ON Semiconductor Corporation

Good day and thank you for standing by. Welcome to the On Semiconductor fourth quarter 2023 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 will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host today, Parag Agarwal, Vice President of Corporate Development and Investor Relations. Please go ahead.

Thank you, Liz. Good morning, and thank you for joining our semi-sport quarter 2023 quarterly results conference call. I'm joined today by Hassan El Khoury, our President and CEO, and Ted Pert, 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 one hour following this conference call and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the investor relations section of our website. Our earnings release and this presentation 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-Q and other filings with Securities and Exchange Commission and in our earnings release for the fourth quarter of 2023. 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. Let me turn it over to Hassan. Hassan?

Thank you, Parag. Good morning, and thank you all for joining us on the call. We're 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 and 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 margins. Our revenue from approved products in 2023 increased more than 40% over 2022. Year-over-year design wind 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 and sensing. We achieved our first billion-dollar 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 four 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 US, 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% to 40% growth for silicon carbide in 2024, OEM's latest EV plans indicate a more tapered growth signaling a sick 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 industries. Electrification remains a content expansion opportunity for us. Our broad portfolio of silicon carbide and IGBTs combined with our high-power packaging solutions give us a competitive advantage across all levels of EVs, ranging from HEV to PHEV 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 XEVs and specifically up to $350 of content in hybrid electric drivetrains and onboard chargers. We grow no matter which one gains traction, pun intended. On Semi 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 XEV 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 this same period grew 60%. The IEA predicts that renewable energy is on course to increase by 2 and 1 half times by 2030. For EV chargers, we just released a full suite of ELITE SICK power integrated modules, enabling bi-directional charging capabilities for DC ultra-fast electric vehicle chargers. Our newly released modules can be used up to 350 kilowatt 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 system, and using our portfolio to provide a system-level optimized solution across our power and sensing technologies remain a competitive advantage. We are also excited about our power opportunity to support the transition to 48V. We are already in production with a leading automotive customer on their new 48V 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 LTSA 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. Thad?

Thanks, Hasan. Our ongoing transformation in 2023 delivered significant improvements 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 maintain 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, an 11% decline year-over-year driven by softness in compute and mobile in markets. Revenue for the intelligence 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 materialize 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. Gap 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 equivalent was $2.5 billion, and we had $1.1 billion undrawn on a 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 and 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. DISD 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 LTSA commitments. We expect to replenish the channel in 2024 to service the long tail of customers and expect inventory to start to normalize with 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 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 98 cents to $1.10. We expect capital expenditures of $310 to $340 million in brownfield investments, primarily in silicon carbide and EFK. As we navigate through 2024, we'll 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.

As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Ross Seymour with Deutsche Bank.

Hi, guys. Can you hear me?

Yep.

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 one 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, we all know what the third party estimates are. But when you look at customers, even public 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 a demand-driven. We'll just tag on to demand. On the 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 recover, 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 Thad, 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? If 65% is 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 know, you're absolutely right. So we plan on holding that mid-40% floor. We think utilization will bottom out around the mid-60s. You know, we're pretty close to that now. And if you look at our margin today, you know, I think the company has executed very well, which really shows that our fab lighter 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.

Our next question comes from the line of Vivek Arya with Bank of America.

Thanks for taking my question. Hassan, 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 listened to Tad 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 recovery? So kind of two parts, you know, what has helped you avoid some of the correction? And, you know, from what you can see today, is Q1 kind of the relative trough of this cycle for OnSemi?

Yeah, Vivek, thanks for that question. Look, if you think about what, helped us navigate better than a lot of our peers, given the guide of companies that guided already. And like you mentioned, 20%, 30% is really the fact that, you know, we talked about the LTSAs. We talked about how, at a minimum, the LTSAs are going to provide us a phone call when things start getting softer. Those phone calls started happening in industrial before anyone talked about industrial softness. I'm talking six quarters ago. That's when we started taking utilization down. That's when we tightened even more what we ship into the channel to be way closely tied to what we believe the demand is at that point in time. The other thing in automotive, we talked about it in our Q3 earnings over 90 days ago when we talked about we started to see signs because we started getting the calls about the LTSAs and customers wanting to get some relief on the volume. So those are the tools that we have implemented over the last few years in order to give us that visibility. But it's not, you know, the LTSAs are not going to solve a demand problem. What LTSAs have done is allowed us to prepare what we do in response to a softer demand environment. And you've seen we put a tight management on this inventory. It didn't bubble up. We've actually reduced our utilization. We've reduced our base inventory in dollars. All of these are signs of the resiliency we have in our model, which, by the way, all of them will be tailwinds on the other side of that. Now, as far as what we believe the trough is Q1 or not, look, I'm I'm smart enough not to call a bottom until I'm standing on top of the hill looking back at it. So I'll let you know when that happens.

On silicon carbide, could you help give us some sense of what it was in Q4, what the auto industrial mix is, what's the implied for Q1? And why tied to a market rate? You know, why not in the past you have given us very, you know, specific and absolute numbers because, you know, you had those supply agreements. So why not give an absolute number? Why tied to, you know, to a market rate? So just any more quantification of what silicon carbide did in Q4, what the implied is for Q1, and then, you know, kind of an absolute number for this year instead of giving, tying it to a market rate.

Yeah, so I'll first cover on in Q4, our revenue for silicon carbide went up as we discussed in the Q3 call and as we expected. So it came in line with our expectation. Again, it grew from Q3 to Q4. So that shows both the diversification and the strength in that business that will also remain in 2024 with the growth we're going to see in 2024. Now, the reason we don't talk about absolute numbers It is a ramping business, and the lumpiness of a very new ramping business is going to be in silicon carbide like it is with any ramping business that is tied to adoption. That's the reason we went to 2x Mark. And by the way, it is what we pecked to at our analyst day. So we didn't really... change what we do, we change the short term more on the long term. We've always said we're going to outgrow the market. We're going to be 2x the market. That is our trajectory for the next five years that we discussed in analyst day. And my comments are we will remain committed to that trajectory based on the design ends we have. And as I mentioned in Ross's question, all the design ends are done. All the shipments have been made. for the ramp to start with a very broad range of customers, the question remains, what is end demand going to do? And if end demand is better than what we're forecasting, we're going to grow better than what we forecast at 2x the market. That's where I would leave kind of the, I'm going to call it the short term, which is 2024. Thank you.

Our next question comes from the line of Chris Dainley with Citi.

Hello?

Hello.

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 to six months ago?

Let me cover the pricing one because it's easier. Pricing has not changed. As we've always discussed, you know, our pricing is tied to the LTSAs, although we will discuss with customers on volume changes depending on ramps or end market, as I discussed earlier. Pricing is consistent. Therefore, I'm not seeing any of the pricing impact other than the efficiencies that we get as we improve yields, as we transfer technologies, et cetera. Those are very tied to technology advancements that actually enhance our gross margin. So that's on that. As far as customer concentration, We will remain with a few handful of lead customers. That's not going to be any different from 2023. However, as a percent, we're going to see more diversification as we ramp more customers across the worldwide, both in Asia and North America. And you're going to start seeing Europe ramp up in the second half of the year from design wins we've done over the last couple of years. So we will remain with a profile of having key customers. I won't discuss percentage of revenue for each, but it will just keep diversifying as we predicted in the Q3 call.

Great. Thanks, Hasan. 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 relatively. Or lack thereof.

I'm laughing. Look, I can only manage and comment of what we see. And therefore, what we see is kind of that inventory digestion and software and demand. Therefore, that's what we're managing too. I've been very consistent over the last almost two quarters that we're going to manage 2024 as there is no recovery per se. And then if there is one, we'll just take advantage of it and it will become a tailwind across all financial metrics. Margin goes up with utilization, revenue goes up, et cetera. So that's how we're going to manage. Now, what I will say, though, is both of these markets, auto and industrial, you know, two of the largest markets that we have, we saw the softness, I would say, even ahead of a lot of our peers. You know, as I mentioned, we talked about automotive softness in the Q3 quarter. We talked about industrial softness in Q4 22 quarter. So we've seen it. We've managed to it. We've done very well managing to it. And we're going to keep managing to the signals we can control and we can see. And then when they start recovering, we'll take advantage of it as well. But one thing for sure, we're not sitting here ignoring it, just keeping utilization artificially high, hoping for a recovery. And if it doesn't come, then the correction is much harder, which you've seen with some of our peers. We're taking a much more disciplined approach as far as how we address our markets.

And Chris, to give you a little more color on the Q1 question, 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.

Our next question comes from the line of Toshi Yahari with Goldman Sachs.

Hello? Can you hear me? Yep. Oh, sorry about that. Yeah, I had two as well. Thank you for taking the question. Hassan, in your prepared remarks, you talked about your automotive image sensor business, I think, hitting or exceeding a billion dollars in 23. You also talked about design wins being up 50% year over year. How are you thinking about that business specifically in 24? And can you speak to the profitability of that business as you continue to insource more than in the past?

Yeah, look, given that the business is tied to auto and industrial, over 90% of our revenue in image sensor 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 webcams and all of that. So that transition is behind us. Therefore, what I'm seeing from a financial performance standpoint, 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 FAP 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 THAAD. So you're reiterating the 53% medium to long-term. In the past, you've talked about the THAAD 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. 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, 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 that 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.

Thank you.

Our next question will come from the line of Gary Mobley with Wells Fargo.

Hi, guys. Can you hear me? Yep. Sorry, the operator keeps cutting out, I guess, for everybody. Ted, you mentioned that, I believe you mentioned that Q1 represents the bottom for utilization, manufacturing utilization for the year. And given that we've seen your inventory increase in days for four consecutive quarters, should we read into that as if you're also saying that Q1 represents the bottom for the fiscal year for revenue?

No, look, I think Hassan answered that earlier. We're not calling a bottom here. In terms of utilization, we think we're going to be in this kind of mid-60% range until the market normalizes and starts to return to the levels that we saw earlier in the year and in 2022. So utilization will kind of stay at this level. In terms of inventory, if you look at what we've been doing, we've actually been growing what we call our strategic inventory, silicon carbide and the fab transition. If you look at the inventory, what I call our working inventory or base inventory, it was actually down $52 million sequentially. Days were up just because of the COGS number was a lower number, but we've been managing that very effectively and kind of in a good tight range here. I expect as we go through the year, we'll build a little bit more of this strategic inventory in terms of dollars, but we'll burn that up over a multi-year period that's always been in our plan as we exit those fabs and start to bring that production into our internal fabs. So we're actually, in terms of base inventory, we're happy where we are.

That's helpful, Pat. For you, Hasan, I know that you began to highlight your analog and mixed signal platforms at your May Annals Day. I believe that was maybe the first time that you were 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.

Yeah, so look, the fact that I'm highlighting in my prepared remarks tells you how excited I am about the progress that we've made with a brand new platform. So as far as technology development, technology development is actually on track, a little bit ahead of schedule as far as products are concerned. We've already taped out a few of our lead products. We will be sampling here in early 2024. And then obviously there's a design cycle before you get to revenue. So from all leading indicators of one, the competitiveness of the platform, and two, the competitiveness of the products and the early adoption that I see from customers, all of those are at or ahead where we thought that technology will get us. You'll hear more about it as we get through 2024 about what that technology platform is. But I will tell you, it is the most competitive mixed signal analog platform that exists in the market today, and it will carry with it products that are highly synergistic with what we do on the power side of it. So very complementary drivers, controllers, as Sudhir mentioned in Analyst Day. So we remain on track. I'm more bullish than I was when we did Analyst Day, given the progress, and we will continue to push forward through 2024. Thank you.

Thank you.

Our next question will come from the line of Joshua Buchalter with TD Cowen. Joshua Buchalter Hey, guys.

Thank you for taking my question, and good morning. I wanted to follow up on an earlier question. I think the conventional view is that silicon carbide is constrained, and a lot of your peer commentary seems to be shifting into more demand-focused right now. I guess to ask it simply, do you still view silicon carbide as constrained and And given we are moving towards more demand signals now, how are you managing investment levels given all the efforts and long lead times that a lot of your vertical integration efforts take? Thank you.

Yeah, from a supply, if you look at a lot of the fabs and the capacity that the whole industry has talked about versus a trajectory of growth for electrification in general, I do believe that we that technology will remain constrained. Now, of course, in the short term, capacity for 2024 to a first order is put in place. So it is a demand driven. But that goes back to the lumpiness of the ramp that we've always talked about. So I don't see that as additional capacity or overcapacity, given that it is temporary in nature and the growth is going to remain. The way we are managing it, of course, is A lot of it is internally driven. You know, majority of our substrate, majority of our supply is generated internally. And we modulate that as we convert to 8-inch. You know, we talked about taking utilization down in the last quarter's earning. Sorry, the capacity, capital intensity will be down in 2024, and that's because we've been performing better on our six inch and therefore we're able to ramp eight inch faster than we originally expected. So we're going to modulate this internal external supply in order to tag on to what we see as a demand signal. So we don't see a under loading above and beyond what you see in the company and we'll manage it that way because revenue is going to recover. EVs are going to keep growing. Whether it's 20 to 30, 30 to 40, it doesn't matter. It's going to grow, and it's a multi-decade growth, given that the penetration of silicon carbide in EVs is still below 25%, and EVs in general are below 25%. A lot of upside in that business. It does not change our outlook for the megatrend, and we will continue to invest in the long term.

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 six inch to eight inch. Our fabs are already eight inch capable. So as we think about substrates, we can convert slowly versus having to go out and do greenfield investments of a new fab, a new facility and having to bring that up. So as the market takes off, we can modulate our investments correspondingly, kind of at an equal basis, depending on what's happening, and move very quickly to bring on capacity if needed.

Got to 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. You know, 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 were supply constraint, so we starved the long tail. And then we focused on our strategic LTSA customers and, again, continue to starve that long tail. So we do need to start replenishing that. I think, you know, for the first quarter, you may see us go up, you know, in terms of weeks, go up, you know, 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, Dad.

Our next question will come from the line of Christopher Roland with Susquehanna.

Hey, guys. Thanks for the question. Can you guys talk about your overall levels of LTSAs? And then if you can, double-click into SICK LTSAs. I think you've given industrial in the past as well, anything there? And then the update on the SICK customer from last quarter, did they come back and did you fill them this quarter? What are your expectations there? 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, as far as, you know, look, I don't want to comment about specific customers, but it came exactly as we guided last quarter, and overall it came higher than Q3. We said last time that we'll keep ramping. We'll keep ramping through 24, and that's coming in exactly as we expected. So that temporary, I would say, demand signal, that impact before is behind us, and we're moving forward 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 yet? 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 and $900 million over a multi-year period. And as you know, we've over-called 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, um, you know, think about over the multi-year period, it's about $475 million. What's remaining is good, healthy business, you know, 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, uh, 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. It'll just be in our baseline.

Perfect. Thank you, Todd.

Our next question will come from the line of Quinn Bolton with Needham.

Hey, guys, thanks for taking my question. First, for Hassan, 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, how do you feel positioned in China, both with the battery electric vehicles and the hybrids?

Yeah, actually, our position in China is we're very well positioned. I think last quarter we talked about having LTSAs with four of the top five China OEMs, both qualified and ramping revenue. But again, it's tied to the end demand commentary I put before. So all our ducks in a row as far as the platforms, the qualification on these platforms, the early ramps on these platforms, that's both SICK and IGBT, as I mentioned. Both are seeing the growth on electrification in general, all flavors of electrification. But we feel pretty good about our success and our exposure in China for EV. And that's, by the way, I would extend that to the industrial side of it with energy storage is the same commentary with our engagement with the OEMs. A lot of them are based in China.

Got it. Thank you for that. And then, just a question on the utilization rates. What gives you the confidence that the utilizations will sort of hold them in 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 know, you've been able to reduce sort of normal inventory by 50 million at this utilization rate? Just, you know, 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, you know, we've been managing that base inventory. It's down at a working level. We have not, we haven't over shipped to our disties. We've kept our working base inventory at optimal levels here. And so as we look forward, you know, 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. Our next question will come from the line of Joseph Moore with Morgan Stanley.

Great, thank you. You guys have talked about some automotive deceleration and are running the business conservatively. When I look at your automotive revenue, you were down low single digits sequentially in Q4. You're still up double digits year on year, which is kind of, there's a gamut of companies guiding for a bunch of different companies kind of views of autos, but everybody's kind of in that same ballpark. So maybe could you talk to, you know, to the year-on-year growth, how much of that is silicon carbide, you know, silicon carbide minus the IGBTs it replaces and how much of that is just general autos and just, you know, it seems like the numbers are a little bit better than maybe your conservatism would imply.

I'm trying to tie all the... So what we... I guess in general, if you take out silicon carbide, the silicon business declined. I guess that's at a high level. The silicon business declined. If we look at the amount of decline, it declined with what the expected market declined based on the early reports that I'm starting to see in general. So I don't think our business is an outlier from the market. It may be an outlier for what some of our peers and what others have said. But for us, we're tied more to market because we've been taking a very disciplined approach about what to ship based on the LTSAs and the discussions we've had with the customers that have been ongoing. So I think we feel pretty good about our response to demand signals being pretty quick as far as taking utilization down in response to it and making sure we don't build inventory in the channel in response to it or at the direct customers, as a matter of fact. So between these two, I think automotive came in line, except a few of the strengthened pockets like we talked about in image sensor, which is a content growth and an ASP growth approach here.

Okay, great.

Thank you very much.

Thank you. Our next question will come from the line of Harsh Kumar with Piper Sandler.

Yeah. Hey, guys. Gents, first of all, congratulations. I'm doing a lot better than it appears, but I am giving you a loaded compliment because other companies are guiding down 10% to 20% on a sequential basis. You're guiding down a lot smaller. Do you think you're cutting enough? In other words, why not go ahead and cut a lot more? And then part two of the question is, assuming demand stays at this level, and we know that you know, we don't know where the demand will go, but at this 65 something percent utilization, how many quarters of excess inventory do you think you might have?

Yeah, look, I'll cover the first one and then a little bit on the second question. Look, it's not a matter of did we cut enough and did we do enough? It's we are guiding based on our level of visibility and based on our very close engagement with the customers. Where we guide it is where we believe, and, you know, based on the quarter progression, where we believe the customers need from us. So it is a demand-driven signal. Now, the difference between, you know, our smaller reduction in the first quarter versus some of the larger reductions from some of our peers is historical. We've been tapering down a lot of what we ship to customers, and we believe we've been closer and more in line with demand that our customers need versus some of our peers that don't have that same visibility levels with whatever construct they have on whether LTSAs or similar programs. We believe the LTSAs gave us that visibility. We have been engaged with customers earlier than most of our peers, and we believe we have been closer to what a real demand signal is, and therefore changes to demand signals are not as drastic as with some of our peers. So when we talk about our guide is better than some of our peers, I think our business and where we are with our business, we put ourselves in a much better position than some of our peers. And you can see that, by the way, not just on the revenue, You can see that on our utilization. You can see that on our base inventory. You can see that on our channel inventory. All of these are better and show better discipline than some of our peers that had a much larger correction. So we don't see this as a quote-unquote correction. What we see it is a view and a transparent view of what we believe demand is going to do in the first quarter.

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. And then as my follow-up, Hassan, should I think of your silicon carbide business as having a starting point of about a billion dollars in 2024 because that capacity, I believe, that came on, the $200 million was, from my understanding, reallocated to other customers. And then part two of the question is you made a very subtle but I think important comment that something to the tune of you're already running 200-millimeter silicon carbide in the fabs or maybe on trial air. Could you just expand on that?

Yeah. So look, I'm not going to give an absolute guide on silicon carbide. What I would say is 2x the market. We feel comfortable with 2x the market given all of the platforms and given the customers and the ramps that we've seen. The question now is on end demand. But end demand is better. We're going to grow better. End demand is where we believe it is. We're going to grow at that. But it will be 2x the market. And that's showing both an aggressive ramp and share gains. So that's on the outlook for 2024. As far as the 200 millimeter, this one, it was more, I would say, I thought it was a more direct comment because what we've always said is we're going to qualify 200 millimeter in 2024 and ramp in 2025. So my prepared remarks is purely highlighting the fact we are on track to achieve that goal that we set out, which is qualifying in 24, revenue ramp in 25. It's already running in the FAB, which is a pretty good leading indicator of where our qual and our confidence in the qual is going to be in 24.

Very helpful, guys. Thank you.

That concludes today's question and answer session. I'd like to turn the call back to Hassan El Khoury for closing remarks.

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've remained 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.

This concludes today's conference call. Thank you for participating. You may now disconnect.