ON Semiconductor Corporation

Good day and thank you for standing by. Welcome to the OnSemi second quarter 2024 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal. Please go ahead.

Thank you, Kevin. Good morning and thank you for joining Arm's Semi's second quarter 2024 quarterly results conference call. I'm joined today by Hassan Al-Khoury, our President and CEO, and Pat Berg, our CFO. This call is being webcast from the investor relations section of our website at www.armssemi.com. A replay of this webcast, along with our 2024 second 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 include certain non-GAAP financial measures. The cancellation of these non-GAAP financial measures to 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 future events or the future financial performance of the company. 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 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 second quarter of 2024. Our estimates are that forward-looking statements might change, and the company assumes no obligation to update forward-looking statements to reflect the actual results, change assumptions, or other events that may occur, except as required by law. Now, let me turn it over to Hasan.

Hasan? Thank you, Parag. Good morning, and thanks to everyone for joining us on the call. In the second quarter, we exceeded the midpoint of our guidance for revenue, non-GAAP gross margin, and non-GAAP earnings per share as our global teams continue to execute on all fronts. As we indicated in our Q1 call, we are seeing some stabilization in demand in our core markets. Inventory digestion persists with some pockets improving as customers maintain a cautious stance in 2024. We don't see a change to the L-shaped curve I talked about in Q1, but we expect parts of industrial, such as energy infrastructure, to recover in the second half. Among the regions, Asia Pacific, namely China, is recovering, driven by both automotive and industrial. During this time of market uncertainty, we have not taken our foot off the pedal and remain focused on what we can't control, our execution. We have doubled down on our investments to build out our strategic portfolio of analog mixed signal and power solutions. We have been gaining share by securing significant design wins in power. and we have continued to improve our cost structure through ongoing structural changes. All these efforts position us very well in a recovery with top-line growth and growth margin expansion. Our advantage remains in our comprehensive and innovative product portfolio to capture market opportunities. OnSemi's intelligent power and sensing solutions have become synonymous with high efficiency and performance, which are critical to solving customer problems and the high-growth megatrends in automotive, industrial, and AI data centers. In intelligent sensing, we continue to invest to sustain our technology and market leadership. We announced the acquisition of SWIR Vision Systems to add disruptive, colloidal, quantum-based, dot-based short-wavelength infrared technology to our portfolio to further strengthen our industrial and defense product offering. We will leverage our manufacturing and R&D expertise to accelerate the commercialization of this technology with cost effective and differentiated products for industrial and defense applications. On the analog mixed signal product development, in addition to sampling our first products, we are now proliferating a broader range of product families from high performance analog with integrated power and automotive to a low power sensing interface in medical. This broad range of applications and products we can already offer to our lead customers highlight the competitiveness of this new technology platform. We are excited to share more detail about our analog mixed signal product and technology roadmap later this year. We continue building on our design wind momentum, and last week we announced that Volkswagen Group has selected OnSemi to be the primary supplier of a complete power box solution as part of its next generation traction inverter, for its scalable system platform, SSP. The first of a kind solution features silicon carbide based technologies in an integrated module that can scale across all power levels from high power to low power traction inverters to be compatible for all vehicle categories. VW Group is the second largest automotive OEM in the world. And we expect that all VW brands, including Volkswagen, Audi, Porsche, Skoda, will be powered by OnSemi's silicon carbide in their next generation platforms. To best support VW Group and our global customer base, we have also announced a multi-year investment in the Czech Republic for a vertically integrated silicon carbide manufacturing facility. This strategic expansion, provided the European Commission approves the incentive measure, would enable us to meet the rising demand for our silicon carbide modules and other power semiconductors, by bringing front-end manufacturing and advanced packaging capabilities to Europe. As customers place an increasing importance on geopolitical risks to their supply chain, they value the resilience we have built into our manufacturing footprint through our Fab Right strategy. Our collaboration with the Czech government on this state-of-the-art facility aims not only to support our European customers, but also positions Ansemi as a central piece of the European power ecosystem further enhancing our supply resilience strategy. Additionally, OnSemi is a silicon carbide market share leader in China, and we are designed into nearly 60% of the BEV models from OEMs who are primarily introducing their 800-volt platforms at the Beijing International Auto Exhibition last quarter. China is the largest and fastest-growing BEV market in the world, and Chinese OEMs are adopting on semi-silicon carbide solutions based on the market leading efficiency of our modules and devices like the M3E we've just announced. In automotive, silicon carbide will continue to outgrow the industry for many years as EVs are adopted, but also as the penetration rate in EVs increases. The latest research reports show that 22% of EVs in production are enabled with SICK, excluding the market leader Only 6% of the EVs worldwide include SICK, but all OEMs are driving adoption to improve range and cost of the vehicles. Our success with SICK and automotive extends to the industrial market with demand expanding beyond energy infrastructure with emerging mass market applications such as commercial heating, ventilation, and air conditioning. The use of 1,200-volt silicon carbide and HVAC applications leads to more efficient, reliable, and compact systems ultimately reducing energy consumption, improving electromagnetic interference, and operational costs. We're already working with customers looking to integrate silicon carbide into their next generation designs with revenue over the next three to five years. We remain on track to outgrow the silicon carbide market growth by 2x in 2024 through share gain and our geographical and market diversification strategy, specifically on the share gains and supporting our revenue growth Our bottoms-up assessment has our growth in units, outgrowing the BEV unit growth by 2x, further supporting our outlook. We also have a significant opportunity in the data center and AI market, where our focus is on leveraging our silicon and silicon carbide portfolio to address the entire power tree. In Q2, we released our latest generation of T10 power trench family and EliteSig 650-volt MOSFET that are being designed into various subsystems of the AI data center, including power supply units, battery backup units, and intermediate bus converters. These solutions offer superior efficiency, high thermal performance, and reduced power losses, making them ideal for data centers and energy storage systems. They can reduce energy consumption by 10 terawatt hour annually as compared to our previous generation, equivalent to powering nearly 1 million homes per year. We continue to invest in multi-phase controllers to pair with our industry-leading smart power stages, which enable highly efficient power delivery to the CPUs and GPUs. As power consumed by AI data center racks increases from 40 kilowatts today to 120 kilowatts in 2025, our addressable content is expected to increase from $2,500 to $9,500. Our strategy to focus on the high-growth megatrends of automotive and industrial by partnering and innovating with the market leaders and disruptors has proven successful. We have been investing in power and sensing technologies to further our leadership position, and we will continue to leverage our portfolio to address adjacent market opportunities such as AI and data centers. Let me now turn it over to Thad to give you more details on our results.

Thanks, Hassan. In the second quarter, our teams once again demonstrated remarkable resilience and adaptability in navigating a challenging market environment. Our Q2 results exceeded the midpoint of our guidance with revenue of $1.74 billion, non-GAAP gross margin of 45.3%, non-GAAP operating margin of 27.5%, and 12% free cash flow margins. We continue to deliver consistent gross margin performance against a challenging market and underutilization, once again demonstrating the structural improvements in our business model. Q2 revenue declined 7% sequentially and 17% from Q2 of 2023. This decline was driven by an ongoing inventory correction in the automotive and industrial end markets, which together contributed 79% of our revenue. While we are facing short-term demand uncertainty, our long-term outlook remains unchanged. We're at the forefront of the fastest-growing segments of the automotive, industrial, and AI data center markets, and we expect to resume our growth trajectory as end-customer inventory levels normalize. In line with our expectations, automotive revenue declined 11% quarter-over-quarter to $907 million, a decline of 15% over the same quarter last year. From the time we embarked on our transformation in Q4 2020, which included a strategic shift to focus on automotive, our automotive revenue has nearly doubled, largely driven by increasing content for vehicle electrification and ADAP. Our industrial revenue was $468 million, down 2% sequentially, and 23% versus the second quarter of 2023. As we noted in our Q1 call, we are seeing pockets of stabilization in this market. Looking at the split between the business units, revenue for the Power Solutions Group, or PSG, was $835 million, a decrease of 15% year over year. Revenue for the Analog and Mixed Signal Group, or AMG, was $648 million, a decrease of 18% year over year. And revenue for the Intelligent Sensing Group, or ISG, was $252 million, a 22% decrease year over year. The revenue drop for all business groups was driven by ongoing inventory burn in the automotive and industrial market. GAAP gross margin was 45.2% and non-GAAP gross margin was 45.3%, compared to 45.9% in Q1 and 47.4% in the quarter a year ago. We continue to maintain gross margins above 45% through this downturn, even as our utilization has reached a historical trough of 65%, which positions us well for a market recovery. For reference, in previous downturns, our gross margin was approximately 30% at these utilization levels. We continue to deliver on our FABRIGHT strategy of driving efficiency across our global operations. In Q2, we executed additional restructuring actions to improve the cost structure of our manufacturing network to support our gross margin expansion plans. We expect our gross margins to benefit once demand begins to recover, and we increase utilization back to normalized levels. This, coupled with ramping of new products at accretive margins, will allow us to achieve our long-term target of 53%. Now let me give you some additional numbers for your models. GAAP operating expenses for the second quarter were $396 million as compared to $319 million in the second quarter of 2023. Non-GAAP operating expenses were $308 million as compared to $306 million in the quarter a year ago. Non-GAAP operating expenses were lower than our guidance due to active cost control and lower variable compensation. GAAP operating margin for the quarter was 22.4% and non-GAAP operating margin was 27.5%. Our GAAP tax rate was 15.8% and non-GAAP tax rate was 16%. Diluted GAAP earnings per share for the second quarter was 78 cents as compared to $1.29 in the quarter a year ago. Non-GAAP earnings per share was 96 cents as compared to $1.33 in Q2 of 2023. GAAP diluted share count was 433 million shares, and our non-GAAP diluted share count was 429.5 million shares. In Q2, we deployed $150 million, or 72% of our free cash flow, for share repurchases. Turning to the balance sheet, cash and short-term investments was $2.7 billion, and we had $1.1 billion undrawn on our revolver. Cash from operations was $362 million, and free cash flow was $208 million, representing 12% of revenue. Capital expenditures during Q2 was $154 million, which equates to a capital intensity of 9%. We achieved our long-term target ahead of schedule due to higher efficiency resulting from the structural changes in our manufacturing footprint. We expect to remain at or below our long-term target of 11%, including the investments needed for the silicon carbide expansion in the Czech Republic. Inventory increased by $78 million sequentially and increased by 20 days to 214 days. This includes 97 days of bridge inventory to support fab transitions in the silicon carbide ramp. Excluding these strategic builds, our base inventory increased $6 million sequentially to 117 days, which is within our target range of 100 to 120 days. Distribution inventory increased as expected to 8.9 weeks versus 8 weeks in Q1 to support the mass market, which we have underserved for the last two years. Let me now provide you the key elements of our non-GAAP guidance for the third quarter. Today's press release contains a table detailing our GAAP and non-GAAP guidance. Given the current macro environment and our demand visibility, we anticipate Q3 revenue will be in the range of $1.7 billion to $1.8 billion. We expect non-GAAP gross margin to be between 44.4% and 46.4% with utilization in the mid-60% range. This includes estimated share-based compensation of $7 million. We expect non-GAAP operating expenses of $305 to $320 million, including estimated share-based compensation of $31 million. We anticipate our non-GAAP other income to be a net benefit of $12 million, with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP diluted share count expected to be approximately 429 million shares. This results in non-GAAP earnings per share to be in the range of $0.91 to $1.03. We expect capital expenditures in the range of $130 to $170 million. And as we've previously highlighted, the acquisition of Swear Vision Systems is not expected to have any meaningful impact on our near or mid-term financial outlook. Through this downturn, we have remained committed to our long-term financial model. We're allocating resources for future growth while continuing to execute on our strategies to enhance operational effectiveness throughout the company. During the second quarter, we announced the consolidation of many of our facilities to improve efficiencies and accelerate time to market by centralizing our efforts into fewer centers of excellence. We've continued to invest in R&D to drive long-term growth and capitalize on opportunities in intelligent power and sensing despite the market downturn. We also remain committed to our capital allocation strategy. Over the last 12 months, we have deployed 78% of our free cash flow for share repurchases, significantly higher than our stated long-term target of returning 50%. Since initiating our $3 billion share repurchase program in February 2023, we have returned $814 million to our shareholders. Finally, at OnSemi, we are driven to excellence. Guided by this principle, we hold ourselves accountable not only to our financial commitments, but also to our environmental initiatives. This past quarter, we published our 2023 sustainability report, marking another pivotal step in our ongoing commitment to sustainability and highlighting the progress we have made in the past year. Wrapping up, I'd like to thank our employees for their dedication to excellence. Our strategy is working and we remain committed to unlocking shareholder value. We are a more resilient company with steady growth drivers and innovation pipeline and trusted relationships with our customers and suppliers around the world. With that, I'll turn the call back over to Kevin to open it up for Q&A.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Ross Seymour with Deutsche Bank. Your line is open.

Hi, guys. Thanks for asking the question. I guess for my first question, kind of two sneaky parts to it, but any pluses or minuses by your three segments for the third quarter guide? And then the bigger part is, Hasan, you talked about some stabilization on the industrial side and even energy infrastructure potentially rising in the back half. Any sort of similar color on your automotive business that dropped pretty significantly sequentially? You talked about some design wins in EVs, et cetera. How are you looking at that for the back half of the year?

Yeah, Ross, it's that. To answer your first part of the question, you broke up a little bit, but I think I got it. The end markets played out pretty consistent with what we expected going into the quarter. You know, we were expecting both automotive and industrial to be down. It played out that way. If we saw any, you know, signs of improvement, it was really in that industrials. We continue to see some stabilization there. So really played out as we expected during our guide for the quarter.

And I guess for my follow-up question then, moving on to the gross margin side of things, Thad, you talked about some of the idiosyncratic drivers, the East Fishkill side of things, as well as the fab divestitures in the past. Can you just walk us through any evolution of those? We get the utilization rate when that goes up. That's going to be beneficial. You laid that out clearly. But the 100 basis points from East Fishkill, that's a headwind this year. And then the fab divestitures, which I think is about a two-point tailwind when those kick in. Can you just walk us through how those unfold over the next kind of six to 12 months?

Sure, sure. So, you know, starting with utilization, which is the key driver here in the short term, just to reiterate what we said in the past, you know, every point of utilization is 15 to 20 basis points of gross margin improvement. So as you think about us coming off of a low of 65%, going back into normalized levels, you can do the math. on the gross margin expansion on that. Uh, and you're right, uh, East Fishkill with the global foundry business that we're running in there is about a hundred basis points dilutive. We'll continue that through the rest of this year. And then we'll start to see that start to, uh, to moderate in, uh, in 2025. And then the other piece is the fab divestitures. We divested four fabs in, um, a couple of years ago, and it's $160 million of fixed costs that, uh, that we'll start to recognize as demand picks up and we start manufacturing those products within our existing network. So we've got to bleed through that inventory that we've been building for those FAB transitions. And as we move that into our network, we start to see that benefit. And then the last thing is, and I noted it in my prepared remarks, is the ramping of new products that are creative gross margins. And I think if you start to do that math, you can start to get pretty close into our gross margin target, the long-term target being 53%. So we feel good. We just need a market recovery here, and we have some nice tailwinds. Thank you.

One moment for our next question. Our next question comes from Vivek Arya with Bank of America Securities. Your line is open. Thank you.

Thanks for taking my question. I wanted to revisit the Q3 outlook question. I think at the midpoint, your guiding is up a bit sequentially, and I was hoping you could, Hassan, maybe give us a sense of how you see your different end markets, especially automotive. Do you expect that to be up, down, flat sequentially? Thank you.

Yeah, I mean, Vivek, if you look at our biggest markets, you know, 79% of revenue this quarter to auto and industrial. We expect those in the third quarter to be flat to up slightly.

Okay. And then maybe as a follow-up, over the last few months, we have seen deceleration in, you know, battery-powered EV demand. And I'm curious, If you look at your silicon carbide outlook for this year at absolute dollars, so not versus the market, how do you think it has fared? Do you think what you thought in terms of absolute dollars for this year, is it still on track for that or has that view changed? And then kind of part B of that, I think you mentioned more optimism for the China EV market. Is your share in China EV above or below that 35% to 40% share? that you think you will have globally for this year?

So let me break it down. So for the silicon carbide market, I think, like you said, regionally from a BEV market, it's very different regionally. You know, the comment and reports that you're seeing more Western than China. But overall, we do expect the BEV market to remain healthy. with the little lumpiness in the short term. But long term, we're still the penetration of BEV and the penetration of silicon carbide within BEV is still call it mid single digit without the market leader. So having said that, you know, I will anchor back on 2024 growth of 2x market. I'm not going to, you know, get into the absolute dollars. We have the absolute dollars that we're driving to internally. but I will anchor on the 2x market given all of the news and all the headlines that you referred to. From the China perspective, I talked about our penetration, China being about 60%. So in China, we're ahead of where we are with the rest of the world or overall, but that's also a timing, meaning We started in China, given it's the biggest market, ahead of everybody else. If you recall, at the end of last year, I mentioned that in 2024, we do expect the ramps to start in Europe. So as the ramps start in Europe, the blend of geographical distribution of our revenue for silicon carbide will change in the second half. But overall, China is ahead of the rest of the world from our market share as well, just because it's the biggest market, and we started there earlier.

Thank you, Hassan. One moment for our next question. Our next question comes from Toshai Hari with GS. Your line is open.

Hi, good morning. Thank you so much for taking the question. I wanted to follow up on the SIC business as well. To the extent you're willing to share, Hasan, I'm curious how that business trended in Q2, whether it be on a sequential basis or a year-over-year basis, and what your expectations are for Q3. And then I guess for the full year, I'm guessing that the mix of your business, whether it be by application or customer, has evolved over the past 90 days. What's your outlook there by geo and application today versus 90 days ago?

I'm not going to break out our silicon carbide on a quarterly basis given what we've been talking about, the lumpiness of the revenue. and really the timing of customer ramps when they start, when they peak, and when they stabilize. For that, we're only going to be covering silicon carbide revenue on an annual basis, and we'll talk about it at the end of the year of where it all landed. What I will tell you is externally, what I stated is the 2x market, that's where we look at. That's where we're trending. And I added in my prepared remarks, when I look at units growth, which is a lot of it is socket of designed and share, we're also trending at the 2x further supporting our growth in silicon carbide. From a regional, you know, we talked about China being strong for us. Europe in the second half will start seeing some ramps in Europe. That's, again, in line with what we talked about at the end of last year. So all that is coming in exactly as we expected. And we continue to diversify our design in with the announcement with VW Group. That's, of course, out longer in time, but still adding to the geographical distribution of our revenue over time.

Got it. Thank you. And then as a quick follow-up, just on distribution inventory, it went up a little bit sequentially at the end of June. I'm curious what's embedded or what's assumed in your Q3 guidance. And as you think about the next couple of quarters, several quarters, What's your plan in terms of managing that inventory? You sound relatively still muted as it pertains to the cycle. Should we expect weeks to stay generally flat, or do you feel like that can go up just given how much you had underserviced that business over the past couple of years? Thank you.

Yeah, Toshi, it's Thad. So we exited the quarter at 8.9 weeks, just where we expected. We talked about that mass market you referred to. we need to put inventory into the channel. So we're achieving that well. We're managing it tight still, you know, given the market uncertainty. But for Q3, I think it's going to be right in this range, you know, let's call it nine weeks. And I really think through the remainder of this year and probably in the next year, you're kind of looking at that type of range, you know, nine weeks plus or minus. You know, we'll see how the market recovers and the adoption of the mass market. But that's our plan for the short term here.

Very helpful. Thanks, guys. One moment for our next question. Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Yeah, hi. Just a quick question. In the prior quarters, you had given your order backlog. If you could give us some thoughts on what the same-year silicon carbide backlog looks like. Thanks.

The silicon carbide backlog, you know, Look, you know, we announced a few things here over the last few quarters, right? I mean, that backlog is healthy, right? There's some short-term softness, you know, that's well-known in the EV market, but I would say the backlog is still very healthy.

Yeah, if you look at design and activity, whatever we feel in the market in the short term, and I call it short term, given the trend for silicon carbide, Not just in Bev, by the way. We talk about silicon carbide in industrial proliferating further because of the benefit that it brings, and even silicon carbide making its way into the power stages of the AI data center. So when we talk about silicon carbide, we're talking about a long-term, multi-year megatrend. That's why we're participating in it. So in the short term, of course, we all see what the market shows. But nevertheless, customers are still investing in silicon carbide for their platforms whether it be a car industrial or ai data center as i mentioned this is what we can control is our design and capability on our new products which means that as the market starts to go uptake the other way and best starts to proliferate further we are in a much better position than otherwise we we would be if we weren't winning today The VW group announcement is an example of such a large deployment of silicon carbide in an electrification platform. So if you talk about backlog as that, that's exactly what we can't control and we're working on. That same story happens in industrial. That same story happens in the AI. We're designed in. Now the ramps will support our growth.

Got it. And one quick question. On the 200-millimeter side, any thoughts on how you're looking at that ramp on silicon carbide?

Yeah, still on track to what we said. We will qualify 8-inch this year. That's when I talk about qualifying. It substrates all the way through fabs. So that will be qualified this year, starting revenue next year, in line with our expectations that I outlined last year. So no change to that. Obviously, we look at the 8-inch as what we've talked about earlier. 8-inch for us is a capacity expansion. So once it's qualified, we sample and we start seeing revenue. We will start increasing the share of 8-inch internal versus 6-inch as we convert our furnaces and so on. in order to support the ramp. But from a capability, 8-inch, I'm very happy with where 8-inch is, and therefore, we're right on track.

Got it. Thank you.

One moment for our next question. Our next question comes from Blaine Curtis with Jefferies. Your line is open.

Hey, good morning, guys. Thanks for letting me ask the question. You talked about only really the energy business inflecting the second house. I'm just kind of curious. I mean, obviously, the auto market has come in a little bit weaker. I'm just kind of curious. You said you're sticking with that L-shaped recovery. Is it right to think, though, that as you look through the rest of the calendar year that you're looking kind of flat? I just wanted to understand the comment of just highlighting that one part. Yeah.

L, I would say flat. So Blaine, I have no reason to call a recovery. Now, look, is there going to be some green shoots here and there, some markets within our automotive and industrial that will fare better than others? Probably. I don't have a crystal ball. That's why I can manage to what we can see, and I can guide to what we can see. But what I would put it in perspective is we're not planning or seeing what I would call a recovery which is a big deviation from kind of flattish. So some recovery in certain areas that will change the course. We don't guide, you know, in the out quarters, but that's kind of my view of the market today.

Thanks. And I just want to ask a lot of comments or questions on Silicon Carbide. I want to ask on the intelligent sensing group. So that business is down quite a bit. I mean, you have a driver with eight megapixels in terms of, you know, ASPs. I'm sure you're working through some inventory there as well. Just kind of outlook in terms of that content driver, where that is today and where you see that could go. And then kind of just, you know, should that follow the same trajectory of recovery?

Yeah. Yeah. I mean, we have the difference with image sensing. We do have a big market share in that market, in the ADAS automotive market. So that's more on the recovery of the market itself. But like you mentioned, there's an ASP uplift that will increase our revenue growth. disproportional from just the unit growth and also a penetration rate that as ADAS gets to more level 2+, you got more units within the base of the SAR that we're targeting. So, you can think about it as SAR plus the content uplift both ASPs and units. Now, importantly also, I do want to talk about the industrial side of that business. where we don't have the same market share as we do in automotive, so there's more expansion we can do. We've had a slew of new products that we've introduced in the industrial market. The SWIR acquisition we've made adds yet another layer of that differentiation and that technology leadership for our image sensing group that goes specifically in the industrial and the defense market. So again, same strategy of regional and application proliferation that we're doing in the power. You're seeing that kind of parallel in the imaging or the sensing business.

Thanks, Don. One moment for our next question. Our next question comes from Joshua Buckhalter with TD Cow, and your line is open.

guys thank you for taking my question uh and good morning i know you mentioned that otter was kind of in line with your expectations but i think you know 11 sequentially was a little worse than i was expecting and then and some of your peers are printed this quarter you know was that a conscious decision on on semi's part to shift more conservatively um or did something did anything in your customers behavior change over the last couple months as some of the weaker auto production came out or maybe something eosyncratic was sick uh you know most importantly Does the slight growth in the third quarter that you're guiding to assume you're roughly shipping to end demand or is there any more digestion going on there? Thank you.

Yeah, let me start with the last part. We believe it's below end demand as I talk about the inventory burn. But as far as, you know, quarter-on-quarter guide, it's hard, and I'll give you a piece of advice, it's hard to compare to peers because it's all the timing. You know, in the short term, when I call it within a 90-day period, plus 90 days, minus 90 days. It's really a timing discussion of how much inventory was there, how far ahead or below end demand. At the end of the day, you have to look at it from an end demand. End demand is exactly what I mentioned. We don't see signs of recovery, but we do see signs of stabilization. Over a multi-quarter period, it's all going to stabilize, and everybody who ships into auto is going to converge to a auto number plus their content specifically to the company. So I don't look at it as a delta to peers or a delta to customers. It's literally where we believe the automotive market is. Some of our tier ones have more inventory than others, so we'll take them longer. But inventory burn is directly related to demand. Demand accelerate, inventory burns accelerate. Demand doesn't, inventory burn takes longer to achieve. So I would call it just a timing thing. There's nothing, I guess, intentional in managing to a number here.

Thank you. I appreciate that, Collin Hassan. And then thanks for the data point on the X market leader silicon carbide attach rate being in the 6% range. You're speaking with customers and have a great insight into obviously ongoing design wins in their product ramps. Any intermediate milestones you could give us on where you expect the stick attach rate to be maybe in 2025 or the next few years? Thank you.

Yeah, look, I mean, we still see a growth in silicon carbide as a market driven, of course, by the auto industrial and AI that I talked about. So it's a broad proliferation. I think it's too early to talk about 2025. We'll have to see how 2024 exit rate is and really what the market does in 2025. If you look at a lot of the reports that are out there and talk to a lot of the customers that have reported already, it's a very broad range of what 2025 is going to look like. So it's too early to talk about 2025. What I can talk about is the rate of design wins that we have. Because that I can measure, that I can control, and that I can provide where we are. I'm very happy with that progress. You know, we talked about China. We talked about the Beijing auto show where literally we went through every car that got announced in the show. And I can tell you exactly that we are designed into it. as those cars ramp and as those cars become successful and the market recovers for BEF both in China beyond what it is and outside of China, those are the design wins that are gonna ramp for us and dictate what 2025, 26 and beyond are gonna be. So I will tell you from a design win perspective and a market relation perspective, we are firing on all cylinders here. Or I guess I shouldn't say cylinders. We're firing on all motors today.

Well, thanks, Hassan. One moment for our next question. Our next question comes from Quinn Bolton with Needham & Company. Your line is open.

Hey, Hassan, just wondering if you might be able to give us any sense of sort of timing of the VW ramp. You mentioned you thought you'd be across pretty much all of the VW models over time. Are they staged or did they sort of all ramp in the same general time period? And then I've got a follow-up.

Typically, you know, well, that's a question for them, really. I can't disclose their plan for a ramp. But it's not an on-off switch. I guess I can say that.

Got it. And then just looking at the second half, you know, it's pretty clear your message is that end demand hasn't really started to recover yet. Maybe it's stabilizing. So if you look at your L-shaped recovery comments, I guess I'm just trying to reconcile. You guys are shipping below end consumption right now as inventory is being digested. Is your L-shaped commentary really more a reflection of end demand or of your revenue? Because I would think at some point as the inventory digestion process ends, you would snap back to consumption. And I would think that would put some growth into your numbers if you're currently shipping below consumption levels. So any thoughts on that reconciliation would be helpful. Thank you.

Yeah, this is Thad. You nailed it, right? When we talk about the L-shaped recovery, it's really our revenue, right? We believe right now we're still undershipping natural demand as there's an inventory digestion going on. As that inventory is bled off, we think our revenue over time will increase again. But yeah, the L-shape is not demand. It's more of our revenue just given the inventory out in the channel.

So like we've got a couple more quarters of that inventory digestion from your vantage point?

Well, I think it depends on demand. It's his onset, right? I mean, if demand picks up, the inventory is bled faster. If demand slows, it takes a little bit longer. But look, for what we can see for the remainder of this year, that's why we're saying L-shaped. If you look at Q3, we're up almost 1%. We'll see what Q4 does. Thank you.

One moment for our next question. Our next question comes from Chris Dainley with Citi. Your line is open.

Hey, thanks, guys. Just a quick question on the DISTI inventory going back up. It sounds like there's still plenty of inventory out there amongst certain OEM customers. So given the L-shaped recovery, why would the DISTIs want to take up their inventory and not keep it flat?

Yeah, so if you recall in our last call, we talked about the mass market. So it's not really the top customers or the named customers that we have. It's more of the tail of customers that we really Ourselves have starved, and I've mentioned it multiple times during the, you know, call it the pandemic, where we didn't have a lot of, we were supply constrained. We prioritized all of our lead customers at the expense of the broad market or mass market. Right now, we talked about how we're starting to replenish and address the mass market. We started last quarter, so we expected that slight uptick. So it is driven strategically by us. Obviously, the metric, just to give you a little insight of how I look at it and why it's important for us, I look at it as new customer counts that we are adding. And that's, again, mass market, thousands of customers. As that remains on an upward trajectory, even today, we will continue to replenish the mass market. So strategically, that's the closed-loop approach that I look at operationally to manage this.

Yeah, and Chris, if you look at that 8.9 weeks, there's actually a mixed shift within that 8.9 weeks, right? So more going to the mass market and less going into specifics for customers as we continue to bleed through that inventory. So we're managing that inventory extremely tight in the channel. And just keep in mind, you know, historical levels of inventory in the channel was 11 to 13 weeks. So we're significantly below where the company had been, you know, historically.

Oh, thanks, guys. That's really helpful. And then for my follow-up on silicon carbide, I know you're not, you know, giving any numbers or anything, but if we look at your backlog and pricing for the year for next year, was there any volatility? Has that changed in the last three months? Any sort of changes in your own, like, 24, 25 backlog or pricing assumptions?

No, no. Pricing is stable, if you recall. I mean, Whether the units are coming in exactly what we had in the LTSAs or not, pricing is in the LTSAs. So we've been very consistent about we discuss with customers on the LTSAs to reach to a win-win. But we invested based on the ROI. And ROI is specific not just on volume but also pricing. We can't control volume. Neither can our customers. So first order is market dependent. So we're flexible there. But from an investment and pricing, I would say that's stable. And that's really stable across all of our business. I won't just say about silicon carbide. And it's seen in the margin holding where it is versus historical. So pricing is stable. And recall, when we started on this transformation journey, I said we're pricing for value. Value doesn't change based on market environments. If the product brings value, then the product brings value and will price accordingly, and then the volume in units will follow up with the market.

Great. Thanks, Son.

One moment for our next question. Our next question comes from Christopher Roland with Susquehanna. Your line is open.

Hey, guys. Thanks for the question. Just given some of your announcements mid-quarter on data center power using SICK, I was wondering if you guys could size that opportunity. It sounded like AI in 25 was at least a half billion dollar opportunity, just running some rough numbers there. But if you could size the opportunity, talk about, you know, kind of your expected market share or any other details, that would be terrific.

Yeah, I'm not breaking the AI market at that level. We will as that market really, in my view, starts proliferating for us. If you recall, the same thing we did with energy infrastructure, where we started talking about it from a design win until it became a more meaningful part of revenue and more meaningful part of the market. So stay tuned. What I talked about today is the opportunity from a product perspective, design in, and really that call it the SAM per rack. And as we make progress through these and with our new product introduction on the mixed signal analog, not just on the power, we'll give out a little bit more detail on that.

And Chris, if you go back to our analyst day last year, we talked about the data center growing at 22% over a multi-year period. I think with AI and data center ramping, you can think about that over a multi-year period as probably being higher than that. Excellent. Thank you.

And then my second question is around LTSAs. I don't know if you have any numbers or updates there, but just kind of how are they trending? Have you noticed in terms of push outs, renegotiations, have those slowed? Have they become more favorable in those negotiations? Any changes over the past couple of quarters here?

Yeah, Chris, I would say it's pretty stable. So the lifetime value of our LTSAs are $14.7 billion. If you look at what's shippable over the next 12 months, it's about $4.4 billion, so about 30% of that. Pretty consistent with what we've been seeing as you ship LTSAs. I think, as we've said, the LTSAs Pricing is stable. It gives us that call on demand changes and why we've seen many of the market shifts prior to many of our peers. So I think the LTSAs are strategic in the way that they're actually proving value in how we manage our business.

Yeah, I mean, even today with the market environment that we've been talking about, we do have customers asking for LTSA because you don't need the LTSA when the market is what it is today. they stage on needing the LTSA when the actual market recovers and they don't want to be stuck in traffic in the allocation. If the snapback is across all markets and very quick, so it's a future-proofing, it's a strategic tool, and of course it drives that discussion with the customer about what is their need based on new products and existing product ramps.

Thank you, guys. Very helpful. One moment for our next question. Our next question comes from Harlan Sir with JP Morgan. Your line is open.

Yeah, good morning. Thanks for taking my question. Your direct customer business was down about 18% sequentially in the June quarter versus your district business, which was up five. So it seems that most of the inventory-related issues are with your direct customers. And given that orders are probably the best indicator of inventory dynamics at your direct customer's since you don't monitor the sell-through, did the order trends in direct start to stabilize in Q2, and has that stabilization continued so far, quarter to date?

Yeah, so first of all, in the mix shift between disty and direct, keep in mind, most of that industrial business goes through the distribution, so that's that long tail of customers. So that's why you're seeing a little bit more there, where the big automotive guys typically are direct. So you're right, as we've seen some Recovery in industrial, you're seeing a little bit more of a shift to disti and a little bit less on direct. So I think it's just kind of a short term as you go through this digestion period. Looking forward, I would say things are stabilizing here.

Great. Thanks for that. And then other of your peers in the analog and power markets have seen a pickup in China. I know in the first quarter you had not seen the seasonal pickup post-Chinese New Year's. As you move through the second quarter, it looks like Asia, which includes China, you did see slight sequential revenue growth. So have the order trends also started to stabilize or improve in this region? And is it broad based or biased more towards industrial and or automotive?

Yeah, so, you know, we said in our prepared remarks, you know, we're seeing China stabilizing, we're seeing growth there. It's both automotive and industrial. We talked about energy infrastructure as well as the second half recovery. So that would be a lot of that goes through China. But, yeah, I would say it's the broader market of auto and industrial in China, and that's definitely leading the recovery right now.

Great color. Thank you.

One moment for our next question. Our next question comes from Tristan Gare with Baird. Your line is open.

Hi, good morning. Thanks for letting me in. Just follow up on China. How sustainable do you believe this is? How would you categorize inventories in China specifically? Are you seeing any type of government incentives or is it just that there's a rebound after several quarters of weakness?

I guess that's a tough question to posture, but The market pickup in China, I think the demand is coming back. We've had a pretty big trough, you know, what we talked about in the prior question, you know, there was no recovery after the Chinese New Year. We've been talking about potential regards. So I look at it as driven by end market demand, not necessarily specific government incentives or any of that, because I haven't really seen any major announcements in China to drive their economy. So therefore, I would call it as a broad-based demand stabilization towards a recovery. For us, with our penetration in China on silicon carbide and really on the silicon across the board, we will just benefit and we will see it. And given that we are very tight on the inventory in the channel, we will see the sell-through much quicker than having to wait to drain through large channel inventory like potentially some of our peers. So from our view, we've established ourselves in a very good position to see the uptick really quick. We start to see it in Asia, specifically in China, like we talked about. But I wouldn't call it any specific incentives that may or may not be sustainable. So therefore, as long as the market stays the way it is, I would call that sustainable.

Okay, great. Very useful. And then as my follow-up question, Maybe I missed it. What was the point of sales for DSTIs in Q2 sequentially, and what was the percentage of DSTI of your total revenue in the quarter?

Yeah, all that's on the website that we post. Distribution is the percentage of total increased where direct actually decreased, but that's all posted on the revenue trends that we put on the website there.

Great, thank you. One moment for our next question. Our next question comes from Harsh Kumar with Piper Stanley. Your line is open.

Yeah, hey, thanks, guys. I guess congratulations on weathering the storm reasonably well in this cycle, gentlemen. Hasan, one for you. Is it fair to say that your win at Volkswagen... should put all the wafer quality, rumors, guzzle, conjecture, whatever you want to call it, that's been going on in the last year, that should be put to rest now that you've got a major win like Volkswagen. And then the second part to that question is, are your wins in silicon carbide still a function of wafer availability, the fact that you can make your own wafer? And did you say that you're the lead at Volkswagen for this particular set of wins?

Yeah, so by the way, by now, I thought the whole rumors about yields and quality and all that nonsense has been put to bed. But just for the record, if not, the answer is, of course, the answer has always been. So for the few non-believers out there, I think they're either not listening, not looking at the signs, not listening to the announcement, or the head is buried in the sand. We've been very clear about our performance. Our wins have been speaking for themselves. So the answer is, of course, somebody like VW Group doesn't award on a whim. They award based on audits, based on reviews, and based on in-depth, on-site, and technical depth and reviews. So I'll just put it at that. As far as the VW win, we are the primary. Which is, you know, to answer your question, yes, we are the primary for that. And the breadth is for the VW brand overall, or the VW group overall.

And for my follow up, in the past cycles, we've seen the channel recover fast, particularly when it's been stopped in this manner. I guess I'm going to put you in a theoretical spot here. Why do you think the channel is not spiking up? Is it because there is still plenty of inventory out there and they don't feel like they need to load up just yet and it's going to come or is something shifted in the way they're thinking about stocking product?

Yeah, look, I mean, I can't speak for the channel in general. I can speak for what we've done in the channel. If you recall the last few years, we've been managing the channel way tighter than a lot of our peers and really way tighter than they would want us to manage. They would take more if we ship more. But we didn't want to have a balloon in the channel inventory like some of our peers have because that puts us quarters away from seeing a recovery. Because even if you get the POS recovered and you have a lot of weeks in the channel, that's that latency that we didn't want to have and we want to be closely tied. That's why I mentioned strategically, as we ship specifically to the mass market, the metric I use is customer count increasing that we ship to. So we are shipping and replenishing the mass market. And I do monitor, again, it's not a quarterly metric. Think about it as inventory velocity. From the time we ship it to the mass market, how long before it ships out? That velocity is monitored. The number of customers is monitored. That's why we are very good about increasing our channel inventory for the mass market. But if you talk about channel inventory for the top customers, you know, the industrial customers or what I would call the named customers, that just follows the trend. Because look, half of our inventory in the channel is fulfillment. So it is demand related directly. Got it. Thank you, gentlemen.

Ladies and gentlemen, this concludes the Q&A portion of today's conference. I'd like to turn the call back over to Hassan Elkari, President and CEO, for any closing remarks.

We continue to prioritize operational excellence through the market correction and demonstrate the resilience of our business. We're very proud of our global teams for executing through the current demand environment with prudent financial management. We are a better structured company because of the work we've put in during the downturn. Thank you all for joining us today.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.