ON Semiconductor Corp Q4 2024 Earnings Call Transcript

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

Question: Ross Seymore - Deutsche Bank Securities Inc. - Analyst : First question, I wanted to get into the structural versus cyclical side. You guys have been conservative for quite some time on a cyclical basis, probably one of the first ones. But yes, the magnitude of this drop is very, very significant. Hassane, I know you talked about late in the quarter, things kind of fell apart from a demand perspective. But how much of this do you believe to be ON specific versus the end market? And just from a revenue basis, are you at all concerned that the structural end market or product portfolio needs larger adjustment and isn't going to be as resilient as you hoped? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 2:00PM, ON.OQ - Q4 2024 ON Semiconductor Corp Earnings Call

Question: Ross Seymore - Deutsche Bank Securities Inc. - Analyst : And then, I guess, along the lines of the sizing side of things, you talked about some of the structural actions you are going to take on the cost front as soon as 2Q and then some of the benefits potentially on the COGS side coming into the back half. Any sort of color as far as putting magnitude around those? Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer No, not at this point. We're still working on the plans. We'll give updates throughout the quarter as we solidify those plans. So expect some updates as we go.

Question: Vivek Arya - BofA Global Research (US) - Analyst : Just first, kind of few clarifications. So Q1, what are you expecting for the sequential segment trends in automotive, industrial and other segment? And I think you mentioned something unfavorable in the mix. And then any early look at Q2 seasonality? Because Hassane, what everyone is obviously trying to guess is what is the path of recovery for ON from here. Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer Yes. So by end market, Vivek, automotive is going to be down the most. We think that's going to be probably 25% or more down sequentially. When you look at industrial and other, we think it's going to be down mid- to high single digit sequentially. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 2:00PM, ON.OQ - Q4 2024 ON Semiconductor Corp Earnings Call

Question: Vivek Arya - BofA Global Research (US) - Analyst : And for my follow-up, Hassane, so if I look at Q1 automotive, I think you mentioned down 25%, so let's say, $70-ish million or so. It has sort of reset back to mid-'22 levels. But it is still well above the levels we saw forward, right, which were in the $400 million, $500 million quarterly range. What is the right baseline that we should have when we start to think about automotive business for long periods of time? Because we have seen industrial businesses get reset back to much lower levels, but automotive is still above the 2019 level. It's closer to '22 level. So how do you think about what is that right baseline? When was automotive at the right baseline level for us to project it? What have been the effects of LTSAs, pricing, content, EV, silicon carbide, et cetera, that'll help us project what your automotive business can be over the next several years as you start to normalize?

Question: Toshiya Hari - Goldman Sachs & Company, Inc. - Analyst : Hassane, I wanted to go back to the automotive outlook for Q1 down, call it, 25% sequentially. This outlook is much worse than many of your peers. I'm just curious, what's driving the delta there? Is it pricing? Is there a noncore component within automotive? Any additional context or color there would be really helpful. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 2:00PM, ON.OQ - Q4 2024 ON Semiconductor Corp Earnings Call

Question: Toshiya Hari - Goldman Sachs & Company, Inc. - Analyst : That's helpful. And maybe one for Thad. You talked about rationalizing your portfolio. You talked about reviewing your manufacturing footprint. As you draw up your forward strategy and your plans, is the aspiration to kind of hold on to the 2027 model that you guys shared with us a couple of years ago, i.e., gross margins of 53%, operating margins of 40%? Or I mean I realize the backdrop is very, very different at this point. So should we think about -- should we assume you guys are looking at sort of a different or updated long-term model at this point? Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer No. Look, we still remain committed to that 53% target. If you look at the gross margin, in the short term, it's all impacted by utilization, right? I talked about the moving pieces, but utilization is the largest headwind that we have right now. Assuming the market recovers and we continue to execute on our Fab Right, we will rightsize our manufacturing to fit the size of the company here. And we don't need that top line revenue that was in that original target, but we do remain committed to that 53% gross margin target. If you look at the gross margin actions that we're taking now, it's primarily a lot of noncash actions, if you think about it. And it will generate strong free cash flow as we think about this year and in '26. And then, obviously, as we go into '27 and hit that target, we believe we'll hit that. But even if you look at '25 from a free cash flow standpoint, we believe we're going to hit that target model of free cash flow of 25% to 30% in 2025 for the year. We achieved it in Q4 of '24 with a 25% free cash flow margin, and we believe we'll continue to generate strong free cash flow going forward.

Question: Chris Danely - Citigroup Inc. - Analyst : I guess for the rest of the year, how would you expect the auto versus the industrial growth to trend? Do you expect auto to recover after Q1, or no visibility at all?

Question: Chris Danely - Citigroup Inc. - Analyst : That's fair. And then a question on silicon carbide. With this decline, are you guys reassessing your long-term targets on silicon carbide as far as growth or margin scale?

Question: Blayne Curtis - Jefferies LLC - Analyst : I had two. I'm just kind of curious, I wanted to go back to the nonstrategic business. You said $350 million or $400 million. Just how much of that -- in terms of the guidance for March, are you planning on some of that delta coming out in March? Or is that something that would be on top of what you're seeing in March and would come out further in the year if you make those decisions? Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer No. Look, we think that if that business -- if we do lose up business because of pricing, it will happen over a multi-quarter period. So it's not all baked into Q1. It's further out into the year. And like I said, that will really be market-dependent adopt. We'll keep that business. It's good margin, like it has been historically. But if the pricing continues to drop, we'll just let it wither away over time.

Question: Josh Buchalter - TD Cowen (Research) - Analyst : I also wanted to ask about the first quarter gross margin. So you walked through the 100 basis points of unfavorable mix and then the new rule of thumb, adding probably 100 to 150 basis points headwind as well. Can you sort of, I guess, provide more details on the remaining part of the sequential decline? And also, any more details you can give on what specifically is driving the unfavorable mix, given it sounds like you're walking away from business as is? Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer Yes. So starting with the gross margin, if you do the walk from Q4 to the midpoint of our guidance in Q1, and I said this in our prepared statement here, the half of it -- roughly half of that decline is a calculation change in the under-absorption. So if you think about the under-absorption on a lower revenue number, that's driving half of that margin delta right there. There's 100 basis points from the unfavorable product mix. And then there's -- you do the math, it's roughly about 150 basis points from the underutilization as we drop utilization down further. The mix is just purely a price/mix. If you think about the long tail of customers that we talk about and some of that -- some of these businesses, that's what is remaining soft. Some of this industrial is soft. So it's purely just a product mix unfavorability kind of in the short term here. We believe that over the long term, that will come back as well. So if you think about -- whenever there's a recovery and revenue comes back, you will get that -- half of that delta just with the revenue increase because it's a pure calculation. Does that make sense, Josh?

Question: Vijay Rakesh - Mizuho Securities USA, LLC - Analyst : Just wondering, when you look at the fab utilization, how that should play out over the next couple of quarters, I guess, after 1Q? Like do you see that flat and maybe second half picking up? Or seeing there's some trend? Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer Well, look, utilization is all going to be demand-driven, right? We said that in Q1, our utilization will drop to the mid-50% range from 59% here in Q4. So we're already taken that action. For what we can see right now, we'll kind of be running in that range, plus or minus, until we see demand recovery. Once we see the demand recovering, utilization will go up, and then there's the natural latency until you see gross margin improvement. That will happen when we see the demand -- the market recover.

Question: Christopher Rolland - Susquehanna Financial Group, LLLP - Analyst : Some others look like they're starting to see stabilization, and so I'm wondering about the delta there. Could this have been related to your emphasis on LTSAs? And with auto down, let's say, 25% quarter-over-quarter, I wouldn't imagine everyone is complying to LTSAs just given that drop. So do you think part of this kind of delayed responses around LTSAs? And then secondly, should we expect them to be renegotiated moving forward here?

Question: Christopher Rolland - Susquehanna Financial Group, LLLP - Analyst : Excellent. And there was not a lot of discussion around image sensor. I'm just wondering how much of that auto weakness is related to image sensor? Is there anything to note in terms of pricing or competition or internalization in China? How would you classify image sensor overall?

Question: Gary Mobley - Loop Capital Markets, LLC - Analyst : You were -- you're clear on your messaging with respect to noncore products and the pricing pressures in that particular product group. But maybe if you could talk about pricing trends for core products, I presume you just went through annual price negotiations. Perhaps you can give us an update on pricing trends there for the vast majority of your business.

Question: Gary Mobley - Loop Capital Markets, LLC - Analyst : Okay. Just my follow-up on about silicon carbide for sourcing. The market overall for devices clearly underperformed expectations in 2024, and there seems to be more adequate supply of raw wafers coming from China. So any update on your internal sourcing of raw and epi wafers, whether that be internal or external?

Question: Joe Quatrochi - Wells Fargo Securities, LLC - Analyst : On the $350 million to $400 million price-sensitive revenue that you're thinking this year, are there any end markets or geographies in particular that we should think about as being more price-sensitive or more aggressive there?

Question: Joe Quatrochi - Wells Fargo Securities, LLC - Analyst : Got it. That's helpful. And then I think in your deck, you talked about AI data center revenue growing more than 40% in 2024. Just wondering how you're thinking about the growth opportunity in '25 with the potential acceleration from the JFET business. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 10, 2025 / 2:00PM, ON.OQ - Q4 2024 ON Semiconductor Corp Earnings Call

Question: Tore Svanberg - Stifel, Nicolaus & Company, Inc. - Analyst : I had a question about gross margin and when the recovery comes. Should we still think about the 20 to 25 basis points in improvement per utilization -- well, per increase in utilization? And Thad, I assume that that's sort of a comment prior to some of these site changes that you are considering. Thad Trent - ON Semiconductor Corp - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Treasurer Yes. That's right. If you think about the 20 to 25 is from here to low 60, right? After that, go back to the 15 to 20 basis points, right, as you just get the scale there. So the change there was the fact that our fixed costs are becoming a larger percent of the overall factory cost. You can only cut so much variable cost, right? And so we're kind of getting down when you're -- when you're stepping down into the 50% range, you're kind of hitting up against that. So you'll get to a point where you get -- you start to get some scale and then we go back to the 15 to 20 basis points, similar to the numbers we've given you in the past. But yes, that is all based on current capacity.

Question: Harsh Kumar - Piper Sandler & Co. - Analyst : Hassane and Thad, I had two qualitative ones for you. I think earlier you mentioned you're still undershipping relative to your true demand. So I was curious if you could give us an idea starting off with the guide that you gave for the March quarter, if you were just to kind of give us an idea of what your true demand estimate is? In other words, how much are you undershipping or what is a table to take for your business, if you were not to undership?

Question: Harsh Kumar - Piper Sandler & Co. - Analyst : I got it. Okay. And then I wanted to ask you about one of your neighboring companies and based in Arizona also. They supposedly had some of the worst inventory problems, and they've guideposting as bad as perhaps yours, I mean, neither the automotive nor the total guide. And I was curious what the puts -- I'm not asking you to comment on their business, but I'm trying to understand -- I guess, what I'm trying to say is, are you kind of pad for some level of decline that you're building in based on your judgment? Or are you strictly giving us a guide based on what you're seeing?