Q2 2024 Summary
Published Jan 10, 2025, 5:10 PM UTC- The company is seeing stabilization and recovery in China, particularly in both automotive and industrial markets, which is leading to growth and is expected to be sustainable. , ,
- ON Semiconductor has secured a significant win with Volkswagen Group, becoming the primary supplier for their silicon carbide power solutions across all VW brands, indicating strong demand and market confidence in their technology. ,
- The company expects to outgrow the silicon carbide market by 2x in 2024, driven by strong design wins and growth in units, which supports their revenue growth and positions them well for future opportunities. ,
- The company's automotive revenue declined 11% sequentially, which was worse than expected and lagged behind some peers, indicating potential market share loss or weakening demand in this key segment.
- Inventory digestion is ongoing, and the company acknowledges they are shipping below end demand, suggesting that revenue may remain under pressure until inventories are cleared, which could take more time.
- The company is not providing quarterly details on its silicon carbide (SiC) business, citing revenue lumpiness, which may indicate uncertainty or volatility in this important growth area.
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Silicon Carbide Outlook Amid EV Demand Softness
Q: How does EV demand softness impact your SiC outlook?
A: Despite some short-term lumpiness in battery electric vehicle (BEV) demand, we expect the BEV market to remain healthy. Long-term, BEV and silicon carbide (SiC) penetration is still in the mid-single digits. We reiterate our 2024 SiC growth at 2x the market, and our SiC design wins support this trajectory. In China, our SiC penetration is about 60%, ahead of the rest of the world. -
Gross Margin Drivers and Outlook
Q: Can you walk us through the evolution of gross margin drivers?
A: Utilization is the key driver in the short term; every point of utilization adds 15 to 20 basis points to gross margin. East Fishkill operations are about 100 basis points dilutive and will continue through the rest of this year but will moderate in 2025. Fab divestitures will start to benefit us as demand picks up, contributing $160 million in fixed cost savings. Additionally, ramping new products at accretive gross margins will help us reach our long-term gross margin target of 53%. -
Revenue Recovery and L-Shaped Outlook
Q: Is your revenue expected to remain flat due to inventory digestion?
A: Yes, we anticipate an L-shaped recovery, meaning our revenue will be relatively flat in the near term. We believe we are still undershipping natural demand due to inventory digestion, particularly at our direct customers. As inventory levels normalize, our revenue should recover to align with end demand. -
Volkswagen Win and SiC Wafer Quality
Q: Does the VW win address SiC wafer quality concerns?
A: Absolutely. Any rumors about yields and quality are unfounded. A company like Volkswagen Group doesn't award contracts on a whim; they conduct thorough audits and reviews. We are the primary supplier for VW Group's SiC needs, covering the breadth of their electrification platforms. -
China Market Stabilization
Q: Are you seeing stabilization or improvement in China?
A: Yes, we're seeing China stabilizing and growth resuming in both automotive and industrial sectors. The demand pickup is broad-based and driven by end-market demand rather than specific government incentives. Our exposure to China allows us to benefit quickly from this recovery. -
Inventory Levels and Distribution Management
Q: How are you managing inventory levels in the channel?
A: We exited the quarter at 8.9 weeks of inventory, as expected. We plan to maintain this level, focusing on replenishing the mass market while managing it tightly due to market uncertainty. Historically, inventory levels were 11 to 13 weeks, so we're significantly below past levels. The increase is strategic, aiming to serve a growing number of mass market customers. -
Long-Term Supply Agreements and Pricing Stability
Q: Have there been changes to LTSAs or pricing assumptions?
A: LTSAs are stable, with a lifetime value of $14.7 billion, and about $4.4 billion shippable over the next 12 months. Pricing remains stable within these agreements, and we haven't experienced any significant pushouts or renegotiations. -
Automotive Business Decline and Outlook
Q: What caused the decline in automotive revenue, and what's the outlook?
A: The automotive business declined due to timing and inventory burn at customers, but it played out as we expected. We anticipate automotive and industrial revenues to be flat to slightly up in the third quarter. Inventory digestion is ongoing, but as demand accelerates, inventory burn will accelerate as well. -
Data Center and AI Market Opportunities
Q: Can you size the SiC opportunity in data center and AI markets?
A: While we aren't breaking out the AI market at this level yet, we see significant opportunities as SiC penetrates power stages of AI data centers. At our Analyst Day last year, we projected data center growth at 22% over a multiyear period, and with AI ramping, it could be higher. We'll provide more details as the market becomes more meaningful for us. -
Intelligent Sensing Group Business Outlook
Q: What's the outlook for the ISG business amid recent declines?
A: The ISG business is closely tied to the automotive market. While we have a strong market share in automotive ADAS, recovery depends on market demand. Content uplift through higher ASPs and increased penetration rates will boost revenue. Additionally, we're expanding into the industrial market with new products and leveraging recent acquisitions to enhance our technology leadership.