ON Semiconductor Corporation Price & Performance (ON)

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'll 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 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 ks Form 10 Qs and other filings with the Securities and Exchange Commission and in our earnings release for the and full year 2024. [indiscernible] Our estimates or other forward looking statements might 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. Now let me turn it over to Hassan. Hassan, Thank you, Parag. Good morning, everyone, and thank you for joining us on the call. 2024 marked the fourth year of our transformation journey.

Transformation that began by focusing our efforts where we add value. Intelligent power and sensing technologies. We've invested in differentiated products to win with disruptive innovation and the high growth megatrends of automotive and industrial and AI data centers. We streamlined manufacturing through our Fabrite strategy and we've improved operational efficiencies in doing so. Market conditions aside, and I'll get to those, I'm proud of the hard work our worldwide teams continue to put in and I want to thank everyone for their tenacity amid what continues to be a very difficult environment. We remain committed to our winning formula and we have demonstrated the resilience in our business model delivering non GAAP gross margin of 45.5% against revenue of $710,000,000,0.0 for the full year.

As for the market environment, demand declined late in the the quarter and continued into Jan. 0, resulting in revenue of $1,720,000,000,.00 non GAAP gross margin of 45.3% and non GAAP earnings per share of $0,.95 Regional revenue declined sequentially except North America, which remains flat with Japan seeing the sharpest decline. On quarter declines were driven primarily by our non core market segments. Made a backdrop of end market softness and geopolitical uncertainty, inventory digestion persists across our key end markets. Our stance has not changed. We are prioritizing value, we will now play in highly volatile price sensitive markets. We are maintaining the integrity of our value proposition and positioning ourselves Our automotive revenue increased 8% sequentially driven by China followed by North America. Results were driven by share gains and new customer ramps. China grew 18% quarter over quarter and while was up, an early Chinese New Year and extended shutdown period already impacted Jan. 0 EV deliveries from the top China based automakers. Demand from all other region weakened towards the end of the which continued into In The U. S, Tier 1s have been impacted by lower global auto demand than expected the along with slower EV ramp than anticipated, Entering we expect persisting volatility due to the geopolitical uncertainty across all geographies as our customer assess their many We are monitoring the demand signals of EV adoption given the uncertainty around EV tax credits and slowing infrastructure deployment.

In Europe, EV demand weakened in with new vehicle registrations dropping 10% month over month in Dec. 0. Our industrial revenue decreased 5% sequentially with weakness in the traditional parts of the business. The PMI across all major regions remained weak and the slowdown in manufacturing activity that further compounded by ongoing inventory digestion and we expect the weakness to persist into 2025. Smaller but growing parts of the business that we don't break out are AI data center, aerospace and defense, where revenue grew more than 4050% respectively in 2024 over 2023. Silicon carbide, our revenue increased sequentially, resulting in a 22% increase for the over the For the full year, revenue declined slightly from 2023 as programs did not ramp at the expected levels. We remain focused on executing our strategy We have delivered on our 200 millimeter technology development and sampled customers we are balancing our internal versus external substrate supply and we are winning with the market movers by pushing the boundaries of innovation. The performance of our silicon carbide enables us to deliver ON optimized system performance while lowering the total cost of ownership to our customers without eroding the value of our solutions. In China, we continue to win based on performance and we expect to gain share in the silicon carbide TAM as the transition to 800 volt batteries continue.

Furthering our strategy of delivering the complete Power Treat for automotive and thus and AI data center, We closed the acquisition of Qorvo silicon carbide junction field effect transistor business. The SICK JFET portfolio complements our Elite SICK power solutions and is the most competitive technology to get the energy efficiency and power density and power supply units for AI data centers. It is a high voltage play in AI data centers and as power levels in these systems are nearly doubling, AC to DC conversion for UPS and PSUs is transitioning from silicon solutions to silicon carbide. We expect JFET to continue to replace the incumbent superjunction technologies and PSUs as we need as the need for smaller footprint, better performance and lower cost continues to increase. ON terms of silicon carbide, revenue growth and AI design wins for the hyperscalers started to ramp in the and we expect our SiC JFET and SiC MOSFET revenue continue to grow in 2025. The acquisition of this highly capable team and technology also accelerates our readiness for emerging markets such as EV battery disconnects and solid state circuit breakers. We expect this portfolio to We expect this portfolio to unlock a $130,000,000,0.0 TAM opportunity with a 30% revenue CAGR through 02/30.

Despite the current environment, we remain committed to our long term strategic goals and we continue to invest in disruptive innovation to drive profitable growth and to emerge stronger from this downturn. In Nov. 0, we introduced the most advanced analog and mixed signal platform for intelligent power and sensing solutions our new Treo platform built on leading edge BCD 65 nanometer technology for high performance and advanced features, supports the industry's widest voltage range of 1 to 90 volts for unmatched integration. Trello platform embodies our strategy of prioritizing high value products and will accelerate our portfolio proliferation to unlock a $36,000,000,000 TAM opportunity at up to 70% gross margins. The modular architecture of the platform is enabling us to sample products faster. This year, we will start to reap the benefits of the investments we've already made in the technology and capacity at our East Fishkill fab, as we ramp up revenue and double the number of products available on the market. Customer reaction has been very positive. They are taking advantage of the level ON integration and accelerated time to market for applications such as Ethernet for automotive Zonal ultrasonic sensing for ADAS park assist, and high efficiency power management for AI data centers and they are actively designing Trello based devices into their next generation platforms.

As we look ahead to 2025, visibility is very limited and customers are taking a wait and see approach in a backdrop of geopolitical uncertainty. We will continue to focus on what we can control. We are taking this opportunity to review our portfolio, and further rationalize based on the value we bring we will optimize our manufacturing footprint and we will control spending by focusing on efficiency through automation while we continue to invest in R and D to support our long term growth. Our actions will position us to better benefit while supporting our long term strategy. Let me now turn it over to Thad, to give you more detail on our results and approach going into 2025. Thanks, Hassane.

As Hassane mentioned, despite the downturn, our 2024 results demonstrate our team's relentless pursuit of operational excellence to drive cost efficiencies a weak market environment. Their efforts allow us to maintain gross margin at 45.5% against revenue of $710,000,000,0.0 and to generate $120,000,000,0.0 of free cash flow. A 3x increase year over year. Our proactive approach to prudent cost management and capacity planning has proven to be the right strategy to deliver better results than the company has ever achieved in similar market conditions. Looking to 2025 and beyond, we believe rightsizing the organization will benefit the company in the long term. These structural changes should position us to expand gross, and operating margins and generate strong cash flow in the future. We are moving aggressively and with urgency on the following actions. We plan to further rationalize our manufacturing footprint and reduce excess capacity through our Fab Right strategy. These actions will reduce our underutilization absorption as we lower our fixed We expect to see the results of these actions to positively impact the income statement in and continue driving margin expansion towards our long term target by providing greater leverage in our business model as the market recovers.

We will make structural changes across the company to reduce our operating expenses. We are exploring a number of options, including rationalization of our product portfolio headcount reductions and potential site closures. We expect to see a meaningful impact of these actions as early as the We will continue R and D investments ON differentiated high margin products to support our long term growth. And we will focus on free cash flow generation in 2025 as we manage working capital tightly reduce capital spending to our revised intensity target, of mid single digit percentage range in 2025. We generated $4.22,000,000 dollars of free cash flow in that's 39% sequential increased sequentially. We're committed to our long term target of returning 50% ON of free cash flow to shareholders through our share repurchase program and in 2024, we exceeded it by returning 54% or approximately $6.50,000,000 dollars This includes $200,000,000 of share repurchases in the and there is approximately $170,000,000,0.0 remaining ON our repurchase authorization Turning to revenue for the a slowdown in demand across all end markets resulted in revenue of $1,720,000,000,.00 Automotive and industrial accounted for 84% of revenue in the Automotive revenue was $1,030,000,000,.00 which increased 8% sequentially driven by programs that ramped in silicon carbide.

Revenue for industrial, was $4.17,000,000 dollars down 5% sequentially.

Inventory digestion persists and we saw further degradation in the traditional parts of industrial offset by pockets of growth in medical. Outside of auto and industrial, our other business declined 24% quarter over quarter and more than was seasonally expected. We have seen early signs of pricing pressures in pockets of these non core end markets which we will not pursue and exit over time as the volatility returns to historical levels.

Looking at the split by the business units, revenue for the Power Solutions Group or PSG was $8.00 $9,000,000 a decrease of 2% quarter over quarter and 16% year over year. Revenue for the Analog and Mixed Signal Group or AMG was $6.11,000,000 dollars a decrease of 7% quarter over quarter and a decrease of 18% year over year. Revenue for the Intelligent Sensing Group or ISG was $3.00 $3,000,000 a 9% increase quarter over quarter ISG revenue decreased 2% over the same quarter last year. Turning to gross margin ON the GAAP gross margin was 45.2% and non GAAP gross margin was 45.3%.

Down 20 basis points sequentially and 140 basis points Manufacturing utilization decreased to 59% ON as we aggressively took action late in the quarter to match our demand visibility. Now let me give you some additional numbers for your models. GAAP operating expenses for the for the were $3.71,000,000 dollars as compared to $3.30,000,000 dollars in the Non GAAP operating expenses were $3.21,000,000 dollars compared to $3.6,000,000 dollars in the quarter a year ago. Non GAAP operating expenses increased sequentially due to the timing of R and D project expenses.

GAAP operating margin for the quarter was 23.7% and non GAAP operating margin was 26.7%.

Our GAAP tax rate was 14.2% and our non GAAP tax rate was [indiscernible] Diluted GAAP earnings per share for the was $0,.88 compared to $1,.28 in the quarter a year ago. Non GAAP earnings per share was $0,.95 as compared to $1,.25 in ON GAAP diluted share count was $4.30,000,000 shares and our non GAAP diluted share count was $4.26,000,000 shares.

Turning to the balance sheet.

Cash and short term investments was $3,000,000,000 with total liquidity of $410,000,000,0.0 including $110,000,000,0.0 undrawn on a revolver.

Cash from operations was $5.80,000,000 dollars and free cash flow increased 39% sequentially to $4.22,000,000 dollars representing 25% of revenue. For the year, we generated almost $120,000,000,0.0 of free cash flow. Capital expenditures during were $157,000,000 which equates to a capital intensity of 9%.

Inventory was flat quarter over quarter on a dollar basis and increased by three days to two sixteen days. This includes one hundred days of bridge inventory to support fab transitions in silicon carbide. We are nearing the completion of these strategic builds and expect this inventory to peak in the as we ship and convert the inventory to cash. Excluding the strategic builds, our base inventory is at one hundred and sixteen days, which continues to be within our target range of one hundred to one hundred and twenty days. Distribution inventory declined $55,000,000 with weeks of inventory remaining relatively versus nine point seven weeks in Our plan to change the mix ON the channel to support the mass market has resulted in an 18% increase in customer count year over year. We expect distribution weeks of inventory to be plus or minus ten weeks going forward. Looking forward, let me provide you the key elements of our non GAAP guidance for the As a reminder, today's press release contains a table detailing our GAAP and non GAAP guidance. Given our visibility we anticipate revenue will be in the range of $1,350,000,000,.00 to $1.1,450,000,000,.00 dollars We expect non GAAP gross margin to be between 3941% with utilization declining to mid 50% This includes share based compensation of $7,000,000 At the midpoint of our guidance, approximately half of the quarter on quarter change in gross margin is attributable to the drop in revenue as the under absorption is calculated on a lower revenue number.

An additional 100 basis points is due to unfavorable product mix and the remainder is driven by lower utilization which now drives a 20 to 25 basis points change in gross margin for every 100 basis points of utilization at these lower utilization levels. This change is due to the higher fixed cost as a portion of total factory cost. As the market recovers, and utilization improves, we will see significant leverage in our gross margin as these costs dissipate and we recognize the benefit of our Fabrite cost reductions. Moving on to non GAAP operating expenses, we we expect OpEx to be in the range of $3.13,000,000 dollars to $3.28,000,000 dollars including share based compensation of $31,000,000 We anticipate our non GAAP other income to be a net benefit of $14,000,000 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 is expected to be approximately $4.25,000,000 shares.

This results in non GAAP earnings per share to be in the range of $0,.45 to $0,.55 We expect capital expenditures in the range of $110,000,000 to $150,000,000 The structural changes we plan on making will position us to react quickly and favorably to changing market conditions. We believe electrification, AI data center and renewable energy are still the major growth drivers for our industry over the next decade decade and we remain confident our technology and innovations in these markets will allow us to capitalize on those trends. With that, I'll turn the call back over to Kevin to open it up for questions. Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Hi, guys. Thanks for letting me ask a question. First question, I ON to get into the structural versus cyclical side. You guys have been conservative for quite some time on a cyclical basis, probably 1 of the first ones. But yet the magnitude of this drop is very, very significant. Hassan, I know you talked about late in the quarter things fell apart from a demand perspective, but how much of this do you believe to be on specific versus the end market? And just from a revenue basis, are you at all concerned that the structural end market portfolio or product portfolio needs larger adjustment and isn't going to be as resilient as you hoped? No, look, I think the big change in the precipitous, the 1 thing I can say that is on specific is the non core business that is seen the largest decline And we've been very consistent not to play in that volatility. If you recall, when we started the we had a big portion call it $800,000,000 to $900,000,000 of non core business where we said we would exit We only exited about half of that And we're seeing with that extended downturn, we're seeing more and more volatility in that pricing but we remain consistent with our strategy that we're not going to play in this highly volatile we're going to maintain the value of our core products, which is where we're investing, think Trello, silicon carbide, thing ON the medical and so on.

All of these are where the growth is going to come from. And in the short term, as we see the volatility, we're not going to participate yet we will choose to rationalize our portfolio further and match our capacity accordingly.

And Ross, I would add just the size of that business that Asana is talking about, the non core is roughly $3.50,000,000 dollars to $400,000,000 that more volatile that as this downturn extends that is we will exit over time. Just to put a sizing to it. Thanks for that, Thad. And then I guess along the lines of the sizing side of things, you talked about some of the structural actions you are going to take in the cost front as soon as and then some of the benefits potentially on the COGS side coming into the back half. Any sort of color as far as putting magnitudes around those? No, not at this point. We're still working on the plans. We'll give updates throughout the quarter as we solidify those plans. So expect some updates as we go.

Thank you. 1 moment for our next question. Next question comes from Vivek Arya with Deutsche I'm sorry, with Bank of America Securities. Your line is open.

Thanks for taking my question. Just first kind of few clarifications. So what are you expecting for the sequential segment trends in automotive and industrial [indiscernible] segments. And I think you mentioned something unfavorable in the mix. And then any early look at seasonality because Hassan what everyone is obviously trying to guess is is the path of recovery for ON from here? Yes. So by end market Vivek, automotive is going to be down the most. We think that's going to be probably 25% or more down sequentially. When you look at industrial and other, we think going to be down mid to high single digit sequentially.

Okay. And on the visibility side, we're sticking with visibility of about a quarter Of course, we have some looks into but it's too early to talk about. Seasonality in given really the volatility and backdrop of between geopolitical and tariffs. As early as over the weekend. So we're not going to be talking about yet as we get more and more visibility, we'll update them. But as far as recovery, look, I think I know what others have said it's a lot of the talking about, oh, the second half would be better than the first half and so ON. It's the same string that everybody is pulling that they did in 2024. I don't subscribe to that. I subscribe to the data I see and we're going to manage the company to the data we see. [indiscernible] getting it at this point will just be upside for us as the market recovers. And I'd rather have that and be right in that aspect versus hope for a recovery, run the company. And if the recovery doesn't come, now you have a headwind. I'd rather all of that work that we do now like that said, not standing still to be tailwind for us whether there's a recovery or not.

For my follow-up, Hassan ON, so if I look at Q1 automotive, I think you mentioned down 25% so let's say $7.70 dollars ish million or so, it has sort of reset back to levels. But it is still well above the levels we saw pre COVID, right, which were in the $400,000,000 $500,000,000 quarterly range. What is the right baseline that we should have when we start to think about automotive business for long periods of time because you have seen industrial businesses get reset back to much lower levels, but automotive is still above the 2019 levels. It's closer to 2020 level. So how do you think about what is that right baseline? When was automotive at the right baseline level for us to project it? What have been the effects of LTSAs, pricing, content, EV, silicon etcetera, that will help us project what your automotive business can be over the next several years as you start to normalize. Thank you.

Yes. Look, I think from looking for it's hard to talk about a baseline given all the changes that we've done to our portfolio. And you mentioned some of them, the growth in silicon carbide which is not just the growth in silicon carbide, but a mix shift even on the ASP side A silicon carbide module is a much higher dollar content than some, for example, the discretes we used to ship more of prior. So from a unit you can expect unit decline, but revenue went up. So it's hard to get a baseline given how drastic our portfolio has shifted over the last even two to three years. But moving forward, our long term view, which remains consistent outside of the market environment today, our long term view remains consistent which is SAAR plus, call it, high to low teens. Sorry, from high single digit to low teens that's the range over SAAR. So which is what we're seeing. That I would say is the base line that we are building to and the baseline we are investing to, which is both a mix shift into higher value products, especially as for example, we start introducing [indiscernible] which comes with a margin expansion as well towards our long term target So moving forward, that's how you can think about it, but it's hard to go backwards and talk about a baseline just because of the shift that we've done over the last few years.

Thank you. 1 moment for our next question. Our next question comes from Toshiya Hari with Goldman Sachs. Your line is open. Hi, good morning. Thank you so much for taking the question. Hassan, I wanted to go back to the automotive outlook for down call it 25% sequentially.

This outlook is much worse than many of your peers. I'm just curious what's driving the delta there? Is it Is it pricing, Is there a non core component within automotive? Any additional context or color there would be really helpful.

Yes. So of course, there's a non core business component to it, as I mentioned.

So that's built into the But some of it is the silicon carbide. We've always said silicon carbide core on quarter is lumpy. We've had a great However, in China, it's all driven by China. China today is looking at the softer I think that's temporary as it digests the inventory that they've built. It's not our inventory, but I'm talking about vehicle inventory. We're monitoring that. You have an early Chinese New Year. Some of the Chinese customers have done an extended shutdown in order to absorb that inventory. So net net, I don't worry about that quarter on quarter lumpiness as I look at it over a multi quarter period.

We're still gaining share both in China and some of the European names. I've said it before, they're not ramping at the rate that we expected but they're still ramping, which is what drove the So quarter on quarter, the number is what the visibility shows. But the structural changes in the business and the outlook remain unchanged.

That's helpful. Thank you. And then maybe 1 Thad. You talked about rationalizing your portfolio reviewing your manufacturing footprint. As you draw up forward strategy and your plans, is the aspiration to kind of hold on to the 2027 model that you guys shared with us couple of years ago, I. E. Gross margins of 53%, operating margins of of 40% ON I mean, I realize the backdrop is very, very different at this point. So should we think about should we assume you guys are looking at sort of a different or up updated long term model at this point? Thank you.

Yes. Look, we still remain committed to that 53% target.

If you look at the gross margin ON the short term, it's all impacted by utilization. Right? I talked about the moving pieces, but utilization is is the largest headwind that we have right now. Assuming the market recovers and we continue to execute on our fab right. We will right size our manufacturing to fit the size of the company here. And we don't need that top line revenue that was in that original target, but we do remain committed to that 53% gross margin target. You look at the gross margin actions that we're taking now, it's primarily a lot of non cash actions. If you think about it, And it will generate strong free cash flow as we think about this year and in 2026 and then obviously as we go into 2027 and hit that target. We believe we'll hit that. But even if you look at '25 from a free cash flow standpoint, We believe we're going to hit that target model of free cash flow of 25% to 30% in 2025 for the year. We achieved it in with a 25% free cash flow margin and we believe we'll continue to generate strong free cash flow going forward.

Thank you so much.

Our next question comes from Christopher Damley with Citi. Your line is open.

Hey, thanks guys. I guess for the rest of the year, how would you expect the auto versus the industrial growth? To trend, do you expect auto to recover after or no visibility at all?

It's too early to talk about the rest of the year to be honest with you. We know what designs we have We know what designs we're ramping. At this point, the shares are have been gained Designs have been qualified. It's purely an end market demand right now.

Yes. And we do believe that we're still under shipping natural demand. So at some point, you got to come to that level. It's just a matter of when That's fair. And then a question on silicon carbide, with this decline are you guys reassessing your long term target ON silicon carbide as far as growth or margins go?

No, not on the margin. Because you can think about it, it's a demand. So as far as growth is concerned, outside [indiscernible] Our long term growth, we aim to be the leaders in the market from a market share perspective. Silicon carbide business we have given the innovations that we believe we bring to the So that remains unchanged. There will be some strategic reviews of the capacity. But overall, we're focused on that market and that will remain tailwind for us both on growth and margin. [indiscernible] 1 moment for our next question. Next question comes from Blaine Curtis with Jefferies. Your line is open. Hey, thanks for taking my question. I had 2.

I was just ON of curious, I wanted to go back to the non strategic business. You said $3.50,000,000 dollars or 400 Just how much of that is ON terms of the guidance for March 0, are you planning on some of that delta coming out in March 0 ON is that something that would be on top of what you're seeing in March 0 and would come out further in the year if you make those decisions.

Look, we think that if that business if we do lose that business because of pricing, it will happen over a multi quarter period. So it's not all baked into It's further out into the year. And like I said, that will really be market dependent at that point. We'll keep that business if it's good margin like it has been historically, but if the pricing continues to drop, we'll just let it wither away over time. Got you.

And then I want to ask the auto demand by geography. You actually were up in Dec. 0, a lot of people saw China strength think you called that out. I'm just kind of curious if you can just talk about March 0 demand by geography and auto? Yes. I think ON general, we expect it to be down. I don't think we can call out relatively speaking, there are some regions that are better than others. But the growth that we've had China, as I spoke about in my prepared remarks. And getting into I highlighted the early Chinese New Year and they expect the [indiscernible] So that's again demand environment. We are in these sockets. We ramped in the As customers sell through their inventory, meaning the inventory of cars not our inventory with them, but the cars. As that inventory sells through, they will replenish and we'll see the orders recover. So that's the uncertainty because it's purely a consumer confidence end game. As we get better visibility after the Chinese New Year, we will be able to get more clarity on how the rest of the year will be.

Thanks. 1 moment for our next question. Our next question comes from Joshua Buckhalter with TD Cowen. Your line is open.

Hey guys, thanks for taking my question.

I also wanted to ask about the gross margin. So you walked through the 100 basis points of unfavorable mix and then the the new rule of thumb adding probably 100 basis points to 150 basis points headwind as well. Can you sort of, I guess, provide more details on the remaining part of the sequential decline? And also, any more details you can give on what's specifically is driving the unfavorable mix given it sounds like you're walking away from business as is? Thank you.

Yes. So starting with the gross margin, if you do the walk from to the midpoint of our guidance in and I said this in our prepared statement here. The half of it roughly half of that decline is a calculation change in the under absorption. So if you think about the under absorption on a lower revenue number, that's driving half of that margin delta right there. Is 100 basis points from the unfavorable product mix. And then there's you do the math, it's roughly about 150 basis points from the underutilization as we drop utilization down further. The mix is just purely a product mix.

If you think about the long tail of customers that we talk about ON some of that some of these businesses, that's what is remaining soft, some of this industrial soft. So it's purely just a product mix unfavorability kind of in the short term here. We believe that over the long term that will come back as well.

So if you think about whenever there's a you will get that half of that delta just with the revenue increase because it's a pure calculation. [indiscernible] Yes.

Thank you, Thad.

And then for my follow-up, You mentioned sort of inventory levels coming down at your auto Tier 1 ON to be able to strip out downstream at your Tier 1s? And where levels I guess are now and where you expect them to be exiting the Yes. Look, it's not really an industry response because every Tier 1, depending on their financial and strength of their balance sheet are taking a different approach to inventory. It's hard to get 100% visibility there. Mean, we work with customers as we see orders Our priority is depleting So we're not pushing inventory out. That's why Thad mentioned we believe we are well under shipping demand at some point that will recover. However, the inventory levels at our customers really directly correlated to what the demand is and has demand deteriorated inventory looks elevated and they will keep taking action. So it's kind of a moving target but it is not industry specific. We have some Tier 1s we work with that have already achieved it. So we're already shipping through demand. But in general, there's still a lot of inventory digestion across the industry. Thank you 1 moment for our next question.

Next question comes from Vijay Rakesh with Mizuho. Your line is open.

Yes. Hi, Hassan and Ted. Just wondering when you look at the fab utilization, how that should play out over the next couple of quarters, I guess, after Like do you see that flat or maybe second half picking up or is it going to be some trend?

Well, look, utilization is all going to be demand driven. Right? We said that in our utilization will drop to the mid-fifty percent range from 59% here in So we've already taken that action. For what we can see right now, we'll kind of be running in that range plus or minus. Until we see demand recovery. Once we see the demand recovery, utilization will go up and then there's the natural latency until you see gross margin improvement. That will happen when we see the market recover.

Got it. And in terms of the silicon carbide outlook, I think you said might be up year on year. Just wondering if any color ON that and the backlog, how that's trending there as well?

Thanks. The only comment I made is we're designed in We gained the share. We saw that in the strength getting into the At this moment, 2025 is purely a demand We're gaining share across all major customers. But at this point in time, it is what they will end up it achieving from, call it, vehicle, EV vehicle sales we will ramp accordingly. But we're in a very good position with the customers It's purely an end demand.

Right.

Thank you. 1 moment for our next question. Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Hey, thanks for the question guys.

Some others look like they're starting to see stabilization. And so I'm wondering about the delta there. Could this have been related to your emphasis on LTSAs and with auto down, let's say, 25% quarter over quarter, I wouldn't imagine everyone's complying to LTSAs just given that drop. So do you think part of this kind of delayed ON is around LTSAs And then secondly, should we expect them to be renegotiated moving forward here?

Yes, we don't believe so because our stance have been we've been I've been very consistent across even the last couple of years that we've been negotiating LTSA's We've been negotiating LTSAs to match demand as closely as the visibility of the time. Some LTSAs have been negotiated multiple times. It's not something new that we're doing in as a response. That's been a consistent and continuous effort that we have with the customer. On really landing ON a, what I call the win win. So I don't believe that's got those 2 are related. I don't think the LTSA call it amendment or negotiation has accelerated We've been consistent throughout 2024 as we are with the customers trying to land to what the real demand environment is. Because we what we did and again, I've been very consistent with that we're not going to overshift demand just to adhere to the LTSAs. So your comment, our customers abiding by the LTSAs they are, but they're a change in the LTSAs over the last few quarters, call it, just to be able to land where they believe and we believe a healthy inventory digestion happens in order for us to get back to what the natural demand is.

That's been our approach for the last few years. That remains our approach even into 2025.

Excellent. And there was not a lot of discussion around image sensor. I'm just wondering how much of that auto weakness is related to image sensor? Is there anything to note in terms of pricing or competition ON internalization in China?

How would you classify Image Sensor overall?

I think image sensor has been, call it, more stable. I don't I wouldn't call anything up or down. Our approach for image sensor has been the same for the last few years. We walked we've been call it, trimming our portfolio. We're not aiming to be number 1 market share [indiscernible] atrocious profits, while we've used shortages in the last few years because remember all that business is outsourced. We've done over the last few years is refocus our efforts and refocus our image sensing business to what we call machine vision where the quality of the image sensor is where the value comes in because it's really processed directly by a machine versus an LCD. That's been ongoing. We're happy with the consistency of that business. We are ramping the 8 megaphicks as the market shifts. But that business is, I would call it, more stable. We do see competition and we're attacking it as we see fit. But again, just like I mentioned ON overall portfolio, we are focusing where we add value, not where we can just ship units. Thanks, Hassan. 1 moment for our next question. Our next question comes from Gary Mobley with Loop Capital.

Your line is open.

Hey, guys. Thanks for taking my question.

You were clear on your messaging with respect to non core products and the pricing pressures in that particular product group. But maybe if you could talk about pricing trends for some of the core products. I presume you just went through annual price negotiations pricing trends there for the vast majority of your business.

Yes. Look, I think what people refer to the annual price negotiation, which is a negotiation with an impact in We're not seeing that Are there benefits and efficiencies that we have done in our product? We've talked about our Matt Fab Wright, we've talked about taking costs out of the products. Of course, as we do that, customers see some of that benefit as our margin expands from a call it standard margin. If I take out the underutilization that Ted walked you through, I focus really when I talk about value of the products, I focus on our standard margin taking out the manufacturing underutilization in the short term. If I look at that, that's been very consistent. Because we are offsetting whatever discussions we have with the [indiscernible] Those I wouldn't call call it pricing negotiation. Those are efficiencies because the typical pricing negotiation that you're referring to look, there's no demand out there. So you give price reduction just for the heck of it? Then you end up with a gross margin headwind and no additional demand. Is no demand elasticity based on proprietary products which is where our focus has been. From an efficiency perspective, of course, we are working with customers to support their transition to our new products as we gain those efficiencies.

But net net, it's good for margin and good for the customer.

Okay. It's my follow-up. I wanted to ask about silicon carbide wafer sourcing. The market overall for devices clearly underperformed expectations in 2024. And there seems to be more adequate supply of raw wafers coming from China. So any update on your internal sourcing of raw and epi wafers whether that be internal or external?

No, we've been well, we do both internal and external. We have a lot of sources qualified externally. And we will manage the transition internal external. As far as mix, there's the First, what you have to think about is the certainty of supply ON a backdrop of geopolitical uncertainty. If you take that out, we are basically balancing our internal and external. We have [indiscernible] both internal and external. As I mentioned in my prepared remarks, we've also qualified hundred millimeter and we've qualified the three fifty micron thick substrates, which is state of the art today from a silicon carbide wafer thickness. And those are running in the fab and we've sampled customers. So from an execution perspective, we're on track from a mix perspective we have full flexibility. We believe we're in the best of both worlds where we can do internal, external. And we will continue to refine the mix between internal, external as we proceed through 2025 and as we get some stability and clarity in the, call it, the geopolitical environment. [indiscernible] 1 moment for our next question. Our next question comes from Joe Chocchi with Wells Fargo. Your line is open.

Thanks for taking the question. The $3.50,000,000 dollars to $400,000,000 price sensitive revenue that you're thinking this year are there any end markets or geographies in particular that we should think about as being more price sensitive or more aggressive there?

No, I think it's think it's more of a product rather than a region. What I mean by that is more market products Now it could be that some of these markets are more skewed to a region but we don't look at it as a region. We don't have local pricing practices based on region. We look at it as a product and end markets So that's kind of how I look at the non core revenue.

Got it. That's helpful. And then I think in your deck, you talked about AI data center revenue growing more than 40% in 2024.

Wondering how you're thinking about the growth opportunity in 2025 with the potential acceleration from the JFS business?

We expect that business to continue to grow as we we've had some penetration in the Of course, that will continue to grow on an annual basis. We do have some platform [indiscernible] to the 2025 So we're on beat with the design cycle in that market. With our new products and looking forward our trail platform [indiscernible] will start getting us a faster beat so we can do more and more aggressive portfolio introductions for that. But we're in a good spot today. That growth will continue in 2025. Thanks.

Moment for our next question. Our next question comes from Tory Svanberg Stifel. Your line is open.

Yes, thank you. I had a question about gross margin 2020 to '25 basis points ON improvement per [indiscernible] per increase in utilization. And that I assume that that's sort of a comment prior to some of these site changes that you are considering?

Yes, that's right. And you should think about the 20% to 25 is this from here up to low 60, right? After that go back to the 15 to 20 basis points, right, as you just get the scale there.

So the change there was the fact that our fixed cost becoming a larger percent of the overall factory costs. You can only cut so much variable costs. Right? And so we're kind of getting down when you're when you're stepping down into the 50% range. You're kind of hitting up against that. So get to a point where you get you start to get some scale and then we go back to the 15 to 20 basis points.

Similar to the numbers we've given you in the past. But yes, that is all based on current capacity.

Great.

That's very helpful. And as my follow-up on Trio, how should we sort of track financial success of that business? Are you going to be perhaps sharing with us your revenue associated that business or the impact to gross margin in any given quarter? Just trying to understand financially how we should track the success of Treo?

No, the intent for me is to give you kind of the updates as we as we report on call it, the early milestone because those are the leading indicators. So what you'd expect is product introductions, confirmation of the margin profile, and maybe at some point depending on the customer and their willingness is joint announcements with customers as they design it in. We have customers, as I mentioned, that are starting will start to ramp in 2025. So first revenue is actually going to happen. But don't expect to update on a quarterly beat or on an annual beat at that level of granularity. That's helpful. Thank you, Hassan.

Our next question comes from Harsh Kumar with Piper Sandler. Your line is open. Yes. Simon and Pat, I had 2 qualitative ones for you. I think earlier you mentioned that you're still under shipping relative to your true demand. So I was curious if you could give us an idea starting off with the guide that you gave for the March, if you were just to kind of give us an idea of what your true demand estimate is? In other words, how much are you under shipping or what is the market able to take for your best if you were not to undership.

That's a hard 1 because unless you have first, unless you have 100% visibility of what the inventory is at the by customer, but also demand is a moving target. Demand has not stabilized as we've talked about and I think some of my peers have talked about different peers talk about different end markets, but think what's consistent across the board is demand has not really landed and stabilized. So as that's a moving target inventory, remains or inventory levels that they customers would like to achieve remains a moving target. That's why when we talk about at some point, it has to snap back and we'll see that when we get there. But today, just managing to what we can see. And while making sure while we're making sure we don't over ship but back to the LTSA question, which is a reason we keep negotiating the LTSA, We want to make sure we are at or below demand in order to [indiscernible] accelerate to the extent we can the inventory burn, so we do get to a normalized view soon.

I got it. Okay. And then, I wanted to ask you about 1 of your neighboring companies ON Basin, Arizona, all They supposedly had some of the worst inventory problems and they guide forcing as bad as perhaps yours. I mean, neither the automotive nor the total guide. And I was curious what puts it. I'm not asking you to comment on their business, but I'm trying to understand I guess what I'm trying to say is, are you trying to pad some level of decline that you're building in based on your judgment? Or are you strictly giving us a guide based on what you're seeing?

It's purely based on what I can see. I don't give guide and I'm not running the company based on what peers have done. Of course, I look at the peers what peers have done across the quarter and across their earnings and what they look at, But everything you get from me is purely in context of [indiscernible] everybody has a different portfolio, everybody has a different strategy. So I can't really peg anything to it. From a however, what I would say is from an inventory and the inventory I can't control, Our internal inventory clicked up in days, but in dollars, consistent. So we have been very disciplined about maintaining and not letting our inventory get out of line. So the margin that you see is a pure margin not inflated by ON From Adisti, you've also seen us be very consistent on our disti actually the distribution inventory in dropped $55,000,000 So we drained as we saw the softness in towards the end of Q4, we took decisive action and we reduced the C inventory by $55,000,000 in the quarter. So the inventory that we have visibility and the ones we control we are very disciplined again, so when we see a recovery happen, We turn on manufacturing, utilization goes up, revenue goes up and margin will go up accordingly.

That's what we're running the company to achieve and that's what we'll continue to focus on. Stuff that we can control.

That's fair. Thank you, guys.

Ladies and gentlemen, that does conclude the Q and A portion of today's conference call. I'd like to turn the call back over to Hassan Al Khouri, President and CEO for any further remarks.

Thank you all for joining us on the call this morning.

I want to thank our worldwide employees again for their perseverance through this downturn. Remaining focus on operational excellence and innovation will enable us to continue to drive value for our customers and shareholders and emerge stronger than we were going into this.

We intend to provide additional information on our progress at a future date.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day. [indiscernible]