Q3 2024 Summary
Published Feb 7, 2025, 7:58 PM UTC- 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.
- 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.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q4 2024 | no prior guidance | $1.71B to $1.81B | no prior guidance |
Non-GAAP Gross Margin | Q4 2024 | no prior guidance | 44% to 46% | no prior guidance |
Utilization | Q4 2024 | no prior guidance | flat to slightly down | no prior guidance |
Non-GAAP Operating Expenses | Q4 2024 | no prior guidance | $300M to $315M (incl. $31M SBC) | no prior guidance |
Non-GAAP Other Income | Q4 2024 | no prior guidance | net benefit of $12M | no prior guidance |
Non-GAAP Tax Rate | Q4 2024 | no prior guidance | ~16% | no prior guidance |
Non-GAAP Diluted Share Count | Q4 2024 | no prior guidance | ~427 million | no prior guidance |
Non-GAAP EPS | Q4 2024 | no prior guidance | $0.92 to $1.04 | no prior guidance |
Capital Expenditures | Q4 2024 | no prior guidance | $130 million to $170 million | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Silicon Carbide (SiC) Growth & Market Share | Q2: Expected to outgrow SiC market by 2×. Q1: Also projected 2× growth vs. market. Q4: Reached ~$800M in SiC revenue in 2023, 4× 2022. | Moderate growth with ~50% BEV share in China, underscoring strong automotive traction; continued focus on 8-inch wafer transition. | Consistent topic, near-term growth moderated but long-term SiC outlook remains strong. |
Automotive End Markets | Q2: $907M, down -11% sequentially. Q1: $1B, up 3% YoY. Q4: Softness despite +29% YoY in 2023. | $951M revenue, +5% sequential; down -18% YoY. Strength in China EVs, with SiC driving growth; cautious EV sell-through. | Recurring focus, continuing softness but robust SiC-driven potential in EVs. |
China EV Market | Q2: ~60% share for BEV models with 800V platforms. Q1: Largest EV penetration worldwide, gaining share in top 10 Chinese OEMs. Q4: Strong position with 4 of top 5 OEMs. | Expects ~50% BEV SiC share, major wins in 800V architectures, fueled by share gains. | Consistent mention, slight recalibration from 60% to 50%, remains a key growth driver. |
Data Center & AI | Q2: Targeting ~$2,500 to $9,500 content per rack as power consumption rises. Q1: ~22% CAGR expected in AI/data center segment. Q4: No mention [—]. | Design wins with 3 of top 4 hyperscalers for T10 PowerTrench, Vcore products; revenue ramps in 2025; focus on efficiency in AI servers. | Growing emphasis, broadening power solutions for AI/data centers. |
Inventory Management | Q2: 8.9 weeks, focus on mass market replenishment. Q1: ~8 weeks, building inventory for new ramps. Q4: ~7.2 weeks, bridging for fab transitions. | 9.7 weeks distribution inventory, strategic build for SiC substrate; maintaining 9–11 weeks target, disciplined approach. | Consistent priority, gradually increasing distribution inventory to support new demand. |
Factory Utilization | Q2: 65% utilization, each +1% utilization adds ~15–20 bps to margin. Q1: 65%. Q4: 66%. | At ~65%, historically low yet GAAP gross margin at ~45%; East Fishkill remains a ~100 bps headwind. | Steady mention, low utilization but margins sustained via structural improvements. |
LTSAs | Q2: ~$14.7B lifetime LTSA value. Q1: ~$15.7B total, stabilizing demand. Q4: $4.8B over next 12 months, ~80% automotive. | Reinforced value-based pricing approach, not chasing volumes; part of drive toward 53% margin target. | Ongoing stability with LTSA strategy, ensuring pricing discipline. |
Exiting Volatile Markets | Q2: No mention [—]. Q1: Walked away from ~$475M low-margin markets. Q4: Aimed to exit $800–900M total, reached ~$475M so far. | No specific new exits mentioned, reiterated no pursuit of less-profitable segments. | Continued commitment to shedding low-margin areas, minimal new details in Q3. |
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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.