ON Semiconductor Corp Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ross Seymore - Deutsche Bank AG - Analyst : I guess the first one is on the silicon carbide business. I know it's not the hugest part of your total revenues, but strategically, it's incredibly important. When Hassane you talked about that being up low to mid-single digits, do you believe that is just evidence of a cyclical weakness? Or has something started to secularly change as people have gotten a little more concerned on not only the pace of EV growth, but competition coming in and commoditization and those sorts of dynamics?

Question: Ross Seymore - Deutsche Bank AG - Analyst : Thanks for that. And I guess for my follow-up one for Thad on the gross margin side of things. Has anything changed in your ability to hold the 45%? Obviously, in your quarter and guide, it didn't. But as you look forward, you said utilization is going to be flat to down on one hand. You also talked about demand continuing to be weak. But the CapEx is also coming down. So lots of moving parts, it seems. Is the net conclusion anything different than what you've said before on both the 45% floor and the 53% peak?

Question: Vivek Arya - BofA Global Research - Analyst : My question is, if we look forward, Q1 is when you tend to have some of these pricing discussions with your customers. And I imagine at some point, right, some of the benefits of long-term supply agreements tail off. So Hassane, I'm curious, what's kind of your early preview on how these pricing discussions will take place? Just how we should think about Q1 seasonality given all the comments you made about the macro environment? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 1:00PM, ON.OQ - Q3 2024 ON Semiconductor Corp Earnings Call

Question: Vivek Arya - BofA Global Research - Analyst : Thank you. And for my follow-up, if the macro environment is softer, why is ON deciding to expand distribution inventory? I thought the prior thinking was that you would keep inventory, I think, around nine weeks or below nine weeks, but it is going up in Q3 and the assumption is that it goes up in Q4. So what's the thinking and the trend behind that? And can that create an overhang as we go into the first half of next year?

Question: Toshiya Hari - Goldman Sachs Group, Inc. - Analyst : Hassane, I guess my first question is on the silicon carbide business. I'm curious what your application mix or customer mix looks like today and going into 2025 versus what it looked like a year ago? I think a year ago, it was something like 80% auto, 20% industrial. And then within auto, you were very over-indexed to one North American customer. I think on prior calls, you had talked about that mix broadening out to companies in Europe and customers in China, particularly on the automotive side. So I'm curious what that looks like today, and more importantly, how it broadens out into 2025?

Question: Toshiya Hari - Goldman Sachs Group, Inc. - Analyst : Got it. Thank you. And then as my follow-up on capital intensity -- and maybe this one is for Thad. So medium to long term, your target is now mid-single digits percentage of revenue versus 11%, which I think is a pretty big change. You talked about some of the reasons and capacity expansion being behind you and you guys being able to identify some productivity gains. But has there been any changes in how you think about, for example, in SiC, internal substrates versus external silicon broadly, foundry versus internal, whether it be wafer processing or packaging and test? Any structural changes to how you think about your footprint?

Question: Chris Danely - Citigroup, Inc. - Analyst : Hey, guys. I think that's me, Chris Danely. Maybe I should put on my Sopranos accent again. A couple of longer-term questions. So Thad, you mentioned that CapEx is peaking and going down. Can you just talk about like depreciation for '25 versus '24? And then what you expect depreciation to do for the next several years as it tails off?

Question: Chris Danely - Citigroup, Inc. - Analyst : Wouldn't depreciation go down with the lower CapEx?

Question: Chris Danely - Citigroup, Inc. - Analyst : Okay. Great. And then for my follow-up, another longer-term question on just silicon carbide. So if the market is -- if growth is slowing and the market is flattening out a little bit, what about all this bridge inventory you guys have? Is there any risk of like pricing or anything like that? Or how do we get rid of that bridge inventory? And then where do we expect that to go over the next four quarters? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 1:00PM, ON.OQ - Q3 2024 ON Semiconductor Corp Earnings Call

Question: Blayne Curtis - Jefferies - Analyst : I just want to drill into the auto segment. I thought I heard you say that the growth sequentially in auto was driven by silicon carbide. I just wanted to kind of double click on the -- what you're seeing by geography? I mean there's been this expectation that China is going to gain share in EVs. Can you just talk about what drove -- what geography drove that strength? And to the extent that China EVs do take share globally, your positioning there. I saw you talked about 50% share, but those are in design. If it happens now, I'm just kind of curious if that's good or bad for you?

Question: Blayne Curtis - Jefferies - Analyst : And I was just curious, you mentioned the data center. Can you just wrap some maybe timing around that in terms of when you could see kind of first revenue? And in terms of -- you said you've been working on it for a long time here. What's the right time frame to think about getting design wins for that?

Question: Quinn Bolton - Needham & Company LLC - Analyst : Hassane, I just wanted to follow up on the AI data center wins that you just mentioned. I think you said you had wins at three of the four hyperscalers for multi-phase controllers and individual voltage [rigs]. I just wondered, one, clarify? And two, if that's the case, is that more for CPU power? Or does it also include GPU or AI accelerator? And then I've got a follow-up.

Question: Quinn Bolton - Needham & Company LLC - Analyst : Got it. And then for Thad, I think East Fishkill was expected to be about a 100-basis point headwind to margins Q3, Q4, and then sort of taper off into next year? Just want to make sure that's still the right way to think about the East Fishkill overhang?

Question: Joshua Buchalter - TD Cowen - Analyst : Sorry for belaboring silicon carbide, but you're probably used to it by now. I wanted to sort of ask about the guidance for low single-digit growth again? Can you -- it was helpful walking through some of the auto versus non-auto and then commentary on your lead customer. Can you give us any details on what each of those buckets are growing? Because I'm trying to reconcile the ongoing share gains in China with what looks like a stabilized outlook at your lead customer with the low single-digit growth. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 1:00PM, ON.OQ - Q3 2024 ON Semiconductor Corp Earnings Call

Question: Joshua Buchalter - TD Cowen - Analyst : Got it. And then following up kind on that, one of your large peers talked about their China auto business up 20% sequentially this quarter. I'm guessing you won't give us a metric there, but maybe you could talk about what you're seeing in that vertical specifically? Because since the earnings, we've gotten a little bit of concern that there might be some pull-in or idiosyncrasies going on with that market. So I'd be curious to hear you expand on what you're seeing in the China auto market a bit. Thank you.

Question: Christopher Rolland - Susquehanna Financial Group LLP - Analyst : I guess my first is can you break down automotive geographically for us just into some larger buckets between Europe, Japan and China for us?

Question: Christopher Rolland - Susquehanna Financial Group LLP - Analyst : I mean, just as a percent of revenue, sorry.

Question: Christopher Rolland - Susquehanna Financial Group LLP - Analyst : Okay. I was just talking kind of larger percentages roughly, but if you can't provide that, that's okay. I guess for my second question, guys like TI are going back to consumer customers, broader markets. It sounds like with your distribution comments, you might be a little more warm to these markets. I'm not sure. But could you talk about how you're approaching that other bucket?

Question: Christopher Rolland - Susquehanna Financial Group LLP - Analyst : Price, but are you a little more open? Yes.

Question: Vijay Rakesh - Mizuho Securities USA - Analyst : Let me ask a question. Hassane and Thad, just a quick question on the inventory side. When you look at disti and OEM inventory, can you talk to where those levels would be exhibiting the December versus what normal levels are? And then a follow-up.

Question: Vijay Rakesh - Mizuho Securities USA - Analyst : Got it. And then last question. When you look at -- and good to hear your 200 millimeters is ramping well. But as you -- let's say, looking out, exiting 2025, let's say, what would be a mix of internal 200-millimeter silicon carbide?

Question: Vijay Rakesh - Mizuho Securities USA - Analyst : But it's a 17 internal or --?

Question: Tore Svanberg - Stifel, Nicolaus & Company, Incorporated - Analyst : Yes. I had a question on the share gain in China EV for 800 volt. I think last quarter, I think you said approaching 60%, I think now you said 50%. Is

Question: Tore Svanberg - Stifel, Nicolaus & Company, Incorporated - Analyst : Perfect. I just wanted to clarify that. Second question is on the mass market and the staging of inventory. So how far will you go? Is 10 weeks sort of the highest we should expect over the next few quarters? Or would it go beyond that as you continue that staging?

Question: Chris Caso - Wolfe Research, LLC - Analyst : The first question is on the capital intensity that you mentioned moving lower. I guess, is there anything structural in that we should be contemplating? Or is this just a function of where utilization is right now and the fact that you can grow revenue into the existing capacity? And perhaps with that, given where the utilization levels are right now, is there a particular sort of revenue capacity that you could grow into without increasing the CapEx very much?

Question: Chris Caso - Wolfe Research, LLC - Analyst : Got it. Thank you. I guess as a follow-up, I'll ask you another question on silicon carbide. And interested in your view on where this market goes into next year. And I recognize that where volume goes is a tough question at this point. But the other part of silicon carbide is penetration because silicon carbide, the penetration rate is still relatively low. I think you've got some visibility there on design wins. So I guess the first part of the question is, where do you think you can grow this business next year? And then secondly, how much of that growth potential growth comes from penetration versus just EV units?

Question: Jed Dorsheimer - William Blair & Company L.L.C. - Analyst : I guess first question, Hassane, I was wondering if you might be able to elaborate on the value proposition that your customers are asking you about in the power tree data center specifically? Do you see it -- how does that relate to the efficiency and the shift to modules in EVs? And what gives you confidence that silicon carbide versus gallium nitride is going to be the solution there? And then I have a follow-up. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 1:00PM, ON.OQ - Q3 2024 ON Semiconductor Corp Earnings Call

Question: Harsh Kumar - Piper Sandler & Co. - Analyst : Saw a good job controlling what you can control in this tough environment. Thad, I had 1 for you. Your guiding revenue as sort of flattish. Should I assume the mix between the 2 key end markets, automotive and industrial, to be kind of the same flattish, just basically what it was last quarter? Or is there some puts and takes that I can think about?

Question: Harsh Kumar - Piper Sandler & Co. - Analyst : Great. Thank you for that colour. And then maybe one for Hassane. Hassane, when you talk to -- I'm curious, I want to get some visibility on what kind of conversations you have with your customers. It seems like there is excess inventory. It seems like there's lackluster end demand, seems like it's both. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 28, 2024 / 1:00PM, ON.OQ - Q3 2024 ON Semiconductor Corp Earnings Call So when you talk to your customers, when do they envision a turn to happen or they simply don't know? And is interest rate a factor here at all as it starts to kick in into the economy? And then my last part of the question, separate, was one of your competitors got basically a lot of CHIP Act money, much more than I would have thought. I was curious where you guys stand in that spectrum?