ON Semiconductor Corp (ON) — Q4 2023 Earnings Call Transcript

Thank you, Liz. Good morning, and thank you for joining onsemi's fourth quarter 2023 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 2023 fourth quarter earnings release will be available on our website approximately 1 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 includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial 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 will make projections or other forward-looking statements regarding the future events or the 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 fourth quarter of 2023. Our estimates or other forward-looking statements will change and the company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or other events that may occur except as required by law. Now, let me turn it over to Hassane.

Thank you, Parag. Good morning, and thank you all for joining us on the call. We are pleased to share our results with you following another year of significant accomplishments as we continue transforming the company to achieve our long-term financial model. Our Intelligent Power & Sensing Technologies accounted for 71% of our revenue in 2023 compared to 62% in 2021 as we have driven our portfolio to strategic areas with higher gross margin. Our revenue from crude products in 2023 increased more than 40% over '22. Year-over-year, design win growth continues to outpace the long-term revenue growth target we outlined during our Analyst Day. We had a record year of automotive revenue increasing 29% over 2022, driven by both Intelligent Power & Sensing. We achieved our first $1 billion revenue year for automotive image sensors with design wins increasing more than 50% year-over-year, fueling our future growth with new products. It was a great year for silicon carbide. We shipped more than $800 million in 2023 or 4 times 2022 revenue. Our silicon carbide revenue had the highest growth in the industry, both in terms of dollars and percentage in 2023, delivering an estimated 25% market share. We increased our customer base to more than 600 customers in 2023. Our top 10 customers are geographically distributed with over 50% in APAC, including Korea, followed by the U.S., and we expect to further diversify our customer base in 2024 as European customers ramp production. We continue to make progress on our transition to 200 millimeter with material already running through our manufacturing steps and we announced the world's largest silicon carbide fab with our expansion in Bucheon, South Korea. While market reports still project 30% or 40% growth for silicon carbide in 2024, OEM's latest EV plans indicate more tapered growth signaling a SiC market growth in the range of 20% to 30%. We still expect to grow at 2x the market growth in 2024 with customers ramping production in both industrial and automotive. Electrification remains a content expansion opportunity for us. Our broad portfolio of silicon carbide and IGBT combined with our high power packaging solutions give us a competitive advantage across all levels of EVs, ranging from HEV to PATV and BEV. In fact, our 2023 hybrid vehicle related revenue nearly doubled year-over-year, while the number of vehicles grew 30%. We have significant content gains across all ex-EVs and specifically up to $350 of content in hybrid electric drivetrains and onboard chargers. We grow no matter which one gains traction, pun intended. Onsemi is number two in silicon power with best-in-class IGBT and MOSFET technologies. Our overall IGBT revenue nearly doubled over the last two years, driven by market share gains and further penetration in ex-EV and energy infrastructure. In automotive, onsemi is number one in image sensors with 2023 revenue increasing more than 12% year-over-year driven by the shift to higher value 8 megapixel sensors as customers move to better performance options at higher ASPs. 8 megapixel image sensor revenue nearly doubled year-over-year demonstrating the market trend toward higher resolution for ADAS systems. We are also number one in automotive LED lighting, inductive and ultrasonic sensing and we plan to advance our leadership position with our upcoming analog and mixed signal platform. In Industrial, we are number one in solar and energy storage solutions with our IGBTs, silicon carbide and module portfolio from commercial to utility scale string inverters. Energy infrastructure is still our highest growth megatrend in industrial, where we continue to see demand for our hybrid modules with silicon and silicon carbide. In 2023, the International Energy Agency, or IEA, reported that the world's renewable energy surpassed 50% growth over 2022, its fastest rate in the past 25 years. Our revenue for energy infrastructure during the same period grew 60%. The IEA predicts that renewable energy is on course to increase by 2.5 times by 2030. For EV chargers, we just released a full suite of Elite sick power integrated modules, enabling bidirectional charging capabilities for DC ultrafast electric vehicle chargers. Our newly released modules can be used up to 350 kilowatts in EV chargers, the highest in the industry to reduce charging time to 15 minutes for a near full charge. Our broad portfolio of products has enabled us to become a one-stop shop for our customers and the source for the most optimized solutions. It is critical for customers to extract the best performance for their systems and using our portfolio to provide a system-level optimized solution across our power and sensing technologies remains a competitive advantage. We are also excited about our power opportunity to support the transition to 48 volts. We are already in production with a leading automotive customer on their new 48-volt architecture as we had already planned our portfolio for such a transition. Last year, we responded to the market uncertainty by focusing on our execution. As demonstrated with more predictable and sustainable financial results, our worldwide teams delivered operational excellence in the face of challenging market conditions without losing sight of innovation to further our leadership position in intelligent power and sensing solutions. We are happy with the progress we've made in 2023, having built a resilient business model capable of performing in all market environments. We are now turning to the opportunities for operational improvements in 2024 to achieve our target financial model. In the near term, based on our current outlook and early Long-Term Supply Agreement signals, we expect continued softness across all end markets through a period of inventory digestion and slowing end demand. The bottom line is that we will weather 2024 with substantially better financial performance than in prior downturns. Meanwhile, we will continue to invest in extending our leading portfolio, and we will benefit disproportionately as the market recovers. With that, I'll turn it over to Thad to provide further details on our results.

Thanks, Hassane. Our ongoing transformation in 2023 delivered significant improvement towards our long-term financial model. Our ability to proactively navigate through the current cycle while delivering better results than ever in a downturn is a testament to the work our teams have accomplished over the last three years. Today, onsemi is a different and more resilient company, having achieved 2023 non-GAAP gross margin of 47.1%, which is 1,440 basis points higher than 2020, the last year in which utilization was at comparable levels. We maintained revenue of $8.3 billion for the year, non-GAAP operating margin of 32.3% and delivered $5.16 of non-GAAP earnings per share. For the year, we returned 140% of free cash flow to our shareholders through share repurchases and we have $2.4 billion remaining on the buyback authorization we announced a year ago. For the fourth quarter, we reported revenue of $2.02 billion, non-GAAP gross margin of 46.7% and non-GAAP earnings per share of $1.25, all above the midpoint of our guidance. Looking at the fourth quarter breakdown by end market, our Automotive business of $1.1 billion grew 13% as compared to the quarter a year ago and declined 4% quarter-over-quarter, in line with our expectations. Still, vehicle electrification and advanced safety features are driving upside as demonstrated by our record automotive revenue for image sensors in 2023. Our revenue for Industrial was $497 million, down 10% versus Q4 2022 and down 19% sequentially as anticipated. All segments have been impacted by macroeconomic factors and slowdown in industrial activity. Our automotive and industrial revenue accounted for 80% of our business in 2023 as compared to 68% in 2022, following our strategy to shift to high growth megatrends for the sustainable ecosystem. In Q4, we exited another $30 million of non-core business and for the full year, we exited $180 million. While we expected customers to find alternative options, the remaining non-core portions of our business are now healthy nearing corporate gross margins and demonstrating the power of our portfolio. Looking at the split between the operating units, revenue for the Power Solutions Group, or PSG was $1.1 billion an increase of 4% year-over-year due to an increase in silicon carbide revenue for auto and energy infrastructure. Revenue for the Advanced Solutions Group, or ASG was $625 million, a 11% decline year-over-year, driven by softness in compute and mobile end markets. Revenue for the Intelligent Sensing Group, or ISG was $308 million, a 13% decrease year-over-year due to a decline in compute and industrial. In the fourth quarter, our GAAP and non-GAAP gross margin of 46.7% was above the midpoint of our guidance. Our gross margin exceeded expectations despite total utilization decreasing to 66% from 72% in Q3, further validating the structural changes we have implemented over the last three years. We should see the full impact of the decline in utilization materialized in Q1. At East Fishkill, we have already made progress by improving the overall cost structure of the fab making it 50 basis points less dilutive than expected in the fourth quarter. Based on our current outlook, we expect to hold our gross margin above the mid-40% floor with utilization in the mid-60% range. Silicon carbide gross margin also remained above 40% with high profit fall-through, and we expect to maintain these levels through 2024. Now let me give you some additional numbers for your models. GAAP operating expenses for the fourth quarter were $330 million as compared to $316 million in the fourth quarter of 2022. Non-GAAP operating expenses were $306 million as compared to $300 million in the quarter a year ago. GAAP operating margin for the quarter was 30.3%, and non-GAAP operating margin was 31.6%. Our GAAP tax rate was 7.8%, and our non-GAAP tax rate was 15.4%. GAAP earnings per diluted share for the fourth quarter was $1.28 as compared to $1.35 in the quarter a year ago. Non-GAAP earnings per share was above the midpoint of our guidance at $1.25 as compared to $1.32 in Q4 of 2022. Our GAAP diluted share count was 440 million shares, and our non-GAAP diluted share count was 434 million shares. In Q4, we were aggressive with our share repurchases and returned 136% of free cash flow to shareholders through $300 million of buybacks. Turning to the balance sheet. Cash and cash equivalents were $2.5 billion, and we had $1.1 billion undrawn on our revolver. Cash from operations was $611 million, and free cash flow was $221 million or approximately 11% of revenue. Capital expenditures during Q4 were $391 million, which equates to a capital intensity of 19%. We expect 2024 capital intensity to be in the low-teens for the full year ahead of our original plan and driven by our improved silicon carbide manufacturing output on 150 millimeters. Inventory increased by $27 million sequentially and days increased by 13 days to 179. This includes approximately 74 days of bridge inventory to support fab transitions in the silicon carbide ramp. Excluding these strategic builds, our base inventory decreased $52 million sequentially with days of inventory at 105 days. We continue to proactively manage distribution inventory. Thus the inventory was down $11 million sequentially with weeks of inventory at 7.2 weeks versus 6.9 weeks in Q3. We have been underserving the mass market through this channel while we focused on our Long-Term Supply Agreement commitments. We expect to replenish the channel in 2024 to service the long tail of customers and expect inventory to start to normalize with an increase in inventory levels between seven and nine weeks over the next few quarters. Now let me provide you the key elements of our non-GAAP guidance for the first quarter. A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our fourth quarter results. Given the current macro environment and our demand visibility, we anticipate Q1 revenue will be in the range of $1.8 billion to $1.9 billion with softness across all end markets. We expect non-GAAP gross margin to be between 44.5% and 46.5%, primarily due to lower factory utilization and continued EFK headwinds. Our Q1 non-GAAP gross margin includes share-based compensation of $5 million. We expect non-GAAP operating expenses of $305 million to $320 million, including share-based compensation of $27 million. We anticipate our non-GAAP other income to be a net benefit of $8 million with our interest income exceeding interest expense. This benefit is a result of the debt restructuring activities we have completed over the last two years, reducing a significant historical drag on the P&L. We expect our non-GAAP tax rate to be in the range of 15.5% to 16.5% and our non-GAAP diluted share count for the first quarter is expected to be approximately 433 million shares. This results in non-GAAP earnings per share to be in the range of $0.98 to $1.10. We expect capital expenditures of $310 million to $340 million in brownfield investments primarily in silicon carbide and EFK. As we navigate through 2024, we will focus on operational excellence without losing sight of our long-term commitments to our customers and our shareholders. We remain perfectly positioned in the markets where we focus and continue to engage in long-term supply agreements with our strategic customers. We remain confident in our 53% long-term gross margin target as we execute our fab-right strategy to optimize factory utilization and drive operational efficiencies across the company. With that, I'd like to start the Q&A. So I'll turn it over to Liz to open the line.

Hi, guys. Can you hear me?

Yeah.

Great. First question is on the automotive side of things. I guess, kind of two parts to it. The silicon carbide side, it sounds like there's a little bit of a difference between the third-party estimates and what you're seeing from OEMs. And then last quarter, you talked about some weakness emerging in the Tier 1 guys in Europe. Can you just give us an update on what you've seen on kind of that side of the business as well?

Sure. Yeah. Look, we started the year regarding the silicon carbide, you know all know what the third-party estimates are. But when you look at customers, even the publicly announced outlook for 2024, the outlook has been tapered down a little bit. From our side, however, it's purely demand driven. The platforms are qualified. The designs have been shipping. The question now is tied to end demand. And that's why we're still very confident in 2x the market growth. The question is, what will the market do in 2024 based on the few announcements that have been made, but it's demand driven. We'll just tag on to demand. And then on automotive in general, look, we saw softness. I mentioned it in my prepared remarks, it is inventory digestion, but it's also slowing demand. You'll see that in our guide as we work through it. But one thing for us as a very high priority is managing the inventory internally and managing the inventory externally, which means we have been taking utilization down in order to match what we believe the outlook is and when the outlook recovers, we'll get all of that as tailwinds. So that's the cautious approach we've had given the signals we've seen. And we've seen them kind of come in as we've talked about since last quarter, because of the LTSAs are giving us that outlook.

Thanks for that. And I guess my follow-up for that. On the gross margin side, it looks like you're going to hold the 45 floor you talked about before. Can you just walk us through the puts and takes as the year progresses? And perhaps how big of a headwind is the utilization of 65% going to be, the floor on the utilization side, approximately how much of an impact is that versus kind of the long-term target of getting back to 53%? Thank you.

Yeah, Ross. You're absolutely right. So we plan on holding that mid-40% floor. We think utilization will bottom out around the mid-60s. We're pretty close to that now. And if you look at our margin today, I think the company has executed very well, which really shows that our Fab Liter strategy that we implemented two years ago has worked very effectively. And as we execute Fab Right, we'll continue to drive cost efficiency across that network. What you should think about is every point of utilization is about 15 basis points of gross margin going both ways up and down. So you can kind of think about we're there; we've proactively taken our utilization down. We started taking it down in late '22, and we're kind of at that point where we think we can manage through this at this level.

Thank you.

Thanks, Ross.

Thanks for taking my question. Hassane, I'm curious, what do you think has helped you avoid some of the deeper 30%, 40% kind of peak-to-trough correction that we have seen at several of your peers? And I think kind of related to that, what we're all trying to grapple with, do you think Q1 is kind of the trough because when I listen to Thad talking about utilization and that you're close to the bottom, that suggests Q1 is the trough. But do you think of it that way? And should we be modeling kind of seasonal recoveries? So kind of two parts: what has helped you avoid some of the correction and from what you can see today, is Q1 kind of the relative trough of the cycle for onsemi?

Thank you for the question, Vivek. If we consider what has enabled us to navigate the current environment more effectively than many of our peers, especially given the guidance from various companies, the key factors are the long-term supply agreements (LTSAs). At the very least, these agreements provide us with early warnings when demand starts to soften. We began receiving these alerts in the industrial sector six quarters ago, which led us to reduce utilization and adjust our shipments to align with our demand expectations at that time. In the automotive sector, we noted these signs over 90 days ago during our Q3 earnings call, as we started hearing from customers about wanting to manage their volume. These tools have given us better visibility over the past few years, but it's important to note that LTSAs don't directly solve demand issues; rather, they allow us to strategize our response to a declining demand environment. We've maintained tight control over our inventory, preventing any significant buildup, and we've actively lowered our utilization and reduced our base inventory. All of these actions demonstrate the resilience of our model, which will ultimately benefit us as conditions improve. Regarding the potential for Q1 being the trough, I prefer not to predict a bottom until we're certain, so I will keep you updated on that.

Regarding silicon carbide, can you provide insight into what the figures were in Q4 and the auto industrial mix? What are the implications for Q1? Also, why are we referencing a market rate instead of providing specific numbers as you have in the past due to supply agreements? It would be helpful to have more quantification on what silicon carbide performed in Q4, the expectations for Q1, and a definitive figure for this year rather than tying it to a market rate.

In Q4, our revenue from silicon carbide increased as we anticipated and as we mentioned in the Q3 call, showing growth from Q3 to Q4. This demonstrates the diversification and strength in that business, which we believe will continue into 2024. We don’t disclose absolute numbers because it's a ramping business, and such businesses often experience fluctuations tied to adoption. This is why we aim for double the market growth, which we originally communicated at our Analyst Day. Our long-term goal remains unchanged, and we expect to outpace the market. Our trajectory for the next five years is based on design-ins that are now completed, and all shipments have been made to a diverse range of customers. The key question is about end demand; if it exceeds our forecasts, we expect to grow faster than our predicted market rate. That’s how I would summarize the short-term outlook for 2024.

Thank you.

Hello.

Hello. Hi, Chris.

Sorry, I got cut off for a second. Anyway, so just a few clarifications on the silicon carbide business. Do you still expect to have one major customer this year that's, say, 30%, 40% of revenue? And then have your pricing expectations for silicon carbide changed for this year versus, say, three months to six months ago?

Let me discuss pricing first, as it's more straightforward. Our pricing remains unchanged, as we have always indicated, being tied to the long-term service agreements. We may engage with customers about volume adjustments based on market demand, as I mentioned earlier. Pricing is stable, and I don't foresee any pricing issues, aside from the efficiencies we achieve through improved yields and technology transfers. These factors are closely linked to technological advancements that enhance our gross margin. Regarding customer concentration, we will continue to work with a small number of key customers, which will not differ from 2023. However, we expect to see greater diversification as we onboard more customers globally, including in Asia and North America, and we anticipate Europe will begin to increase in the latter half of the year due to design wins from recent years. Therefore, while we will maintain relationships with key customers, the revenue contributions from each will continue to diversify as anticipated in the Q3 call.

Great. Thanks, Hassane. And for my follow-up, can you just talk a little bit more about your trends and overall expectations for the big two end markets, automotive and industrial, which one would you expect to start to recover sooner? And do you think that either of them can get much worse from here? Maybe just give us a sense of your confidence in both the markets relative to that.

Or lack thereof?

I'm amused. We can only manage and comment on what we observe. Currently, we are witnessing inventory digestion and weaker end demand, and that is what we are focusing on. I've been consistent for nearly two quarters that we will approach 2024 as if there is no recovery. If a recovery occurs, we will leverage it, which will positively impact all our financial metrics. Utilization will increase margins, revenue will rise, and so on. That’s our management strategy. However, I want to highlight that both the automotive and industrial markets, which are among our largest, have shown signs of softness even before many of our peers did. We've acknowledged automotive weakness in the Q3 quarter and industrial weakness in Q4 '22. We have recognized these trends and managed them effectively, and we will continue to respond to the indicators we can control and observe. When recovery starts, we will take advantage of it too. One thing is certain: we are not ignoring the situation or maintaining artificially high utilization in the hopes of a recovery. If recovery does not occur, the correction is much more severe, as some of our peers have experienced. Our approach is much more disciplined in handling our markets.

And Chris, to give you a little more color on the Q1 for auto and industrial. We expect both of those end markets to be down kind of high single digits quarter-on-quarter in Q1. So we're not seeing a recovery of either one of them yet.

Great. Thanks, guys.

Hello. Can you hear me?

Yeah.

Sorry about that. Yeah, I had two as well. Thank you for taking the question. Hassane, in your prepared remarks, you talked about your automotive image sensor business. I think hitting or exceeding $1 billion in '23. You also talked about design wins being up 50% year-over-year. How are you thinking that business specifically in '24? And can you speak to the profitability of that business as you continue to in-source more than in the past?

Yeah. Look, the business, given that the business is tied to auto and industrial, over 90% of our revenue in image sensors is auto and industrial. That has been a very active transition over the last few years, moving our capacity to auto and industrial, where a lot of the growth has been away from the consumer and the web cams and all of that. So that transition is behind us. Therefore, what I'm seeing from a financial performance, the margin performance is much better than it's ever been. It's higher than the corporate average. So it is actually accretive. And profitability is in, I would say, around the corporate. As we maintain OpEx in that business and invest in innovation like the 8 megapixels and the Fab transfers. As far as the mix change from outside to inside, that's more of a longer term. We sampled our products out of East Fishkill, but until that ramps and becomes a meaningful percent of revenue, you're not going to see an impact on margin from a mix change to an internal sourcing. But that will be part of our call it, outlook as we get to the 53% margin model for the company. That will be a contributor.

That's great. Thank you. And then as my follow-up, that's kind of where I wanted to go, long-term gross margins maybe for Thad, so you're reiterating the 53% medium to long-term. In the past, you've talked about the fab divestitures contributing to gross margin expansion. You talked a little bit about EFK. I think SiC should normalize and you've got utilization rates, hopefully, marching higher over time. I guess my question is, in the 2027 model, the revenue assumption was somewhere in the $13 billion plus to maybe $14.5 billion range, and do you need to get to those revenue levels to hit 53% gross margin or do you think you can hit those levels even at a significantly lower revenue level given the progress you've made on multiple fronts? Thank you.

Yeah, Toshi. It's Thad. Look, I don't think the march to the 53% gross margin is revenue dependent. Clearly, we've got a tailwind as we crank up utilization as the market normalizes and recovers in the outer years. But we don't look at it, given our current manufacturing footprint, we don't look at that as the primary driver being revenue. You nailed it, right? It's the utilization, it's the EFK getting that cost under control. It's the monetization of the divested Fabs that we divested in 2022. And then it's the ramping of these new products that are accretive to gross margins. All of that will give us the tailwind that gets us there. Clearly, we've got to have some growth from here, but we don't need to have the growth that you talked about. So we look at it much more as internally controlled, but what we can execute to versus a demand-driven, revenue-driven number.

Hi, guys. Can you hear me?

Yeah.

Sorry, the operator keeps cutting out for everyone. Thad, I believe you mentioned that Q1 represents the bottom for manufacturing utilization for the year. Given that we've seen your inventory increase in days for four consecutive quarters, should we interpret that as you also indicating that Q1 represents the bottom for the fiscal year for revenue?

No. I think Hassane addressed that earlier. We're not declaring a bottom here. Regarding utilization, we anticipate staying in the mid-60% range until the market normalizes and returns to the levels we experienced earlier this year and in 2022. Thus, utilization will remain steady at this level. On the inventory front, we've been increasing what we refer to as our strategic inventory, which includes silicon carbide and the Fab transition. Our working inventory or base inventory actually decreased by $52 million sequentially. The increase in days was simply due to a lower COGS number. However, we've been managing that effectively and keeping it within a good range. I expect that as we progress through the year, we will build a bit more of our strategic inventory in terms of dollars, but we will gradually reduce that over multiple years, as has always been part of our plan when exiting those Fabs and transitioning production to our internal Fabs. Overall, we are content with our base inventory levels.

That's helpful, Thad. For you, Hassane, I know that you began to highlight your analog and mixed signal platforms at your May Analyst Day, I believe that was maybe the first time that you're really vocal on it. And maybe if you can give us an idea of where that ramp stands, how material can it be as we look through the balance of fiscal year '24 or maybe even into fiscal year '25?

Yes. I want to emphasize how thrilled I am about the advancements we’ve made with our new platform. Technology development is progressing well, and we're slightly ahead of schedule regarding our products. We've already completed some of our leading products and will begin sampling early in 2024. There's a design cycle before we can expect revenue, but early indicators suggest that the competitiveness of both the platform and the products, as well as the initial customer adoption, are meeting or exceeding our expectations. We will provide more details about the technology platform as we move through 2024, but I can confidently say it is the most competitive mixed-signal analog platform currently on the market, with products that align well with our power solutions. These are very complementary, as Sudhir noted during Analyst Day. We are on track, and I'm feeling more optimistic than I was during Analyst Day due to our progress. We will keep moving forward into 2024.

Thank you.

Thank you for taking my question, and good morning. I wanted to follow up on an earlier question. The conventional view is that silicon carbide is constrained, and it seems that many of your peers are currently focusing more on demand. Do you still see silicon carbide as constrained? With the shift towards increasing demand signals, how are you managing investment levels, considering the extensive efforts and long lead times required for your vertical integration initiatives? Thank you.

From a supply perspective, considering the capacity of various fabs and the general industry's growth trajectory for electrification, I believe technology will continue to face constraints. In the short term, we have established capacity for 2024, which is driven by demand. However, this aligns with the fluctuating ramp-up that we've discussed previously. I don't view this situation as indicative of additional or excessive capacity since it is temporary and growth is expected to continue. We are managing our supply predominantly through internal sources, as most of our substrate supply comes from our own operations, which we adjust as we transition to 8-inch. We mentioned reducing capacity utilization in the previous quarter, and capital intensity will decrease in 2024 because we have achieved better performance on our 6-inch lines, allowing us to accelerate the ramp-up of 8-inch production more quickly than anticipated. We will adjust our internal and external supply based on demand signals, and we don’t see any underloading beyond what is evident in our company. We plan to manage it this way because we expect revenue to rebound. The growth of electric vehicles will continue, whether it increases from 20 to 30 percent or 30 to 40 percent; the growth trajectory is unavoidable and spans multiple decades. With silicon carbide's penetration in the EV market still below 25%, there is significant potential in this area, and it does not alter our outlook on the overarching trends. We are committed to making long-term investments.

And Josh, for the investments over the long term, we can modulate our investments very easily because we have a capital-light strategy of converting from 6-inch to 8-inch. Our Fabs are already 8-inch capable. So as we think about substrates, we can convert slowly versus having to go out and do greenfield investments of a new facility and having to bring that up. So as the market takes off, we can modulate our investments correspondingly kind of on an equal basis, depending on what's happening and move very quickly to bring on capacity if needed.

Got it. Thank you. There's a lot of helpful context there. As my follow-up, I believe in the prepared remarks, you mentioned that at some point in 2024, you were going to look to refill the channel. Could you maybe provide some context of what signals you would need to see to go ahead and do that? I know you mentioned you're not planning on a recovery, but is a recovery needed to get you to refill the channel? And I guess how much of a revenue tailwind would you expect that to be? Thank you.

Yeah. In the prepared remarks, I said we're going to start replenishing seven to nine weeks. We're at 7.2 this quarter. We need to start filling that channel now. We're underserving that mass market. So if you look over the last few years, we are supply constrained, so we started the long tail. And then we focused on our strategic LTSA customers and again, continue to start that long tail. So we do need to start replenishing that. I think for the first quarter, you may see us go up in terms of weeks, go up a week plus or minus. But keep in mind, on this revenue basis, it's likely down in terms of dollars, right? But we're going to be thinking about it that way is we've got to actually start moving inventory into that channel to support that longer tail. So you think about all those customers that broad set of customers, industrial through the catalog, we have not been servicing them well. Our distributors have been putting orders on us. They actually want to hold more inventory than what we've allowed them to hold. So we've got to start replenishing that. But we don't see a big step function here as much as just a gradual increase over the course of several quarters.

Thank you, Thad.

Thank you for the question. Can you discuss your overall levels of Long-Term Supply Agreements? Specifically looking at the SiC Long-Term Supply Agreements, which you've mentioned in the past regarding industrial usage. Additionally, can you provide an update on the SiC customer from last quarter? Did they return this quarter and were you able to fulfill their needs, or what are your expectations in that regard? Thank you.

Yeah. So our LTSAs for the next 12 months, the value is $4.8 billion. The breakdown of what that looks like roughly is about 80% auto, about 17% industrial and the rest kind of in that other bucket. So that gives us that view over the next 12 months of the LTSA coverage.

Yeah. I don't want to comment on specific customers, but our performance matched the guidance we provided last quarter and was higher than Q3. We mentioned previously that we would continue ramping throughout 2024, and it's happening just as we anticipated. The temporary demand signal that affected Q4 is now behind us, and we are progressing with the ramp.

Great. Thank you. In terms of your non-core customers, if you could update us there, are we done with that at this point? Do you keep any remaining? Any other thoughts there would be great?

Yeah, Chris. When we rolled this out, we thought we would exit somewhere between $800 million and $900 million over a multiyear period. And as you know, we've overcalled this for a couple of years now. I think that gives you an indication of the value that we bring to these customers. So for the year, we exited $180 million, think about over the multiyear period, it's about $475 million. What's remaining is good, healthy business at the corporate average. So as we've said, at this point, if our customers haven't found another source, we're just going to consider this good business as long as we don't need that capacity. So we'll continue to support those customers. Those customers are valuing that and valuing our ability to support them because we provide them many products, not just these products we're talking about. So we're not going to talk about exits any further, I'd just be in our baseline.

Perfect. Thank you, Thad.

Hey, guys. Thanks for taking my questions. First for Hassane, you mentioned the diversification of the silicon carbide business in Asia, and I think you specifically called out Korea, U.S. and then Europe. Just wondering if you could comment on how do you feel positioned in China, both with the battery electric vehicles and the hybrids?

We're very well positioned in China. Last quarter, we mentioned having long-term supply agreements with four of the top five Chinese OEMs, both qualified and ramping up revenue. However, this is linked to the demand dynamics I discussed earlier. All the necessary factors are aligned regarding platforms, their qualifications, and early ramp-ups. Both SiC and IGBT are experiencing growth due to the overall electrification trend. We are confident about our success and presence in China's EV market. This perspective also applies to the industrial sector, especially with energy storage, as we have strong engagement with key OEMs, many of which are located in China.

Got it. Thank you for that. And then, Thad, just another question on the utilization rates. What gives you the confidence that the utilizations will sort of hold in the mid-60s? Obviously, kind of an uncertain demand environment, inventory needs to be reduced. Is it just the visibility the LTSAs give you? Is it the fact that you've been able to reduce sort of normal inventory by $50 million at this utilization rate? Just how do you feel confident holding the line there on utilization? Thanks.

Yeah. It's exactly that. I mean we get visibility through the LTSAs, but more importantly, as we've been managing that base inventory. It's down at a working level. We have not over shipped to our distributors. We've kept our working base inventory at optimal levels here. And so as we look forward in the current market dynamics, we feel like we can hold that mid-60 just because of where we are in an inventory position. We don't need to take it lower because we're not over-inventoried anywhere. And the fact that we've got to start shipping into the channel to support that mass market, we're going to have to build some products for that as well. And that's that broad-based product line, not something specific to silicon carbide. So that's what gives us the confidence of where we are here, given the current market dynamics.

Got it. Thank you.

Thank you. You've mentioned some slowdown in the automotive sector and a cautious approach to managing the business. However, when I examine your automotive revenue, it was down low single digits sequentially in Q4 but still up double digits year-on-year. Many companies are projecting varied use of automobiles, but they seem to fall within a similar range. Could you elaborate on the year-on-year growth, specifically how much of that is attributable to silicon carbide and IGBTs versus general automotive demand? The figures seem to be performing better than what your cautious perspective might suggest.

I'm trying to connect everything, and in general, if we exclude silicon carbide, the silicon business experienced a decline. At a high level, that's the situation regarding the decline in the silicon business. When we examine the extent of the decline, it aligns with the expected market downturn based on the early reports I've been receiving. Therefore, I don't believe our business is unusual in relation to the market. It may stand out compared to some peers or others' statements, but we are more closely tied to the market because we have been taking a disciplined approach regarding shipments in accordance with the long-term supply agreements and ongoing discussions with our customers. Overall, we feel confident about our response to demand signals, reacting quickly by reducing utilization to prevent inventory buildup in the channel or with direct customers. Regarding automotive, it has performed consistently, with some areas of strength, such as in image sensors, which contribute to growth in content and average selling prices.

Okay. Great. Thank you very much.

Congratulations on outperforming your peers. Other companies are forecasting declines of 10% to 20%, but your forecast is much more modest. Do you believe you are reducing enough? Why not consider making deeper cuts? Additionally, if demand remains at its current level, which we know is uncertain, how many quarters of excess inventory do you anticipate having at this approximately 65% utilization rate?

Sure, I’ll address the first question and then touch on the second one. Our guidance isn't simply about whether we made enough cuts. It's based on our visibility and close engagement with our customers. We set our guidance based on what we believe our customers require as the quarter progresses. This is driven by demand signals. The smaller reduction we've implemented in the first quarter, compared to the larger cuts some of our competitors made, is due to our historical approach of gradually aligning our shipments with customer demand. We have maintained better visibility into this demand, largely thanks to our long-term service agreements. Our engagement with customers has been proactive, allowing us to better understand real demand signals. As a result, our adjustments aren't as drastic as those faced by some of our peers. We believe our guidance reflects a more accurate picture of where we stand compared to others. This is evident not only in our revenue but also in our utilization, base inventory, and channel inventory, all of which demonstrate greater discipline compared to peers who underwent larger corrections. We view our approach as a transparent assessment of anticipated demand for the first quarter, rather than a mere correction.

Yeah. And Harsh, on the utilization, just to remind you, we started taking utilization down in Q3 of 2022 as we saw softness in industrial at that time. So if you look at our base inventory, we've managed it very effectively. If you really think about utilization, it's been a soft landing in terms of utilization. We weren't in a position where we got over inventory, too much inventory in the channel and had to take it down hard. So at these levels, it's what gives us confidence that this mid-60s that we can hold here.

Understood, guys. Very helpful. As a follow-up, Hassane, should I consider your silicon carbide business to have a starting point of around $1 billion in 2024? I believe that the capacity tied to the $200 million was reallocated to other customers. Additionally, you made a subtle yet important comment about running 200 millimeter silicon carbide in the fabs. Could you elaborate on that?

I'm not going to provide a specific forecast for silicon carbide, but we believe we can achieve double the market growth based on our platforms, customer relationships, and production ramps. While there are questions about end demand, we are optimistic about growth. If demand aligns with our expectations, we will grow at twice the market rate, reflecting an aggressive ramp-up and market share gains, which we anticipate for 2024. Regarding the 200-millimeter wafers, our intention has always been to qualify them in 2024 and ramp production in 2025. My remarks emphasize that we are on track to reach that goal, with qualification set for 2024 and revenue increases expected in 2025. We are already running this process in the Fab, which indicates our confidence in the progress we expect in 2024.

Very helpful, guys. Thank you.

Through the structural changes we've made over the last three years, we've built the resilience required in our business to navigate a dynamic macro environment. We remain close to our customers. We are committed to our financial target model with our strategy of enabling the sustainable ecosystem. Again, we’d like to thank our worldwide teams for their continued tenacity and ongoing contributions to the company’s success, and thank you for joining our call today.