Yahoo Finance ON Semiconductor Corporation (NASDAQ:ON) Q1 2024 Earnings Call Transcript
ON Semiconductor Corporation (NASDAQ:ON) Q1 2024 Earnings Call Transcript April 29, 2024
ON Semiconductor Corporation beats earnings expectations. Reported EPS is $1.08, expectations were $1.04. ON Semiconductor Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Onsemi First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal. Please go ahead.
Parag Agarwal: Thank you, Kevin. Good morning, and thank you for joining Onsemi's first quarter 2024 quarterly results conference call. I'm joined today by Hassane El-Khoury, our President and CEO; and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast along with our 2024 first-quarter earnings release will be available on our website approximately one hour following this conference call and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non-GAAP financial measures.
Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and a discussion of certain limitations when using non-GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we'll make projections or other forward-looking statements regarding the future events or future financial performance of the Company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ materially from our forward-looking statements are described in our most recent Form 10-K, Form 10-Qs, and other filings with the Securities and Exchange Commission and in our earnings release for the first quarter of 2024.
Our estimates or other forward-looking statements might change and the company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions, or other events that may occur except as required by law. Now, let me hand it over to Hassane. Hassane?
Hassane El-Khoury: Thank you, Parag. Good morning, and thank you all for joining us on the call. In the first quarter, our worldwide team delivered revenue of $1.86 billion, non-GAAP gross margin of 45.9%, and non-GAAP earnings per share of $1.08, all above the midpoint of our guidance. We have remained laser-focused on our execution, driving new design-win growth of 30% quarter-over-quarter and gaining share in silicon and silicon carbide based on the strength of our technology. Customers value the breadth of our portfolio and the superior performance of our intelligent power and sensing technologies, which continue to fuel platform wins. Leading indicators of future revenue support our plan to outgrow the market in automotive and industrial with new product revenue in Q1, increasing 9% year-over-year, and we expect it to continue to outpace total company growth with favorable gross margins at scale.
Specifically, we believe our silicon carbide business to have the best financial performance in the industry on a fully-loaded basis with more than 50% of substrates coming from internal production in the first quarter. The performance of our silicon carbide solutions combined with our vertically integrated supply chain are enabling us to rapidly diversify our customer base. Having just returned from the China Auto Show in Beijing, I remain confident that we are continuing to gain share and expanding into the top 10 leading Chinese OEMs where we are already designed into the newly announced 800-volt EV platforms and is set to start ramping in the second half of 2024. As for the global silicon carbide market, we still expect an increase in the TAM, although at a lower rate than previously anticipated.
The increase is primarily driven by incremental volumes of EVs produced globally over 2023, even as total SAR is projected to be flat to slightly down. We continue to gain share in silicon carbide and diversify across all markets and still expect our revenue to increase 2x the market growth in 2024. Outside of silicon carbide, there was incremental softness in the market in the first quarter. Inventory digestion persisted across the automotive and industrial markets with stabilization in the traditional part of our industrial business. We remain cautious about the second-half outlook, but we expect customer inventory levels to normalize and the market to stabilize. We will maintain our disciplined approach to navigating the current environment and expect to deliver predictable results as we have demonstrated.
Through this environment, we're also investing to further our leadership in the high-growth megatrends of automotive, industrial, and cloud, including data centers. During our Analyst Day last May, we highlighted a $19 billion high-margin TAM opportunity that we could service by expanding our portfolio of power management and sensor interface technologies. To best align with the strategic intent, we have formed the analog and mixed-signal group, which will deliver industry-leading full-system solutions for these markets. Electrification remains the largest growth opportunity for Onsemi across xEVs from BEV to ATV. We provide a unique value proposition for our customers with our wide range of silicon carbide and IGBT solutions along with our high-power packaging technologies.
Our revenue from xEV grew by approximately 60% year-over-year, significantly outpacing unit production and we continue to gain share with our silicon carbide and silicon products, primarily in BEV. In automotive sensing, the shift towards higher resolution image sensor for ADAS systems continues with customers moving to better performance options. Our revenue for 8-megapixel image sensors increased more than 30% quarter-over-quarter and more than 60% year-over-year, demonstrating the market trend towards higher resolution for ADAS systems. In medical, we are leveraging AI technology in our processors for hearing aids to adapt to the user's unique hearing environment for an improved listening experience and we are designed in more than 50% of over-the-counter hearing aids currently available in the market.
With a relentless focus on innovation, we are actively investing in new products and technologies to extend our competitive advantage and drive above-market revenue growth at favorable margins, consistent with our Analyst Day commitment. We remain on track and continue to make progress towards 200 millimeter in silicon carbide. We are already sampling new mixed-signal products and we are gaining share across the portfolio based on the differentiation of our technology. Our investment in cloud and data centers over the last three years has enabled us to benefit from the incremental opportunity we are seeing from the rapid rise of AI. Next-generation AI server racks will require 200 kilowatts to 300 kilowatts of power as much as the power needed in a BEV.
Our full suite of high-efficiency power tree solutions from the power supply unit or PSU to the CPU or GPU consuming the power continues to present the content expansion opportunity as customers look to us to solve their power density problems in data centers. As we look forward, with disciplined consistent execution, while maintaining the customer-centric mindset, we will navigate the current environment and continue to deliver value for our stakeholders. Let me now turn it over to Thad to give you more details on our results. Thad?
Thad Trent: Thank you, Hassane. Our teams have been relentless in their pursuit of operational excellence. Their focus on execution to drive more predictable and sustainable results once again delivered first-quarter results that exceeded expectations. Our ability to respond to the current market environment and deliver better results than ever in a downturn demonstrates the resiliency we have built into the business over the last three years. Amid continued inventory digestion in automotive and industrial, we reported Q1 revenue of $1.86 billion, down 8% quarter-over-quarter and down 5% year-over-year. Our automotive business of $1 billion grew 3% as compared to the quarter a year ago and declined 9% quarter-over-quarter, in line with our expectations.
Vehicle electrification and advanced safety applications remain the long-term growth drivers for this business. Our revenue for industrial was $476 million, down 14% versus the first quarter of 2023 and down 4% sequentially. We are seeing early signs of stabilization in our traditional industrial business, which is slightly less than half of our total industrial. Long-term, we expect upside opportunities in the industrial to come from energy infrastructure, factory automation, and medical applications. As a result of our strategy to shift to the high-growth megatrends for the sustainable ecosystem, our automotive and industrial revenue accounted for 80% of our business in Q1. Looking at the split between the operating units, revenue for the Power Solutions Group or PSG was $874 million, an increase of 2% year-over-year coming from higher silicon carbide revenue in automotive and industrial applications, offset by a decline of silicon power products.
Revenue for the Analog and Mixed-Signal Group or AMG was $697 million, a 6% decline year-over-year, driven by declines in industrial and automotive. As previously announced, we have formed AMG to deliver industry-leading full-system analog-mixed-signal solutions. Prior-period revenue has been reclassified and is available on the Investor Relations section of our website. Revenue for the Intelligent Sensing Group or ISG was $292 million, an 18% decrease year-over-year due to a decline in industrial and automotive. GAAP gross margin was 45.8% in the first quarter and non-GAAP gross margin was 45.9% compared to 46.7% in Q4 and 46.8% in the quarter a year ago. These results exceeded expectations, even though utilization was at 65%, a slight decrease from 66% in Q4.
In prior downturns at similar utilization levels, our gross margin was approximately 30%. Though muted by utilization, our gross margin expansions continue. Most notably, our Fab Right strategy of optimizing our existing footprint is well underway and our teams continue to drive operational excellence with cost-improvement opportunities. At this fiscal, we have aggressively improved the operational efficiency of the fab, reducing the fixed and variable cost to reach parity and wafer cost with our other fabs. The dilutive impact in Q1 was 140 basis points as compared to 200 basis points in the fourth quarter. We expect this to be roughly 100 basis points dilutive for the remainder of the year for the ongoing foundry business with Global Foundries.
As a result of our cost-reduction efforts at EFK and our Fab Right initiatives, we now expect one point of utilization improvement across our manufacturing network will result in approximately 15 basis points to 20 basis points of gross margin improvement. Now let me give you some additional numbers for your models. GAAP operating expenses for the first quarter was $328 million as compared to $353 million in the first quarter of 2023. Non-GAAP operating expenses were $314 million as compared to $286 million in the quarter a year ago. As Hassane mentioned, we continue to invest to further our leadership position in our focus markets. GAAP operating margin for the quarter was 28.2% and non-GAAP operating margin was 29%. Our GAAP tax rate was 15.7% and non-GAAP tax rate was 16%.
GAAP earnings per share for the first quarter was $1.04 as compared to $1.03 in the quarter a year ago. Non-GAAP earnings per share was near the high end of our guidance at $1.08 as compared to $1.19 in Q1 of 2023. GAAP-diluted share count was 437 million shares and our non-GAAP diluted share count was 432 million shares. In Q1, we deployed $100 million, or 36% of our free cash flow for share repurchases. In the last 12 months, we have repurchased $560 million worth of shares and returned nearly 100% of our free cash flow back to our shareholders. Turning to the balance sheet. Cash and cash equivalents was $2.6 billion, and we had $1.1 billion undrawn on our revolver. Cash from operations was $499 million and free-cash flow increased 3x year-over-year to $276 million, representing 15% of revenue.
Capital expenditures during Q1 were $222 million, which equates to a capital intensity of 12%. As previously indicated, we expect 2024 capital intensity to be in the low teens for the full year. Inventory increased by $35 million sequentially and days increased by 15 days to 194 days. This includes 86 days of bridge inventory to support fab transitions in the silicon carbide ramp. Excluding these strategic builds, our base inventory decreased $31 million sequentially to approximately 109 days. We continue to proactively manage distribution inventory. Thus the inventory was down $19 million sequentially with weeks of inventory at eight weeks as expected versus 7.2 weeks in Q4. As previously mentioned, we expect to replenish the channel in 2024 to service mass-market customers and expect inventory to start to normalize with increasing inventory levels to approximately nine weeks over the next few quarters.
Now let me provide you the key elements of our non-GAAP guidance for the second quarter. Table detailing our GAAP and non-GAAP guidance is provided in the press release related to our first-quarter results. Given the current macro-environment and our demand visibility, we anticipate Q2 revenue will be in the range of $1.68 billion to $1.78 billion with softness across all end markets. We expect non-GAAP gross margin to be between 44.2% and 46.2%. As we have shown, our structural changes are proving sustainable and we expect to hold the mid-40% gross margin for utilization in the mid-60% range. Our Q2 non-GAAP gross margin includes share-based compensation of $6.5 million. We expect non-GAAP operating expenses of $313 million to $328 million, including share-based compensation of $28.6 million.
We anticipate our non-GAAP other income to be a net benefit of $12 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP diluted share count for the second quarter is expected to be approximately 432 million shares. This results in non-GAAP earnings per share to be in the range of $0.86 to $0.98. We expect capital expenditures in the range of $180 million to $220 million. Our financial strategy and long-term targets remain unchanged. We are investing for our future while leaning on our playbook to drive operational efficiencies across the organization. We also remain committed to our capital allocation strategy of returning 50% of our free cash flow to shareholders over the long term.
We are a different company today, and I'd like to take this opportunity to thank our employees around the world for the value they've unlocked during their transformation journey. Their efforts were most recently recognized by the management top 250 ranking published by the Wall Street Journal, which identifies the most effectively managed businesses. We are proud to have been named as posting the biggest gain of any company and we will continue to strive for operational excellence as we navigate the coming quarters. With that, I'd like to turn the call back over to Kevin to open it up for Q&A.
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