Good day, and thank you for standing by. Welcome to the ON Semiconductor Corporation fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal, Vice President of Core Development, Investor Relations. Please go ahead.

Good morning, and thank you for joining ON Semiconductor Corporation's fourth quarter and full year 2024 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 fourth quarter and full year 2024 earnings release will be available on our website approximately one hour following this conference call and the recorded website will be available for approximately thirty days following this conference call. Additional information is posted on the Investor Relations section of our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain limitations when using non-GAAP financial measures are included in our earnings release which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to 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 fourth quarter and full year 2024. 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 Hassane.

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, industrial, and AI data centers. We streamlined manufacturing through our Fabrite strategy and 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 have demonstrated resilience in our business model, delivering non-GAAP gross margin of 45.5% against revenue of $7.1 billion for the full year. As for the market environment, demand declined late in the quarter and continued into January, resulting in fourth-quarter revenue of $1.72 billion, non-GAAP gross margin of 45.3%, and non-GAAP earnings per share of $0.95. Regional revenue declined sequentially except North America, which remained flat, with Japan seeing the sharpest decline. Quarter-on-quarter declines were driven primarily by our non-core market segments. Amid 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 not play in highly volatile price-sensitive markets. We are maintaining the integrity of our value proposition and positioning ourselves for profitable growth in the future. Our fourth-quarter 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 Q4 was up, an early Chinese New Year and extended shutdown period have already impacted January EV deliveries from the top China-based automakers. Demand from all other regions weakened towards the end of the fourth quarter, which continued into Q1. In the US, tier ones have been impacted by lower global auto demand than expected in the fourth quarter, along with slower EV ramp than anticipated. Entering Q1, we expect persisting volatility due to the geopolitical uncertainty across all geographies as our customers assess their manufacturing footprints and the impact of tariffs. 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 Q4, with new vehicle registrations dropping 10% month over month in December. 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 was 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 and aerospace and defense, where revenue grew more than 40% and 50%, respectively. In silicon carbide, our fourth-quarter revenue increased sequentially, resulting in a 22% increase for the second half over the first half of 2024. 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 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 continues. Furthering our strategy of delivering the complete powertrain for automotive, industrial, and AI data centers, we closed the acquisition of Corbus Silicon Carbide junction field-effect transistor business. The SiC JFET portfolio complements our elite SiC power solutions and is the most competitive technology to get the energy efficiency in 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 the JFET to continue to replace the incumbent superjunction technologies in PSUs as the need for smaller footprint, better performance, and lower cost continues to increase. In terms of silicon carbide, revenue growth and AI design wins for the hyperscalers started to ramp in the fourth quarter, and we expect our SiC JFET and SiC MOSFET revenue to 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 unlock a $1.3 billion TAM with a 30% revenue CAGR through 2030. 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 November, 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. The Treo platform embodies our strategy of prioritizing high-value products and will accelerate our portfolio proliferation to unlock a $36 billion 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 of integration and accelerated time to market for applications such as Ethernet for automotive zonal architecture, ultrasonic sensing for ADAS park assist, and high-efficiency power management for AI data centers, and they are actively designing Treo-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, improve our cost structure, and we will control spending by focusing on efficiency through automation while we continue to invest in R&D to support our long-term growth. Our actions will position us to better benefit from a market recovery 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 in a weak market environment. Their efforts allow us to maintain gross margin at 45.5% against revenue of $7.1 billion and to generate $1.2 billion 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 Fabrite strategy. These actions will reduce our underutilization absorption as we lower our fixed cost structure. We expect to see the results of these actions to positively impact the income statement in late 2025 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 headcount reductions and potential site closures. We expect to see a meaningful impact of these actions as early as the second quarter. We will continue R&D investments in 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 and reduce capital spending to our revised intensity target of mid-single-digit percentage range in 2025. We generated $422 million of free cash flow in Q4, a 39% sequential increase. We're committed to our long-term target of returning 50% of free cash flow to shareholders through our share repurchase program, and in 2024, we exceeded it by returning 54% or approximately $650 million. This includes $200 million of share repurchases in the fourth quarter, and there is approximately $1.7 billion remaining on our repurchase authorization. Turning to revenue for the fourth quarter, a slowdown in demand across all end markets resulted in revenue of $1.72 billion. Automotive and industrial accounted for 84% of revenue in the fourth quarter. Automotive revenue was $1.03 billion, which increased 8% sequentially, driven by programs that ramped in silicon carbide. Revenue for industrial was $417 million, 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've seen early signs of pricing pressures in pockets of these non-core end markets, which we will not pursue, and we will exit over time if the volatility returns to historical levels. Looking at the fourth-quarter split by the business units, revenue for the Power Solutions Group or PSG was $809 million, a decrease of 2% quarter over quarter and 16% year over year. Revenue for the Analog and Mixed Signal Group or AMG was $611 million, a decrease of 7% quarter over quarter and a decrease of 18% year over year. Revenue for the Intelligent Sensing Group or ISG was $303 million, a 9% increase quarter over quarter. ISG revenue decreased 2% over the same quarter last year. Turning to gross margin in the fourth quarter, GAAP gross margin was 45.2% and non-GAAP gross margin was 45.3%, down 20 basis points sequentially and 140 basis points from the quarter a year ago. Manufacturing utilization decreased to 59% in Q4 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. Operating expenses for the fourth quarter were $371 million as compared to $330 million in the fourth quarter of 2023. Non-GAAP operating expenses were $321 million compared to $306 million in the quarter a year ago. Non-GAAP operating expenses increased sequentially due to the timing of R&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 16%. Diluted GAAP earnings per share for the fourth quarter was $0.88 as compared to $1.28 in the quarter a year ago. Non-GAAP earnings per share was $0.95 as compared to $1.25 in Q4 of 2023. GAAP diluted share count was 430 million shares and our non-GAAP diluted share count was 426 million shares. Turning to the balance sheet, cash and short-term investments were $3 billion with total liquidity of $4.1 billion, including $1.1 billion undrawn on a revolver. Cash from operations was $580 million, and free cash flow increased 39% sequentially to $422 million, representing 25% of revenue. For the year, we generated almost $1.2 billion of free cash flow. Capital expenditures during Q4 were $157 million, which equates to a capital intensity of 9%. Inventory was flat quarter over quarter on a dollar basis and increased by three days to 216 days. This includes 100 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 first half of 2025 as we ship and convert the inventory to cash. Excluding the strategic builds, our base inventory is at 115 days, which continues to be within our target range of 100 to 120 days. Distribution inventory declined $55 million, with weeks of inventory remaining relatively flat at 9.6 versus 9.7 weeks in Q3. Our plan to change the mix in the channel to support the mass market has resulted in an 18% increase in count year over year. We expect distribution weeks of inventory to be plus or minus ten weeks going forward. Let me provide you the key elements of our non-GAAP guidance for the first quarter. As a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance. Given our visibility, we anticipate Q1 revenue will be in the range of $1.35 billion to $1.45 billion. We expect non-GAAP gross margin to be between 39% and 41%, with utilization declining to mid-50% in Q1. This includes share-based compensation of $7 million. 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 point impact 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 expect OpEx to be in the range of $313 million to $328 million, including share-based compensation of $31 million. We anticipate our non-GAAP other income to be a net benefit of $14 million, with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 16%, and our non-GAAP diluted share count is expected to be 425 million 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 million to $150 million. As you can see, we are not standing still. 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. And we remain confident our technology and innovations in these markets will allow us to capitalize on those trends.

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to remove yourself from the queue, please press star one one again. We will pause for a moment while we compile our Q&A roster. 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 want to get into the structural versus cyclical side. You guys have been conservative for quite some time on a cyclical basis, probably one of the first ones. But, yeah, the magnitude of this drop is very, very significant. Hassane, I know you talked about late in the quarter things kind of fell apart from a demand perspective, but how much of this do you believe to be ON Semiconductor Corporation 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 be as resilient as you hoped?

No. Look. I think that the big change in the precipitous drop, the one thing I can say that is ON Semiconductor Corporation specific is the non-core business that has seen the largest decline, and we've been very consistent not to play in that volatility. If you recall when we started the transformation, we had a big portion, call it, the $800 to $900 million of non-core business where we said we would exit, and we've 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 market, and we're going to maintain the value of our products. Which is where we're investing. You know, think Treo, think silicon carbide, think in 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 Hassane is talking about, the non-core. It's, you know, roughly $350 to $400 million that is more volatile that, as this downturn extends, 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 on the cost front as soon as Q2 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.

Thanks for taking my question. Just first kind of few clarifications. So Q1, what are you expecting for the sequential segment trends in automotive and industrial segments? And I think you mentioned something unfavorable in the mix. And then any early look at Q2 seasonality because Hassane, what everyone is obviously trying to guess is what is the path of recovery for ON Semiconductor Corporation from here.

Yeah. So by end market, Vivek, automotive's 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 it's going to be down mid to high single-digit sequentially.

You know, on the visibility side, you know, we're sticking with visibility of about a quarter. Of course, we have some looks into Q2, but it's too early to talk about seasonality in Q2. Given, really, the volatility and backdrop of geopolitical and tariffs. As early as over the weekend. So we're not going to be talking about Q2 yet as we get more and more visibility, we'll update then. But as far as recovery, look, I think I know what others have seen have said. It's a lot of the everybody's, you know, talking about, oh, the second half would be better than the first half and so on. It's the same string that everybody's 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. Because 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 Thad said, not standing still, to be a tailwind for us whether there's a recovery or not.

For my follow-up, Hassane, so if I look at Q1 automotive, I think you mentioned down 25%. So let's say $770 million or so. It is sort of reset back to mid-2022 levels. But, you know, it is still well above the levels we saw pre-COVID, right, which were in the $400 to $500 million quarterly range. What is the right baseline that we should have when we start to think about the 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 2022 levels. 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 LTSA's pricing? You know, content, EV, silicon carbide, etcetera. That'll help us project what your automotive business can be over the next several years as you start to normalize? Thank you.

Yeah. Look. I think from looking forward, 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. You know, the growth in silicon carbide, which is not just the growth in silicon carbide, but a mix shift even on the ASP side. You know, a silicon carbide module is a much higher dollar content than some, for example, the discrete we used to ship more of prior. So from a unit, you can expect, you know, 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, you know, our long-term view, which remains consistent, you know, outside of the market environment today, our long-term view remains consistent, which is SAR plus call it, high to low teens. Oh, sorry. From high single-digit to low teens. That's the range over SAR. So which is what we're seeing. That, I would say, is the baseline that we are building to and the baseline we are investing to, which is both a mix shift into higher value products, especially as an example, we start introducing Treo. 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.

One 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. Hassane, I wanted to go back to the automotive outlook for Q1, 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 pricing? Is there a non-core component within automotive? Any additional context or color there would be really helpful.

Yeah. So, of course, there's a non-core business component to it, as I mentioned. So that's built into the fourth quarter. But some of it is the silicon carbide, you know, we've always said silicon carbide quarter on quarter is lumpy. We've had a great second half. However, in China, it's all driven by China. China today is looking at the softer Q1. I think that's temporary, you know, as it digests the inventory that they built. It's not our inventory, but I'm talking about the 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, you know, they're not ramping at the rate that we expected. But they're still ramping, which is what drove the second half of 2024. So quarter on quarter, you know, 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 one for Thad. You know, you talked about rationalizing your portfolio. You talked about reviewing your manufacturing footprint. As you draw up your forward strategy and your plans, is the aspiration to kind of hold on to the 2027 model that you guys shared with us a couple of years ago, you know, i.e., gross margins of 53%, operating margins of 40% or 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 updated long-term model at this point? Thank you.

No. Look. We still remain committed to that 53% target. If you look at the gross margin, in the short term, it's all impacted by utilization. Right? I talked about the moving pieces, but utilization is the largest headwind that we have right now. Assuming the market recovers and, you know, we continue to execute on our Fabrite, we will rightsize 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'll generate strong free cash flows 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 2025 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 Q4 of 2024 with a 25% free cash flow margin, and we believe we'll continue to generate strong free cash flow going forward.

One moment for our next question. The next question comes from Christopher Danely 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 Q1 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. You know, at this point, the shares have been gained. The designs have been qualified. It's purely an end-market demand right now.

Yeah. And we do believe that we're still under-shipping natural demand. So at some point, you gotta come back 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 in 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, you know, outside of the short-term lumpiness and the volatility and really the EV, our long-term growth, we aim to be the leaders in the market from a market share perspective. And we aim to run the highest profitability silicon carbide business we have given the innovations that we believe we bring to the table. 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 a tailwind for us both on growth and margin.

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

Hey, thanks for taking the question. I had two. I was kind of curious, I wanted to go back to the non-strategic business. You said $350 to $400 million. Just how much of that is in terms of the guidance for March, are you planning on some of that delta coming out in March, or is that something that would be on top of what you're seeing in March and would come out further in the year if you make those decisions?

No, look, we think that if that business, if we do lose that business because of pricing, it'll happen over a multi-quarter period. So it's not all baked into Q1. 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.

Gotcha. And then I want to ask, the auto demand by geography. You actually were up in December. A lot of people saw China strength. I think you called it out. I'm just kind of curious if you can just talk about March demand by geography and auto?

Yeah. I think in general, we expect it to be down. I don't think we can call out, you know, relatively speaking, there are some regions that are better than others, but the growth that we've had was China, as I spoke about in my prepared remarks. And getting into Q1, you know, I highlighted the early Chinese New Year and the extended shutdown. So that's, again, a demand environment. We are in these sockets. We ramped in the fourth quarter. 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.

One moment for our next question. Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

Hey, guys. Thanks for taking my question. I also wanted to ask about the first-quarter gross margin. So you walked through the 100 basis points of unfavorable mix and then the new rule of thumb, you know, adding probably 100 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 driving the unfavorable mix given, you know, it sounds like you're walking away from business as is. Thank you.

Yeah. So starting with the gross margin, if you do the walk from Q4 to the midpoint of our guidance in Q1, and I said this in our prepared statement here. 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. 100 basis points from the unfavorable product mix. And then there's, you know, 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. You know, if you think about the long tail of customers that we talk about and some of these businesses, you know, 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, you know, whenever there's a recovery and revenue comes back, you will get that half of that delta just with the revenue increase because it's a pure calculation. That make sense, Josh?

Yeah. Thank you, Thad. And then for my follow-up, you mentioned sort of inventory levels coming down at your auto tier one customers. Any metrics you can give us on how much inventory you expect to strip out downstream at your tier ones and where levels, I guess, are now and where you expect them to be exiting the first quarter?

Yeah. Look. It's not really an industry response because every tier one, depending on their financial and the strength of their balance sheet, are taking a different approach to inventory. It's hard to get 100% visibility there. I 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 are really directly correlated to what the demand is, and as demand deteriorated, you know, inventory looks elevated, and they will keep taking action. So it's kind of a moving target, but it is not industry-specific, you know. We have some tier ones we work with that have already achieved it. So we're already shipping through demand. But in general, there's still a lot of digestion across the industry.

Thank you.

One moment for our next question. Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Yeah. Hi, Hassane and Thad. Just wondering when you look at the fab utilization, how that should play out over the next couple of quarters, I guess, after Q1, like, do you see that flat or maybe second half picking up, or is it in some trend?

Well, like, utilization's all going to be demand-driven. Right? We said that in Q1, our utilization will drop to the mid-50% range from 59% here in Q4. 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, you know, the natural latency until you see gross margin improvement. That'll happen when we see the demand, the market recover.

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

No. Like, the only comment I made is we're designed in. We gained the share. You know, you saw that in the strength getting into the second half of 2024. 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 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 commentary.

One 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, I imagine everyone's complying with LTSAs just given that drop. So do you think part of this kind of delayed response is around LTSAs? And then secondly, should we expect them to be renegotiated moving forward here?

Yeah. We don't believe so because our stance has been very consistent across even the last couple of years that we've been negotiating LTSAs. We've been negotiating LTSAs to match demand as closely as the visibility of the time. You know, some LTSAs have been negotiated multiple times. It's not something new that we're doing in Q1 of 2025 as a response. That's been a consistent and continuous effort that we have with the customer. On really landing onto a, what I call, the win-win. So I don't believe that's got those two 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 what we did, and again, I've been very consistent with that. We're not going to overship demand just to adhere to the LTSAs. So your comment, you know, 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, has 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 sensors. I'm just wondering how much of that auto weakness is related to image sensors. Is there anything to note in terms of pricing or competition or internalization in China? How would you classify image sensors overall?

I think image sensors have been more stable. I wouldn't call anything up or down. Our approach for image sensors has been the same for the last few years. You know, we've been trimming our portfolio. We're not aiming to be, you know, number one market share with tortuous profits. Well, we've used shortages in the last few years because remember all that business is outsourced. What 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 eight-megapixel. So 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 the overall portfolio, we are focusing where we add value, not where we can just ship units.

One 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, you know, 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. Perhaps you can give us an update on pricing trends there for the vast majority of your business.

Yeah. Look. I think what people refer to as the annual price negotiation, which is a Q4 negotiation with an impact in Q1, we're not seeing that. Are there benefits and efficiencies that we have done in our product? You know, we've talked about our Fabrite, talked about taking cost 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 Thad walked you through, I focus really when I talk about the 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 customer. We're offsetting it with efficiencies of our own internally. Those I wouldn't call 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. There's no demand elasticity based on proprietary products, which is where our focus has been. But 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. That's my follow-up. I want to ask about silicon carbide wafer sourcing. The market overall for devices, you know, clearly underperformed by 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, you know, there's the first, what you have to think about is the certainty of supply in a backdrop of geopolitical uncertainty. If you take that out, we are basically balancing our internal and external. We have qualified both internal and external. As I mentioned in my prepared remarks, we've qualified 200-millimeter, but we've qualified the 350-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 geopolitical environment.

Thanks, Hassane.

One moment for our next question. Our next question comes from Joe Moore with Wells Fargo. Your line is open.

Thanks for taking the question. The $350 to $400 million price-sensitive revenue that you're thinking about 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 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 JFETs business.

We expect that business to continue to grow as we, you know, we've had some penetration in the second half of 2024. Of course, that will continue to grow on an annual basis. We do have some platforms that we are designed in, and those will start adding up to the 2025. So we're on beat with the design cycle in that market. With our new products, and we're looking forward, our Treo platform will start getting us 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.

One moment for our next question. Our next question comes from Tore Svanberg with Stifel. Your line is open.

Yes. Thank you. I had a question about gross margin. When the recovery comes, should we still think about the 20 to 25 basis points in improvement per utilization? Well, 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.

Yeah. That's right. And you should think about the 20 to 25 as, you know, from here, you know, 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 costs are becoming a larger percent of the overall factory cost. You can only cut so much variable cost. Right? And so we're kind of getting down when you're stepping down into the 50% range. You're, you know, 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 Treo, how should we sort of track the financial success of that business? Are you going to be, you know, perhaps sharing with us your revenue associated with that business or the impact of 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 report on, call it, the early milestone because those are the leading indicators. So what you'd expect is, you know, product introductions, confirmation of the margin profile, and, you know, maybe at some point, depending on the customer and their willingness, is a joint announcement with customers as they design it in. We have customers, as I mentioned, that will start to ramp in 2025. So first revenue is actually going to happen. But don't expect to update, you know, on a quarterly beat or on an annual beat at that level of granularity.

One moment for our next question. Our next question comes from Harsh Kumar with Piper Sandler. Your line is open.

Yeah. Hassane and Thad. I had two 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, you know, starting off with the guide that you gave for the March quarter, if you were just to kind of give us an idea of what's 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 guess if you were not to under-ship?

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

I got it. Okay. And then I wanted to ask you about one of your neighboring companies in Arizona also. They supposedly had some of the worst inventory problems, and they guide posting as bad as perhaps yours. I mean, neither the automotive nor the total guide. And I was curious what to put you, 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 for 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 see?

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 what peers have done across, you know, the quarter and across their earnings and what they look at. But everything you get from me is purely in context of ON Semiconductor Corporation. Because everybody has a different portfolio. Everybody has a different strategy. So I can't really peg anything to it. However, what I would say is from an inventory, and the inventory I can't control. From an internal inventory and DC inventory, our internal inventory, you know, 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 an inventory build at all. So that's point number one where our discipline comes in. From a disti, you've also seen us be very consistent on our disti. Actually, the distribution inventory in Q4 dropped $55 million. So we drained as we saw the softness in Q4, towards the end of Q4, we took decisive action and we reduced disti inventory by $55 million 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 why we'll continue to focus on the stuff that we can control.

That's fair. Thank you, guys.

Ladies and gentlemen, this does conclude the Q&A portion of today's conference call. I'd like to turn the call back over to Hassane El-Khoury, 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 focused 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. Thank you.

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