Release Date: October 28, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- ON Semiconductor Corp (ON, Financial) reported revenue, gross margin, and earnings per share above the midpoint of their guidance, demonstrating strong execution and operational excellence.
- The company saw sequential growth in silicon carbide revenue, driven by utility-scale solar and share gains in China's battery electric vehicles (BEVs).
- ON Semiconductor Corp (ON) has qualified its 200-millimeter M3 silicon carbide ahead of schedule, with 8-inch wafers running in the fab at 350-micron thickness, showing strong technological advancement.
- The company's Intelligent Sensing business grew 11% quarter over quarter, with strength in advanced driver-assistance systems (ADAS) and industrial imaging.
- ON Semiconductor Corp (ON) has secured design wins with three of the top four hyperscalers in North America, expected to contribute to revenue in 2025, indicating strong future growth potential in the data center market.
Negative Points
- The demand environment remains muted with ongoing inventory digestion and slow end demand, particularly in the automotive and industrial sectors.
- Automotive revenue was down 18% compared to the third quarter of 2023, despite sequential growth driven by silicon carbide and ADAS image sensors.
- Revenue for the Industrial segment decreased 6% sequentially and 29% year over year, with traditional industrial markets remaining relatively stable but not recovering broadly.
- ON Semiconductor Corp (ON) does not expect meaningful market growth for the full year 2024, with silicon carbide revenue projected to grow only in the low- to mid-single digits over 2023.
- The company is facing challenges with inventory management, as inventory increased by $18 million sequentially, and distribution inventory is expected to increase to 10 weeks plus or minus in Q4.
Q & A Highlights
Q: Can you elaborate on the current state and future outlook of the silicon carbide business, considering the recent growth projections?
A: Hassane El-Khoury, President and CEO, explained that the current low to mid-single-digit growth in silicon carbide is viewed as cyclical rather than a secular change. The long-term trend for electrification and EV growth remains unchanged, with models going into production but not ramping as expected. The strategic importance of silicon carbide in EVs, especially in China, remains significant, and the company is cautiously monitoring demand to avoid inventory build-up.
Q: How is ON Semiconductor managing gross margins amid current market conditions and utilization levels?
A: Thad Trent, CFO, stated that maintaining a mid-40% gross margin is a major initiative, even with utilization at around 65%. The company is optimizing its manufacturing footprint and focusing on cost reduction. While Q4 guidance shows a slight decrease due to mix, the long-term target remains unchanged, with a focus on efficiency and cost management.
Q: What is the strategy behind increasing distribution inventory despite a softer macro environment?
A: Hassane El-Khoury explained that the increase in distribution inventory is part of a strategy to expand the mass market customer base, which is typically high-margin. The company is placing strategic products into the channel to support this growth, ensuring that inventory is moving and not creating an overhang. Thad Trent added that the mass market customer count has increased by 15% year over year, indicating the strategy's success.
Q: Can you provide insights into the application and customer mix for the silicon carbide business, particularly in automotive?
A: Hassane El-Khoury noted that the mix between automotive and industrial applications remains around 80-20, aligning with market trends. The company has seen share gains in China and Europe, with design wins going into production. While end volumes are not as high as expected, the company is well-positioned for future growth as market conditions improve.
Q: How does ON Semiconductor view the potential for growth in the AI data center market?
A: Hassane El-Khoury highlighted the company's opportunity in the AI data center market, expecting the power delivery market for enterprise cloud and AI servers to double by 2028. ON Semiconductor has invested in silicon and silicon carbide portfolios to meet increasing demands, securing design wins with major hyperscalers. Revenue from these efforts is expected to contribute significantly in 2025.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
