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ON Semiconductor Corporation, known as onsemi, specializes in providing intelligent power and sensing solutions, primarily for the automotive and industrial markets . The company offers a range of semiconductor products organized into three main segments: Power Solutions Group, Analog and Mixed-Signal Group, and Intelligent Sensing Group . onsemi is strategically focused on high-growth areas such as vehicle electrification and advanced driver-assistance systems (ADAS), and is expanding its silicon carbide (SiC) manufacturing capabilities to meet the increasing demand for high-efficiency power applications .
- Power Solutions Group (PSG) - Offers analog, discrete, module, and integrated semiconductor products, serving as the largest revenue contributor by providing essential components for power management and conversion .
- Analog and Mixed-Signal Group (AMG) - Develops a variety of analog and mixed-signal semiconductor products, previously known as the Advanced Solutions Group, supporting a wide range of applications in the automotive and industrial sectors .
- Intelligent Sensing Group (ISG) - Focuses on CMOS image sensors and related technologies, catering to the growing needs for advanced sensing solutions in various applications .
What went well
- ON Semiconductor is gaining a competitive advantage in the AI data center market by offering a comprehensive portfolio of silicon carbide, silicon, and GaN technologies, optimizing efficiency in the power tree, which is crucial for hyperscalers seeking to reduce utility costs associated with even 1% efficiency loss.
- The company is strategically preparing for a recovery in demand by strengthening customer relationships and focusing on new design wins, particularly in the automotive sector where design activity remains strong, indicating continued commitment to electrification and long-term growth.
- With major capital investments in silicon carbide production and the East Fishkill fab now behind them, ON Semiconductor is well-positioned to grow capacity and revenue with reduced capital expenditure, enhancing free cash flow and potential for margin expansion.
What went wrong
- Excess inventory and lackluster end demand persist, with customers unsure when demand will recover; interest rates could be impacting consumer confidence and spending.
- Silicon carbide market growth is slowing and flattening, raising potential risks associated with ON's bridge inventory and possible impact on pricing and obsolescence.
- Market share in China's 800-volt EV market appears to have decreased from approaching 60% to 50%, which may indicate reduced expectations in share gains.
Q&A Summary
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SiC Business Outlook
Q: Is SiC weakness cyclical or secular?
A: Management believes the weakness is cyclical, not secular. The long-term trend for electrification and EV adoption remains unchanged. Designs expected to ramp did go into production but didn't reach anticipated levels due to short-term demand issues. They expect continued adoption of EVs in China, followed by the U.S. and Europe. -
Margin Targets
Q: Can you maintain the 45% margin floor and 53% peak?
A: Yes, they believe they can hold the mid-40% margin floor. Utilization is at about 65%, historically low. They're optimizing the manufacturing footprint, focusing on cost reductions, and at current levels, they can maintain margins. -
Capital Intensity and CapEx
Q: Has anything changed structurally in your manufacturing footprint with lower CapEx?
A: CapEx target is now 5% of revenue, down from 11%. Manufacturing footprint optimization has exceeded expectations. No structural changes; moving into maintenance capital. SiC capacity will increase through low CapEx conversion from 6-inch to 8-inch wafers, boosting output without new investments. -
Distribution Inventory Levels
Q: Why are you expanding distribution inventory despite softer macro?
A: They're expanding distribution inventory to grow mass market customers, a high-margin business. Mass market customer count is up 15% year-over-year. They monitor inventory closely to avoid overhang, with strategic products placed in the channel and a tight process to manage FIFO levels. -
China EV Market
Q: How is your positioning in China EV market affecting growth?
A: Growth in auto and SiC was driven by China, with share gains in key customers. They're in 800-volt platforms now in vehicles, ramping into 2025. Expect strength in China to continue, benefiting from increased penetration and market share. -
East Fishkill Margin Impact
Q: Is East Fishkill still a 100 bps margin headwind?
A: Yes, it's about a 100 basis points dilutive to corporate gross margin, continuing in Q4. Improvement will be linear in 2025, and by year-end, most of that 100 bps impact will be gone as they exit that business for GLOBALFOUNDRIES. -
Data Center Revenue
Q: When will data center revenue ramp up?
A: They already have design wins and early revenue in the data center segment. Expect revenue growth in 2025 as products like the T10 TrenchFET get qualified and customers ramp up. New product introductions will boost their portfolio offered to customers. -
Inventory Targets
Q: Will distribution inventory levels increase further?
A: Their new target range is 9 to 11 weeks of inventory, with 10 weeks being the sweet spot. They don't expect levels to go beyond 11 weeks as they focus on mass market customers and manage inventory tightly. -
Pricing Strategy
Q: How will pricing discussions take place amid macro concerns?
A: They price on value and won't chase the market or engage in low-price competition. They've walked away from business that doesn't meet their margin targets. Focused on reaching a 53% margin model by creating differentiated products that hold value and avoid frequent pricing negotiations. -
SiC Market Penetration
Q: How will SiC business grow next year?
A: They expect SiC business to grow in 2025, driven by EV unit growth and increasing SiC penetration, currently around 6%. Penetration is expected to rise, especially with new 800-volt EV models in China using SiC. Long-term view remains unchanged.
Guidance Changes
Quarterly guidance for Q4 2024:
- Revenue: $1.71B to $1.81B (no prior guidance)
- Non-GAAP Gross Margin: 44% to 46% (no prior guidance)
- Utilization: flat to slightly down (no prior guidance)
- Non-GAAP Operating Expenses: $300M to $315M (no prior guidance)
- Non-GAAP Other Income: net benefit of $12M (no prior guidance)
- Non-GAAP Tax Rate: approximately 16% (no prior guidance)
- Non-GAAP Diluted Share Count: approximately 427M shares (no prior guidance)
- Non-GAAP Earnings Per Share (EPS): $0.92 to $1.04 (no prior guidance)
- Capital Expenditures (CapEx): $130M to $170M (no prior guidance)
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Given the current market softness and slowdown in silicon carbide growth, how confident are you in your strategy of building up bridge inventory in silicon carbide substrates, and is there a risk that this inventory could become obsolete or lead to pricing pressure?
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With the expansion of distribution inventory to support mass market customers despite a softer macro environment, how are you mitigating the risk of creating an overhang or potential write-downs if demand does not materialize as expected?
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Considering that you are reducing capital expenditures and capital intensity, are you at risk of underinvesting in future capacity, especially in light of your competitors receiving significant CHIPS Act funding that could enhance their competitive position?
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As you transition from 6-inch to 8-inch silicon carbide wafer production, which increases capacity by 2.5 times, how are you balancing this capacity expansion with the current demand environment to avoid potential overcapacity and its impact on pricing?
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In your efforts to capture share in 800-volt EV systems in China, you previously mentioned approaching 60% share but now state 50%; has there been a change in your competitive positioning or market dynamics affecting your share, and what are you doing to address this?
Q3 2024 Earnings Call (Guidance for Q4 2024)
- Revenue: $1.71 billion to $1.81 billion .
- Non-GAAP Gross Margin: 44% to 46% .
- Non-GAAP Operating Expenses: $300 million to $315 million, including share-based compensation of $31 million .
- Non-GAAP Other Income: Net benefit of $12 million .
- Non-GAAP Tax Rate: Approximately 16% .
- Non-GAAP Diluted Share Count: Approximately 427 million shares .
- Non-GAAP Earnings Per Share: $0.92 to $1.04 .
- Capital Expenditures: $130 million to $170 million .
Q2 2024 Earnings Call (Guidance for Q3 2024)
- Revenue: $1.7 billion to $1.8 billion .
- Non-GAAP Gross Margin: 44.4% to 46.4% .
- Utilization: Mid-60% range .
- Non-GAAP Operating Expenses: $305 million to $320 million, including share-based compensation of $31 million .
- Non-GAAP Other Income: Net benefit of $12 million .
- Non-GAAP Tax Rate: Approximately 16% .
- Non-GAAP Diluted Share Count: Approximately 429 million shares .
- Non-GAAP Earnings Per Share: $0.91 to $1.03 .
- Capital Expenditures: $130 million to $170 million .
Q1 2024 Earnings Call (Guidance for Q2 2024)
- Revenue: $1.68 billion to $1.78 billion .
- Non-GAAP Gross Margin: 44.2% to 46.2% .
- Non-GAAP Operating Expenses: $313 million to $328 million, including share-based compensation of $28.6 million .
- Non-GAAP Other Income: Net benefit of $12 million .
- Non-GAAP Tax Rate: Approximately 16% .
- Non-GAAP Diluted Share Count: Approximately 432 million shares .
- Non-GAAP Earnings Per Share: $0.86 to $0.98 .
- Capital Expenditures: $180 million to $220 million .
Q4 2023 Earnings Call (Guidance for Q1 2024)
- Revenue: $1.8 billion to $1.9 billion .
- Non-GAAP Gross Margin: 44.5% to 46.5% .
- Non-GAAP Operating Expenses: $305 million to $320 million, including share-based compensation of $27 million .
- Non-GAAP Other Income: Net benefit of $8 million .
- Non-GAAP Tax Rate: 15.5% to 16.5% .
- Non-GAAP Diluted Share Count: Approximately 433 million shares .
- Non-GAAP Earnings Per Share: $0.98 to $1.10 .
- Capital Expenditures: $310 million to $340 million .
This comprehensive view includes all the metrics guided for in each of the last four earnings calls.
Competitors mentioned in the company's latest 10K filing.
- Infineon Technologies AG (Infineon)
- STMicroelectronics N.V. (STMicroelectronics)
- Wolfspeed Inc.
- Texas Instruments Incorporated (TI)
- Nexperia BV
- Analog Devices, Inc.
- Renesas Electronics Corporation
- Monolithic Power Systems Inc.
- NXP Semiconductors N.V. (NXP)
- Sony Semiconductor Manufacturing Corporation
- Samsung Electronics Co., Ltd.
- Omnivision Technologies Inc.
Recent developments and announcements about ON.
Legal & Compliance
- United Silicon Carbide, Inc.
- Qorvo US, Inc.
- Semiconductor Components Industries, LLC
- ON Semiconductor Corporation
- The agreement includes provisions for indemnification by both the parent and purchaser, which could have financial implications depending on future claims or disputes .
- There are specific conditions to close the transaction, which, if unmet, could delay or prevent the completion of the sale, impacting operational plans .
- The agreement also addresses tax matters, which could affect the financial outcomes post-closing .
Legal Proceedings
The legal matter involves a Stock Purchase Agreement dated December 9, 2024, between United Silicon Carbide, Inc., Qorvo US, Inc., Semiconductor Components Industries, LLC, and ON Semiconductor Corporation. The agreement outlines the sale and purchase of transferred shares, with ON Semiconductor Corporation involved solely for specific articles and sections .
Key Parties Involved:
Nature of the Proceedings: The agreement details the sale and purchase of shares, including the closing purchase price, post-closing adjustments, and representations and warranties regarding the parent and transferred companies. It also includes covenants related to the conduct of business, employee matters, and tax matters .
Potential Financial or Operational Consequences:
Overall, the agreement is structured to facilitate the transfer of shares while managing potential risks through detailed covenants and indemnification clauses.