Q4 2023 Summary
Published Jan 10, 2025, 5:10 PM UTC- ON Semiconductor has strong revenue visibility with $4.8 billion in Long-Term Supply Agreements (LTSAs) over the next 12 months, with approximately 80% in automotive and 17% in industrial, providing stability in uncertain markets.
- The company expects its silicon carbide revenue to grow at twice the market rate in 2024, benefiting from diversification of customer base and stable pricing tied to LTSAs, and is on track with 200mm silicon carbide production for qualification in 2024 and revenue ramp in 2025.
- ON Semiconductor maintains strong operational efficiency, expecting to hold gross margins above the mid-40% floor despite lower factory utilization, demonstrating resilience and better demand management than peers, resulting in more favorable guidance.
- ON Semiconductor anticipates continued softness across all end markets, with no recovery expected in the near term. Both automotive and industrial revenues are projected to be down high single digits quarter-over-quarter in Q1 2024.
- Lower factory utilization rates (mid-60%) are expected to negatively impact gross margins. Each point of utilization reduction equates to approximately 15 basis points decrease in gross margin, putting pressure on profitability.
- Reliance on a few key customers in the silicon carbide business remains a risk. Customer concentration may impact revenue if major customers reduce orders, as was experienced in Q4.
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Silicon Carbide Outlook
Q: How will your SiC business perform this year, and why tie guidance to market rates rather than absolute numbers?
A: We expect our SiC business to grow at twice the market rate in 2024, based on our design-ins and customer ramps. Tying guidance to market rates allows for flexibility amid end demand variability, but we remain confident due to qualified platforms and a broad customer base. Our pricing remains consistent under long-term agreements, and we anticipate reduced customer concentration as we diversify our customer base. -
Gross Margin Expectations
Q: Can you discuss your gross margin outlook and the impact of utilization rates?
A: We plan to maintain a gross margin floor of mid-40%, with utilization bottoming around mid-60%. Each point of utilization affects gross margin by about 15 basis points. Our Fab Liter strategy has worked effectively, and we expect tailwinds from improved utilization as the market recovers. -
Automotive and Industrial Markets
Q: What are your expectations for the automotive and industrial markets, and which might recover sooner?
A: Both markets are experiencing inventory digestion and slowing demand. We expect both to be down high single digits quarter-on-quarter in Q1, and we are not seeing recovery yet. We're managing cautiously, reducing utilization to match outlook, and will benefit from tailwinds when demand returns. -
Avoiding Larger Corrections
Q: How have you avoided deeper corrections seen by peers, and is Q1 the trough?
A: Our long-term supply agreements provided early visibility into demand softness, allowing us to proactively reduce utilization and manage inventory. While it's hard to call a bottom, we are prepared to capitalize when markets recover. -
Inventory and Utilization Levels
Q: Are you cutting production enough given peers' larger reductions, and how long might excess inventory last?
A: We've been disciplined in managing utilization and inventory, starting to reduce utilization in late 2022. Our base inventory is at optimal levels, and we believe current utilization rates are appropriate without overcorrecting. -
Long-Term Gross Margin Targets
Q: Can you achieve your 53% gross margin target without significant revenue growth?
A: Yes, reaching the 53% gross margin is not dependent on revenue growth alone. Factors such as utilization improvements, efficiency gains from East Fishkill, monetization of divested fabs, and ramping new accretive products will drive margins higher. -
Channel Inventory Refill
Q: When will you start refilling channel inventory, and what revenue impact will it have?
A: We will begin replenishing channel inventory to reach 7 to 9 weeks, starting now. This will support mass market and long-tail customers previously underserved. The increase will be gradual over several quarters, providing support without a significant immediate revenue impact. -
China Market Position
Q: How are you positioned in the China EV market?
A: We are well-positioned in China, with long-term agreements with four of the top five Chinese OEMs. Our engagement includes both SiC and IGBT products, and we anticipate growth in both automotive and industrial applications like energy storage. -
Analog and Mixed Signal Platforms
Q: What's the status and outlook for your analog and mixed signal platforms?
A: We're on track with technology development, ahead of schedule. We've taped out lead products and will sample in early 2024, targeting highly competitive mixed-signal analog markets with products synergistic with our power portfolio. -
Non-Core Customer Exits
Q: Are you done exiting non-core customers, and do any remain?
A: We've exited about $475 million over multiple years, with $180 million in the past year. Remaining business is healthy and at corporate average margins. We consider the exit program complete unless capacity is needed.