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spk00: Ladies and gentlemen, thank you for standing by and welcome to the On Semiconductor First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to Parag Agarwal, Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead. Parag Agarwal, Vice President of Investor Relations and Corporate Development Thank you, Denise.
spk01: Good morning, and thank you for joining On Semiconductor Corporations First Quarter 2021 Quarterly Results Conference Call. I am joined today by Hassan El Khoury, our President and CEO, and Pat Tran, our CFO. This call is being webcast from the Investor Relations section of our website at www.onsunday.com. A replay of this webcast, along with our 2021 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 related to our end markets, business segments, geographies, channels, share count, and 2021 fiscal calendar are also posted on our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures with the most directly comparable measures under GAAP 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 on other forward-looking statements regarding future events or future financial performance of the company. The words believe, estimate, project, anticipate, intend, may, expect, will, 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 would cause actual results to differ from our forward-looking statements, are described in our Form 10 case, Form 10Qs, and other filings with Securities and Exchange Commission. Additional factors are described in our earnings release for the first quarter of 2021. Our estimates for 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 emails that may occur except as required by law. Our analytics day is scheduled for August 5th. We plan to host the event in New York City, and we look forward to seeing you all in person in the summer. We will send out further details regarding the event in a few weeks. Now, let me turn it over to Hasan. Hasan?
spk03: Thank you, Parag, and thank you, everyone, for joining us today. For the first quarter of 2021, we posted strong results driven by solid execution and broad-based strength across our strategic end markets. We reported revenue of $1.48 billion, up 16% year-over-year. More importantly, our focus on gross margin expansion is beginning to show results, with first quarter gross margin increasing by 370 basis points year-over-year and by 80 basis points quarter-over-quarter. We have taken steps to optimize our product portfolio and channel strategy to ensure that we capture the right value for our products, and these steps will continue to drive favorable and sustainable results. At the same time, we continue to drive cost improvements throughout our supply chain, improving efficiency of our operations and shifting our product mix towards higher margins. We are seeing increased demand across most end markets, And while the strength in the automotive market is well publicized, we also see strength in the industrial market as global industrial activity is gaining momentum. The steep acceleration in demand has impacted our ability to supply certain products, especially those manufactured by our foundry partners, and in certain pockets, products manufactured internally. We are working diligently with our manufacturing partners to ensure timely supply of our products to our customers and have taken steps to ensure continued supply to our strategic customers by building inventory on our balance sheet and reducing inventory in the distribution channel. By having better control over inventory, we are able to quickly respond to the needs of our strategic customers. The steep acceleration in demand that we have seen in the last few quarters will likely begin to subside in the second half of the year, but will remain at a very healthy level. We expect supply and demand to get back in balance as the demand stabilizes later this year. On our transformation initiatives, I had indicated in the previous call our goal to realign our investment and resources to accelerate our growth in high-margin businesses. At the same time, we are looking at our pricing practices to identify and address price-to-value discrepancies and are realigning our cost structure across the whole supply chain given the recent increases in material costs. We are productively engaging with our customers to ensure we recover these costs, but more importantly, working with our strategic customers to secure long-term agreements to provide better supply and price visibility over the next few years. Over the last few months, we have made several changes to streamline the organization and improve efficiency. We have brought in leaders with strong execution track records, promoted new leaders from within, all with the focus on accelerating our strategic transformation and capitalizing on the current market strength to set our path for growth and margin expansion over the next five years. My goal is to have an organization that is able to react quickly to changing business conditions and is able to make decisions efficiently and objectively in the best interests of shareholders. I remain bullish on the potential of our company and believe we are uniquely positioned to benefit from the key megatrends in the automotive and industrial markets. These are the fastest-growing semiconductor end markets with solid margin potential. We have outstanding assets and a highly talented and motivated workforce. With a disciplined investment strategy and consistent and strong execution, we can maximize the value for our shareholders, customers, and employees. We will provide you with greater insights into our strategy and targets at our analyst day on August 5th. Let me now discuss a few highlights of our key strategic end markets, starting with automotive. We set a new record for automotive revenue in Q1 with revenue of $515 million. This revenue represents 35% of our Q1 revenue and an increase of 17% from Q1 2020. This increase was broad-based, and we continue to maintain strong momentum in our vehicle electrification, automotive MOSFETs, CMOS image sensors, lighting, and ultrasonic products. We continue to see strong momentum in our silicon carbide and IGBT products for electric vehicles, and during the first quarter, we secured significant design wins with leading Tier 1 and global electric vehicle OEMs, few of whom have recently launched marquee platforms. These wins are expected to ramp starting in late 2021 and will contribute to the growth we will see over the next few years. It takes more than technology to win these platforms. Among the most important source of differentiation is our expertise in packaging, which is critical for improving heat dissipation and reducing the footprint of the module. In addition, we have been serving automotive and industrial customers for a few decades, and during this time, we have built a vast distribution network, strong customer relationships, solid domain knowledge, and a reputation for quality. Customer feedback on our silicon carbide traction modules has been very strong. The efficiency of our modules is meaningfully higher than that of our competitors, which enables our customers to make favorable trade-offs between the cost of battery and the range of the vehicle. From the sensing solutions in automotive during the first quarter, we secured a platform win for up to 11 image sensors on a single vehicle, which is expected to ramp in 2022. The industrial end market which includes military, aerospace, and medical, contributed revenue of $371 million in the first quarter of 2021 at 25% of our revenue. Excluding the impact from geopolitical factors related to a specific customer, our first quarter industrial revenue increased by 22% driven by a broad-based demand. In the industrial end market, we continue to see strong momentum for our power modules and various applications, with alternative energy being a key area of growth. We are expanding our customer engagement into the EV infrastructure, and we secured our first design win for our silicon carbide power modules for a charging application with an emerging electric vehicle OEM. Now I will turn the call over to Thad to provide additional details on our financials and guidance. Thad? Thanks, Hassan.
spk02: Let me start by saying that I'm energized to join On Semiconductor at a very exciting time for our company. We have tremendous opportunities to create value for our shareholders, customers, and employees as we execute our strategic transformation. We have the building blocks of a robust product portfolio, excellent teams, and operational scale to drive sustainable financial results during this transition. Now let me comment on the current business environment. During the first quarter of 2021, we saw continuing recovery in business conditions driven by further acceleration in global economic activity. We are seeing broad-based strength across most end markets as semiconductor content continues to increase in the products we encounter in our daily lives. As Ahsan mentioned, we continue to benefit from the secular megatrends in automotive and industrial end markets, which now account for 60% of our total revenue. Although the industry is faced with severe supply constraints globally, we have supported our customers through proactive inventory management by taking channel inventory down while holding more on our balance sheet. We believe supply and demand will start to balance later in the year. Now let me turn to results for the quarter. Revenue for the first quarter of 2021 was $1.48 billion, an increase of 16% over the first quarter of 2020, and 2.4% quarter over quarter. versus normal seasonality of a sequential decline of 2% to 3%. The year-over-year increase in revenue was driven by broad-based strength, with automotive and industrial growing by 16% and 17% respectively. Gross margin for the first quarter of 2021 was 35.2%, a 370 basis point improvement year-over-year, and an 80 basis point improvement sequentially. The gross margin improvements are being driven by improved mix to higher margin products, improved utilization, and our laser focus on cost structures across the company. Our factory utilization was 84% as we ramp production to align with the strong in-demand. As we move forward, our fab lighter strategy will allow us to continue to reduce our manufacturing footprint and optimize a mix of products within our fab to reduce our overall cost structure. GAAP earnings per share for the first quarter was $0.20 per diluted share as compared to a net loss of $0.03 per share in the first quarter of 2020. Non-GAAP net income for the first quarter of 2021 was $0.35 per diluted share as compared to $0.10 per share in the first quarter of 2020. Next, let me provide additional color in the performance of our business units, starting with the Power Solutions Group, or PSG. Revenue for PSG for the first quarter was $747 million. PSG revenue increased by 20% year-over-year due to strength in automotive, industrial, and computing end markets. Revenue for the Advanced Solutions Group, or ASG, for the first quarter was $531.5 million, an increase of 14% year-over-year. In addition to strength in industrial and automotive, ASG benefited from strength in computing, especially in high-end graphic cards. Revenue for the Intelligent Sensing Group, or ISG, was $203 million, an increase of 9% year-over-year. Strength in ISG was primarily driven by automotive and by computing, with the work-from-home trend remaining strong. Now let me give you some additional numbers for your models. Gap operating expenses for the first quarter of 2021 was 395.3 million as compared to 384.1 million in the first quarter of 2020. Non-gap operating expenses for the first quarter of 2021 was 324.7 million, an increase of 6 million year over year and 32.3 million quarter over quarter as expected. This increase is primarily due to an increase in variable and stock-based compensation and the normal reset of fringe rates going into the year. Our gap operating margin for the first quarter of 2021 was 8.5% as compared to 1.5% in the first quarter of 2020. Our non-gap operating margin was 13.3% as compared to 6.6% in the first quarter of 2020, driven largely by higher revenue and gross margin performance. Our GAAP diluted share count was 445.4 million shares and included 12.8 million shares for the in-the-money portion of our convertible notes. Our non-GAAP diluted share count was 432.6 million. Please note we have an updated reference table on our investor relations website to assist you with calculating our diluted share count at various share prices. So turning to the balance sheet, cash and cash equivalents was $1.04 billion, and we had $1.42 billion undrawn on a revolver. Cash from operations was $218.5 million, or 15% of revenue. Capital expenditures during the first quarter of 2021 were $77 million, which equates to capital intensity of 5.2%. As we indicated previously, we are directing a significant portion of our capital expenditures towards enabling our 300-millimeter capabilities at the East Fishtail FAB. Accounts receivable was $684 million, resulting in DSO of 42 days. Inventory increased $44 million sequentially to $1.3 billion, and days of inventory increased three days to 123 days. Distribution weeks of inventory decreased $113 million to 8.4 weeks from 11 weeks in Q4 and currently is significantly below our target of 11 to 13 weeks. As I mentioned earlier, we proactively reduced the distribution inventory to hold more inventory on our balance sheet to support our customer needs rather than building inventory in the supply chain. Total debt was $3.34 billion and we paid down $154 million in the quarter. So turning to guidance for the second quarter, A table detailing our GAAP and non-GAAP guidance is provided in our press release related to our first quarter results. Let me now provide you key elements of our non-GAAP guidance for the second quarter. As mentioned, demand remains strong, driven by improving global macroeconomic environment and the steep recovery in our markets following the COVID-19 downturn. Based on current booking trends and backlog levels, we anticipate that revenue will be in the range of $1.57 billion to $1.67 billion. We expect gross margins between 35.8% and 37.8%. This includes share-based compensation of $3.5 million. We expect total non-GAAP operating expenses of $323 million to $337 million in the second quarter, This includes share-based compensation of approximately $20 million. Capital expenditures expected to be $110 to $120 million for the quarter. We anticipate our non-GAAP OIE, including interest expense, to be $28 to $30 million. Our non-GAAP diluted share count for the second quarter
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