ON Semiconductor Corp. Q3 FY2024 earnings call

Management Statement and Operational Highlights:

• Structural changes in the business led to revenue, gross margin, and earnings per share above guidance midpoint despite muted market demand and inventory digestion.
• Market conditions: Muted demand, ongoing inventory digestion, slow end-demand; L-shaped recovery continues with automotive soft, industrial with pockets of growth, and China/Japan recovering while North America/Europe soft.
• Automotive: China driving innovation to 800-volt architectures, silicon carbide well-positioned in China's extended range EVs, aiming for ~50% China's silicon carbide market share by year-end.
• Industrial: Leads in silicon carbide portfolio, growing industrial SiC customer count by 17% over 4 quarters; gaining momentum in renewable energy with high-density F5BP IGBT and hybrid SiC/IGBT modules, designed in with top utility-scale manufacturers.
• Intelligent Sensing: Grew 11% QoQ, with strength in ADAS and industrial imaging; proliferating portfolio with new image sensors, including for medical, biometrics, and robotics; SWIR technology acquired last quarter expands industrial offerings.
• Data Centers: Opportunity in power delivery market for enterprise, cloud, and AI servers; invested in portfolio to meet AI data center demands, securing design wins with top hyperscalers for 2025 revenue.
• Fab Right strategy: Lowering capital intensity to mid-single digits percentage of revenue, focusing on efficiency and cost control, with free cash flow focus on returning to shareholders.

Segment Performance:

• Power Solutions Group (PSG): Revenue $829 million, a decrease of 1% quarter-over-quarter and 23% year-over-year.
• Analog and Mixed Signal Group (AMG): Revenue $654 million, an increase of 1% quarter-over-quarter and a decrease of 16% year-over-year.
• Intelligent Sensing Group (ISG): Revenue $279 million, an 11% increase quarter-over-quarter driven by ADAS, but down 15% year-over-year.
• Automotive: Revenue $951 million, increased 5% sequentially, driven by silicon carbide and ADAS image sensors, but down 18% year-over-year compared to Q3 2023.
• Industrial: Revenue $440 million, down 6% sequentially and 29% year-over-year, with pockets of growth in utility-scale solar and aerospace and defense.
• Silicon Carbide: Sequentially increased, with full year 2024 expected to have low to mid-single digit growth over 2023, driven by utility-scale solar and share gains in China BEVs, but sell-through below forecast in H2 2024.
• Intelligent Sensing: Grew 11% quarter-over-quarter with strength in ADAS and industrial imaging.

Guidance:

• Q4 2024 revenue expected to be in the range of $1.71 billion to $1.81 billion.
• Non-GAAP gross margin expected to be between 44% and 46% with flat to slightly down utilization.
• Non-GAAP operating expenses anticipated to be $300 million to $315 million.
• Non-GAAP earnings per share expected to be in the range of $0.92 to $1.04.
• Capital expenditures expected in the range of $130 million to $170 million.

Risks:

• Market demand uncertainty affecting silicon carbide ramp and sell-through expectations.
• Inventory levels and potential overhang if end-demand doesn't recover as expected.
• Macro-economic factors, including interest rates and consumer confidence, impacting end-demand for automotive and industrial products.

Question and Answer: Q: Ross Seymore of Deutsche Bank asks about whether silicon carbide business weakness is cyclical or secular.

A: Hassane El-Khoury responds it's cyclical, long-term electrification and EV trend unchanged, designs went into production but sell-through not at expected levels.

Q: Vivek Arya of Bank of America Securities inquires about Q1 pricing discussions and distribution inventory strategy.

A: Hassane El-Khoury states focus on pricing on value, not chasing market; Thad Trent explains distribution inventory strategy to expand mass-market customers with high-margin mix.

Q: Toshiya Hari of Goldman Sachs asks about silicon carbide application and customer mix and capital intensity.

A: Hassane El-Khoury discusses broadening application mix and customer diversification; Thad Trent mentions new long-term capital intensity target of mid-single digits.

Q: Chris Danely of Citi asks about depreciation and silicon carbide bridge inventory.

A: Thad Trent talks about depreciation and bridge inventory risk; Hassane El-Khoury states no pricing risk with bridge inventory as it's strategic and holds optionality.

Q: Various questions on silicon carbide, capital intensity, market mix, and data center wins, with responses from Hassane El-Khoury and Thad Trent addressing each aspect.