarter because we were back-end constrained.

So, we really haven’t had to ramp the front-end jet because we’re still playing in a constrained back-end environment. As we get to Q3 with higher revenues, then we can start to look at that..

Great. Thank you..

Thank you. Our next question comes from the line of John Pitzer with Credit Suisse. Your line is open..

Yeah. Good morning, guys. Thanks for letting me ask in the call. Keith, I’m just hoping that you could quantify what you think the supply impact was from COVID in the March quarter and what’s embedded in the June guide.

I’m just trying to get a sense that if you weren’t having these issues in Malaysia and the Philippines how much higher do you think revenue could have been in March and how much higher do you think it could be in June..

Yeah. I guess, I will try and get as quantified - as viable as I can. We would have made our original guidance in the first quarter had we not had the supply disruptions. And you can figure out that’s a pretty significant number.

And actually, in the second quarter, the supply constraints have at least as big of impact, if not slightly more, because it is for a much longer period of time in the second quarter than we had in the first..

That’s really helpful. Thanks, Keith. And then, I want to go back to your comments about content growth in autos helping kind of take some of the sting out of units being down 20% to 25% this year. I guess, when you look back at calendar year 2019, your business contracted about as much as [ph] SAARS did.

And I understand that 2019 within the auto space was also an inventory digestion period. But I got to believe, with units being down this much, that it’s more likely that the supply chain continues to take inventory down in calendar year 2020.

So, why are you more optimistic about content growth this year than last? Are there company-specific drivers that you can touch to? Thanks..

Twofold. One, we really do think that inventory situation is in better control this year. The orders came down on us quite dramatically in automotive during the first quarter and into the second quarter. So, we believe they’re being very prudent. But they are now getting to levels of inventory that I think that actually concern our customers a bit.

They don’t want to go lower than that from a supply perspective. And there are still certainly some memories out there of 2010 from a lot of them. So, I guess, the first order would be we don’t expect more inventory contractions this year.

Second piece is, looking at the electric vehicle content and particularly in China, we do think that, that mix will go up much nicer than it was in 2019, very significant increase there. And so, that piece of it, as we mentioned earlier, opens up a couple of hundred dollars or more of content per car.

And if you have an increase in EVs in China of a couple of percent, it would certainly offset a weakness of the SAAR that’s been projected..

Helpful. Thanks, Keith..

Thank you. Our next question comes from the line of Tristan Gerra with Baird. Your line is open..

Hi, guys. Good morning.

Just a quick follow-up question to John’s question, so what type of point-of-sale is built into your Q2 guidance, given the supply disruptions that you’ve mentioned? And is it - should we assume that inventory level [indiscernible] are going to come down in Q2 and potentially rebound in Q3 as a result of your supply coming back in the second half?.

So, we are assuming an increase in our POS on a sequential basis. We expect that, on a week basis, we’ll be trending back down to the 11 to 13 weeks that we have in our normal operations [ph] growth..

Okay.

And then, any quick update on Quantenna in terms of new product development? And any type of potential savings that you’re doing there?.

We continue to make good progress on our client devices that we talked about at the time of acquisition and, obviously, no revenue here in 2020. We’re not expecting those devices [indiscernible] next year. But the balance of the business has held up quite well. In these environments, folks are still doing the infrastructure investment similar to 2019..

Great. Thank you..

Thank you. Our next question comes from the line of Shawn Harrison with Loop Capital. Your line is open..

Hi. Good morning, everybody. Keith, I was hoping to [indiscernible] point on the automotive content. I think you outperformed production by maybe 17 points in the first quarter. In the past couple of years, you’ve seen, I don’t know, anywhere from 5 points of outperformance to 10 points of outperformance.

Do you think second quarter [ph] maybe you more production and then you start to see that type of potentially high-single digit, double-digit outperformance versus production for 2020?.

Yeah. Again, we’re expecting in the third quarter, as things begin to ramp again, you’ll see more of the leverage. And then, as I mentioned several times, particularly, as the mix shifts more electric, you should see an acceleration of that delta..

Okay.

But the second quarter would more maybe mirror global production instead of outperforming?.

Yes. Well, I’m not looking for any outperformance in the quarter. Again, everybody is shut down and - yes, I would not expect to outperform this quarter..

Great. And then, Bernard, just the incremental $90 million of cost [indiscernible] the first $25 million was more focused then on R&D. I think you were implying that the majority of this $90 million is SG&A related versus incremental R&D. I just wanted a clarification on that, please..

No, the remaining $90 million is spread across the whole [ph] OpEx P&L geographies, including R&D but also all the other sales and marketing, G&A and a little bit of COGS..

Okay.

Maybe relatively equal?.

Probably as a percent, yes..

Okay. Great. Thank you very much..

Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Your line is open..

Thanks for taking my questions. I just wanted to, for the first one, nail down gross margin. So, if - Bernard, let’s say, Q3 sales are flat versus Q2.

What’s the gross margin? And if let’s say sales grow 10%, what’s the gross margin assuming some seasonal mix?.

So, definitely, on the - if the revenues are flat, I would still expect the approximately $20 million of period expenses going away. That should be the primary improvement in gross margin and assuming no change in revenue or mix. And if we have a 10%, you pretty much have to take about a 50% fall-through on that incremental 10%..

Got it. And then, I was wondering. Did you talk about the [ph] - the resale activity in June? What are your expectations? And just kind of what we should think of your balance sheet inventory and distribution inventory exiting June? Thank you..

So, let me start with internal inventories. We expect those to be flattish to slightly higher. To Keith’s comment about depending on how strong we see the third quarter, we might have to restart some of the fabs at a higher level [indiscernible] more dye.

On the [ph] days of the inventory, as I mentioned earlier, we expect to trend back down to that 11 to 13 weeks due to stronger resale sequentially than in the first quarter..

Okay. Thanks very much..

Thank you. Our next question comes from the line of Craig Hettenbach with Morgan Stanley. Your line is open..

Yes. Thank you.

Just a question on automotive and understanding the quarterly trends could be noisy, but in the full year in the context of if auto production is down 20% to 25%, what would you expect to be kind of a rough growth for ON in 2020?.

So, we expect that the unit - the content growth will be just like we have talked for a long time in that 7% to 8%. So, we can see that whatever the unit [ph] is they’re offset by a 7% to 8% content growth [ph] offset..

Got it. Thanks.

And then, just to follow up on the 300-millimeter, really, in the context of consolidating other fabs, can you just talk about maybe a rough time line of how that plays out over the next couple of years?.

So, we’ve announced the divestiture of one of our factories now, closure of a second one there in Rochester, New York [ph] have both been announced those will be actioned sometime in the next year. And that we have no further ones to announce today. But clearly, the demand picture in 2021 will give us some more direction on timing..

Got it. Thanks..

Thank you. Our next question comes from the line of [ph] Nick Perdovas with Long Beach Research. Your line is open..

Thanks. Good morning, guys. I just want to go back to the industrial comments and specifically the strength in China. I was wondering if you can give us some more color. I think you mentioned indications of increased automation and robotics.

Do you see the current pandemic kind of essentially putting the [ph] seeds due to a secular change in that industry and to your point seeing that increase in automation, if you can comment? To what level of the demand in China and industrial is coming back to compared to pre-COVID levels?.

Yeah. So, first, I’ll talk about trends. We do see this pandemic as accelerating people’s thoughts and investment in automation. And so, we are seeing that industrial automation piece pick up quite nicely.

And we think that, that will be a continued trend because, again, just from a rational business perspective, the biggest impact we’ve had is on the people sort of the more automation we have, the less expectation for further disruption. But broadly beyond just that secular trend, we do see a pick back up.

And the factories closed in the first quarter in China. The orders completely stopped. And what we’re seeing now is just a return to a more normal environment that we had pre-Chinese New Year, so not excessively greater than we had pre-Chinese New Year, but very similar to that..

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day..