Good day and thank you for standing by. Welcome to the onsemi First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please be advised today's conference is being recorded. .

I would now like to hand the conference over to your speaker today, Parag Agarwal. Please go ahead. .

Thank you, Kevin. Good morning and thank you for joining onsemi's First Quarter 2024 Quarterly Results Conference Call. I'm joined today by Hassane El-Khoury, our President and CEO, and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com.

A replay of this webcast, along with our 2024 first quarter earnings release, will be available on our website approximately 1 hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. .

Our earnings release and this presentation includes certain non-GAAP financial measures.

Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and a discussion of certain limitations when using non-GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investors Relations section. .

During the course of this conference call, we will make projections or other forward-looking statements regarding the future events or the future financial performance of the company. 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 that can affect our business, including factors that could cause actual results to differ materially from our forward-looking statements, are described in our most recent Form 10-K, Form 10-Qs and other filings with the Securities and Exchange Commission and in our earnings release for the first quarter of 2024. .

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

Now let me hand it over to Hassane.

Hassane?.

Thank you, Parag. Good morning and thank you all for joining us on the call. In the first quarter, our worldwide team delivered revenue of $1.86 billion, non-GAAP gross margin of 45.9% and non-GAAP earnings per share of $1.08, all above the midpoint of our guidance.

We have remained laser focused on our execution, driving new design win growth of 30% quarter-over-quarter, and gaining share in silicon and silicon carbide based on the strength of our technology. .

Customers value the breadth of our portfolio and the superior performance of our intelligent power and sensing technologies, which continue to fuel platform wins.

Leading indicators of future revenue to support our plan to outgrow the market in automotive and industrial with new product revenue in Q1 increasing 9% year-over-year, and we expect it to continue to outpace total company growth with favorable gross margins at scale. .

Specifically, we believe our silicon carbide business to have the best financial performance in the industry on a fully loaded basis with more than 50% of substrates coming from internal production in the first quarter.

The performance of our silicon carbide solutions, combined with our vertically integrated supply chain, are enabling us to rapidly diversify our customer base. .

Having just returned from the China Auto Show in Beijing, I remain confident that we are continuing to gain share and expanding into the top 10 leading Chinese OEMs where we are already designed into the newly announced 800-volt EV platforms and set to start ramping in the second half of 2024. .

As for the global silicon carbide market, we still expect an increase in the TAM, although at a lower rate than previously anticipated. The increase is primarily driven by incremental volumes of EVs produced globally over 2023, even as total SAAR is projected to be flat to slightly down. .

We continue to gain share in silicon carbide and diversify across all markets and still expect our revenue to increase 2x the market growth in 2024. Outside of silicon carbide, there was incremental softness in the market in the first quarter. .

Inventory digestion persisted across the automotive and industrial markets with stabilization in the traditional part of our industrial business. We remain cautious about the second half outlook, but we expect customer inventory levels to normalize and the market to stabilize. .

We will maintain our disciplined approach to navigating the current environment and expect to deliver predictable results as we have demonstrated. Through this environment, we're also investing to further our leadership in the high-growth megatrends of automotive, industrial and cloud, including data centers. .

During our Analyst Day last May, we highlighted a $19 billion high-margin TAM opportunity that we could service by expanding our portfolio of power management and sensor interface technologies.

To best align with the strategic intent, we have formed the analog and mixed signal group, which will deliver industry-leading full system solutions for these markets. .

Electrification remains the largest growth opportunity for onsemi across xEVs from BEV to ATV. We provide a unique value proposition for our customers with our wide range of silicon carbide and IGBT solutions along with our high-powered packaging technologies. .

Our revenue from xEV grew by approximately 60% year-over-year, significantly outpacing unit production, and we continue to gain share with our silicon carbide and silicon products primarily in BEV. .

In automotive sensing, the shift towards higher-resolution image sensor for ADAS systems continues with customers moving to better performance options. Our revenue for 8-megapixel image sensors increased more than 30% quarter-over-quarter and more than 60% year-over-year, demonstrating the market trend towards higher resolution for ADAS systems. .

In medical, we are leveraging AI technology in our processors for hearing aids to adapt to the user's unique hearing environment for an improved listening experience, and we are designed in more than 50% of over-the-counter hearing aids currently available in the market. .

With a relentless focus on innovation, we are actively investing in new products and technologies to extend our competitive advantage and drive above-market revenue growth at favorable margins, consistent with our Analyst Day commitment. .

We remain on track and continue to make progress towards 200-millimeter in silicon carbide. We are already sampling new mixed-signal products, and we are gaining share across the portfolio based on the differentiation of our technology. .

Our investment in cloud and data centers over the last 3 years has enabled us to benefit from the incremental opportunity we are seeing from the rapid rise of AI. Next-generation AI server racks will require 200 to 300 kilowatts of power, as much as the power needed in a BEV. .

Our full suite of high-efficiency power tree solutions from the power supply unit or PSU to the CPU or GPU consuming the power continues to present the content expansion opportunity as customers look to us to solve their power density problems in data centers.

As we look forward with disciplined, consistent execution while maintaining the customer-centric mindset, we will navigate the current environment and continue to deliver value for our stakeholders. .

Let me now turn it over to Thad to give you more details on our results.

Thad?.

Thanks, Hassane. Our teams have been relentless in their pursuit of operational excellence. Their focus on execution to drive more predictable and sustainable results once again delivered first quarter results that exceeded expectations.

Our ability to respond to the current market environment and deliver better results than ever in a downturn demonstrates the resiliency we've built into the business over the last 3 years. .

Amid continued inventory digestion in automotive and industrial, we reported Q1 revenue of $1.86 billion, down 8% quarter-over-quarter and down 5% year-over-year. Our automotive business of $1 billion grew 3% as compared to the quarter a year ago and declined 9% quarter-over-quarter, in line with our expectations.

Vehicle electrification and advanced safety applications remain the long-term growth drivers for this business. .

Our revenue for industrial was $476 million, down 14% versus the first quarter of 2023, and down 4% sequentially. We are seeing early signs of stabilization in our traditional industrial business, which is slightly less than half of our total industrial.

Long term, we expect upside opportunities in industrial to come from energy infrastructure, factory automation and medical applications. .

As a result of our strategy to shift to the high-growth megatrends for the sustainable ecosystem, our Automotive and Industrial revenue accounted for 80% of our business in Q1. .

Looking at the split between the operating units. Revenue for the Power Solutions Group, or PSG, was $874 million, an increase of 2% year-over-year coming from higher silicon carbide revenue in automotive and industrial applications, offset by a decline of silicon power products. .

Revenue for the analog and mixed signal group, or AMG, was $697 million, a 6% decline year-over-year driven by declines in industrial and automotive. As previously announced, we have formed AMG to deliver industry-leading full system analog mixed-signal solutions.

Prior period revenue has been reclassified and is available on the Investor Relations section of our website. .

Revenue for the Intelligent Sensing Group, or ISG, was $292 million, an 18% decrease year-over-year due to a decline in industrial and automotive. Gross margin -- GAAP gross margin was 45.8% in the first quarter and non-GAAP gross margin was 45.9% compared to 46.7% in Q4 and 46.8% in the quarter a year ago.

These results exceeded expectations, even though utilization was at 65%, a slight decrease from 66% in Q4. .

In prior downturns, at similar utilization levels, our gross margin was approximately 30%. Though muted By utilization, our gross margin expansions continue. Most notably, our Fab Right strategy of optimizing our existing footprint is well underway, and our teams continue to drive operational excellence with cost improvement opportunities. .

At East Fishkill, we have aggressively improved the operational efficiency of the fab, reducing the fixed and variable cost to reach parity and wafer costs with our other fabs. The dilutive impact in Q1 was 140 basis points as compared to 200 basis points in the fourth quarter.

We expect this to be roughly 100 basis points dilutive for the remainder of the year for the ongoing foundry business with GLOBALFOUNDRIES. .

As a result of our cost-reduction efforts at EFK and our Fab Right initiatives, we now expect 1 point of utilization improvement across our manufacturing network will result in approximately 15 to 20 basis points of gross margin improvement. .

Now let me give you some additional numbers for your models. GAAP operating expenses for the first quarter was $328 million as compared to $353 million in the first quarter of 2023. Non-GAAP operating expenses were $314 million as compared to $286 million in the quarter a year ago.

As Hassane mentioned, we continue to invest to further our leadership position in our focus markets. .

GAAP operating margin for the quarter was 28.2% and non-GAAP operating margin was 29%. Our GAAP tax rate was 15.7% and non-GAAP tax rate was 16%. GAAP earnings per share for the first quarter was $1.04 as compared to $1.03 in the quarter a year ago.

Non-GAAP earnings per share was near the high end of our guidance at $1.08 as compared to $1.19 in Q1 of 2023. .

GAAP diluted share count was 437 million shares, and our non-GAAP diluted share count was 432 million shares. In Q1, we deployed $100 million or 36% of our free cash flow for share repurchases. In the last 12 months, we have repurchased $560 million worth of shares and returned nearly 100% of our free cash flow back to our shareholders. .

Turning to the balance sheet. Cash and cash equivalents was $2.6 billion, and we have $1.1 billion undrawn on our revolver. Cash from operations was $499 million, and free cash flow increased 3x year-over-year to $276 million, representing 15% of revenue. .

Capital expenditures during Q1 were $222 million, which equates to a capital intensity of 12%. As previously indicated, we expect 2024 capital intensity to be in the low teens for the full year. .

Inventory increased by $35 million sequentially, and days increased by 15 days to 194. This includes 86 days of bridge inventory to support fab transition in the silicon carbide brand. Excluding these strategic builds, our base inventory decreased $31 million sequentially to approximately 109 days. .

We continue to proactively manage distribution inventory. Disti inventory was down $19 million sequentially with weeks of inventory at weeks -- at 8 weeks as expected versus 7.2 weeks in Q4.

As previously mentioned, we expect to replenish the channel in 2024 to service mass market customers and expect inventory to start to normalize with increasing inventory levels to approximately 9 weeks over the next few quarters. .

Now let me provide you the key elements of our non-GAAP guidance for the second quarter. A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our first quarter results.

Given the current macro environment and our demand visibility, we anticipate Q2 revenue will be in the range of $1.68 billion to $1.78 billion with softness across all end markets. We expect non-GAAP gross margin to be between 44.2% and 46.2%.

As we have shown, our structural changes are proving sustainable, and we expect to hold the mid-40% gross margin for -- floor with utilization in the mid-60% range. .

Our Q2 non-GAAP gross margin includes share-based compensation of $6.5 million. We expect non-GAAP operating expenses of $313 million to $328 million, including share-based compensation of $28.6 million. We anticipate our non-GAAP other income to be a net benefit of $12 million with our interest income exceeding interest expense.

We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP diluted share count for the second quarter is expected to be approximately 432 million shares. This results in non-GAAP earnings per share to be in the range of $0.86 to $0.98. We expect capital expenditures in the range of $180 million to $220 million. .

Our financial strategy and long-term targets remain unchanged. We are investing for our future while leaning on our playbook to drive operational efficiencies across the organization. We also remain committed to our capital allocation strategy of returning 50% of our free cash flow to shareholders over the long term. .

We are a different company today, and I'd like to take this opportunity to thank our employees around the world for the value they've unlocked during our transformation journey. Their efforts were most recently recognized by the management top 250 ranking published by The Wall Street Journal, which identifies the most effectively managed businesses.

We are proud to have been named as posting the biggest gain of any company and we will continue to strive for operating excellence as we navigate the coming quarters. .

With that, I'd like to turn the call back over to Kevin to open it up for Q&A. .

[Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. .

First question, Hassane, I just want to get into the linearity of demand you saw in the first quarter and thus far in the second quarter and maybe specifically what you're seeing in the silicon carbide side. I know you said that the market TAM is going to be slower, but you'll still grow 2x that.

What's your estimation for what the market TAM is going to do?.

Yes. Specifically, on the first quarter, we did see a slowdown through the quarter.

Specifically, if I were to break it, you can think about it after Chinese New Year, typically, we would expect a slight recovery or back to linearity, and we didn't -- that's where we started to see some of the incremental softness that we talked about, specifically in auto..

As far as the silicon carbide, I think it's too early in the year to call a market. What I'm basing my comments on, and specifically the 2x growth, is really a bottoms-up share gain that we have based on a vehicle-by-vehicle and socket-by-socket that we're designed in. And we know what the sockets and the designs of the platforms are out there..

What is pending to see today, and like I said, it's early in the year still, is the sell-through of these vehicles. As we get through the second half of the year, that picture will get clearer. I'll get a little bit more accurate as far as what the market would do.

But for right now, we're looking at it as are we designed in more than 2x the sockets that are deployed this year, and the answer is yes. .

I guess for my follow-up, Thad, from you -- one for you on the gross margin side of things. Congrats for holding the 45% floor. Can you just walk some of the idiosyncratic puts and tastes going forward? I know you said what the utilization impact will be when revenues and all of that go up.

But East Fishkill, exiting fabs, all those sorts of things, what sort of -- what are the pluses and minuses as we think about gross margin through the year?.

Sure, sure. So just starting with the utilization. So as I mentioned in the prepared remarks, 1 point of utilization is 15 to 20 basis points of gross margin improvement. So think about us being at the mid-60s. If we get back up into the low 80s, you can do the math on the tailwind there..

For East Fishkill, we expect this year, it's about 100 basis points dilutive as we go through the rest of the year. That's the foundry business. As I mentioned, we now have the cost parity with our other fabs. So we're happy with the progress we've made there. That gap is underutilized. So you get that benefit, as I mentioned, on the utilization..

The other component is the fab divestitures from 2022, the 4 fabs. We start to see that's starting to be monetized in 2025. That's $160 million of annualized costs. We won't see it all in '25, but we'll start to recognize it in '25 and the outer-years as we move that production into our fab network. So that's another nice tailwind..

And then we've got the ramping of new products that are accretive to gross margins. That includes silicon carbide. As we continue to scale silicon carbide in '25 and further, that becomes accretive. And all new products, as Hassane mentioned, the new product revenue is growing, that at scale is all accretive as well.

So I think if you do the math there, you start to get pretty close to our target. .

Our next question comes from Vivek Arya with Bank of America Securities. .

Hassane, I'm trying to understand the message and the outlook for the second half that we get the -- weaker and the headwinds for Q2, but how should we think about the pace of recovery from here? Because I thought I heard Thad say that you plan to increase, I think, distribution inventory.

That sounds like a positive message, but if things started to get weaker towards the end of Q1, that doesn't sound like a positive message. .

So I'm just trying to understand what are you trying to signal for the second half. Is Q2 the bottom? And how should we think about Q3 from what we know today? Obviously, it's a fluid environment. .

Yes. I'll -- let me try to clarify here. First off, I'm not going to call the bottom. I was very clear last time, I'll call it when I'm sitting on the top on the other side. But what we are seeing -- we did see the slowdown -- that slowdown -- inventory digestion and demand. And I believe the 2 are related persistent in our outlook for Q2.

But for the second half, we are starting to see stabilization in demand..

Now I wouldn't go as far as calling it a recovery. But I think if I were to use a letter that everybody talks about, it's an L at this point, meaning we're seeing stabilization, we're seeing recovery, meaning it's not deteriorating further. Now whether or not the demand will pick up, that's too close to call that.

But at least we see stabilization in our outlook. .

Okay. And then on the silicon carbide, just 1 or 2 near term and then kind of the longer term.

On the near term, what did your silicon carbide sales do in Q1, either sequentially or year-on-year? And what's your China exposure?.

And then there's a lot of industry discussion about low-priced EVs. And I think you guys have both silicon and silicon carbide. And I'm wondering if there is an industry move towards the so-called lower-priced EVs, especially in the U.S.

market? Would that be positive or neutral to ON's power opportunity?.

Yes. So on the first question, we're not breaking up the silicon carbide on a quarterly -- last year, we annual and we talked about, for both competitive reasons, we're not breaking up the quarterly.

What we have said is, it will obviously increase in 2024 from 2023, but we will update the annual year or the annual results for 2024 as we get towards the end of the year..

As for the low-cost EVs, it's an interesting dynamic in the market. Our position, we will benefit regardless of what technology the customer uses, whether it's silicon carbide or IGBT. And we have seen areas where we have benefited from both, whether at the same customer account or even in the same platform..

What I also want to highlight is we've been pushing the efficiency on silicon carbide, both device and package with our new generation that we're -- we've announced and designed in -- to customers, where it will be ramping in the second half of this year, specifically with a lot of the China OEMs that you can argue are at a low-cost or low-price point for a low-cost EV.

Those have also silicon carbide because the dynamic that you see, the benefit they get from using onsemi's silicon carbide with onsemi's packaging from a module perspective, given the efficiency that they will save way more dollars on the battery than they were just going from silicon carbide to IGBT..

So from a system-level solution, the battery is the biggest bond and they can save battery by using any of the technology, they win on the low cost, and we've seen customers do that. But regardless of what technology and what system level of cost they want to optimize, we will benefit, whether it's silicon carbide or IGBT. .

Our next question comes from Chris Danely with Citi. .

Just another question on silicon carbide.

So if you're not going to give us the quarterly revenue, what are gross margins doing? Are they stabilizing? Or are they going down? And then how about your pricing expectations for the rest of the year? Have your pricing expectations changed? And what revenue level do you need to get -- to that 50% gross margin target?.

Yes. The -- I think the gross margin is -- for silicon carbide is stable. As we talked about last year, it will remain stable as we increase revenue, but we've also added capacity. So kind of the utilization and the growth will offset each other to give us that stability in the gross margin..

Longer term, of course, you got the utilization as we grow into our installed footprint. So that will give us a nice upside on the gross margin. As we ramp internal substrates, that will give us -- the incremental gross margin that gets us to -- be above the 50% that we talked about.

And as we march closer to the model -- for the corporate level model at 53% long term..

Now one thing I do want to highlight is we also are making incremental improvements on our efficiency side, which means that we are able to service the same level of power that the customer require with a smaller die. So from a system-level cost, we are also making technology improvements in order to improve our cost. .

So between the cost, the new products that we talked about earlier, and growing into the capacity, that's where that's going to give us the incremental margin. We see it in the standard margin if you take out underutilization. And that's what we're going to grow into.

So we're pretty comfortable with our trajectory on silicon carbide margin, and we'll continue to execute. .

Great.

And then for my follow-up, between your 2 big markets, auto and industrial, would it be fair to say that the industrial market appears to be stabilizing, but the automotive market is getting a little bit weaker? And is all of that weakness in silicon carbide? Or is there weakness in auto outside of silicon carbide?.

Sorry, you blanked out the last [indiscernible] -- I didn't catch it. .

Oh, okay. Yes.

Can you guys hear me okay now?.

Yes, we can hear you Chris. .

Okay. Great.

So just between the 2 big end markets, auto and industrial, is it fair to say that broadly speaking, the industrial market for you guys is stabilizing? And then on the automotive market, is it fair to say it's getting a little bit incrementally weaker? And is that incremental weakness all silicon carbide? Or is there weakness in the non-silicon carbide automotive business?.

Yes. I think at a high level, between the market, your comment is true. I don't think from an overall -- from the automotive side, the second part of your question, I don't think it's only on the silicon carbide. .

Silicon carbide, I think it's well understood in general as far as the TAM. But our growth on silicon carbide is really more on share gains rather than just specific to total market. And we've been very consistent about that. 2024 is still on track for that.

But we did see incremental softness in automotive on the silicon side as well, which is more on the broader aspect of automotive. .

Our next question comes from Toshiya Hari with Goldman Sachs. .

I had a question on the silicon carbide business as well. For this year, Hassane, what's the rough split between automotive and industrial? And more importantly, I was hoping you could speak to your diversification efforts. I think customer concentration has been a bit of an issue from an investor perspective.

Your largest customer was significant last year.

I think they'll continue to be significant this year, but how should we think about your customer base and your customer mix broadening, an SiC specifically, going forward?.

Yes. So the first part of the question. It's been pretty consistent. You can think about it as 80-20, 80% auto, 20% industrial, give or take. Depending on the quarter and when the ramp happens, they're a little bit asynchronous ramps based on the end market..

As far as diversification, we've been very consistent on 2024 will be more diversified than what 2023 was. That remains the case. Last quarter, we called out ramps in automotive OEMs in Europe starting to ramp EV with onsemi silicon carbide.

The comment I made today is further proliferation in the Chinese EV, which today is the biggest penetration of electrification in light vehicle production. .

Between those 2 efforts as these ramp in the second half getting us to that 2x market that I talked about, that's going to come with further diversification across all geographies. Very consistent with where our LTSAs originally were, and where the ramps have started to occur. So predictable, consistent and we're executing to that. .

Great. And as a follow-up, I feel like you talked about data center a little bit more than on prior calls.

To level set us, can you speak to the exposure you have to AI or data center more broadly today? And how are you thinking about the growth profile there over the coming years given the focus on AI infrastructure spend across your end customers?.

Yes. If you go back to our last Analyst Day where Sudhir, in his prepared comments, he talked about the power tree being very similar in automotive, industrial and cloud and data center. We've talked a lot about our penetration and our success in auto and industrial, and we've shifted our focus over the last 3 years to the cloud and data center..

And at Analyst Day, we talked about that outlook being about 22% CAGR over the next 5 years. That's what our investment thesis has been.

We've been introducing products both on the power discrete side, and furthermore on, call it, controllers and point of load and so on, which is more on the intelligent power coming from our Analog and Mixed-Signal Group that we've organized around that effort. So all of these put together are where our investment has been..

I talked more about it this quarter than I did last quarter even just because of our progress on it. Last quarter, I talked about our success in sampling, a lot of these products coming from that group. We're further sampling and engaging with customers. I'm very bullish about it. You'll hear more about it as we get through the year.

But the target markets are auto, industrial, but on top of that is the cloud and data centers. .

Are you able to size it for us today? Is it low singles, mid-singles? Any hints there?.

Not yet. .

Our next question comes from Gary Mobley with Wells Fargo Securities. .

Hassane, you probably realized this already, but most investors are worried about the ability for non-China silicon carbide suppliers to compete in the China market against local competition. .

And your messaging on that front was clear that you're gaining share at the top 10 China automotive OEMs.

But longer term, what's your hook to remain successful in that marketplace? Is it a focus on higher-voltage battery systems? Is it hybrid silicon, silicon carbide solution? Is it local investment into the China market? Any color there would be helpful. .

Yes. Look, I've always been very consistent on -- we compete on the value of our products. Because at the end of the day, if you don't have value in the product, somebody somewhere is willing to take a lower margin for just good enough. That's not the business we're in.

Therefore, maintaining our investments and maintaining an aggressive road map that provides value for the customer..

From a customer perspective, they need to be looking at it by -- if I use onsemi, I can save hundreds of dollars on battery versus if I use somebody maybe cheaper locally, and I will have to add that cost on the battery.

If that is the case, which is what we do and why we win in any geography, then it's irrelevant what the competition is doing as long as we maintain our leadership on the technology..

We've proven this year after year. The competition in China has been no less or more, whether it's European vendors or local Chinese vendor. And we've proven our ability with our internal and vertically integrated strategy to compete to have the best financial structured business for silicon carbide, and to grow above market by gaining share.

All of these are the leading indicators of how we were going to continue to tackle that business both in the short term and the long term. .

As a follow-up, I wanted to ask about your design win metrics. You called out a 30% quarter-over-quarter increase in design wins. I presume that's lifetime value.

But looking at it as a more long-term basis, what -- the trends you're seeing there, lifetime value on maybe a trailing 12-month basis, is that supportive of the 10% to 12% long-term revenue growth targets you guys have outlined?.

That's right. We do see that. That's kind of based on the model. You're right, it is a lifetime revenue. But the way I look at it, to support the 10% to 12%, it is the, I guess, the overlaid annual revenue on top of the base, on top of the new products that continue to grow. If I put all of these together, our next outlook is supporting the 10% to 12%.

So you take the base, you add the new products, and you add new design wins on top of it, and that layering effect gives us that 10% to 12% growth. .

Our next question comes from Harsh Kumar with Piper Sandler. .

Hassane, I had a quick question for you on distribution and OEM partner inventory.

I guess the question is, which one for you is bigger? And then are you comfortable at this point with the inventory you're holding? Clearly, you mentioned that you're raising inventory at the disti, but would you give us some color on the inventory of the OEM partners? And also, this environment is a very good test of pricing.

Are you seeing pricing generally hold up pretty well for your products?.

Yes. Let me start with the pricing. Pricing is -- we've been saying pricing is stable. That's the power of the LTSA. A lot of the conversations we've had with customers on -- given the demand environment has been more on what do we do on the volumes rather than the pricing. That goes back to win-win. We invested in capacity.

We will support customers in a softer market. But it has not been a pricing discussion, and we don't expect it to be a pricing discussion..

As far as the inventory, look, we've been -- it changes based on the market. We believe the industrial side of it. If you recall, we start taking utilization down and reducing our shipments in industrial back at the end of 2022.

So we've had longer than most of our peers, kind of a period in 2023, where we've helped customer drain in the industrial market drain their inventory. That's why we're seeing that stabilization that Thad talked about, and even better outlook for the standard part of our industrial business. So that's on the industrial..

On the automotive, I don't think we're done. We saw that softness in Q1. As I mentioned earlier, you see it in the outlook for Q2. But I do think that there is further stabilization in the second half of the year. So that tells you kind of where we feel the inventory of the customers..

But I will remind everybody, inventory at the customer is related to also demand. If demand picks up, inventory drain accelerates. If demand stays stable, it will take longer. But we feel like customers have a healthy level of inventory, and we feel good about it for the second half to call the stabilization..

As far as the disti, we've always run very disciplined distribution inventory. We do have a second half ramp for new products that we talked about. You're going to see us click that up. Remember, this quarter -- or the prior quarter, we drained $19 million on the inventory in the channel. .

Although weeks of inventory went up, dollars came down, although we beat slightly the guide. So with that, that gives you the disciplined approach that we've been pushing for, and we'll continue to do that.

But we do expect inventory at the disti to go up, just readying for the ramps, both silicon carbide and some other new products that we have in the second half..

Internal inventory has been very disciplined. We drained the base aggressively based on the utilization. We've taken a declining utilization to maintain inventory. The only inventory that went up is the strategic for a good reason. It's all a cap transfers. .

Got it. I had a sort of a multipart question on silicon carbide. You talked about 2x growth relative to the market based on design wins, bottoms-up approach.

I guess, when you talk to your customers, what kind of growth are they implying?.

And then secondly, you talked about wins in China.

Are these based on your own internal wafers? Are they based on your outsourced wafers or external wafers? And then is there any situation you see where silicon carbide is flat in 2024 and just kind of wild possibility?.

I don't want to talk about wild possibility. Look, I can only comment on what we see and where the customers and the market is. Silicon carbide is going to grow in 2024. And it's -- and we are going to grow 2x. What I can say about the market is specifically what I commented on earlier, we know the platforms that are ramping this year.

We know the platforms we are in. We know what products we are putting in those platforms because think about it by now, all the stuff is qualified and just shipping and ramping. So based on that, that's where the 2x comes in..

What I'm not commenting on as far as the TAM is, well, until those cars ship in the market, you don't really have a TAM to call out. So that's the reason for that..

As far as mix, I said 50% of our substrates -- over 50% of our substrates are internal. But we don't ship, I guess, a different mix, whether it's going to China or it's going to the U.S. or going to Europe. We ship out of our inventory based on what we need to run manufacturing. And right now, it is a mix of over 50% is -- remains internal.

But no customer has a requirement where the substrates need to come from because the substrates are not what gets qualified at a customer level. It is the device that gets qualified at a customer level. .

Our next question comes from Harlan Sur with JPMorgan. .

With the view that dynamics in the second half are going to start to normalize or stabilize, are LTSA, customer calls to revised volumes, push out cancellations on the non-LTSA business, are these activity levels here starting to stabilize or decline ahead of the second half shipment stabilization? Or do these activity levels continue to remain at pretty high levels?.

Yes. No, you're right in that comment. So they are -- they have slowed down, requests for pushouts, requests for changing volumes, and so on, which gives us that comfort to call out the second half stabilization that we talked about.

But yes, it's basically just like the LTSAs have been a tool in the market softness, and seeing it earlier, that same tool for the slowdown in that discussion and the amendments that we're doing with customers gives us that other side of it. .

And Harlan, I would add, if you look at the non-LTSA orders, the order pattern is getting stronger. So that's the stabilization we're seeing. We're seeing less cancellations, less pushouts than what we saw over the last couple of quarters. .

Perfect. Then from a geographical perspective, Asia ex Japan, which is primarily China, has declined about 24%-dollar terms over the past 2 years versus the total company, which is down 4%.

How much of the decline in China is just broad-based China weakness? How much of it is your lean distribution strategy? Or how much of it is just related to low-margin, commodity-focused China business, which you've been moving away from over the past several years?.

Yes. I think -- yes, I don't have the breakdown. But a majority of it is the exits that we talked about because if you recall, a lot of those exits were in the non-auto and industrial. So if you, add it all up and you do it year-on-year, then those exits are targeting that market, which is where the demand has been.

So that's expected on the industrial and automotive..

Actually, we've seen the share gains, obviously, on silicon carbide, I talked about in automotive. But in industrial -- in prior quarters, I've talked about LTSAs with 8 of the top 10 energy storage or renewable energy vendors. Most of them are in China.

We've had tremendous growth in those markets over the last few years that we called out '22 to '23 even. .

So all of these are share gains. But yes, they are offset. And one is the general weakness that everybody sees with how big the market is for semi's in China. But specifically for onsemi, it is the exits, which are today helping hold the margin where we are structurally. .

Our next question comes from Christopher Rolland with Susquehanna. .

I guess my first one is on the image sensor business, primarily. If you could talk about kind of demand and sell-through there but also inventories and your plans on internalizing some of those wafers from foundry into GLOBFO as well. .

Yes. So I think -- look, demand for -- we have a high market share in image sensors. So demand for image sensor overall demand follows the automotive. We do believe that inventory situation is getting better. I put that under the commentary I made about general automotive..

But the growth that we've seen specifically on the 8 megapixel is specific to a migration to higher-resolution cameras that we really talked about. Over the last 2 to 3 quarters, we've been calling it out. So that continues.

That's a trend we can -- clearly see based on the growth of that business even in light of the light vehicle production numbers that are starting to come up. So from that perspective, it's clear..

We do have an effort to introduce new products coming out of the fab. It is not 100% internal. We do have foundry partners that we value in this business, and we will continue to work together internally and externally. But as you can think about it as a supply assurance rather than a shift in strategy to just go internal. .

Great. And also just a couple of housekeeping.

Did you guys give lead times, utilizations and then cumulative LTSAs and/or next 12-month LTSAs?.

Yes. Chris, it's Thad. Let me get through that. So just starting in reverse order, the lifetime LTSA value is $15.7 billion over the next 12 months, the value of that is $4.7 billion. I think that's consistent with what you heard last quarter if you think about what rolled off in Q1. .

Lead times are down just slightly, roughly around 40 to 41 weeks. So not a big change on that side of things. And I did mention in the prepared remarks, utilization decreased slightly from 66% to 65%. We expect to be running in this range, plus or minus, for the remainder of the year until we start to see more of a market recovery.

As we see the stabilization, we believe we can keep this utilization for the remainder of the year. .

And Thad, since I have you, do you have SiC LTSAs as well?.

I don't have that. .

Our next question comes from Joseph Moore with Morgan Stanley. .

I wonder if you could talk to the opportunity in hybrid cars.

As you sort of see some of the demand shifting from battery power to hybrid, what's the opportunity for ON? Is it silicon carbide? Is it IGBT opportunity? Can you just talk to that?.

Yes. So the -- both the opportunity in, I would say, plug-in hybrid, parallel hybrid, or the non-BEV part of the electrification effort in mobility is both on IGBT. And some customers still are putting silicon carbide in there depending on the drivetrain.

But the opportunity for us that I called out in prior quarters is about $350 worth of content for non-BEV. That's only in the powertrain. And then about $750 in a full BEV vehicle compared to $50 powertrain content in internal combustion. So those are kind of the ballpark numbers that we've talked about. .

Great. And then in terms of the pricing conversation, LTSA pricing, you said, is holding up.

When you have new agreements, new customers, new designs, do you see -- is the pricing for that any different than what you've seen in the past, the way -- what pricing is embedded in your current model?.

No. I mean we don't see -- on a product-by-product basis, there -- if we say the value of the product is what we price on, value doesn't change, whether it's design to design.

Where you do see pricing movement is new technologies that we want to introduce, where the customer gets a benefit but also, we get a benefit, whether it's moving to a much smaller die given the efficiency of our new model. Those are a normal course of the business, where it is incremental margin for us, but you may see an ASP delta.

But it's a different product. But that's the way the industry runs. .

And Joe, it's Thad. Just remember, we walked away from that $475 million of highly volatile price-sensitive market. So I think in this situation, you probably see some pricing pressure on that. Obviously, we're not seeing a [ beach ]. We don't have that business today. .

Our next question comes from Joshua Buchalter with TD Cowen. .

I apologize for beating the silicon carbide horse. But I understand there's a lot of volatility in that market, and you're reluctant to give a granular market forecast right now.

But maybe we compare it to a few quarters ago, has the increased volatility been, would you say, because of a meaningful change in the adoption curve across the EV industry at a broad base of customers? Or is it because of pushouts or unit dynamics because of the early adopters that's driving the lower and more volatile forecast?.

So I can't call out a specific customer. I think everybody can read what specific customers talk about and what their specific outlooks are. But what I would tell you is it's not a pushout, meaning every design that we thought would go to production when we were sitting here in 2023 is still going to production. So it's not a pushout of models.

OEMs are not sacrificing the long-term view that they have on BEVs just because of the short-term volatility..

So we are seeing the designs, qualified design ramp with a plan to ramp in -- starting in the second half of this year. What I called out Europe already. I talked about China as well. So it's not a pushout..

What I would say the TAM is -- my comment about the TAM is what those volumes are. So the volumes that were planned last year are different than they are planned this year given the environment, but the same models planned are still going to market.

So it's a very important distinction because one is the longevity and the strategy of the OEMs, and the other one is just reacting to a macro environment that we're in today. .

That's helpful, Hassane. And maybe for Thad. You called out that over the last 12 months, you've returned over 100% of free cash flow to investors, which is more than your formal policy of 50%.

And was this because of some dislocation in the market you saw, and we should expect it to trend back towards 50%? Or should we expect it to sort of remain elevated here in particular as you go through the period of peak capital spending?.

Yes. If you look back over the last 12 months, in Q4, we bought back $300 million. That was above our target there. And that was the dislocation, right? We've said our policy longer term is 50% over the long term, but we will take advantage and be opportunistic where it makes sense. .

Our next question comes from Quinn Bolton with Needham. .

I know you're not calling for a recovery yet in the second half of the market. But Hassane, your comments on the battery electric vehicle ramps in the second half of the year certainly imply that perhaps silicon carbide sees a better second half.

So I'm wondering what's the offset that would keep revenue sort of more stable in the second half if I'm reading your comments about the battery electric vehicle ramps in the second half correctly. .

Yes. If you look at the -- and again, we don't guide -- we guide only 1 quarter at a time. But the second half, silicon carbide is higher than the first half of silicon carbide. That's absolutely correct, and that's because of the ramps that I called out..

When I talk about stabilization, we go back to normalization. And you can think about it as normal supply and demand. Where demand is, that's what's going to be the offset or not for the second half. So it's too early to call is demand going to recover or not.

But there's definitely demand increase on silicon carbide specifically that we can pinpoint to. .

Got it. Makes sense.

And then just -- I think you touched on it quickly in the prepared comments, but can you just give us the progress update on the 200-millimeter substrates and manufacturing needs to look into next year?.

Yes. Still on track. What we talked about is qualifying '24 ramp in '25, and we're still on track to exactly that timeline. So no changes there, which is obviously a positive development of our silicon carbide efforts. .

Ladies and gentlemen, this does conclude the Q&A portion of today's presentation. I'd now like to turn the call back over to Hassane El-Khoury, President and CEO, for any closing remarks. .

Thanks to the tremendous effort of our global teams. We've transformed the company, improved our resiliency, and adapted to changing market conditions to deliver sustainable financial results. We remain dedicated to our customers, our financial commitments, and our strategy of enabling the sustainable ecosystem.

Thanks to everyone on the call for joining and supporting onsemi. .

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day..