ON Semiconductor Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the On Semiconductor Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, to Mr. Parag Agarwal, Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead.

Thank you, Dinam. Good morning, and thank you for joining our Semiconductor Corporation Third Quarter 2020 Quarterly Results Conference Call. I'm joined today by Keith Jackson, our President and CEO, and Bernard Goodman, our CFO. This call is being webcast on the Investor Relations section of our website at www.allsemi.com. A replay of this webcast, along with our 2020 third 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. The skill for today's call and additional information related to our end markets, business segments, geographies, channels, share count, and 2020 and 2021 fiscal calendars are also posted on our website. Our earnings release and this presentation include certain non-GAAP financial measures. The consideration of these non-GAAP financial measures to the most directly comparable measures and the GAAP are also 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 future events or the future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, with, learn, should, or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially from projections. Important factors which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-K, Form 10-Qs, and other filings with Securities and Exchange Commission. Additional factors are described in our earnings list for the third quarter of 2020. Our estimates or other forward-looking statements may 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. During the fourth quarter, we plan to attend two virtual conferences. This includes NASDAQ 43rd Virtual Investor Conference on December 1st and Wells Fargo TMT Summit 2020 on December 2nd. Now, let me turn it over to Bernard Goodman, who will provide an overview of our third quarter 2020 results. Bernard?

Thank you, Bharat, and thank you, everyone, for joining us today. During the third quarter, we saw strong recovery in business conditions due to sharp acceleration in global economic activity, especially in the automotive market. Border activity has picked up meaningfully across end markets and geographies. Manufacturers are striving to meet the upsurge in demand, which was previously disrupted by the COVID-19 pandemic. Along with strong micro-driven recovery of our business, momentum in our key strategic growth areas in industrial, automotive, and cloud power end markets is accelerating. Our design wins are accelerating, and the design funnel is expanding at a rapid pace. As we stated earlier, gross margin improvement is the primary strategic priority for the company. We're on track with our manufacturing consolidation plan, and discussions are ongoing with various parties regarding the previously announced intended sale of our fabs in Belgium and Jakarta, Japan. In the near term, revenue tailwinds from the ongoing recovery in business conditions and favorable end market mix shifts should help drive margin expansion. Now, let me provide you details on our third quarter 2020 results. Total revenue for the third quarter of 2020 was $1.317 billion, a decrease of 5% as compared to revenues of $1.382 billion in the third quarter of 2019. The year-over-year decline in revenue was driven primarily by a slowdown in global microeconomic activity due to the COVID-19 pandemic. Gap net income for the third quarter was 38 cents per diluted share as compared to a net loss of 15 cents per diluted share in the third quarter of 2019. Non-gap net income for the third quarter of 2020 was $0.27 per diluted share as compared to $0.33 per diluted share in the third quarter of 2019. GAAP gross margin for the third quarter of 2020 was 33.5% as compared to 34.4% in the third quarter of 2019. Non-GAAP gross margin for the third quarter of 2020 was 33.5% as compared to 35.8% in the third quarter of 2019. The year-over-year decline in gross margin was driven primarily by lower revenue, as discussed earlier, and COVID-19-related costs. Our GAAP operating margin for the third quarter of 2020 was 9% as compared to negative 3.2% in the third quarter of 2019. Third quarter of 2019 GAAP operating margin included the impact of $169.5 million related to the intellectual property settlement with power integrations. Our non-GAAP operating margin for the third quarter of 2020 was 12%, as compared to 13% in the third quarter of 2019. The year-over-year decline in operating margin was driven largely by lower revenue and the impact on gross margin due to COVID-19 pandemic. GAAP operating expenses for the third quarter were $322.2 million as compared to $519.1 million in the third quarter of 2019. Third quarter 2019 GAAP operating expenses included $169.5 million related to the intellectual property settlement with power integrations. Non-GAAP operating expenses for the third quarter were $283.6 million as compared to $314.3 million in the third quarter of 2019. The year-over-year decrease in non-GAAP operating expenses was driven primarily by strong execution on the cost front and by restructuring and cost-saving measures undertaken by the company. The third quarter free cash flow was $101.8 million and operating cash flow was $163.4 million. Capital expenditures during the third quarter were $61.6 million which equates to a capital intensity of 4.7%. As we indicated previously, we are directing most of our capital expenditures towards enabling our 300 millimeter capabilities in the East Fishkill FAB. We expect total capital expenditures for 2020 to be in the range of 370 to 390 million. We exceeded the third quarter of 2020 with cash equivalents of 1.654 billion as compared to $2.06 billion at the end of the second quarter of 2020. The decline in cash balance was primarily due to the paydown of amounts drawn under our revolving debt facility as a precautionary measure in response to the COVID-19 pandemic. At this time, with cash balance of approximately $1.6 billion, we are very comfortable with our liquidity positions. In the fourth quarter, we expect to use approximately $690 million to pay off our 2020 convertible note principle at maturity. At the end of the third quarter, days of inventory on hand were 133 days, down seven days as compared to 140 days in the second quarter of 2020. In the fourth quarter, we intend to continue to reduce our balance sheet inventory. Therefore, we plan to run our factories at current levels of utilization despite expected higher revenue levels in the fourth quarter. In the third quarter, distribution inventory decreased by approximately two weeks as sales through the distribution channel increased significantly quarter to quarter. Instead of shipping products in the distribution channel for revenue, we brought down channel inventory, even though it was within our comfort zone. Now let me provide you an update on the performance of our business units, starting with the Power Solutions Group, or PSG, Revenue for PSG in the third quarter was $647.4 million. Revenue for the Advanced Solutions Group, or ASG, for the third quarter was $494.6 million, and revenue for Intelligent Sensing Group, or ISG, was $175.3 million. Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment.