Ladies and gentlemen, thank you for standing by, and welcome to onsemi First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. And please be advised that today's program is being recorded. I would now like to hand the conference over to Parag Agarwal, Vice President of Investor Relations and Corporate Development. Please, go ahead.

Thank you, Carmen. Good morning and thank you for joining onsemi's first quarter 2022 quarterly results conference call. I'm joined today by Hassane El-Khoury, our President and CEO; and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with our 2022 first 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 related to our end markets, business segments, geographies, channels, share count and 2022 fiscal calendar is posted on the Investor Relations section of our website. Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable measures and our GAAP 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. The words believe, estimate, project, anticipate, intend, may, expect, will, plan, should or similar expressions are intended to identify forward-looking statements. 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 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. Additional factors are described in our earnings release for the first quarter of 2022. Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other amounts that may occur except as applied by law. Now let me turn it over to Hassane. Hassane?

Thank you, Parag, and thank you, everyone, for joining us today. I will start off by saying how extremely proud I am of our team's execution in the first quarter. Our employees worldwide continue to push through challenging times, and their efforts have delivered yet another quarter of outstanding results. We had strong revenue growth of 31% over the year, driven by solid performance of our intelligent power and sensing solutions in the automotive and industrial end markets. Key megatrends such as vehicle electrification, ADAS, energy infrastructure and factory automation are accelerating, and we expect to see sustained growth as we service our customers under long-term supply agreements and expand our pipeline of new intelligent power and sensing products at favorable margins. Along with our strong revenue performance in the first quarter, we achieved a gross margin of 49.4%, an increase of 1,420 basis points from a year ago. This outstanding margin performance was driven by improvements we implemented in 2021, including manufacturing efficiencies, reallocation of capacity to strategic and high-margin products to drive favorable mix shift, and continued elimination of price-to-value discrepancies. On the market environment, despite an overhang of unfavorable macroeconomics and geopolitical dynamics, demand for products in our focus end markets of automotive and industrial continues to be strong. In the first quarter, automotive and industrial grew 8% quarter-over-quarter and 42% year-over-year to 65% of our revenue, both delivering record quarters. The growth in our automotive revenue, while SAAR was revised down, highlights the strength of our portfolio and supports the content growth we expect per vehicle driven by ADAS and vehicle electrification. Lead times are flat quarter-over-quarter and we do not see meaningful customer pushouts or increasing cancellation trends. We are fully cognizant of potential risks from inflation, higher interest rates, and ongoing geopolitical tensions. We are monitoring the business environment diligently and have been managing our inventory, manufacturing and customer engagements to support our long-term financial targets and sustain our gross margin within our target range of 48% to 50%. As of now, the COVID-related lockdowns in China have not had any meaningful impact on our business. However, there is potential risk in the second quarter if the lockdowns extend much longer, and our current guidance already accounts for a few percentage points of growth of risk we are seeing at this point. To mitigate any chance of supply disruptions to our customers due to these lockdowns, we have initiated capacity transfers to our Manila and Singapore locations to maintain supply continuity for our customers. We have been making selective investments to expand our capacity in strategic areas and relieve bottlenecks, especially in back-end factories for our imaging products. We are improving the efficiency of our factories and are reallocating capacity to strategic products and end markets, allowing us to expand our margin by driving favorable mix shift. We have been able to secure additional capacity from our external manufacturing partners and our qualifying products in our 300-millimeter fab to meet the long-term capacity needs. In 2022, we are on track to ship more than twice the number of 300-millimeter wafers we shipped in 2021 and the continued ramp in our East Fishkill fab should improve the efficiency of our fab network over the next few years as we execute our fab lighter strategy by consolidating our fab footprint. We have redeployed capacity to strategic higher-margin products. Over the last 12 months, we have exited approximately $200 million in revenue at an average gross margin of 21%, of which $32 million occurred in the first quarter at an average gross margin of 20%. Some of these losses are already being offset with new product revenue, which increased 31% year-over-year at favorable gross margin and will continue to ramp through 2023 and beyond. Our customer engagement remains strong as we see our increased customer base driving approximately 100% year-over-year growth in our design wins. This increase is driven by Intelligent Power and Sensing with design wins doubling year-over-year. Our intelligent power and sensing revenue makes up 65% of total revenue, up from 62% a year ago. We are continuing to make progress on our silicon carbide growth and remain on track to more than double our silicon carbide revenue in 2022 as we ramp shipments to customers who have signed long-term supply agreements with us. At this pace, exiting 2023, onsemi will be on a $1 billion run rate for silicon carbide revenue. In addition to market-leading efficiency of our products, our end-to-end vertically integrated solution in a supply constrained environment is a compelling and differentiated competitive advantage. I'm extremely happy with the progress of our GTAT operation. Since we closed the acquisition, we have already expanded to a second building as we increased our substrate capacity and are still on track to more than quadruple exiting 2022 in support of our LTSA customers and the broader silicon carbide market. From the engineering side, all yields and outputs are meeting our committed production levels, and we are making fast progress on our 200-millimeter substrate development and release to production. We continue to expand our silicon carbide engagement beyond automotive traction and have made inroads into the energy infrastructure market with our power modules. In the first quarter, our revenue for energy infrastructure grew 64% year-over-year, and we secured significant wins for our silicon carbide and silicon power modules with key market leaders. We are currently shipping to seven of the top 10 global providers of solar inverters, and we have signed long-term supply agreements with three of the top five players. The energy infrastructure market will be a long-term driver for our business as utility-scale power plant installations are expected to grow worldwide to reduce the climate impact of fossil fuel-based power plants. In the first quarter, our 5G cloud point-of-load revenue and design wins both increased 33% year-over-year as we displaced an incumbent to secure a design win at a leading 5G infrastructure OEM with a new product based on our superior technical performance and security of supply. In Cloud Power, we secured a major win with our high-performance power management solutions, delivering over 94% of feet energy efficiency. They were adopted by one of the largest cloud providers in the world to power their next-generation Intel servers in their data centers refresh and expansion. Our best-in-class energy efficiency together with supply assurance and technical support enabled us to secure this win, delivering both market share gains and favorable gross margin in the second half of this year. On the intelligent sensing front, we continue to sustain our momentum in automotive imaging with 44% revenue growth year-over-year. Our strong presence on most leading ADAS software platforms and the broad ecosystem we have built over time have been a key driver of our strong market position. We further strengthened our position in the ADAS ecosystem through a key win with a leading ADAS software platform provider in China. We expect this platform to proliferate at all OEMs in China with our content in excess of $150 per vehicle. The growth in our image sensing revenue and design wins is attributed to a doubling of the average number of cameras per vehicle over the past five years and a doubling again in the next five years. In fact, we have designed in 28 cameras per vehicle in a Level 5 autonomous vehicle already. Our industry-leading eight-megapixel camera has already been adopted by eight car OEMs and will quadruple in revenue in 2023 over 2022. In addition to ADAS applications in light vehicles, we are seeing traction for our image sensors in the industrial market for warehouse automation, autonomous delivery robot and agriculture applications. In the first quarter, we secured a win for our image sensors for use in robotic drive units in fulfillment centers with $70 of imaging content ramping in 2023 as a leading e-commerce player. In addition, we continue to win new designs in the growing intelligent agriculture business segment for improving crop yields, which uses 36 image sensors per machine with revenue starting this year. Customers select our sensors based on superior imaging performance, market-leading global shutter efficiency and a strong ecosystem comprising of players that provide supporting software and hardware solutions to rapidly enable complete imaging solutions. Our intelligent sensing products are long-lived and design wins tend to be sticky. Awarded projects typically span multiple years with lifetime in excess of 15 years as customers value the programmability and leverage their software architecture over multiple platforms and end products. This longer life cycle and sticky nature of our products gives us greater revenue stability and visibility. Now I will turn the call over to Thad to provide additional details on our financials and guidance. Thad?

Thanks, Hassane. We had another quarter of record results as we continue to execute on our transformation journey. We reported record revenue, gross and operating margins, and earnings per share driven by structural changes to the business and a reallocation of investment and resources to strategic products and markets with high growth and high margins. Vehicle electrification, ADAS, factory automation, and energy infrastructure are in the early stages of adoption, and these trends will accelerate with the need for higher energy efficiency in the automotive and industrial markets. With an expanding portfolio of highly differentiated intelligent power and sensing products, long-term supply agreements, and end-to-end supply chain capabilities for the fastest-growing product, we are well-positioned to drive long-term revenue, earnings, and free cash flow growth. The hard work and disciplined execution of our worldwide teams are reflected in our financial transformation. Our first-quarter revenue increased 31% year-over-year, gross margin improved 1,420 basis points, and operating income increased 7.5 times faster than revenue while free cash flow was 21% on an LTM basis. Additionally, revenue in our strategic end markets of automotive and industrial increased 42% year-over-year and now account for 65% of revenue as compared to 60% in the quarter a year ago. We also continue to make progress in our fab wider strategy, rationalizing our manufacturing footprint by exiting subscale fabs, accelerating our 300-millimeter ramp, and improving operational efficiencies, all of which will double our capacity per factory over time. By transitioning production to more efficient fabs, we will eliminate fixed costs and lower unit costs while reducing the volatility in the P&L. As previously announced, we closed the sale of our 6-inch fab in Belgium and expect to close the sale of our 8-inch fab in Maine to diodes in the second quarter. We are also on track to close the acquisition of the 300-millimeter fab in East Fishkill from GLOBALFOUNDARIES at year-end. As these transitions take years to fully execute and realize, we've been building bridge inventory to ensure a consistent supply of product to our customers. These structural changes, along with our differentiated portfolio, are driving momentum in our design wins, while long-term supply agreements and the stickiness of our products are providing improved visibility into long-term revenue and profitability. Turning to the results for the first quarter. As I noted, Q1 was another quarter of record results. Total revenue was $1.95 billion, an increase of 31% over the first quarter of 2021 and 5% quarter-over-quarter. This increase was driven by the favorable mix of automotive and industrial, which together grew by 8% quarter-over-quarter and 42% year-over-year. Revenue from both Intelligent Power and Intelligent Sensing was at record levels. Intelligent Power grew by 37% year-over-year to 47% of revenue and Intelligent Sensing grew by 35% year-over-year to 17% of revenue. Turning to the business units, revenue for the Power Solutions Group, or PSG, was $986.7 million, an increase of 32% year-over-year. Revenue for our Advanced Solutions Group, or ASG was $689.3 million, an increase of 30% year-over-year. Revenue for the Intelligent Sensing Group or ISG for the quarter was $269 million, an increase of 32% year-over-year. GAAP and non-GAAP gross margin for the first quarter was 49.4%. Our non-GAAP gross margin improved 420 basis points quarter-over-quarter, driven primarily by favorable mix and pricing ahead of rising input costs. Over the last year, we have exited approximately $200 million of noncore revenue at an average margin of 21% and reallocated this capacity to strategic products with accretive gross margins. The structural changes we have implemented give us confidence in the sustainability of the margin structure, raising the floor in all market conditions. We expect to see modest headwinds to our gross margin with increases in raw material and other input costs, as well as start-up costs as we aggressively ramp our silicon carbide manufacturing, offset by additional cost savings and manufacturing efficiencies. As such, we expect to maintain gross margins within the narrow range of our Q1 margin for the remainder of the year. We also achieved record quarterly GAAP and non-GAAP operating margins of 33.3% and 33.9% respectively, with our Q1 non-GAAP operating income growing quarter-over-quarter at a rate 4.5 times faster than that of revenue. GAAP earnings per diluted share for the first quarter was $1.18 and non-GAAP EPS was $1.22 as compared to $0.35 in the first quarter of 2021 and $1.09 in Q4. Now let me give you some additional numbers for models. GAAP operating expenses for the first quarter were $314 million as compared to $395 million in the first quarter of 2021. Non-GAAP operating expenses were $302.8 million as compared to $324.7 million in the quarter a year ago and decreased $3.6 million sequentially. The decrease was primarily due to delayed hiring as we continue to reallocate resources to our focused products. We expect op ex to trend towards our long-term model over the next several quarters as we increase investments for our long-term growth. Our factory utilization was 81% flat as compared to the fourth quarter and we expect utilization to be approximately 80% in the second quarter. As we guided in the past, our non-GAAP tax rate will increase in 2022 as we have substantially utilized all our NOL attributes. For the first quarter, our non-GAAP tax rate increased to 15.6% from roughly 6% in 2021. This change accounted for $0.16 of EPS dilution from the fourth quarter. Our GAAP diluted share count was 448.9 million shares and our non-GAAP diluted share count was 442 million shares. Please note that we have an updated reference table on the Investor Relations section of our website to assist you with calculating our diluted share count and various share prices. Turning to the Q1 balance sheet, cash and cash equivalents was $1.6 billion, and we added $1.97 billion undrawn on our revolver. Cash from operations was $470 million and free cash flow of $305 million. Capital expenditures during the first quarter was $173.8 million, which equates to a capital intensity of 9%. As indicated previously, we are directing a significant portion of our capital expenditures towards enabling our 300-millimeter capabilities at East Fishkill fab and the expansion of silicon carbide capacity. This increase is in line with the higher capital intensity in the near term, as mentioned at our Analyst Day. Accounts receivable was $910.7 million, resulting in DSO of $43. Inventory increased $116.5 million sequentially to $1.5 billion and days of inventory increased by 15 days to 139. This increase was driven primarily by growth in width and raw material and additional build of inventory to support our fab transition and our long-term supply agreements. We expect to reduce days of inventory in the second half of the year. Distribution inventory was slightly down at 7.1 weeks. We continue to maintain distribution inventory at historically low levels to hold more inventory on our balance sheet for our customers' needs, rather than building inventory in the supply chain. Total debt was $3.2 billion, and our net leverage remains under one. Turning to guidance for the second quarter, the table detailing our GAAP and non-GAAP guidance is provided in the press release related to our first-quarter results. Let me now provide you key elements of our non-GAAP guidance for the second quarter. Based on current market trends, bookings, and backlog levels, we believe demand will continue to outpace supply through much of 2023. We anticipate that revenue for the second quarter will be in the range of $1.965 billion to $2.065 billion. This guidance range includes the anticipated impact of the China lockdown of a couple of percentage points of revenue growth. We expect non-GAAP gross margins between 48.5% and 50.5%. This includes share-based compensation of $3.2 million. We expect non-GAAP operating expenses of $305 million to $320 million, including share-based compensation of $23.2 million. We anticipate our non-GAAP OIE to be $20 million to $24 million. And for the remainder of 2022, we expect our non-GAAP tax rate to be in the range of 15.5% to 16.5% and the non-GAAP diluted share count for the second quarter to be approximately 443 million shares. This results in non-GAAP earnings per share to be in the range of $1.20 to $1.32. We expect capital expenditures of $240 million to $270 million in the second quarter, as we ramp our silicon carbide production and invest in 300-millimeter capabilities. In summary, we believe ON Semi's differentiated portfolio focused on the sustainable ecosystem, coupled with the structural changes in our business will continue to drive profitable long-term growth and value for our shareholders. Our worldwide teams continue in presses with their unwavering commitment and dedication to our customers despite ongoing challenges across the globe, and I want to thank them for their outstanding results.

Thank you. Your first question comes from Ross Seymore with Deutsche Bank. Please go ahead.

Hi, thank you. Let me ask my question. Congratulations on the strong results. Hassane, my first question is for you. I understand that you mentioned there haven't been any changes from the demand side. However, investors seem to be struggling to believe that this situation will continue, even though you aren't seeing it at the moment. Could you provide more details? Are there any changes in demand behaviors across different end markets? We would appreciate a bit more insight and context on what you're observing, so investors can assess this in light of concerns about potential recessionary or cyclical downturns.

Yes. I'll address the automotive and industrial sectors, which represent our largest exposure. We do not observe any changes in the demand environment or the outlook for demand versus supply at least through 2023. Our long-term supply agreements, established in 2021 and the first quarter of 2022, extend beyond 2023 into 2024 and 2025. We are currently working to extend most of these agreements beyond the original timelines we had set for 2024. The fact that customers are still focusing on supply, based on a solid demand, and are willing to commit to long-term agreements beyond 2024 and 2025 provides us with visibility and assurance regarding the sustainability of demand. Our chief exposure, which continues to grow as mentioned in our Analyst Day, is driven by the megatrends I previously discussed. Electric vehicles will become increasingly prevalent, and whether they reach 50% of total demand in 2028, 2026, or 2027 is not the main concern; what matters is that they are fundamentally increasing as a percentage of total SAAR. This trend is what is propelling our growth, and we are seeing customers' confidence in their outlook, leading them to commit to these agreements.

Thanks for that color. Hassane, I guess for my follow-up one for Thad or you, Hassane, if you want is to pivot on to the gross margin side of things. Obviously, you guys have done a great job surprised to the upside pretty much every quarter since you took over. I wanted to get into two parts of that, the flatness going forward for the rest of the year. That, if you could walk through the puts and takes on that. And then the confidence with keeping the higher floor, a 4 handle, that changed? Is it what used to be 40% is now 45%? Any sort of color on the gross margin sustainability there?

Yes, Ross, it's Thad. Look, as I said in our prepared remarks, we're really confident with the floor, especially where we are today with the margin today. We believe the floor is definitely with the fore handle. If I kind of think about the impact to gross margin, we saw a favorable mix this quarter. We saw favorable pricing ahead of the input costs. So, we saw input costs coming at us. We've always said we're going to pass on those cost increases to our customers. So, as you look forward, we've got a number of factors coming in play, right? So, we've got favorability in the manufacturing side as we continue our Fab-Liter strategy. That's offset by increases in the input cost as well as in the second half of the year, we've got the ramping of silicon carbide, which is a headwind to margins because we don't exclude those start-up costs in our non-GAAP numbers. And so you've got a headwind associated with that in the second half, and that's why we believe that we'll see the margins sustain in that Q1 range for the remainder of the year. Longer term, we still remain very optimistic in terms of where we're going, but we've got a lot to do between here and the end of the year.

Thank you.

Thank you. Your next question comes from Chris Barney with Citi. Please go ahead.

Chris Barney? Okay. I'm a purple dinosaur now. Hey guys, I hope this is me, by the way. I hope I didn't take some Chris Barney question. One more question on the gross margin. Can you talk about how much of the upside in Q1 was mix versus pricing and your pricing expectations for the rest of 2022?

Well, the mix versus pricing in Q1 to the first order, pricing was first followed by favorable mix, and that's what gave us the upside to our guidance in Q1. As we go forward, we'll continue to pass on incremental cost increases that we get in our models, either through input cost or from our external foundries. I think we continue to close the price-to-value discrepancy on those products. And then we also plan on exiting the $300 million of non-core business later in the second half of the year. And as we've always said, we're basically pricing ourselves out of that market. When supply comes online, we will exit that business.

Got it. For my follow-up, you mentioned that there is no change in lead times. Would you say that the overall shortage situation for ON is similar to what it has been in the last couple of quarters? Do you expect any improvement in the shortage or supply situation before the end of the year?

Yeah. This is Hassane. Yes, I would say there's no change as far as the main versus supply to date. We don't see that changing materially over the next few quarters; call it, for the remainder of 2022. We do have some manufacturing efficiencies and some supply coming online from investments we've done in 2021, but not to the level to meet demand. So we'll still be supply constrained through 2022 and even with the outlook we have for 2023.

Okay, great. Thanks guys.

Thank you. Your next question comes from Vivek Arya with Bank of America. Please go ahead.

Thank you for taking my question. Hassane, I thought you mentioned that you have excluded some impact of China lockdowns in your Q2 outlook. I was hoping you could help us quantify how much is that? And is this something you can recover later in the year? Is this something that you can deliver to customers outside of the other, I believe, in Manila and Singapore distribution centers? Just how are you quantifying the impact of lockdowns, or is this a headwind even for the second half of the year?

We see a few percentage points of top-line impact included in our guidance for Q2. This is based on current conditions without knowing when restrictions might be lifted. We believe that demand remains strong, which is why we are working to maximize our distribution channels. However, we do face some short-term challenges due to supply constraints. While this situation may seem temporary, we lack visibility on when the lockdowns will end. We have communicated with all customers about demand, which is still present. Our main concern is the delay in fulfilling that demand from a supply standpoint. I anticipate this issue will resolve once the lockdowns are lifted. However, we've deemed it necessary to incorporate this uncertainty into our guidance due to the associated risks.

Got it. Hassane, longer-term silicon carbide, could you maybe give us a sense of what percentage of your sales does silicon carbide represent today? And then where do you see it going? And how do you differentiate between some of your competitors who are focused on the material side, such as Wolfspeed or others, and then others who are coming at it from a device incumbency perspective, such as Infineon and ST? What are ON’s main differentiators in the silicon carbide market?

Yes, of course. Regarding the first part of your question, I won't provide specific figures for silicon carbide. However, I want to highlight that we expect to more than double our revenue this year, putting us on track for a $1 billion run rate in 2023. This growth is based on committed revenue and long-term supply agreements. Currently, we are enhancing our capacity to meet the existing demand associated with these agreements from various geographies and customers. In terms of differentiation, we are positioned in a unique space, enabling us to support our customers with our substrate and vertical integration, along with the extensive knowledge we've accumulated over decades in device development and packaging. Our capability to assure substrate supply, combined with expertise in device design and packaging, allows us to provide optimal solutions for our customers. This is a key reason why we have been receiving a significant amount of business over the past few quarters, with more opportunities on the horizon. Our immediate priority is to ramp up our supply chain and increase our silicon carbide substrate production through GTAT, while remaining committed to our LTSA obligations to customers. We continue to see success this quarter, with our pipeline converting into committed revenue.

Thank you.

Thank you. Your next question comes from Toshiya Hari with Goldman Sachs. Please go ahead.

Hi, good morning. Thanks so much for taking the question. I had two as well. First on silicon carbide, Hassane, I was hoping you could give us an update on the design win funnel? Obviously, you reiterated your view on 2022 and exit rate for 2023. But last quarter, I think you gave a $2.6 billion number through 2024. I was hoping to get an update on that. And if you can speak to the mix between automotive and energy infrastructure, that would be helpful?

Yes, sure. I mean, look, I'll reiterate the committed revenue number of $2.6 billion. Obviously, we have a lot of design in the offer that I'll be hoping to talk about over the next few quarters to '22 as we close these out. But from a high-level perspective, the highest percent of that revenue is coming from traction just because of the TAM. EV is the biggest TAM for silicon carbide. Therefore, our biggest, I would say, 80% or so, $2 billion of that is in automotive traction. The rest of the $2.6 billion that I talked about is in non-automotive traction. So, think about it as the industrial side of alternative energy or infrastructure that I talked about, that has been ramping. I talked about being 50% growth in 2022 from 2021 last quarter; we closed the first quarter at 65% growth. So, we're growing that business nicely outside of just the automotive and that's very broad across geographies and very broad across customers. More importantly, we are engaged with the top 10, as I mentioned in my prepared remarks.

Great. Thank you. And then I've got a quick follow-up for Thad as well on the gross margin side. You talked about silicon carbide and the ramp there being the headwind later this year and I guess, potentially into 2023. I was hoping you could quantify that for us and when you'd expect it to reverse and to be more of a tailwind for your business? Is it late '23, when you're run rating at about $1 billion? Is it beyond that? Any comment there would be helpful and the positive benefits from Belgium, Maine and I guess, East Fishkill. I know this probably takes a couple of years, but if you can speak to that as well, that would be super helpful? Thank you.

Yes, the silicon carbide will pose challenges for us starting in the second half of this year, and this will likely continue into the first half of next year before we start seeing benefits. The product margins will improve; however, the initial start-up costs will be incurred as we increase production to meet our long-term supply agreements. Regarding the Belgium facility, we will gradually eliminate about $30 million to $35 million in fixed costs on the Maine side. We will also be purchasing products from the acquirer over time, and we will begin to see the benefits upon exiting. The Belgium facility, being smaller, will result in a decrease of approximately $20 million in fixed costs over time as well.

Thank you.

Your next question comes from William Stein with Truist Securities. Please go ahead.

Hi, thank you for taking my question. I wonder if you can remind us what the revenue level of products that you're exiting is expected to do over the next couple of quarters? And are you done with those product exits by the end of this year? Thank you.

We finished the first quarter with approximately $32 million in exits. We don't anticipate significant activity in the second quarter. In the latter half of this year, we expect to exit around $300 million more. The margin during this period is expected to be higher than in the past. So far, we've exited a total of $200 million with a gross margin of 21%. The next $300 million is expected to have a higher margin due to the pricing environment, although it will still be dilutive to our overall margins. As we mentioned at our Analyst Day last August, we expect losses to range from $800 million to $900 million. There's more to come in 2023, and we've redirected our capacity towards higher-margin products, allowing us to optimize that capacity rather than invest more capital in manufacturing, resulting in a more favorable mix.

Great. I would like to follow up on any changes in order patterns or point of sale through the channel. You mentioned that demand remains stable and strong in the direct business. I'm curious if that includes the channel as well or if there have been any changes. Thank you.

Yes, this is Hassane. We don't see any changes in demand, whether it's direct or through distribution. I want to emphasize that we maintain direct contact with our distribution customers, which allows us to quickly assess demand. As Thad mentioned, we are holding inventory and keeping distribution inventory at historically low levels to ensure we can meet the demand for all our customers. When we talk about demand, we are referring to both direct and distribution demand, and we observe that both are highly constrained, with supply not yet catching up to demand throughout 2023.

Thanks and congrats on the great results.

Thank you.

Thank you.

Thanks. And the next question comes from Harsh Kumar with Piper Sandler. Your question, please.

Yes. First of all, congratulations on implementing an impressive turnaround. What you have accomplished so far is remarkable. Hassane and Thad, as we approach the June quarter and review the guidance, do you expect something similar to what occurred in the first quarter where industrial and automotive experiences growth at the same level sequentially? Or is there something else we should consider? Perhaps you could share some insights on how to understand the revenue breakdown.

So, to a first order, the answer is yes. Our guide is driven by auto and industrial, more led by automotive in the second quarter, as we see more of the strength. And really, the ramps for some of our customers under the long-term supply agreements that we talked about. So it will be about the same growth, but led by automotive.

Great. My question is about gross margin and the significant increase you've demonstrated in the March quarter. I recall you mentioning in response to Chris Danley's question that there was some element of price increase. Are you specifically raising prices in the channel, or is this mainly about moving away from cheaper legacy products and making a mix change? Could you clarify if there is an actual dollar increase in average selling prices that you're implementing?

It encompasses everything you've mentioned. First, it revolves around the discrepancies between price and value that I frequently refer to, as we recalibrate our overall demand based on the value of our products. As we adjust our mix more towards auto and industrial sectors, which yield higher average selling prices and greater margins, we achieve the sustainable margin expansion that we have been experiencing. This includes both the increased value of our products and the shift towards these higher-value segments. Additionally, we have net price increases that we've discussed, including the $200 million we've exited so far or the $32 million we exited this quarter with a 22% margin in a favorable pricing environment. However, this isn't a sustainable approach. As we mentioned, we have lost that revenue and anticipate another approximately $300 million in 2022 at a dilutive margin. Once we move away from that business, our margin will see more expansion as a result. Thus, there are two categories to consider: one is the sustainable aspect we see moving forward and the longer-term outlook, while the other is the short-term net increase that is dilutive and not sustainable, which we will phase out throughout this year and into next year.

Thanks guys.

Your next question comes from Matt Ramsay with Cowen. Please go ahead.

Thank you very much. Good morning. Hassane, I wanted to ask another question about silicon carbide. And I guess the question that I get from investors most is not inside, it's not the visibility of design wins that you have, it's the confidence that you can scale capacity with GTAT to the levels that you're forecasting. And maybe you could give a little bit of insight into how the operations are going and your confidence in being able to scale that revenue so quickly with internal supply at good margins? Thanks.

Sure. The first building is already full and performing as we expected, which is a strong indicator of our progress. I noted this in my remarks about yield and capacity, specifically the output in millimeters from our substrate factory. All our metrics are on track. The focus now has shifted from engineering and development to expanding manufacturing. We have secured another site and are set to quadruple our output by the end of 2022, particularly in terms of the number of furnaces and the resulting substrate height. Overall, I have a high level of confidence in our plans. Our capital expenditure is directed towards this expansion, and we are already generating revenue from the materials. I'm optimistic about our prospects and am committed to supporting our long-term supply agreements. That's my perspective.

Thanks. That's really helpful. As my follow-up question, there's been a lot of back and forth on gross margin on this call. And I think it's remarkable what you guys have done. My own view was that given the barriers of entry in power semis that the margin profile of yourselves and your competitors should be sort of higher than it's been. And we're seeing that with your results and with some of your competitors' results as well. I guess the question is how have you seen the competitive response from the rest of the players in the space to increase pricing that you've put out there, increased margins for the group everyone sort of acting rationally? Do you think this is sort of sustainable for yourself and peer companies, or do you see any kind of changes in the pricing environment from competitors that might make some of this temporary? Thanks.

Sure. That's a very good question. And obviously, I can't comment on what my competitors will do in an environment today or later, especially on pricing and so on. The only thing I can't control is what our view of the market is and our view of the pricing environment is. So I'll focus my answer on that. We view this as sustainable because it's driven by value. But I will remind everybody the portion that we acknowledge is not sustainable, is on the non-core that we plan on exiting, and we price ourselves out of the market. So what does that mean? In the future where demand and supply starts to come in balance, we're not going to chase that down. Our competitors may end up hashing it out amongst themselves, but you were not going to see onsemi engaging in a pricing down to keep market share. That's not what our company is about. We're going to focus on the value. Our products today that we're focusing on are strategic and our growth are based on value we provide to customers; that pricing is stable. I don't see it going anywhere else. And for the rest of the market, let them hash it out, but we're not going to chase it down.

Thanks very much guys. Appreciate it.

Thank you. Your next question comes from Harlan Sur with JPMorgan. Please go ahead.

Good morning, and congratulations on the strong results and execution. On the non-core low-margin business, as you've mentioned, you're exiting another $300 million in the second half. Previously, you thought that this exit would temper the second half and full year revenue growth profile, but the team actually continues to unlock better-than-expected manufacturing efficiencies, and it does seem like you guys are getting more external supply as well. So I guess, how should we think about the profile of second half revenues versus the first half?

Well, Harlan, it's Thad. What we're seeing right now is strength in the market. Demand continues to exceed supply. We are receiving more supply from our external foundry partners and optimizing our own manufacturing capabilities. This will provide some growth potential in the second half. However, we have to consider the $300 million headwind that will be rolling off. While we don't anticipate significant growth, we believe that the second half will actually perform better than the first half when comparing Q3 and Q4 to Q1 and Q2.

Perfect. I appreciate the insights there. And then as my follow-up, despite the aggressive exit of the non-core low-margin businesses, I mean, your other segments still drove strong 15% year-over-year growth in the quarter. In this segment, you do actually have a fast-growing, high-margin end market focus, which you touched upon a little bit, but this is your cloud data center and 5G infrastructure markets, right? You guys have a pretty strong portfolio, medium voltage MOSFETs, power management, analog products. You talked about the strong design win pipeline. But from a revenue perspective, I know you guys have targeted this market to go at about an 11% CAGR going forward. But just given strong data center compute spending trends, strong 5G non-China build-out activity, can you guys just give us a rough sense on how fast this part of the business is currently growing on a year-over-year basis?

Yeah. Look, I didn't break it up specifically as far as growth. But the design win that is fueling that growth was about 33% year-over-year. This is new designs and replacing incumbents, further supporting our 11%. So the 11% we talked about, you're absolutely right. We do have growth in that other segment, and that's driven by the cloud, which is key for us from a growth and margin expansion business. Our design wins, our revenue today supports a comfortable 11% growth over the next five years.

Great. Thanks, guys.

Thank you. Your next question comes from Joe Moore with Morgan Stanley. Your question, please.

Great. Thank you. Going back to the China potential disruption that you talked about, can you talk about how much of that is your facilities in China versus impact from your customers' manufacturing? Do you see impact from either of those? And then there were some press commentary that there was an image sensor specific supply coming out of China. Can you just talk if there's any disproportionate impact there? Thank you.

Yes. Look, so it's primarily the supply disruption overall. Think about logistics, think about getting material in and out of factories and so on. So we're able to mitigate some of that by rerouting, but the lack of mobility is what is hard to judge. I don't know what commentary you're referring to on the image sensor. I can't comment on that because that did not come from – from onsemi source. I don't see any specific product impacted versus just, like I said, the logistics that everybody has been commenting about. That's really their present on the ground. And like we talked about, we do see that. We put it into our guide already. So depending on how that loosens up, we'll talk about it in the second quarter.

Great. Thank you very much.

Your next question comes from Raji Gill with Needham & Company. Please go ahead.

Yes. Thank you and congratulations on the strong results across the board. Just that, going back to pricing, if I can, we talked about some of the impact of favorable pricing on the margins. But with respect to revenue, the auto industrial segment grew 42% year-over-year combined. Is there a way to kind of break that out between unit growth versus ASP growth? And it really speaks to the larger point about the sustainability of the pricing in the core business. As part of your long-term supply agreements, you have price increases. So I just want to talk a little bit about kind of price versus units?

Look, a lot of the growth in our strategic core is driven by units that we talk about the content because a lot of the price-to-value discrepancy that we talked about, that was implemented primarily in 2021. So a lot of the growth moving forward is a lot of it is content. Overall, units will be down because a lot of the exits that we've done are low ASP, low margin, high volume, so we focus our unit to where our strategic focus has been, and that's been increasing, and I mentioned that in my prepared remarks, driven a lot by the content, not just per car, from apples-to-apples, car to car, where there's more content, whether it's imaging or power, but also as we shift more into EVs that have much more content. So from that perspective, it's driven by units. The ASP is in the baseline to a first order. And as we ship more of the auto and industrial, we're going to benefit from the ASP reset that we've done throughout 2021, which calls it, in my view sustainable as we move forward.

Got it. That's really helpful. Thad, for my follow-up, you talked about obtaining capacity from your external foundries and improving capacity from your internal factories, which is contributing to some growth in the second half. You also mentioned that demand will be outpacing supply for much of 2023, if I heard you correctly. I want to understand the demand-supply conditions as you look ahead to 2023. If we remain in a tight supply situation, is there a way to evaluate the extent of it? Will it be less constrained next year but still have limitations? Any insights on the balance between demand and supply would be appreciated. Thank you.

Yes. Yes, that's a good. So we are getting obviously some increases from foundry and some reducing bottlenecks internally in our manufacturing. But like I said, not enough to catch up to the demand. So, if I answer the question directly, we do see an increase in supply through '22 and even '23. But based on where the demand is, it's not going to get into balance, and that's where I keep talking about the supply constraint because it's the supply and demand side. Both of them increase, demand has increased at a faster rate, which keeps us a little bit behind because it takes 18 to 24 months to add capacity these days with all of the lead times and everything. Demand has been increasing. So, net-net, we're not catching up. But we have been making investments in our CapEx, but very specifically on technologies. For example, we're not adding CapEx just across the board to increase capacity for non-core products, although that demand is still high because we plan on exiting. We're focusing our CapEx investments on EFK, on silicon carbide on some of the mixed signal analog that all drive growth and accretive margins. But net-net, we don't see us catching up.

That’s super helpful.

Appreciate it.

And your next question comes from Christopher Rolland with Susquehanna. Please go ahead.

Congratulations on the results, particularly the gross margin. Following up on the last question, can we assume that you will have the entire East Fishkill facility in 2023? Is that fab fully occupied? Additionally, as you consider internal versus external operations, what are the plans once East Fishkill is at capacity? Thank you.

Yes, hey Chris. It's Thad here. So, we take ownership in January of 2023. There is a plan for GLOBALFOUNDRIES to exit just as we've been ramping up over the last couple of years, they'll ramp down over three years as we continue to move production into that facility. So, we've said that our units are actually doubling this year in 2022. We'll continue to accelerate that beyond '23, but there is a three-year period where they wind down, we wind up. And our assumption right now is, yes, we have a full fab at that time. Now we've said this in the past, at that time in '23, for a couple of years, we're going to be a foundry business or GLOBALFOUNDRIES, and that's at a low margin, which is a little bit of a headwind as well, but we'll be able to offset that with the cost improvements that we get across the portfolio.

Long term, as we exit the other fabs we have already announced and ramp up East Fishkill, our fixed costs will improve overall, similar to the figures mentioned for Belgium and our North America fab. Ultimately, we expect our capacity to increase by approximately 1.3 times once we fully utilize the 300-millimeter wafers and phase out the lower-scale fabs. Thus, we anticipate growth driven by increased capacity and reduced fixed costs, all within a more efficient fab footprint.

Great. Given that the 300 is primarily accounted for, what conditions would need to be met to consider a second 300 fab, or is there a way to boost capacity at East Fishkill?

As GLOBALFOUNDRIES moves forward from the last three years, we have significant opportunities to expand our 300-millimeter capacity at that facility. Over the next five years, we will evaluate our needs for additional manufacturing capacity based on the outlook.

Thank you, guys.

And with that, we conclude our Q&A session. I will turn the call back over to the President and CEO, Hassane El-Khoury, for final remarks.

Thank you all for joining us today. I thank our worldwide teams for their hard work in accelerating our transformation and driving record results once again, with leadership in intelligent power and sensing solutions and exposure to fast-growing megatrends, such as vehicle electrification, ADAS, energy infrastructure and factory automation, we are well positioned to deliver sustained and profitable long-term revenue growth and margin expansion. Thank you.

And with that, we conclude today's conference. Thank you for participating. You may now disconnect.