ON Semiconductor Corp (ON) — Q2 2021 Earnings Call Transcript

Good morning, and thank you for joining ON Semiconductor Corporation’s second quarter 2021 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. A replay of this webcast, along with our 2021 second quarter earnings release, will be available on our website approximately one hour following this conference call, and a recorded webcast will be available for approximately 30 days following this conference call. Additional information related to our end markets, business segments, geographies, channels, share count and 2021 and 2022 fiscal calendar is posted on our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are included in our earnings release. During the course of this conference call, we will make projections or other forward-looking statements regarding the future events or future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should or similar expressions are intended to identify forward-looking statements. 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 create actual results to differ from our forward-looking statements are described in our most recent Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. Additional factors are described in our earnings release for the second quarter of 2021. Our Analyst Day is scheduled for Thursday August 5 in New York City. We look forward to seeing you in person later this week. Now, let me turn it over to Hassane.

Thank you, Parag, and thank you everyone for joining us today. We delivered record results in Q2 driven by strong execution and broad-based strength in demand. We posted record revenue of $1.67 billion, an increase of 38% year-over-year and 13% quarter-over-quarter.

Thanks, Hassane. I’m pleased to announce a record quarter as we’re seeing the real impact of our transformation initiatives on our financial results. Customer demand remained strong and the design win pipeline for our innovative power and sensing technologies continues to expand. We’ve been successful in securing additional supply from our internal manufacturing sites as we optimize our efficiency, which contributed to revenue at the high end of our guidance.

Hi, everyone. Thank you. I have a few questions. Congratulations on the results. Hassane, I want to discuss the demand and shortage commentary from last quarter. You mentioned that demand would likely stabilize and that the pace of increase might slow, but you expected shortages to ease in the latter half of the year. It appears that this has now been pushed to the first half of next year. Can you explain what has changed regarding demand? Additionally, how can you assure us that there is no double ordering involved?

Sure. That's a good question. Look, the demand environment, as we've always stated, it's very dynamic. We see it basically pushing out into the first half of next year. That's based on our backlog, customer interactions, and really based on the long-term supply agreements that we have been engaging with customers, either signed or in active engagement. As far as the double ordering, we're managing our supply chain to ensure that doesn't happen. We've been reducing and managing inventory very closely. That keeps the inventory on our balance sheet but allows us to serve strategic customers as we see the demand from the end customer without really accounting for any buffer stocking that you may or may not see in the distribution channel or any OEM. So that's how we're managing it, and that gives me confidence given the numbers of inventory that has been reducing and building up on our balance sheet that we are literally tackling end demand on a one-to-one basis with our direct customers.

Thanks for that color, Hassane. I guess as my follow-up for either you or Thad. On the gross margin side of things, that's probably the most impressive line given where ON has been historically and the challenges it faced. Can you just talk a little bit about what drove the upside even to your guidance in the second quarter, similarly for the third quarter? And a higher-level question, how much of that do you believe is structural versus just you guys benefiting from some pretty strong cyclical tailwinds that, as we've learned in the past, can come and go at different times?

Yes, if you look at the components of the gross margin strength, obviously, we've always said in the first and second quarter now, we have probably thousands of line items that we are structurally working on improving our operation and streamlining our business, which will drive gross margin expansion. Those have been firing on all cylinders, and we are seeing the benefit incrementally, and you're going to see that in our guidance for Q3. I would call those structural. Utilization has been flagged from last quarter. But you see a big gross margin jump that I would also call structural because the jump from Q1 to Q2 is on all the other work that we have been doing. We continue to streamline our operations, take cost out of our products, and portfolio mix – a couple of quarters ago, I was asked whether it would be delayed because of the demand environment. My commentary has been, it's actually going to be accelerated because it's going to force us to shift faster to our strategic products that will drive higher margins. So you're seeing some of that portfolio mix happening earlier than we anticipated. All of these components indicate that it is structural and sustainable, and forward-looking, I'm very bullish on the capability of our gross margin expansion.

Yes, I would just add that if you look at the upside compared to our guidance, we were able to get more supply out of our manufacturing sites, and then obviously, we're getting favorable mix out of that as well, which is helping with the gross margin. But absolutely agree, it's structural changes that we're making inside the company.

Thanks, guys.

Hey, guys. Can you just be a little more specific on the gross margin drivers? Was there any pricing involved, any kind of specific product lines? It's just a big jump given that utilization rates didn't change. Any specifics there would be great.

Yes, I mean, it's spread across the board. Of course, there is some, what I referred to as the price-to-value discrepancy. We've been looking at our pricing from a strategic perspective, what products and what pricing they need to be in the market to extract the value that we provide for our customers. Cost is a big factor, not just product costs, but supply chain costs as well. Some of the increases that we’ve seen, we pass those on to customers. So it's really, Chris, it's across the board. There's not a big step function that I would anchor on, because when we look at incrementally it came from all of these swimlanes that we have been working on since really the December timeframe when I came in. I said we must structure gross margin, and we have specific owners in the company that drive gross margin improvements for the company. We have about a thousand swimlanes that we are delivering to, and those are starting to come out now. It takes time to get those through the supply chain, and now is the quarter where we see it. And they're going to continue in the forthcoming quarters as well, given the Q3 guidance range.

Great. And then for my follow-up, you mentioned you expect the shortages to extend into next year. Can you just talk about where your lead times are these days? Or what they did sequentially? Did they extend during the quarter? Were they flat, up, or down?

Yes, Chris, last quarter our lead times were in the low 30 range. It's now up to about 42; they've gone up by about 10 weeks sequentially. Obviously, we're working on that, but that's another reason, giving us more visibility into why we see the supply constraint being limited as we look forward.

Great. Thanks, guys.

Thanks for taking my question, and congratulations on the gross margin, and especially the free cash flow improvement. My first question, Hassane, is that investors are trying to grapple with the situation where, as you mentioned, demand is strong. But will the supply environment stay disciplined? So the specific question is, how undersupplied is the industry right now? And you mentioned the situation could persist until the first half. Is that based on demand level staying at current levels or what they could be next year? Just basically what are your views about the supply response from ON and your peer group to give investors the comfort that the supply response from the industry is not going to change this very strong discipline and the pricing dynamic that your industry is benefiting from right now?

Yes, that's a good question. I can really speak for what we're doing here. Of course, the fear is the reaction; you go and build capacity across the board. But if you look at what we are doing specifically, and why I'm comfortable with the forward-looking view of our margin and our posture with gross margin expansion, we are selectively adding capacity where we see the growth and our strategic products forward-looking. We are not adding capacity for the sake of adding capacity. We are shifting from a lot of what we call the legacy portfolio to the strategic growth and adding capacity there. As we are increasing our top line, given the supply relief that we're getting through our supply chain, those are coming from strategic growth products. So when I look at our strategic plans moving forward, and we'll give a little bit more color at Analyst Day, that's where we're expanding the capacity. It is not equal across all segments. There are demand signals within our visibility to our customers that we are not servicing beyond what we can today, so I'm not adding capacity there. We are selective; we are very disciplined on where we add capacity, and we're adding it in our growth products that are strategic, which will drive the gross margin forward-looking. So very selective, not the shotgun approach.

Got it. And for my follow-up, actually a clarification question. On the clarification side, any impact from shutdowns or COVID-related issues in Southeast Asia from the supply side? And then, Hassane, you sound really confident about ON's prospects in the electrification side. So could you help us understand what is your current exposure to EVs? And what kind of content growth do you see both on the powertrain and the ADAS side as the industry moves more towards EVs? Thank you.

So, let me answer the EV first. Our exposure, obviously, is starting to grow; I'm very bullish. I'm not going to hide it. I'm very bullish with our posture, both on automotive safety and electrification. Electrification penetration is starting to pick up. We're well-positioned with strategic OEMs directly, but also through their Tier 1 supply chain. That is really forward-looking, how I look at the market and where our R&D investments are happening. We've seen disruption related to COVID in some of our supply chain, direct or indirect. But our operations and manufacturing teams were wide; we were able to redirect and service more demand by shifting the mix again. So, there was disruption, but we overcame that disruption, and now we're back on track, so let's call it a blip that we were able to sustain given the demand and the work that we're doing on releasing more capacity.

Good morning. Thanks so much for taking the questions and congrats on the strong results. Hassane, I had a two-part question on gross margin. You talked about addressing price-to-value discrepancies. Just curious, what percentage of discrepancies have you been able to execute on in the form of price increases? And how much left is there to go? Guessing your tenure at ON, I'm guessing it's still very early innings. But curious how much is left? And then as my second part, in terms of the 300-millimeter transition, again, I believe it's very early in the process. But how do you see that evolving over the next couple of years and the impact on gross margins? Thank you.

Sure. So the first question as it relates to price-to-value; this is an ongoing effort. I would put it under the portfolio rationalization overall. We're not done yet. That's a continuous improvement. Everywhere we look, there's opportunity. It's not a blip in time where; because of that environment, we're able to extract the value; it is structurally how we're moving forward. So new products are not going to have those issues of price-to-value discrepancies because we are pricing the new products and delivering them exactly at the value they provide customers. As far as the 300-millimeter transition, it's a strategic asset. We're working with Globalfoundries under our transition. We have not taken ownership of that fab yet. However, we're working closely on starting to move volume into that fab. When we take ownership, we hit the ground running, and that is going to be supportive of our gross margin efforts from a product cost perspective. Where we are, we're on track, and I review this regularly as far as how many products have we qualified in the 300-millimeter fab, but more importantly, the customers that have qualified that fab for us to ramp with them over 2022 and into 2023. So that's all on track. I'm happy with the progress; that asset is going to be favorable for us in the long run, both from capacity and from a cost structure.

Yes, on the OpEx side of things, when we did a restructuring activity, and we said we'd realize the benefit of that cost savings over the year. We accelerated that, and we are able to recognize some of that earlier. That's the impact that you're seeing here in Q2, and that’s more favorable to our guidance. We still believe we're going to exit the year somewhere just north of $300 million on a quarterly run rate, and that becomes the new baseline. Obviously, you've got the reset of taxes and things like that going into next year, but that becomes kind of a run rate that we maintain. And then obviously, as we grow, we will add OpEx back at a much slower pace than our revenue growth.

Thank you.

Yes. Hey, guys. First of all, strong congratulations. These are stunning results. Hassane, I'm going to push you a little bit. In the last 5 years results, I think the peak happened at $1.5 billion or 38.5% gross margin, I think it was like 2018 or something. You're now talking almost $1.7 billion, 40%. So my question is, you've got a higher run rate, higher margins, how much is it a function of the actions that you've done and the actions that you've implemented in your opinion? I've got a follow-up.

Sure. Of course, there's only one answer to that. It's all based on the stuff that we've been working on. But let me talk about the timing of it. Of course, the demand environment has helped accelerate a lot of this, as I talked about before. We've always had part of our structural or restructuring plan to start shifting portfolio and shifting that mix to high value, high-margin, high-strategic products in our target markets of auto and industrial. That is part of the actions we have been taking, and we started taking since I joined. They've been accelerated with the demand environment because of the capacity constraints. What we've done is release capacity from what I will call the legacy commodity products that we've always wanted to move away from, part of my strategy, faster into putting that capacity on high value, high growth and strategic products that will grow with us over the next 5 to 10 years. So the actions are all there. The timing was accelerated and helped by the current environment.

I got you.

Harsh, did I answer your question …

Yes, it does. Thank you very much, and very helpful. On following up on Toshiya's question, want to talk fabs and cost cuts. So can you remind us of when you will actually have products running through Fishkill, because that could be a great benefit? Also, we want to ensure that things don't go well, and you're running the factory empty. So when will you be at a point when you sort of utilize well from a timing angle? And then with that big 12-inch fab coming away, how many fabs do you think you will eventually need?

Yes, so let me talk about Fishkill first. We are running revenue and running volume today at Fishkill. Remember, it's a shared fab today with us and Globalfoundries. We have capacity or allocation part of that capacity out of the fab, and Globalfoundries has their capacity as part of our original agreement. We are already shipping qualified products to end customers that are generating revenue out of that fab. That revenue will keep increasing through 2022, as I mentioned, and we're on track based on customer qualifications and our own product qualifications. So that progression is there. Obviously, we will be talking about utilization once we take ownership of that fab in 2023 and through 2024. Right now it's more of an allocation because the fab is still not owned by ON, but I measure, in this case, are we shipping what we need to be shipping to our customers based on the quality because that's usually the latency, and we are on track with that. As far as how many fabs we need to run our operations, obviously, that's not something I can comment on today. My focus is really on rationalizing our manufacturing footprint to going to a fab lighter, so we will have less fabs, but I will be ready to comment more as we have communicated plans specifically.

Hey, guys, very helpful. Congrats again.

Hi, thanks for taking my questions. My first question is about the gross margins. It seems like there is something significantly different happening with ON compared to the last 10 or 15 years. Thad, you mentioned the gross margin upside, referring to mix efficiency, execution, and cost containment, but I don't recall hearing anything about pricing. Hassane, you talked about a price-to-value discrepancy, which I interpreted as a reference to pricing. It appears that you are adjusting the product mix towards higher value products. My question is, over the past 10 to 15 years covering ON, during tough times, price pressures were common, and during better times, price improvements were mentioned. Has that aspect of your business changed? Is ON now experiencing much lower volatility and less sensitivity to pricing pressure? I also have a follow-up question.

So the short answer is yes. Strategically, I think one of them was the first conference that I attended back in January, the CES conference where I really put my focus on gross margin improvement through manufacturing footprint rationalization and product portfolio rationalization. Those are two strategic directions that I've set as far as what we need to do right now. So what does portfolio rationalization mean, in the terms that you describe, which are very accurate? We look at which products are we going to grow in and which products are legacy, where we're not going to invest, and start shifting that to the high strategic products where we want to play. That's more forward-looking. That doesn’t mean that those products are now a better mix; when the market goes the other way, we're going to have to see the 6%. We're moving away from fab filler products, which are low-value, discrete commoditized products; you keep shoving them in the path, and they go up and down with the market. We're moving to strategic high-value products that are going to grow over time. Once you shift your mix to strategic growth products, that volatility disappears. Whatever demand does, it's going to be growth; maybe it's not high growth, but it's still growth.

That’s very helpful.

I’m ready for your follow-up.

Yes, great. That's really helpful. Thank you for spilling that out for me. What are you looking at for leading indicators to tell you that customers are getting over their skis on their orders? And can you talk about any dynamics you're seeing on any cancellations or push outs or anything like that? Thank you.

Yes. Look, there are many metrics that we look at. I have analytics to see that you're not always going to see 100% around the corner. But I'm comfortable with the visibility we get. Both Thad and I review it more than once a week to ensure we don't miss anything. The biggest gauge for how many escalation calls I get from customers is the biggest indicator. When my phone stops ringing, then I know we're not in the position we are today. We have good analytics and visibility of what's happening right now; no significant cancellations or push outs. I think we've got good visibility; it's going into the first half of '22.

And, Mark, just to add, we're not seeing any meaningful cancellations or push outs at this time. We've taken the inventory in the channels down so that we can manage that escalation process, whether that customer is in the channel or direct, making sure customers are getting the inventory just as they need it rather than stockpiling it. So we're doing our best to manage it, and I think we've got good analytics and visibility.

That's great color. Thanks, guys. Really appreciate it.

Yes, thank you, and congrats as well on great momentum across the board. Just picking up on your commentary around inventory, I think last quarter you talked about that you wanted to build inventory on your balance sheet while reducing inventory in the channel. That you're actively reducing channel inventory while holding more inventory on your own balance sheet in order to allocate the right products to the right customers, therefore preventing any excess inventory sitting in the channel. Wondering how that strategy is playing out this quarter? And how do we think about that over the next couple of quarters in a continuation of the supply-constrained environment?

Yes, we are at 8.4 weeks in the channel last quarter. We're at 7.3 weeks this quarter. So on a revenue value, that was a decrease of almost $43 million in channel inventory. At the same time, our balance sheet inventory went up slightly in terms of dollars, up $14 million, but down in terms of days; it went down by 8 days. We're still executing to that strategy of putting that inventory. As we look forward, we think we'll continue the strategy through the remainder of this year. I think inventory in the channel is going to stay level, kind of plus or minus, and our inventory on our balance sheet will probably remain relatively flat to down slightly, just depending on our capacity to get more supply. Through the remainder of this year, we don't see a change in our strategy of holding that inventory.

I have a couple of follow-up questions. Thad, you mentioned that you secured additional internal supply. Can you elaborate on how much supply you've managed to obtain? What actions did you take to increase that supply, and how do we anticipate more supply becoming available, whether from internal sources or external ones? Also, Hassane, I have a question about automotive revenue. You've achieved record revenue in this sector, and you obviously want to transition to electric vehicles and renewable energy infrastructure. Could you provide some updated thoughts on your silicon carbide power products and power modules for charging stations and onboard chargers? Thank you.

Yes, so, Raji, in terms of the supply, and what we saw in our utilization was relatively flat quarter-over-quarter, but we got more supply out. This is really the optimization efficiency of our manufacturing site. We manufacture about 65% of our own product in-house, 35% outside. We still remain severely constrained on the outside, but we've got more control on the inside with what we can do. As our manufacturing team has executed, we've been able to squeeze more out of the existing footprint. If you look forward to our Q3 day, which is up at the midpoint, you can see we're getting more supply coming in Q3 as well.

Yes, and as far as your second question about our power products, obviously, I mentioned renewable energy, I mentioned electric vehicles, which for me is both traction and onboard charging. So as the power demand goes off as far as the need from customers, think about fast charging, whether it's onboard charging or infrastructure. The charger on the road or attraction, where we are winning and why we are winning is our highly competitive efficiency metrics that come from the province and technology that we are flexing, but more importantly, our packaging technology. When you put those two together, you get a LiDAR and more efficient traction module. LiDAR is obviously good for EVs for distance. Our packaging is better than the equivalent competitor power output. That's where we went. You'll hear a little bit more about that at the analyst day. But that's what I tie our current winds to. When I look at the funnel, I talk to the customer, since I've taken over, a lot of customers I call and ask why do we win? Why do you pick ON? Those are the ones that I'm pushing into our strategy to do more of, and where they say we lack, we're putting R&D in order to leapfrog the competition. So all of these give me the confidence; one, on our posture to date and our posture with design wins forward-looking that's going to fuel our growth. Where we are investing R&D to sustain that momentum forward-looking.

Great. Excellent. Thank you.

Yes. Hi, good morning, guys. Thanks for letting me ask the question. Congratulations on the solid results. I'd like to go back to the significant growth margin upside you've seen over the last couple of quarters. I'm just kind of curious, what inning do you think you're in as far as repositioning the portfolio to higher margin? And I guess, was there any meaningful advantage to kind of trying to price yourself out of certain businesses right now? And customers didn't walk away, so that we saw some cyclical pricing advantage to either the June gross margins, or the September gross margins?

Yes. Look, where as far as any call, we're in early innings. As far as what we're able to do, you're starting to see the momentum of the work we've done in Q1 and Q2. You haven't seen the benefit from some of the manufacturing rationalization, the actual fab divestitures that we've talked about; you won't see that benefit yet. Right now it's on cost, product value, etc. All of those are what you're seeing today. There's more to come as we deploy and execute our strategy forward-looking. So that gives me comfort where we are in our trajectory and the gross margin expansion.

That's all for me. And then Hassane, the gross margins were impressive. I would argue the free cash flow, which was even more impressive. If you looked at your share schedule on your website, there's not a lot of dilution coming down as the stock price goes up. So I'm kind of curious how you guys are thinking about the use of cash and cash return. Given how strong the free cash flow generation looks like it was in the quarter and should continue that.

Yes, John. It’s Thad. You’re right. If we took out that convert and swapped it out for a new convert, that old one was heavily in the money. So the dilution impact is insignificant as what you're seeing in the past. As we think about the cash generation, right now it's balance sheet flexibility, it’s continuing to pay down the debt. Long-term, we'll look at returning capital to shareholders, but right now it's reinvest in the business and have balance sheet flexibility.

Thanks, guys.

Good morning. Congratulations on the solid results and execution. The image sensor business, again, they grew both auto and industrial on a quarter-over-quarter and year-over-year basis. I know most of this business is outsourced. You talked previously about being supply constrained into the first half of next year. Has that supply normalization actually pushed out given the strong demand you're seeing? And then just given the strategic nature of sensing to your strategy and portfolio, is this a technology and product segment that the team is actually thinking about potentially bringing in-house?

Look, the supply is indeed constrained because the majority of all of it is foundry-based. Now, as far as the long-term strategy about what we do inside or outside, we'll be talking more about that in our Analyst Day. But it is fundamental to our strategy. The supply constraint is not something we can solve right now. Right now, it's more about optimizing the existing supply chain we have because choosing technologies requires extensive R&D work, plus CapEx. We’re looking at all options, but right now, through ‘22, it's about maximizing the capacity we can get from our foundry partners.

Hi, Hassane and Thad. Congratulations on a great quarter and guide. Just wondering on the EV and ADAS, looks like really strong growth there. Could you give us some color on how that grew sequentially? And as you exit the year, can you talk to what the mix you see, especially with the traction on the EV side? How that EV mix gross year-on-year as a percent of revenues? Thanks.

We're not breaking up details by technology or sub-segments. We expect automotive to maintain its growth; obviously, it's limited by what I mentioned earlier, and on the ADAS side from the supply and imaging, which we are highly constrained on. For our power products or silicon non-imaging products, that's going to be based on how much we are able to get more out of our supply chain as Thad mentioned. So I don't see the momentum; there is growth built in. Demand is there, and right now it's how much of that demand we can service.

Got it. And as we look out, I know Thad mentioned going into Q4, more like the top end of flattish. But I'm wondering if you can give some idea on how the book-to-bill is trending? How it was in Q2, and how you see Q3, Q4? Can you share some idea in terms of how orders are coming in? Thanks.

Yes, Vijay, I mean, the book-to-bill is strong; it remains strong, and we think it's going to continue through the remainder of the year. Again, supply is the issue. We're not seeing major cancellations or push outs, just consistent strength right now. So we're not seeing any swings in the book-to-bill.

Great. Thanks a lot.

Great. I want to add my hearty congratulations to great results and even better outlook, and I appreciate your taking my questions. First, the compute end market was particularly strong in the quarter. I think you attributed that or you at least highlighted graphics cards as part of the success there. I'm wondering if you can talk about trends in that end market as we look out over the next couple quarters. There's been some concern about perhaps in aggregate inventories or mismatched bills of materials that might cause a hiccup in that end market. I wonder what you're seeing in terms of the outlook there? And then I do have a follow-up.

Yes, look, we're seeing trends in both cloud and the server market; it's over market growth. Customers are expanding their capacity, and that's correlating with our demand. The market took a pause in 2020 and maybe at the beginning of '21, and now it's starting to pick up. We haven't seen any slowdown; we continue to monitor all other markets and we're focused on the products we want. From the data I get from our customers directly, there's capacity expansion on their side, and that gives me visibility into demand for our backlog in these markets.

Great. And then as a follow-up, you talked about capacity expansion in the next few quarters. I may have missed it, but is there an aggregate sort of unit growth or dollar growth that you're building as we think about demand and supply rationalizing in the first half of next year as you've highlighted? What should we think about your total capacity as we progress into that timeframe?

Bill, I would say we've got a couple of things going on. We've got 300-millimeter fabs coming online, and we're continuing to ramp up production there. We will continue to optimize supply, but I would look at our supply as being steady throughout the time horizon you mentioned, with some small increases as we optimize and get more output.

Thanks. Congrats again.

Thanks.

Congratulations on all the progress you've made in just a few quarters. The first question is for Hassane. Hassane, long-term supply agreements were significant for you at Cypress. Can you elaborate on the end markets you are targeting for these agreements and how they are being used strategically? Also, do you have a target percentage of revenue that you aim to secure under long-term agreements?

Yes. Chris, so our focus is to start with our strategic markets, strategic products, and strategic customers in those markets. That’s the priority because I wouldn’t want to lock in supply before I get all of my automotive customers taken care of, for example. Once that happens, we then start going into automotive and industrial based on customers and the breadth of customer within them. There are cross-selling impacts in our decision too. Of course, our goal is to support all our customers, and that’s how we will maintain that role. But regarding LTSA, I’m starting with strategic markets and customers, not to throw a percent target out there but we do have based on product line. There are kind of targets where we may not want to go up to 80% because you want to keep 20% or 30% dynamic for growth from new customers not yet at the level.

Excellent. And then a question around the fab footprint. First of all, any updates on your existing fabs for sale? And then secondly, on East Fishkill, the prior management team talked about $2.3 billion in additional revenue. Do you have an update there? In this environment, do you think that could be substantially higher?

In terms of the fab footprint, we continue to have deep discussions with quite a few parties on the two fabs that we publicly announced. Those are tracking along. It does take time to exit a fab. Getting structures in place is more important than the timing. Even though we haven't announced something, we're still on our path, but it takes time, and things are progressing nicely there.

Look, on the East Fishkill fab, we are changing the mix of what goes in that fab based on our new strategy. I wouldn’t put a number to it yet; we are getting incremental growth that is part of the strategy. I'll be more comfortable disclosing that number and our progress once we have ownership of that fab.

Great. Thanks, guys. Great progress.

Thank you all for joining us today. I once again thank our worldwide team for their hard work and driving our transformation and solid results. It's been an exciting few quarters and we are firing on all cylinders. We remain focused on our execution and our drive to streamline our business and unlock our value. I look forward to seeing you all at our Analyst Day in a few days for a deeper look into our strategy and our transformation.