ON Semiconductor(ON) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Q3 revenue increased 2% sequentially to $1.76 billion, driven by silicon carbide growth [21] - GAAP gross margin was 45.4%, and non-GAAP gross margin was 45.5%, up 20 basis points from Q2 [24] - Free cash flow increased 41% sequentially to$ 294 million, representing 17% of revenue [29] - Automotive revenue was $951 million, up 5% sequentially, driven by silicon carbide and ADAS image sensors [21] - Industrial revenue was$ 440 million, down 6% sequentially and 29% year-over-year [22] - Intelligent Sensing Group (ISG) revenue grew 11% quarter-over-quarter to $279 million, driven by ADAS [23] Business Line Data and Key Metrics - Silicon carbide revenue increased sequentially, driven by utility-scale solar and share gains in China BEVs [8] - Industrial SiC customer count increased 17% over the last four quarters compared to the previous four quarters [12] - Intelligent sensing business grew 11% quarter-over-quarter, with strength in ADAS and industrial imaging [14] - Power Solutions Group (PSG) revenue was$ 829 million, down 1% quarter-over-quarter and 23% year-over-year [23] - Analog and Mixed Signal Group (AMG) revenue was $654 million, up 1% quarter-over-quarter but down 16% year-over-year [23] Market Data and Key Metrics - China and Japan are recovering, with strengths in XEVs, while North America and Europe remain soft in automotive and industrial [7] - Global solar installations are expected to reach 552 gigawatts in 2024, a 27% year-on-year increase [12] - Global energy storage system installations are expected to reach 178 gigawatts, with a year-over-year increase of 69% [12] - The company expects to exit the year with approximately 50% of China's best silicon carbide market share [11] Company Strategy and Industry Competition - The company is focused on high-growth megatrends, including automotive, industrial, and AI data centers [7] - The company is vertically integrating its silicon carbide strategy, focusing on advanced packaging solutions for system optimization [10] - The company is investing in renewable energy trends, with leading performance in high-density IGBT and hybrid SiC modules [13] - The company is expanding its intelligent sensing portfolio, with 10 new image sensors released over the last year [14] Management Commentary on Operating Environment and Future Outlook - The demand environment remains muted, with ongoing inventory digestion and slow end-demand [6] - The company expects low to mid-single-digit growth in silicon carbide revenue over 2023 [9] - The company is cautious about the near-term macro environment but remains committed to its long-term strategy [32] - The company expects Q4 revenue to be in the range of$ 1.71 billion to $1.81 billion, with non-GAAP gross margin between 44% and 46% [31] Other Important Information - The company has qualified its 200-millimeter M3e silicon carbide ahead of schedule, with 8-inch wafers running in the fab at 350-micron thickness [9] - The company has received trusted foundry accreditation at its East Fishkill fab, allowing expansion in the aerospace and defense business [22] - The company plans to introduce a new family of image sensors in 2025 to further broaden its offering [15] Q&A Session Summary Question: Silicon Carbide Business Growth - The company believes the current weakness in silicon carbide is cyclical, not secular, and expects long-term growth in electrification and EV adoption [36][37] Question: Gross Margin Stability - The company expects to maintain gross margins in the mid-40% range, with utilization remaining flat at 65% [39] Question: Pricing Discussions with Customers - The company will focus on pricing based on value rather than market competition, avoiding low-margin business [42] Question: Distribution Inventory Expansion - The company is expanding distribution inventory to support mass-market customers, which has grown 15% year-over-year [43][46] Question: Silicon Carbide Customer Mix - The mix between automotive and industrial silicon carbide remains around 80%-20%, with diversification in China and Europe [47][48] Question: Capital Intensity and Depreciation - The company has lowered its long-term capital intensity target to mid-single digits, with depreciation expected to remain stable in 2025 [50][54] Question: AI Data Center Opportunities - The company expects the power delivery market for AI servers to double from$ 2.2 billion in 2024 to $4.4 billion by 2028 [16][17] Question: China Auto Market - The company sees strength in China's EV market, with silicon carbide driving growth, and expects continued share gains in 2025 [60][73] Question: CHIPS Act Funding - The company is not pursuing CHIPS Act funding for unnecessary capacity expansion but welcomes support for strategic investments [108]