Transcript : ON Semiconductor Corporation Presents at Bank of America Global Technology Conference 2025, Jun-03-2025 10

Published: 2025-06-03 16:50:29 ET ON

Published on 06/03/2025 at 16:50 - Modified on 07/16/2025 at 13:35

All right. Welcome, everyone. I appreciate you joining us for this session. I'm Vivek Arya from BofA's semiconductor semi-cap equipment team. I'm really delighted to have the management team from ON Semi join us, Hassane El-Khoury, CEO; and Thad Trent, CFO. And format-wise, I'll go through my questions, but please feel free to raise your hand if you would like to have me bring up any question on your behalf.

So with that, very warm welcome, Hassane and Thad, really happy that you could join us at our conference.

Interesting, exciting time in the industry, a lot of macro cross currents. Maybe Hassane, if you could let's start with the state of the union, how you are seeing the demand environment shape up versus what you thought at the start of the year?

Sure. So let me take it back to a little bit of where we are and how we got here because it does help highlight a little bit on our strategic approach to the volatility that you talked about or the cross current that you talked about. We've set out to really reposition the company strategically, but also from a financial posture. Over the last few years, we've really focused on what we can control, and that became even more important and relevant in the last couple of years with all the volatility that we've had, which is whether it's demand, whether it's geopolitical and [ end ]. So what does that mean? What are the things that we can control? You've seen us maintain investments in new products, and I'll talk a little bit about the penetration of new products that are helping with the growth back, but also growth forward.

We have focused on our manufacturing footprint, rationalizing our manufacturing footprint to match our portfolio of products with high value. We even as soon as last quarter, we talked about taking capacity offline. So not only have we reduced our footprint -- physical footprint of -- part of our Fab Liter, but part of our Fab Right approach is really focusing our manufacturing to the areas where we add value, but also having the right manufacturing capacity to support our growth.

All of these have led to a much more predictable, but also a much more certain environment from a gross margin expansion perspective, where coming out of this, you're going to see a margin expansion that is better than what we would have otherwise gotten have we not done those changes. With the current existing footprint, I talk about it as a strategic realignment, but it's also a competitive advantage, knowing the geopolitical environment we are in. We have set out to have, for example, from manufacturing and primary and a secondary.

When you have a primary and a secondary, one in the U.S., one outside the U.S., when you have geopolitical uncertainties, that becomes a competitive advantage. And we've been utilizing that competitive advantage to maintain stability from our customer and really capture the demand without the volatility.

Now we can't prevent all volatility because customers still have their factories that they have to rationalize. But from our exposure, we give the customer that supply resilience that they have asked for starting in COVID, but now it's for different reasons.

From a demand environment, we started to see signs of recovery. We talked about signs of recovery in the industrial market, which is our second largest market. And based on the outlook that we see, net of any changes in the environment that we talk about, we do expect Q2 to be the bottom even in automotive. We are expecting growth. We're expecting growth driven by our penetration and our success that we've had in EVs in China.

But we're also going to benefit from a broad-based recovery based on the signs that we see even for the second half of this year. Of course, net of any changes in the geopolitical outlook. But net of those disruptions that are not -- that we don't know about, we are -- we feel good about the second half. And of course, next year, it's too soon to talk about next year, but the second half is the first step of did we hit the bottom and are we going to see a recovery from there.

Got it. I don't want to read too much, Hassane, in the body language, but it's the first time after a while that I've heard you use the word good and recovery, right? Or am I reading too much because over the last number of quarterly calls, you have been more kind of guarded, right, because of what -- so is it fair to say you're feeling a little better now? And if yes, what is driving that...

You've known me for a long time. As far as I'm going to call it for what I see it. And I've always said, I'm going to talk about what I see, not what I hope to see or wish to see. Now that works out for or against you. When I started talking about the softness in industrial and automotive, I was public enemy number one.

But we are seeing sign. We talked about it on the call. We're seeing signs of recovery in industrial. Both Thad and I talked about it. Industrial is going to be better in the second half of the year than it's in the first half of the year.

Automotive, bottoming out, like I said, in Q2. Second half of the year is going to be better than the first half of the year, driven by ramps of new products in automotive that we have already seen in the market. I was at the Shanghai Auto Show last month. I saw the models that we are in. They are released. Those we expect rent. Those are facts. They're not projections or -- those are facts. That's what I'm referring to. So yes, based on the facts that we see, again, net of any disruption that I can't project, the second half is going to be more favorable in the markets that we address.

Now of course, you haven't heard me talk about -- I would call out AI, which I'm sure in this conference the first word out of everyone's mouth is AI. AI has doubled year-on-year for us in the first quarter. It's smaller revenue than our primary markets of auto and industrial. But even there, that's more of a penetration. That's not a recovery comment because that market has been good.

But from our side, from onsemi, we've been investing in that. You've seen us -- we've acquired the silicon carbide JFET. As the rack power increases in that market, now you're going to see more of our penetration in that market because now it's in our sweet spot of high power just like auto and industrial is.

Got it. On the automotive side, the second half strength, is that China? Or are you starting to see some signs of recovery outside of Chinese OEMs also?

There are signs outside, but the primary driver is really the new product ramps for us, which is driven by China. But we've -- also outside of China, we have had share gains as well. So share gains, you can call it recovery, but that's specific to onsemi. But from a general market recovery, we're going to benefit just like everybody else. But there are a few that are onsemi specific, the share gains and the China ramp. Those are onsemi specific.

Got it. And I remember, Hassane, in the last almost a year plus or so, one reason you had been a little more measured and guarded in your outlook was because of channel inventory, right, where you mentioned that it wasn't just on, it was a number of your competitors. So where do we stand today in automotive, specifically and then they'll talk about industrial that do you think most of the excess inventory is kind of done within the automotive side? Or are there still spots that we have to worry about?

Yes. So you mentioned channel inventory. I'm going to break the inventory question in 2 different pieces. From a channel inventory, we pride ourselves with the execution that I've talked about. We set the company up very well with really tight control of channel inventory. Even in a downturn, you've seen us some quarters drain channel inventory in dollars, so less and less. So we've been very measured and very disciplined as far as what we ship. We have to see the demand and get the certainty of demand before we fulfill it through the channel. Otherwise, we will get stuck.

So that, we've done very well. That's been really always been in our sweet spot. We've increased the weeks of inventory a little bit in the channel for a very specific reason. We have starved the broad market during the shortages. We said we're going to increase in order to service the broad market. Our customer count in the broad market since that decision was made has increased 19% year-on-year. So we're getting more customers in that broad, which for us is a strategic decision why we increase inventory. But from a dollar perspective, that's been very, very steady.

Inventory on the balance sheet, again, right in our speed spot. Our base inventory is 119 days. You can think about it -- we want to fluctuate between 100 and 120. So that's there. Back to everything we control in a recovery, we don't have to wait to burn inventory in the channel and burn inventory on the balance sheet before we take our utilization up. As soon as the recovery, we're going to start seeing our realization go up. 2 quarters later, margin expansion will start. So that's what we've set the company up for success during downturn back to the things I started with, the things we control.

The second part of your question, specifically on automotive, that is not a channel inventory. That's more on the customers. We believe we're kind of -- we're there. It's not an industry answer. It's more customer by customer. There are some customers that still have inventory, and they're going to kind of continue. But there are customers that have achieved their inventory burn.

And I say customer by customer because the level of inventory, if you ask me, well, where do they want to be? It depends on the customer and their financial position. If they can afford to have working capital tied to inventory, they're going to have higher weeks than others. But we believe even without a recovery, just to go back to demand from undershipping demand to demand, you're going to see that benefit and the outlook for us it.

Got it. Makes sense. Whenever people hear about strength in China, the perception is, well, this is all silicon carbide and just because of the strength of the EV market and silicon carbide, sooner or later is going to commoditize and these sockets are not going to be sticky. How do you -- so maybe just if we take a step back, Hassane, talk to us about the silicon carbide market as it exists today? How strategic is it for you? And your China exposure? Is it just that one aspect? Or is it more broad-based? Just how sticky are these sockets in China?

Sure. So from a silicon carbide, yes, the silicon carbide technology and the market is still strategic for us, not just in automotive, but renewable energy. When I mean renewable energy, I'm not talking about residential solar inverters. I'm talking about charging stations, about energy storage, container-level battery packs. So utility grade and commercial grade. All of these are areas we win, and we win because of the value.

So what does that mean, the value? And why do I still consider silicon carbide strategic versus a lot of the news and the headlines that you see out there? I've always been very consistent from the beginning is you only win if you provide value. I never talked about the cost curve. I never talked about any of that. So what is that value? And why do we win?

If I can -- if we, at onsemi, our products give 10% more efficiency from a silicon carbide and the customer can remove 10% of the battery, that's way more dollars than a piece of silicon given it for x percent less. So the customer will pay more for a highly efficient silicon carbide if they can get their costs out of the battery. That's not a problem at all.

Why is that important in China? Because the customer does the -- sources the battery and the silicon carbide. There's no Tier 1. So think about it in a traditional model. You have a Tier 1 that does the inverter and a Tier 1 that does the battery. So if I say, hey, you got to pay more for silicon carbide on the inverter because I get 10%, you can save the battery. They go, I don't make the battery. So efficiency doesn't matter.

So the fact that EVs are decision points at the OEM highlights the value that we provide because the OEM can do the trade-off and the optimization at a system level. That's why we win in China. That's why we win in Europe. That's why we win in North America, point number one, that's silicon carbide EV.

EV penetration, plug-in hybrid. Last quarter, I talked about how even plug-in hybrid, we've got a North American plug-in hybrid design win with silicon carbide. So as plug and hybrid start to use that, they want to extend the range beyond the 50-mile kind of plug-in hybrid to 75 and 100, now silicon carbide becomes the name of the game. So we are starting to get that penetration in which will support our growth.

So whether it's China, Europe and North America, you win with silicon carbide if you provide the customer the value that they can extract out of the system, starting with the efficiency. We do that. That's why we win. That's why I call it the consistency to win. Are there and has there been silicon carbide suppliers in China? On the substrates? Yes. On devices, there are a few. How close they are? Not close. Then the next thing people say, well, they're going to catch up. Yes. Do we think we're standing still too? They're going to catch up to the prior and prior generation.

On the call, I talked about our trench silicon carbide. So we're also advancing the boundary of what we can offer our customers. That's how we're going to win. So it's not about China or China EV or against Chinese competitor. It's about how do you win with silicon carbide. And that bottom line is efficiency, not just on the device, but also on the packaging.

Also for the Chinese OEMs that are looking to export outside of China, that efficiency matters, right? So just good enough is not going to work outside of China. So they've got to compete with the other disruptors and OEMs. So they've got to differentiate that in that export market as well.

Got it. Now what about the Western EV, so like the ex China EV market, right? You have a fairly prominent North American customer. And we know that outside of China, EV volumes have been softer, right? So what are you seeing just as a kind of a broader Western market EV adoption? Has that trend rolled over? Do you think it's going to pick up at some point? How are you modeling that in your growth?

So by the way, it didn't roll over. Specific OEMs have challenges and headwinds. But if you look at an aggregate, somebody else is getting that because the total number, EVs in Europe are starting to [ increase. ] They're not going down. So the slope is not what we thought from 4 years ago or 3 years ago, but EVs are still a growth market from a unit perspective.

And as those EVs get to the 800-volt battery, which is kind of where the market is going, silicon carbide is going to be more and more. A lot of these EVs have been historically on IGBT because silicon carbide was not that accessible when those cars were designed 4 years ago or 5 years ago.

We're starting to see that conversion. Pretty much 100% of the RFQs on 800-volt batteries today are silicon carbide. So you've got to see that penetration come in. So the growth in silicon carbide specifically is not just tied to the EV volume and EV penetration, but you have the silicon carbide penetration into existing EVs as well. So that's the double growth that you can start seeing.

Got it. To put you on the spot, Hassane, if I could, a few years ago, you had sized that market at, I don't know, roughly $3-ish billion, and you had said on at that time, had mid-20s or so market share. What is that snapshot of the market today and what's ON's market share?

So I won't give you the market because a lot of the quotes for the market is a lot of the third-party reports, which I don't know if all have been wrong so far. I can give you based on our view, the 20% so market share has only increased since then. Our target remains 30% to 40%. That's been our target in the market, has increased, and we've talked about share gains in North America. We've talked about share gains in China. So -- we've talked about share gains in Europe.

So our share has been increasing. So regardless of what the market does, it's going to be bumpy. We've always said the market is going to be bumpy, but our share is increasing. And that will remain. That's on track. And that's increased since we talked about it a few years ago.

One last question on silicon carbide. So there is a well-known kind of smaller competitor of yours, right, that is going through a lot of financial, right, turbulence right now. Does that impact your share or your customer engagement in any way, depending on whatever happens there?

So it doesn't based on, you kind of call it, the last 6 months because the last 6 months has been the financial struggles, right? That has -- was -- and I've talked about it publicly before, a few years ago, when the execution issue started with that peer, that's when customers started coming to us and starting to talk about conversion. So a lot of design wins that are forward-looking. A lot of them are new designs that the customer just made a new EV and we're in -- we're the incumbent.

But some, they were using that competitor. And based on the challenge from 2 years ago, we've been converting since for 2 years now. So the current environment is not what's causing a shift or an opportunity in the short term. That opportunity has been coming along for the past few years. And from a supply side, we don't have any impact. From a supply side, part of our competitive advantage to customers is we don't have the dependency on third-party substrates. We are vertically integrated from that perspective. And that's proven to be a very, very good point versus some of the peers -- the other peers that source from them.

Got it. When we think of ON people and autos, people always bring up silicon carbide. But the one other important thing you guys are very strong at is image sensors. I'm right? And so talk to us about what is the state of that market, especially as it relates to a lot more ADAS, right, adoption in cars. Is that still a growth opportunity for you? Is it kind of being caught up in all these macro issues? So where are you in image sensors? And then how much of a growth market is that for you?

Yes. So for us, image sensors, market is not just auto, but we're also industrial. So as you see a lot of the automation, you're going to see that robotics and factory automation using a lot of our sensors. But automotive is a very interesting market. We've always said we have high share in the market. We're about 60% to 80% in ADAS specifically, but 60% in auto. So market share is high, which means that it's more tied to penetration and volume. So it did get caught up with the inventory burns that we've had.

Some of the SoCs talked about their inventory that they had to adjust. But it's a very interesting market. It's definitely a focus market and it's a growth market. And what I mean by that is, even in the first quarter, we talked about a big Chinese OEM that is going down the path of autonomy across a much broader platform. So we started ramping there as well.

So we are focusing on that business. We have new products coming out, and we will continue to push that penetration as more and more automotive cars get to that autonomy. But it is more tied to volume and penetration. Remember, 3, 4 years ago, we thought we'll be in Level 4 and 5 today, right? We're Level 2 plus. It's kind of that. So every car now is getting that content. Now it's the capability is going to keep evolving. And the more OEMs that introduce higher level of autonomy, the more we're going to see the benefit from that business.

That's what I wanted to ask. You expect ON to participate in some of these new autonomous car, robotaxi type projects?

I don't want robotaxi is...

Autonomy?

Autonomy, yes.

Understood.

I'll keep it at that industry term.

One thing, Hassane, that came up on the earnings call was the concept of pricing that the industry has gone through, not just on, but just broadly, pricing that was supposed to be kind of flattish, but it went up a lot, and then it was supposed to kind of stabilize at flattish and low single digit. And I think on the last 1 or 2 calls, you spoke about price concessions that kind of caught some investors by surprise. So where are we in terms of how you think about pricing going in the next handful of quarters?

Yes. Look, to me, we talked -- I talked about price movement, not really concession because think about it this way. Pricing being flat and unmovable is not a business decision. You can stand behind. Price stability is something we can talk about. So let me explain what I mean. We have new products coming out as an example. We take cost out of our products. If I take 10% cost out of a product, and I work with a customer and say, for more share, I get 3% cost reduction as an example, I'll take that deal any day because I took 10% of the cost, manufacturing cost, and we've been working on our manufacturing network and cost and so on, incentivizing to gain share and using that, that's why I call this surgical and strategic. It is not like pricing across the board is deteriorating.

I very specifically said it was strategic and it was surgical in nature in order to achieve a business outcome. It is one tool like I have in the toolbox with other tools, new products, value. All of these are tools in the toolbox for us to gain share and win designs. Pricing is a normal thing. So it's not a change in strategic outlook is my point.

So it wasn't something that happened -- that is happening to cause you further...

No. I mean we said the stuff that falls under that is the things that we've been very clear about, we're not going to chase it down. We're going to walk away because there's no value. It's purely a pricing discussion. It's not a surgical. That there's no change in our strategy. But from a day-to-day, yes, but don't expect pricing news to keep coming up quarter-on-quarter. That's not where we are.

So in aggregate, how would you kind of characterize the pricing environment for your overall in, let's say, '25? Down low mid-single? Or is it any different than what you...

It's no different than what I talked about than what I already talked about. No increase, no further, it's stable.

Yes. And then what Hassane referred to is the business that we walked away from. The $475 million, which was volatile business, right? We talked about there is pricing pressure on that. If you remember, we kept about $300 million because the margin was favorable. Now we're seeing some pressure, and we always said we weren't going to chase that. And that $300 million could disappear over time. We'll see how the market plays out, but that's one where we're not going to compete on.

Okay. How many more quarters, Thad, do you think that business has to go?

I think it's going to depend on demand, right? If demand comes back, it may not disappear at all, right? I mean we're -- not all of it will go away. So I think it's more dependent. I'm hoping by the time we get to '26, we're not talking about this.

Understood.

I remember, we thought we were going to be done with it 2 years ago.

Right. Still...

It's still here. Yes. So it's market dependent.

Understood. Some of your bigger competitors are in Europe. And what I'm leading to is, given what we see because of all the geopolitics and trade and tariff issues, do you think that they may have an edge in terms of winning future business because they happen to be not based in the U.S.? Are you seeing customers change behavior because of these factors or not really?

No, because it goes back to -- I mean, I'll give the perfect example of our success in China if that were the case. Now I'll flip it the other way. Would that same? I don't -- by the way, I don't think that's true because of the win in China. But let's say, if I take your scenario, then we have a much better advantage in the U.S. because we also manufacture in the U.S. You see what I mean? So the point I'm trying to make is our manufacturing footprint that we have, U.S., Europe, Japan, Southeast Asia and some China, we're in much better position to service customers no matter where they are, number one.

Number two is we do have customers that -- Chinese customers that want to export back to what Thad said, therefore, okay, what about their manufacturing for the export market that they want out of China? So flexibility of supply and a manufacturing network like we have is actually a competitive advantage, not a disadvantage. But at the end of the day, you have to have better products. That's the bottom line.

Got it. One other thing I can't resist but go back to your kind of feeling of optimism is some of your peers, right, as they have started to use words like inflection or recovery, they have often pointed to above seasonal quarters. Are we at that point where you think one could talk about it?

So remember...

You opened the door, so I'm just...

No, no. That's fine. But I also -- I characterize my approach as I'm going to call it to what I see it. Talking about seasonality at this point means nothing. What is -- we've been 4, 5 years of no seasonality. So what is seasonality? I don't talk about seasonality. It's either up or not. What it is -- will happen over time. Seasonality, you need normalcy, whatever the new normal is, but you need normalcy for at least 2 years. So you've got 2 data points. That's when you start hearing me talk about seasonality and so on.

But for now, I am managing to -- do we see green shoots? Do we see growth? Can I understand why the growth is? Is it new designs like we talked about? Is it broad-based? Is it industrial? Those things I can measure, I can track and I can hold my team accountable to. That's what I can talk about. Overall trends is too soon to talk about trends.

Got it. And then gross margins think gross margins also will bottom at roughly where your sales are bottoming? We should be looking for some recovery. Obviously, they're not always perfectly aligned because of utilization and such, but...

Yes. You hit on it. Gross margins are going to be driven by utilization in the short term, right? Longer term, as the new products come out, Treo, we're going to have the accretive margin products ramping as well. But in the short term, if I think about this year, it's all utilization, right? So every point of utilization is 25 to 30 basis points of gross margin improvement.

So if you think about where we are today, roughly 60% utilized going to step down slightly here in Q2. The rest of this year is going to be kind of in this range of where our Q2 guidance is. And by the way, our Q2 guidance, if you take out the under-absorption, that's 900 basis points. So you can just add to that, right? That's the full impact of getting from, let's call it, 60% to the kind of low 80% where we maxed out.

So there's this 2-quarter lag for it to hit the P&L. So for the remainder of this year, we're going to be kind of in this range. But as we take up utilization in the second half, assuming there is a recovery, you're going to see the margin impact started to hit us early in '26. So we expect that, and as Hassane was saying, we don't have to wait for an inventory bleed, right, on our balance sheet or at the distribution -- the [ distis ] to have that increase in utilization. So we can react very quickly and that margin will hit us a couple of quarters later.

And one thing, Thad talked -- in the short term, it's all about utilization, but I do want to make sure we touch on the longer-term margin expansion, which is the new products. He mentioned Treo. We -- I talked in the first quarter, we recognize revenue on Treo already. We expected that, of course, in the second half of '25, but we've already achieved...

What Application did that...

So those are on the industrial, specifically on the medical and -- so it's starts -- and by the way, if you know the medical market, you don't just make a product and get into medical. You have to prove the reliability. So the fact that, that has -- that we achieved the milestones is, again, proof point that one -- that product and that technology is competitive. The first dollar on a branded technology is always the hardest.

Now we have confidence in the funnel. We have confidence in the ramp. We have confidence in the breadth. And right now, what we're focusing on is the breadth of the product. And we're on track to doubling the number of products on that platform, and that's going to fuel the growth towards that $1 billion by the end of the -- by 2030 and with a margin of 60% to 70%.

So as that business becomes a higher percent of revenue, then the margin expansion is going to start coming from mix on top of just the short-term utilization impact.

Got it. And then finally, Hassane, in terms of data center, right, you mentioned that, that is a growth driver. When do you think you get to a point where you might be able to call it out separately also, so one can track the progress in that?

I'll let you know.

Okay. But you see enough opportunity...

I see enough opportunity. We talked about -- we acquired silicon carbide JFET. That's a very differentiated technology. So you're going to start seeing a lot more kind of announcements and...

It's a crowded market.

But that's why you don't hear me -- you haven't heard me talk about it because I'm not going to run after a crowded market. That's why I very clearly talk about silicon carbide JFET. Nobody's got that. As the voltage starts coming up and they need that specific technology, that's where we add value. We're going to penetrate that market.

We're not going to go in and kind of elbowing everybody because if you don't provide value, now you're talking about pricing. That's not the market we're in. We're going to be very disciplined, but we're going to be strategic. We have value to offer customers with the technologies we provide. That's where the progress is going to be, not just general purpose.

Makes sense. On that optimistic note, thank you so much, Hassane. Thank you, Thad. Really appreciate you joining us this morning.

Thank you.