Key highlights from ON Semiconductor Corporation (ON) Q2 2003 Earnings Concall
- [00:04:04] ON said its silicon carbide business is growing rapidly, with revenue in 2Q growing nearly 4x over 2Q22. The company signed more than $3 billion of new silicon carbide LTSAs in 2Q, bringing its total lifetime silicon carbide revenue committed through long-term supply agreements to over $11 billion.
- [00:10:57] The company secured $1.95 billion in long-term supply agreements for power modules with leading global manufacturers of solar inverters.
- [00:15:08] Silicon carbide business achieved its first profitable quarter.
- [00:25:20] Chris Dainley with Citi asked to compare the current state of the semicon cycle, ex silicon carbide, to its state 3 months ago and to comment on any changes in visibility. Hassan El-Khoury CEO said the automotive and industrial markets remain healthy, supported by the growth of electric vehicles and energy infrastructure, even without silicon carbide. However, non-automotive and industrial markets are expected to decline in 3Q, following the trend of ON’s peers, after being up slightly in 2Q.
- [00:26:31] Chris Dainley of Citi also enquired if there have been any changes in ON’s lead times and shortages compared to 1Q. Thad Trent CFO replied that on average, ON’s lead times have remained relatively flat QonQ, with some pockets where lead times have decreased and a few pockets where it has increased.
- [00:27:21] Blake Friedman at Bank of America asked for the mix of autos versus non-auto in the silicon carbide LTSAs signed by ON. Hassan El-Khoury CEO answered that about 90% of ON’s silicon carbide revenue is from the automotive market, while 10% is from the industrial market. The LTSA of $1.95 billion for the industrial market includes both silicon and silicon carbide, as ON is able to provide hybrid modules.
- [00:27:37] Blake Friedman at Bank of America also asked what is ON doing differently in the industrial market that is allowing it to grow while its peers are shrinking. Hassan El-Khoury CEO clarified that ON’s growth in the industrial market is driven by its focus on growth markets within industrial, such as energy infrastructure and medical, where ON has have made strategic investments.
- [00:29:08] Blake Friedman at Bank of America enquired if ON will ever consider building its own greenfield facility for silicon carbide substrates, given the industry’s supply shortage and ON’s focus on brownfield investments. Hassan El-Khoury CEO said that the company is on track to exit volatile non-core businesses and is performing better than expected, with a majority of the business expected to come internally by the end of the year. Currently, ON is able to support its growth with brownfield investments and does not see the need for greenfield investments, but may consider them in the future if business continues to grow.
- [00:31:28] Harsh Kumar with Piper Sandler asked if the change in ON’s silicon carbide business from transactional to multi-year, multi-billion dollar deals due to the competitive environment or ON’s increased comfort in taking on these orders. Hassan El-Khoury CEO answered that ON’s ability to scale quickly and deliver on its commitments to customers has led to increased demand for its silicon carbide products. This has resulted in new and expanded long-term agreements with customers.
- [00:31:49] Harsh Kumar from Piper Sandler also asked if the multi-year, multi-billion dollar orders are for silicon carbide chips, or are they for a combination of chips and wafers. Hassan El-Khoury CEO clarified that ON is not interested in selling substrates, and it is focusing on increasing its substrate manufacturing capacity to meet demand from its customers. The substrate manufacturing operation is performing ahead of plan.
- [00:36:41] Gary Mobley of Wells Fargo enquired for a preliminary view for FY24 silicon carbide revenue, considering supply constraints and ON’s focus on the supply side. Hassan El-Khoury CEO replied that ON will not provide guidance for FY24, but investors can expect silicon carbide revenue to be substantially higher than in FY23.
- [00:37:21] Gary Mobley of Wells Fargo asked for an update on the government funding ON has received for silicon and silicon carbide, including CHIPSAC and equivalent funding. Hassan El-Khoury CEO said ON is considering US, Europe, and Korea for its $2 billion investment in end-to-end silicon carbide manufacturing. The decision will be made between now and the end of the year, and the main factor is the economic and financial viability of each location. Government funding will play a role in the decision.
- [00:39:32] Christopher Rowland with Susquehanna enquired about ON’s strategy for co-investment in silicon carbide and how does it compare to its competitors. Hassan El-Khoury CEO replied that ON is not reliant on customer co-investments to finance its growth in silicon carbide. Co-investments are strategic partnerships that provide customers with dedicated capacity and offset depreciation costs. ON is able to ramp silicon carbide production quickly and cost-effectively because it is investing in brownfield facilities.
- [00:42:39] Christopher Rowland with Susquehanna asked if the solar industry is driving the growth of ON’s industrial SiC business, and is this growth faster than expected. Hassan El-Khoury CEO said the industrial SiC and automotive SiC businesses are both ramping well, with the automotive business expected to ramp to a higher level due to the larger TAM. The financial performance of the SiC business is ahead of schedule, with GM doubling QoQ and operating margins in the high teen percentage.
- [00:49:22] Quinn Bolton from Needham asked if there are any particular headwinds in 3Q that could cause a 40 bp decline in GM at the midpoint, despite revenues trending up and SiC margins moving higher. Hassan El-Khoury CEO answered that the GM is expected to decline in 3Q due to a combination of factors, including the ramp of silicon carbide, which is dilutive to the corporate average, and lower utilization. And expect QtoQ SiC margins to improve.
- [00:51:42] Timothy Arcuri at UBS asked about captive versus external mix over the long term, if there’s an upper limit to how much of ON’s revenue it wants to come from captive customers. Hassan El-Khoury CEO said OnSemi’s target captive vs. external mix is 80%, give or take, depending on factors such as supply assurance, geopolitical considerations, and economic viability.
- [00:55:07] Jeremy with Stifel asked if the LTSA’s revenue prepayments with no ownership of the equipment, and are there any limitations on using the equipment for other customers. Hassan El-Khoury CEO answered that the LTSAs are a mix of revenue prepayments and equipment consignments, with the specific terms varying depending on the customer. ON seeks to maintain flexibility by not tying up capacity for any one customer.
- [00:58:04] William Stein with Truist asked if ON’s emerging products in digital power control are related to servers focused on AI, and what’s ON’s targets and traction towards that market. Hassan El-Khoury CEO said that ON is developing new digital power control products for servers, automotive, and industrial applications. The company is making good progress and expects to start sampling these products in early 2024.
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