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    ON Semiconductor Corp (ON)

    Q1 2024 Summary

    Published Jan 10, 2025, 5:10 PM UTC
    Initial Price$82.77January 1, 2024
    Final Price$73.85April 1, 2024
    Price Change$-8.92
    % Change-10.78%

    What went well

    • ON Semiconductor expects to grow its silicon carbide revenue at twice the market growth in 2024 due to significant design wins and share gains, being designed into more than 2x the sockets deployed this year.
    • ON Semiconductor is successfully expanding into the top 10 leading Chinese OEMs, with design wins in newly announced 900-volt EV platforms set to ramp in the second half of 2024, leveraging their superior product value and vertically integrated supply chain to compete effectively against local competition.
    • ON Semiconductor achieved a 30% quarter-over-quarter increase in design wins, supporting their long-term revenue growth targets of 10%-12%, demonstrating strong demand and customer adoption of their products.

    What went wrong

    • ON Semiconductor observed incremental softness in the automotive market, not only in silicon carbide but also in the broader silicon products segment, indicating potential weaker demand in this key market.
    • The company's utilization rates decreased from 66% to 65%, and they expect to continue running at this lower utilization level until the market recovers, suggesting a slowdown in demand.
    • Lead times decreased slightly to approximately 40 to 41 weeks, which could indicate a loosening supply-demand balance and potential future pricing pressure.

    Q&A Summary

    1. Silicon Carbide (SiC) Business Outlook
      Q: How is the silicon carbide business performing?
      A: SiC sales are expected to grow over 2x the market this year, driven by share gains based on design wins and increased content in vehicles ,. The company is on track with SiC ramps in China and Europe for the second half of the year , ,. Gross margins for SiC are stable now and are expected to improve as utilization increases and internal substrates ramp up, moving towards the target of over 50% gross margins.

    2. Automotive Market Weakness
      Q: Is automotive demand weakening?
      A: Yes, the company observed incremental softness in automotive demand in Q1, which persists into Q2, affecting both silicon carbide and silicon products. However, they are starting to see stabilization and expect this to continue into the second half ,.

    3. China Competition in SiC
      Q: How will you compete with local SiC suppliers in China?
      A: The company competes on product value, offering superior efficiency that saves customers more on battery costs than any savings from cheaper local suppliers ,. They have proven their ability to compete in China by maintaining technology leadership and providing value to customers.

    4. Gross Margin Outlook
      Q: What is the outlook for gross margins?
      A: Gross margins are expected to improve due to increased utilization, which adds 15 to 20 basis points per point of utilization. The East Fishkill fab is about 100 basis points dilutive this year but will become accretive as utilization increases. New products, including SiC, are also accretive to gross margins, supporting progress towards the long-term target of 53% gross margins.

    5. Second Half Recovery
      Q: Is demand expected to recover in the second half?
      A: The company is seeing signs of demand stabilization, particularly in industrial markets, and expects this to continue into the second half ,. They remain cautious but note that requests for order revisions and pushouts have slowed down, indicating potential stabilization.

    6. Inventory Levels and Management
      Q: Are you comfortable with inventory levels?
      A: The company is comfortable with inventory levels, having taken actions to reduce inventories and adjust utilization rates. They expect distributor inventories to increase in the second half to support new product ramps, including SiC. Internal inventory remains disciplined, with strategic increases for capacity transfers.

    7. Customer Diversification in SiC
      Q: How are you diversifying your SiC customer base?
      A: The company expects more diversified SiC revenue in 2024, with ramps in automotive OEMs in Europe and further proliferation in Chinese EVs. They remain on track with long-term supply agreements and expect increased diversification across all geographies.

    8. Pricing Stability
      Q: Are you seeing any pricing pressure?
      A: Pricing remains stable, supported by long-term supply agreements (LTSAs) ,. Discussions with customers focus on volumes rather than pricing, and the company expects this to continue ,.

    9. Data Center and AI Exposure
      Q: How significant is your data center and AI exposure?
      A: The company is investing in cloud and data center markets, introducing new products in power discretes and controllers, with a targeted 22% CAGR over the next five years. While they have made progress, they have not yet sized this exposure publicly.

    10. Design Win Trends
      Q: Are design win trends supporting long-term growth?
      A: Yes, design wins increased 30% quarter-over-quarter, and the trends support the 10% to 12% long-term revenue growth targets. The layering effect of the base business, new products, and new design wins contributes to this growth.

    11. Hybrid Car Opportunity
      Q: What is your opportunity in hybrid cars?
      A: The company sees opportunities in plug-in hybrids and non-BEV electrification, with content of about $350 per vehicle in powertrain compared to $750 in full BEVs, versus $50 in internal combustion engines.

    12. Chinese Revenue Decline
      Q: Why has China revenue declined significantly?
      A: The decline in China revenue is largely due to the company's strategic exits from non-auto and industrial businesses targeting that market. They have offset this with share gains in automotive and industrial markets in China, particularly in silicon carbide and renewable energy.

    13. Image Sensor Business Demand
      Q: How is the image sensor business performing?
      A: Demand for image sensors follows automotive trends. The company is seeing growth in 8-megapixel sensors due to migration to higher-resolution cameras. They maintain both internal manufacturing and foundry partnerships for supply assurance.

    14. 200mm SiC Substrate Progress
      Q: What's the update on 200mm SiC substrates?
      A: The company remains on track to qualify 200mm SiC substrates in 2024 and ramp production in 2025 ,. There are no changes to this timeline, which is a positive development for their SiC efforts.

    15. Capital Return to Investors
      Q: Will elevated cash returns to investors continue?
      A: While the company's policy is to return 50% of free cash flow over the long term, they have returned over 100% in the last 12 months due to opportunistic share repurchases during market dislocations. They will continue to be opportunistic but expect to return to the 50% target over time.

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