Gary Mobley: Thanks, Hassane. As my follow-up, I wanted to ask about your design-win metrics. You called out a 30% quarter-over-quarter increase in design-wins. I presume that’s lifetime value. But looking at it as a more long-term basis, the trends you’re seeing there are lifetime value on maybe a trailing 12-month basis, is that supportive of the 10% to 12% long-term revenue growth targets you guys have outlined?
Hassane El-Khoury: That’s right. We do see that. That’s kind of based on the model. You’re right, it is a lifetime revenue. But the way I look at it to support the 10% to 12%, it is the – I guess, the overlaid annual revenue on top of the base, on top of the new products that continue to grow. If I put all of these together, our next outlook is supporting the 10% to 12%. So you take the base, you add the new products, and you add the new design wins on top of it, and that layering effect gives us that 10% to 12% growth.
Gary Mobley: Thank you.
Operator: One moment for our next question. Our next question comes from Harsh Kumar with Piper Sandler. Your line is open.
Harsh Kumar: Yes, hi. Thank you. Hassane, I had a quick question for you on distribution and OEM partner inventory. I guess the question is, which one for you is bigger? And then are you comfortable at this point with the inventory you’re holding? Clearly, you mentioned that you’re raising inventory at the discrete, but would you give us some color on the inventory at the OEM partners? And also, this environment is a very good test of pricing. Are you seeing pricing generally hold up pretty well for your products?
Hassane El-Khoury: Yes, let me start with the pricing. Pricing is – we’ve been saying pricing is stable. That’s the power of the LTSA. A lot of the conversations we’ve had with customers on given the demand environment has been more on what do we do on the volumes rather than the pricing. That goes back to the win-win. We invested in capacity, we will support customers in a softer market, but it has not been a pricing discussion and we don’t expect it to be a pricing discussion. As far as the inventory, look, we’ve been – it changes based on the market. We believe the industrial side of it, if you recall, we start taking utilization down and reducing our shipments in industrial back at the end of 2022. So we’ve had longer than most of our peers kind of a period in 2023 where we’ve helped customer drain in the industrial market drain their inventory.
That’s why we’re seeing that stabilization that Thad talked about and even better outlook for the standard part of our industrial business. So that’s on the industrial. On the automotive, I don’t think we’re done. We saw that softness in Q1, as I mentioned earlier, you see it in the outlook for Q2, but I do think that there is further stabilization in the second half of the year. So that tells you kind of where we feel the inventory of the customer is. But I will remind everybody, our inventory of the customer is related to also demand. If demand picks up, inventory drain accelerates. If demand stays stable, it will take longer. But we feel like customers have a healthy level of inventory and we feel good about it for the second half to call the stabilization.
As far as the disti, we’ve always run very disciplined distribution inventory. We do have second-half ramp for new products that we talked about. You’re going to see us click that up. I remember this quarter or the prior quarter, we drained $19 million on the inventory in the channel. Although weeks of inventory went up, dollars came down, although we beat slightly the guide. So with that, that gives you the disciplined approach that we’ve been pushing for and we’ll continue to do that. But we do expect inventory at the disti to go up. Just readying for the ramps both in silicon carbide and some other new products that we have in the second half. Internal inventory, internal inventory has been very disciplined. We drained the base aggressively, based on the utilization, we’ve taken a declining utilization to maintain inventory.
The only inventory that went up is the strategic for good reason. It’s all a cap transfers.
Harsh Kumar: Got it. Thank you, Hassane, for all that color. I had a sort of a multipart question on silicon carbide. You talked about 2x growth relative to the market based on design wins, bottoms-up approach. I guess when you talk to your customers, what kind of growth are they implying? And then secondly, you talked about wins in China. Are these based on your own internal wafers? Are they based on your outsourced wafers or external wafers? And then is there any situation you see where silicon carbide is flat in 2024? And just kind of wild possibility?
Hassane El-Khoury: I don’t want to talk about wild possibility. Look, I can only comment on what we see and where the customers and the market is. Silicon carbide is going to grow in 2024 and we are going to grow 2x. What I can say about the market is specifically what I commented on earlier, we know the platforms that are ramping this year. We know the platforms we are in. We know what products we are putting in those platforms because think about it, by now, all the stuff is qualified and just shipping and ramping. So based on that, that’s where the 2x comes in. What I’m not commenting on as far as the TAM is, well, until those cars ship in the market, you won’t really have a TAM to call out. So that’s the reason for that.
As far as mix, I said 50% of our substrates – over 50% of our substrates are internal. But we don’t ship, I guess, a different mix whether it’s going to China or it’s going to U.S. or going to Europe. We ship out of our inventory based on what we need to run manufacturing. And right now, it is a mix of over 50% remains internal. But no customer has a requirement of where the substrates need to come from because the substrates are not what gets qualified at a customer level, it is the device that gets qualified at customer level.
Harsh Kumar: Very helpful, Hassane. Thank you.
Operator: One moment for our next question. Our next question comes from Harlan Sur with JPMorgan. Your line is open.
Harlan Sur: Hi, good morning. Thanks for taking my question. With a view that dynamics in the second-half are going to start to normalize or stabilize, are LTSA customer calls to revise volumes, pushouts, cancellations on the non-LTSA business, are these activity levels here starting to stabilize or decline ahead of the second-half shipment stabilization or do these activity levels continue to remain at pretty high levels?
Hassane El-Khoury: Yes. No, you’re right in that comment. So they are – they have slowed down requests for pushouts, requests for changing volumes, and so on, which gives us that comfort to call out the second-half stabilization that we talked about. But yes, it’s basically just like the LTSAs have been a tool in the market softness, and seeing it earlier, that same tool for the slowdown in that discussion and the amendments that we’re doing with customers gives us that other side of it.
Thad Trent: And Harlan, I would add, if you look at the non-LTSA orders, the order pattern is getting stronger. So that’s the stabilization we’re seeing. We’ve seen less cancellations, less push-outs than what we saw over the last couple of quarters.
Harlan Sur: Yes. Perfect. Thank you for that. Then from a geographical perspective, Asia ex-Japan, which is primarily China has declined about 24% dollar terms over the past two years versus the total company, which is down 4%. How much of the decline in China is just broad-based China weakness? How much of it is your lean distribution strategy or how much of it is just related to low-margin commodity-focused China business, which you’ve been moving away from over the past several years?
Hassane El-Khoury: Yes. I think I don’t have the breakdown, but majority of it is the exits that we talked about because if you recall, a lot of those exits were in the non-auto and industrial. So if you add it all up and you do a year-on-year, then those exits are targeting that market, which is where the demand has been. So that’s expected. On the industrial and automotive, actually, we’ve seen the share gains, obviously on silicon carbide, as I talked about in automotive, but in industrial, in prior quarters, I’ve talked about LTSAs with eight of the top-10 energy storage or renewable energy vendors, most of them are in China. We’ve had tremendous growth in those markets over the last few years that we called out ’22 to ’23 even.
So all of these are share gains, but yes, they are offset in – one is the general weakness that everybody sees with how big the market is for semis in China. But specifically for Onsemi, it is the exits, which are today help and hold the margin where we are structurally.
Harlan Sur: Yes. Thank you.
Operator: One moment for our next question. Our next question comes from Christopher Rolland with Susquehanna. Your line is open.
Christopher Rolland: Hi guys, thanks for the question. I guess my first one is on the image sensor business primarily. If you could talk about kind of demand and sell-through there, but also inventories and your plans on internalizing some of those wafers from foundry into GLOBFO as well?
Hassane El-Khoury: Yes. So I think, look, demand for – we have a high market share in image sensors. So demand for image sensor overall demand follows the automotive. We do believe that inventory situation is getting better. I put that under the commentary I made about general automotive. But the growth that we’ve seen specifically on the 8-megapixel is specific to a migration to higher resolution cameras that we really talked about over the last two to three quarters, we’ve been calling it out. So that continues. That’s a trend we can clearly see based on the growth of that business even in light of the light-vehicle production numbers that are starting to come up. So from that perspective, it’s clear, we do have an effort to introduce new products coming out of the fab.
It is not 100% internal. We do have foundry partners that we value in this business and we will continue to work together internally and externally. But you can think about it as a supply assurance rather than a shift in strategy to just go internal.
Christopher Rolland: Great. And also just a couple of housekeeping. Did you guys give lead times utilizations, and then cumulative LTSAs and/or next 12-month LTSAs?
Thad Trent: Yes, Chris, it’s Thad. Let me go through that. So just starting in reverse order. The lifetime LTSA value is $15.7 billion. Over the next 12 months, the value of that is $4.7 billion. I think that’s consistent with what you’ve heard last quarter if you think about what rolled off in Q1. Lead times are down just slightly, roughly around 40 weeks to 41 weeks. So not a big change on that side of things. And I did mention in the prepared remarks, utilization decreased slightly from 66% to 65%. We expect to be running kind of in this range, plus or minus for the remainder of the year. And so we start to see more of a market recovery. As we see the stabilization, we believe we can kind of keep this utilization for the remainder of the year.
Christopher Rolland: And, Thad, since I have you, do you have sick LTSAs as well?
Thad Trent: I don’t have that.
Christopher Rolland: Thank you.
Operator: One moment for our next question. Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.
Joseph Moore: Great. Thank you. I wonder if you could talk to the opportunity in hybrid cars. As you sort of see some of the demand shifting from battery power to hybrid, what’s the opportunity for ON? Is that silicon carbide? Is it IGBT opportunity? Can you just talk to that?
Hassane El-Khoury: Yes. So the – both the opportunity in, I would say, plug-in hybrid, parallel hybrid, or the non-BEV part of the electrification effort in mobility is both on IGBT, and some customers still are putting silicon carbide in there depending on the drivetrain. But the opportunity for us that I called out in prior quarters is about $350 worth of content for a non-BEV, that’s only in the powertrain. And then about $750 in a full BEV vehicle compared to $50 powertrain content in internal combustion. So those are kind of the ballpark numbers that we’ve talked about.
Joseph Moore: Great. Thank you for that. And then in terms of the pricing conversation, the LTSA pricing you said is holding up. When you have new agreements, new customers, new designs, do you see – is the pricing for that any different than what you’ve seen in the past? What pricing is embedded in your current model?
Hassane El-Khoury: No, I mean, we don’t see – on a product-by-product basis, there if we say the value of the product is what we price on, value doesn’t change, whether it’s design to design. Where you do see pricing movement is new technologies that we want to introduce where the customer gets a benefit, but also we get a benefit, whether it’s moving to a much smaller die given the efficiency of our new model, those are the normal course of the business where it is incremental margin for us, but you may see an ASP delta, but it’s a different product. But that’s the way the industry runs.
Thad Trent: Hi, Joe, it’s Thad. Just remember, we walked away from that $475 million of highly volatile price-sensitive market. So I think in this situation, you probably see some pricing pressure on that. Obviously, we’re not seeing it because we don’t have that business today.
Joseph Moore: Appreciate that. Thank you.
Operator: One moment for our next question. Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.
Joshua Buchalter: Hi guys, thanks for squeezing me in and taking my question. I apologize for beating the silicon carbide horse, but I understand there’s a lot of volatility in that market and your reluctance to give a granular market forecast right now. But maybe we compare it to a few quarters ago, has the increased volatility been, would you say because of a meaningful change in the adoption curve across the industry at a broad base of customers or is it because of pushouts or unit dynamics because of the early adopters that’s driving the lower and more volatile forecast? Thank you.
Hassane El-Khoury: Look, I can’t call out specific customers. I think everybody can read what specific customers talk about and what their specific outlooks are. But what I would tell you is it’s not a push-out, meaning every design that we thought would go to production when we were sitting here in 2023 is still going to production. So it’s not a pushout on models. OEMs are not sacrificing the long-term view that they have on BEVs just because of the short-term volatility. So we are seeing the designs, qualified designs ramps with a plan to ramp in starting in the second half of this year, what I called out Europe already. I talked about China as well. So it’s not a push-out. What I would say the TAM is – my comments about the TAM is what those volumes are.
So the volumes that were planned last year are different than they are planned this year given the environment, but the same models planned are still going to market. So it’s a very important distinction because one is the longevity and the strategy of the OEMs and the other one is just reacting to a macro-environment that we’re in today.
Joshua Buchalter: Thank you. That’s helpful, Hassane. And maybe for Thad, you called out that over the last 12 months, you’ve returned over 100% of free cash flow to investors, which is more than your formal policy of 50%. Was this because of some dislocation in the market you saw and we should expect it to trend back towards 50% or should we expect it to sort of remain elevated here in particular as you go through the period of peak capital spending? Thank you.
Hassane El-Khoury: Yes, if you look at – look back over the last 12 months, in Q4, we bought back $300 million that was above our target there. And that was the dislocation, right? We’ve said our policy longer term is 50% over the long term, but we will take advantage and be opportunistic where it makes sense.
Joshua Buchalter: Thank you.
Operator: One moment for our next question. Our next question comes from Quinn Bolton with Needham. Your line is open.
Quinn Bolton: Hi guys, thanks for squeezing me in. I know you’re not calling for a recovery yet in the second half of the market. But, Hassane, your comments on the battery-electric vehicle ramps in the second half of the year certainly imply that perhaps silicon carbide sees a better second half. So I’m wondering what’s the offset that would keep revenue sort of more stable in the second half if I’m reading your comments about the battery-electric vehicle ramps in the second half correctly?
