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Edited Transcript of ON earnings conference call or presentation 11-May-20 1:00pm GMT

PHOENIX May 12, 2020 (Thomson StreetEvents) — Edited Transcript of ON Semiconductor Corp earnings conference call or presentation Monday, May 11, 2020 at 1:00:00pm GMT

* Keith D. Jackson

BMO Capital Markets Equity Research – MD of Semiconductor Research & Senior Research Analyst

B. Riley FBR, Inc., Research Division – Senior MD & Director of Research

Crédit Suisse AG, Research Division – MD, Global Technology Strategist and Global Technology Sector Head

* Matthew D. Ramsay

* Rajvindra S. Gill

Robert W. Baird & Co. Incorporated, Research Division – MD and Senior Research Analyst

Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst

Ladies and gentlemen, thank you for standing by, and welcome to the On Semiconductor First Quarter 2020 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Parag Agarwal. You may begin.

Thank you, DuWanda. Good morning, and thank you for joining On Semiconductor Corporation First Quarter 2020 Quarterly Results Conference Call. I’m joined today by Keith Jackson, our President and CEO; and Bernard Gutmann, our CFO.

This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this broadcast, along with our 2020 first quarter earnings release, will be available on our website approximately 1 hour following this conference call and the recorded broadcast will be available for approximately 30 days following this conference call.

The script for today’s conference call — today’s call and additional information related to our end markets, business segments, geographies, channels, share count and 2020 fiscal calendar are also posted on our website.

Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are 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 risks and uncertainties that could cause actually events or results to differ materially from projections. Important factors which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-K, Form 10-Qs and other filings with Securities and Exchange Commission.

Additional factors are described in our earnings release for the first quarter of 2020. Our estimates, or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions or other factors except as required by law.

Given the current restriction on travel and gathering due to COVID-19 pandemic, the previously announced strategic business update scheduled for August 18 in New York has been postponed. We will provide you new date and location for the event as we get further clarity.

Now let me turn it over to Bernard Gutmann, who will provide an overview of our first quarter 2020 results. Bernard?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [3]

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Thank you, Parag, and thank you, everyone, for joining us today.

As is the case with most of our peers, our results for the first quarter of 2020, and outlook for the second quarter have been meaningfully impacted by COVID-19. Although our near-term results have been impacted by the pandemic, we believe that long-term drivers of our business remain intact. We expect to show progress towards our target financial model as global macroeconomic environment recovers, and we continue to implement structural changes to drive margin expansion and higher free cash flow.

In face of challenging business conditions, we have taken measures that should strengthen our balance sheet and free cash flow. These steps include the drawdown of approximately $1.17 billion from our revolving line of credit. This step was taken out of abundance of caution to ensure that we have adequate level of liquidity to the global macroeconomic conditions unexpectedly and sharply deteriorate due to the COVID-19 pandemic.

Further, we have taken certain tactical and temporary actions, which should result cost savings of approximately $50 million throughout the rest of the year. These measures include a reduction in executive salaries and compensation for board members, the suspension of our 401(k) company managed program in the U.S., deferral of merit salary and wage increases and staggered furlough of certain employees for 3 weeks during the year. The cost savings of $50 million throughout the rest of 2020 of are in addition to those from our $115 million restructuring programs announced earlier. We anticipate that our capital expenditures for 2020 will be largely focused on enabling our 300-millimeter fab in East Fishkill. At this time, we expect capital expenditures of approximately $425 million in 2020. Furthermore, to preserve our balance sheet strength, we do not intend to buyback our shares until business conditions improve.

Now let me provide you additional details on our first quarter 2020 results. Total revenue for the first quarter of 2020 was $1.278 billion, a decrease of 8% as compared to revenue of $1.387 billion in the first quarter of 2019. The year-over-year decline in revenue was primarily driven by a slowdown in macroeconomic activity and supply constraints resulting from COVID with government-related mandated lockdown measures around the world. We drastically curtailed operations at few of our factories to ensure the safety of our employees and to comply with global regulations.

GAAP net loss for the first quarter was $0.03 per diluted share as compared to a net income of $0.27 per diluted share in first quarter of 2019. Non-GAAP net income for the first quarter of 2020 was $0.10 per diluted share as compared to $0.43 per diluted share in the first quarter of 2019.

GAAP and non-GAAP gross margin for the first quarter of 2020 was 31.5% as compared to 37% in the first quarter of 2019. The year-over-year decline in gross margin was primarily driven by lower revenue and significantly lower level of using factory utilization, as mentioned earlier. As required by GAAP, we recorded a period charge of approximately $19 million due to the significant underutilization of our factory network in the first quarter. This charge also includes the impact of a short strike at our Belgium fab. This strike was related to our announced plan to divest the fab. As utilization of our factory network improved with expected improvement in business conditions, potentially in the second half of the year, we will not be required to take underutilization related period charges. As a result, we did see a step-function increase in our gross margin. First quarter of 2020 gross margin was further impacted by approximately $3 million of charges as a result of higher logistics and freight costs.

Our GAAP operating margin for the first quarter of 2020 was 1.5% as compared to 12.9% in the first quarter of 2019. Our non-GAAP operating margin for the first quarter of 2020 was 6.6% as compared to 15.5% in the first quarter of 2019. The year-over-year decline in operating margin was largely driven by lower revenue and gross margin.

GAAP operating expenses for the first quarter were $384 million as compared to $334 million in the first quarter of 2019. First quarter GAAP operating expenses include approximately $31 million associated with restructuring programs announced earlier. Non-GAAP operating expenses for the first quarter were $319 million, as compared to $290 million (sic) [$299 million] in the first quarter of 2019. The year-over-year increase in non-GAAP operating expenses was primarily due to the acquisition of Quantenna.

First quarter free cash flow was $34 million, and operating cash flow was $166 million. During the first quarter, we used approximately $65 million to repurchase 3.6 million shares of our common stock. Capital expenditure during the first quarter were $132 million, which equates to a capital intensity of 10.3%. Given the current macroeconomic environment, we are directing most of our capital expenditures towards enabling our 300-millimeter fab at East Fishkill. As indicated earlier, we expect capital expenditures for 2020 to be approximately $425 million. We exited the first quarter of 2020 with cash and cash equivalents of $1.982 billion as compared to $894 million at the end of the fourth quarter of 2019. At this time, with cash balance of approximately $2 billion, we are very comfortable with our liquidity position.

At the end of the first quarter, days of inventory on hand were 131 days, up by 8 days as compared to 123 in the fourth quarter of 2019. The increase in days of inventory was driven primarily by a lower expected revenue. Distribution inventory increased slightly in terms of weeks of inventory due to lower resales. In terms of dollars, distribution inventory declined quarter-over-quarter.

Now let me provide you an update on the performance of our business units, starting with Power Solutions Group or PSG. Revenue for PSG for the first quarter of 2020 was $624 million. Revenue for the Advanced Solutions Group, previously known as Analog Solutions Group, for the first quarter was $467 million, and revenue for our Intelligent Sensing Group was $187 million.

Now I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [4]

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Thanks, Bernard. At the outset, I thank all of our employees for their dedication in supporting our first responders and customers in the face of very challenging conditions. Our employees went well beyond what is required of them to ensure supply of critical components for ventilators and other medical equipment. In countries where government instituted lockdown measures to control the spread of the virus, many of our manufacturing and support teams stayed at the factories to ensure supply of critical components to our customers.

Safety of our employees is of paramount importance to us. Consistent with that commitment, we have suspended all-nonessential travel. Globally, the teams are working remotely in compliance with local rules and are following strict social distancing guidelines in case they are required to visit a work facility. Our IT organization has done an outstanding job of enabling thousands of our employees to work remotely.

We are actively supporting local communities by donating medical supplies and personal protective equipment and matching employee donations. We continue to step up on short notice. When the state of California requested one of our customers for a quick turnaround on ventilators, our supply chain and manufacturing teams responded with extreme urgency to provide critical components immediately. These teams, like many others in ON Semiconductor, exemplify the spirit of collaboration and being a good corporate citizen.

Despite the current challenges, key secular megatrends and long-term drivers of our business remain intact. In automotive, we expect the key secular trends such as ADAS, vehicle electrification and fuel efficiency will continue along a steep upward trajectory. In Industrial, we expect to see acceleration in factory and warehouse automation, robotics, energy efficiency and personal medical devices.

In cloud power, along with growth in data-centric applications, we expect to see an increased spending on servers and communications infrastructure as companies put in place a robust infrastructure to enable a remote and distributed workforce.

We believe that the global community should be able to overcome the current health crisis in a timely manner, and we expect business activity to improve soon thereafter. While we are taking measures to mitigate the impact of soft business conditions, our long-term goals and strategy remain unchanged. We are aggressively working to enable our 300-millimeter manufacturing capability. Our product development programs and customer engagement on key strategic projects are continuing as planned. We continue to strengthen our leadership in — by investing in the fastest-growing segments of automotive, industrial and cloud power end markets. We expect that our contact in these applications will continue to grow at a healthy pace despite the current crisis. Along with continued execution on our key strategic initiatives, we are making structural and technical changes to align our business with current conditions and to drive long-term growth in profitability and free cash flow.

Our business realignment programs remain on track. We have taken actions to complete the previously announced restructuring programs. These programs should result in cost savings of approximately $115 million a year. As announced earlier, we should be able to achieve these savings by the fourth quarter of 2020 on a run rate basis. We believe that with these actions, the company is well positioned for accelerated progress towards our target model as the global macroeconomic environment recovers from the COVID-19 pandemic.

As mentioned during the previous results conference call, we are making strong progress towards ramping production at our 300-millimeter fab at East Fishkill. At this point, we are tracking significantly ahead of schedule, and we now expect to begin initial production in the middle of 2020. The results and yields of initial wafer runs have been spectacular. Based on our experience thus far with the East Fishkill fab, we are even more confident that transition of production to this fab will be a major inflection point for our manufacturing cost structure as we consolidate our front-end network.

Let me now comment on the current business environment. On the demand front, it is a mixed picture. Demand from automotive end market has been impacted severely due to the closure of manufacturing plants and extremely challenging global macroeconomic conditions. We expect the automotive weakness to continue till automotive manufacturing plants reopen and global production restarts at least at a moderate pace. We are seeing good strength in a few end markets in the second quarter. Most notably, activity in the industrial end market appears to be strong across most geographies. Server and 5G infrastructure-related demand continues to grow at a healthy pace. Demand from smartphone and consumer end markets continues to be soft due to massive slowdown in global macroeconomic activity.

From a geographic perspective, after slowdown early in the first quarter, demand from China has improved meaningfully. Japan is another area of moderate strength. Demand from the U.S. and Europe has significantly softened due to the pause in most economic activities because of government-mandated quarantines and other regulatory action aimed at reducing the spread of COVID-19. Both in the U.S. and Europe, automotive is an area of conspicuous weakness. It appears that customers are preparing for a recovery in the second half and are placing orders to ensure supply. At this time, we are seeing significantly higher order activity for the second half of the year as compared to that in the first half of the year. The orders are broad-based in terms of end markets, geographies and channels.

During the first quarter, the COVID-19 pandemic significantly affected our operations and impacted our ability to supply products to many of our customers. These disruptions have continued into the current quarter, and we expect to resolve them by the end of this week.

Early in the first quarter, our manufacturing facilities in China were closed for longer than planned for Lunar New Year holidays in compliance with government mandates. Following the extended shutdown, our China factories resumed production and are now running at close to full utilization. Subsequently, in March, our facilities in Malaysia and Philippines, where a sizable part of our back-end operations are located, were severely impacted due to lockdown mandates by various governments. Our Malaysia and Philippines manufacturing plants ran significantly below capacity for most of March. Underutilization of these facilities continues in April and into May. Most of our facilities worldwide are expected to be running at required level of utilization by the end of this week.

Now I’ll provide details of the progress in our various end markets for the first quarter of 2020. Revenue for the automotive market in the first quarter was $439 million and represented a 34% of our revenue in the first quarter. First quarter automotive revenue declined 6% year-over-year. The year-over-year decline in automotive market was primarily driven by the closure of automotive production facilities in various parts of the world and supply constraints driven by reduced level of operations at our partners’ manufacturing facilities.

We saw weakness in China automotive and industrial markets earlier in the first quarter, but business activity has since picked up as factories have reopened in China. Currently, we are seeing significant weakness in the U.S. and European automotive markets due to the closure of automotive factories.

Based on comments by major automakers, it appears that many European factories are now gradually restarting. In the U.S., automakers are planning to reopen factories starting in latter half of May.

Based on third-party reports, we expect global light vehicle production units to decline by approximately 20% to 25% year-over-year in 2020. Despite a massive decline in light vehicle production units, we expect semiconductor content in automotive applications to continue to increase at a healthy pace. Key secular megatrends driving increased semiconductor content in automotive applications such as vehicle electrification, ADAS, fuel efficiency, and LED lighting remain intact, and we are well positioned through our technology leadership and customer relationships to capitalize on these trends.

During the first quarter, we secured a major design win for ADAS image sensors with a Japanese OEM. This OEM is one of the largest automakers in the world. This win underscores our global leadership in ADAS image sensors and highlights customer confidence in our technology in a high safety critical application.

Our momentum for Silicon Carbide and silicon power products for electric vehicles continues to increase at a rapid pace. With a solid product portfolio of Silicon Carbide devices and modules, we are seeing strong growth in revenue from electric vehicles. At the same time, the breadth and depth of our engagement with leading participants in the electric vehicle ecosystem is expanding very significantly. We expect to see strong revenue growth in our IGBT modules for EV traction inverters as our design wins ramp in China this year. Extension of subsidies for electric vehicles in China till 2022 is likely to be a significant boost for our Silicon Carbide and IGBT business in China.

Our power products continue to grow in many automotive applications. Electrification of various vehicle systems to conserve energy and to improve performance is a key driver of increasing content of power devices in vehicles. During the first quarter, we also secured a major design win for our mid-voltage MOSFETs for 48-volt systems.

Revenue in the second quarter of 2020 for the automotive end market is expected to be down steeply quarter-over-quarter due to closure of most U.S. and European automotive factories for a significant part of the quarter.

The industrial end market, which includes military, aerospace and medical, contributed revenue of $315 million in the first quarter. The industrial end market represented 25% of our revenue in the first quarter. Year-over-year, our first quarter industrial revenue declined 12%. This decline was driven by a swift and sharp decline in global industrial activity and supply constraints due to the COVID-19 pandemic.

Despite challenging macroeconomic conditions, we continue to make progress towards our key strategic initiatives. In industrial power segment, momentum for our Silicon Carbide and silicon devices remain robust. We are seeing strong customer interest for our silicon carbide devices for fast charging stations for electric vehicles. During the first quarter, we secured an important design win for our high-voltage super junction MOSFETs for electric vehicle charging stations.

On the medical front, our teams are working very hard to support the medical community in the fight against COVID-19. The entire organization is focused on supporting increased demand for components for critical medical equipment such as ventilator, infusion pumps, patient monitoring systems, cardiac assess systems and medical imaging equipment.

Our engagement with e-commerce customers is growing at a rapid pace, and we expect e-commerce-related applications will be a strong driver of our industrial image sensor business. We believe the growth in our e-commerce-related business will be driven by increasing e-commerce volumes, increasing warehouse automation and adoption of delivery robots. Through our early engagement with industry leaders in e-commerce, we’ve built strong design win pipeline for our CMOS image sensors for warehouse automation and delivery robots.

Revenue in the second quarter of 2020 for the industrial end market is expected to be up quarter-over-quarter, driven by strong recovery in the demand from all regions.

The communications end market, which includes both networking and wireless, contributed revenue of $254 million in the first quarter and represented 20% of our revenues during the first quarter. First quarter communications revenue declined 1% year-over-year. The decline was primarily due to weakness in our smartphone-related business. We saw solid year-over-year growth in our infrastructure business, driven largely by 5G. We further solidified our position in the 5G infrastructure market by winning new designs for medium voltage MOSFETs.

Revenue in the second quarter of 2020 for the communications end market is expected to be down quarter-over-quarter, primarily due to softness in the smartphone market. We expect our 5G infrastructure to grow at a robust pace quarter-over-quarter in the second quarter.

The computing end market contributed revenue of $136 million in the first quarter. Computing end market represented 11% of our revenue in the first quarter. First quarter computing revenue declined 7% year-over-year, primarily due to our selective participation in client-related business. Our server business grew at a very impressive rate year-over-year.

We experienced better-than-expected results in our server business as corporation rushed to augment their IT infrastructure to support a remote workforce. Our power management products for server processors and IGBTs for uninterruptible power supplies were a key driver of strength in our server business.

Revenue in the second quarter of 2020 for the computing end market is expected to be up quarter-over-quarter. We expect growth in both server and client parts of our computing business.

The consumer end market contributed revenue of $134 million in the first quarter. The consumer end market represented 10% of our revenue in the first quarter. First quarter consumer revenue declined by 17% year-over-year. And the year-over-year decline was due to broad-based weakness in consumer electronics market due to the COVID-19 pandemic and our selective participation in this market. Revenue in the second quarter of 2020 for the consumer end market is expected to be down quarter-over-quarter.

In summary, COVID-19 has had a sizable impact on both demand for our products and our ability to supply. We expect that during the second quarter, by the end of this week, our supply capabilities will improve significantly. Based on order patterns, it appears that our customers are planning for a recovery in the second half of the year, and we are encouraged by the gradual resumption of global — activity globally.

Despite current challenges due to COVID-19 pandemic, our long-term goals and strategy remains unchanged. We have taken previously announced restructuring actions to optimize our investments and cost structure, and we are well positioned to make accelerated progress towards our target model as the global macroeconomic environment recovers. We continue to work aggressively to enable our 300-millimeter fab in East Fishkill, and we remain on track to start our 300-millimeter production by the middle of this year.

Despite the current macroeconomic disruptions, key secular megatrends driving our business remain intact, and we are upbeat about our medium- to long-term prospects. We are focused on the fastest-growing end markets of the semiconductor industry, and with our design wins, we expect that our content in automotive, industrial and cloud power applications will continue to grow.

Now I’d like to turn it back over to Bernard for forward-looking guidance. Bernard?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [5]

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Thank you, Keith. Before I get into the details, let me highlight the key drivers of the guidance for the second quarter. Our guidance for the second quarter is based on the assumption that the global macroeconomic environment will not further deteriorate due to COVID-19 pandemic. We will likely continue to face operational and logistical challenges to the government mandates. Also, this period of extreme uncertainty and volatility and future results of our business will not only depend on the course of the pandemic, but also on government actions and pace of recovery in global macroeconomic activity. Therefore, our ability to forecast our business performance is limited and the range of our guidance for various financial for the second quarter is wider than what we have provided historically.

Based on product booking trends, backlog levels and estimated turns levels, we anticipate that total ON Semiconductor revenue is expected to be in the range of $1.1 billion to $1.26 billion in the second quarter of 2020. As noted earlier, we will likely continue to face operational and logistical challenges due to government mandates in the second quarter.

For the second quarter of 2020, we expect GAAP and non-GAAP gross margin between 29% and 31%. Lower revenue in the second quarter as compared to that of the first quarter is the primary driver of the quarter-over-quarter decline in gross margin for the second quarter. We expect to record marginally lower period underutilization charge in the second quarter as compared to that of the first quarter.

We expect total GAAP operating expenses of $340 million to $360 million. Our GAAP operating expenses include amortization of intangibles, restructuring, asset impairments and other charges, which are expected to be only between $43 million and $47 million. We expect total non-GAAP operating expenses of $297 million to $313 million in the second quarter.

We anticipate second quarter of 2020 GAAP net other income and expenses, including interest expense, will be in the $42 million to $45 million, which includes noncash interest expense of $9 million to $10 million. We anticipate our non-GAAP net other income and expenses, including interest expense, will be $33 million to $35 million.

Net cash paid for income taxes in the second quarter of 2020 is expected to be $10 million to $13 million. For 2020, we expect cash paid for taxes to be in the range of $50 million to $60 million. We expect total capital expenditures of $80 million to $100 million in the second quarter of 2020. We are currently targeting an overwhelming proportion of our CapEx for enabling our 300-millimeter fab at an accelerated pace. For 2020, we expect total capital expenditures of approximately $425 million.

We also expect share-based compensation of $19 million to $21 million in the second quarter of 2020, of which approximately $2 million is expected to be in cost of goods sold and the remaining amount is expected to be in operating expense. This expense is included in our non-GAAP financial results.

Our GAAP diluted share count for the second quarter of 2020 is expected to be 413 million shares based on our current stock price. Further details on share count and earnings per share calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K, respectively.

With that, I would like to start the Q&A session. Thank you, and DuWanda, please open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ross Seymore with Deutsche Bank.

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Ross Clark Seymore, Deutsche Bank AG, Research Division – MD [2]

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I guess, first on the revenue side of things, can I get a little more color on what you’re seeing in the near term bookings? And how you’re guiding versus that? Because I guess the impression I have from your script is more that you’re not seeing as much strength as some of your peers in the very near term, but you’re more confident in the back half of the year. And it seems like a bit of a dichotomy where they’re guiding well below currently strong bookings for fear that the macroeconomy is actually going to weaken further, where your guidance seems to take the opposite tact?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [3]

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Yes. Interesting comparison. I think the 2 things that impact that: one, when we’re talking about the revenue strength, the impact that we have in the Philippines and Malaysia is perhaps more significant than much of our competition. And so you’re hearing us talk about supply constraints in the near term. On the demand side, the automotive piece is very significant for us, but it is picking back up for Q3. And so again, I don’t have any specific comparatives other than to say that what we’ve seen is more demand than we can service in the second quarter. And the rate of that pace is going up significantly in the third quarter, but we think we’ll be able to have all of the supply constraints behind.

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Ross Clark Seymore, Deutsche Bank AG, Research Division – MD [4]

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And then I guess my second question would be on the gross margin side of things. It continues to be a source of headwinds. I think directionally, everybody understands why? But the magnitude is bigger than I even thought. So I guess kind of 2 points on that. Weren’t there a number of one-time issues that hit you in the fourth quarter and first quarter, that should have been a bit of a tailwind in the second quarter? And then as we think about that second half trajectory on gross margin, are there some structural changes that are going to kick in? Or what’s the stair-step you’re talking about? Is it just utilization popping up?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [5]

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Thank you, Ross. So you’re correct. We did have some onetime items that affected us in Q4. And basically, those have been resolved. We don’t see those anymore. Same with the OSA that will go away in Q2. Definitely, as Keith mentioned earlier, we were substantially affected by the abnormally low utilization for the periods in which we had lockdowns in our factories and that caused us to book the abnormal one-time $19 million hit to our gross margin, which we expect will continue, maybe a little bit marginally lower, but will continue throughout Q2. One — once that goes away, we’re back to eliminating that and gross margin should step up nicely. Obviously, the markets continue behaving. And our fall through should be pretty nice as we go back to doing that. So it is — and it is primarily the fact that we have had the significant hit to our operations to the supply constraints.

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Operator [6]

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Our next question comes from the line of Chris Danley with Citigroup.

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Christopher Brett Danely, Citigroup Inc, Research Division – MD & Analyst [7]

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Just to follow-up on Ross’ question. So if the revenue levels don’t get back to 2019 levels for quite some time, what’s the plan to drive to the gross margin target, especially considering the manufacturing capacity you have right now?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [8]

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Well, we have already announced the intended sale of our Belgium fab. And we will continue doing that fab. And if things continue getting worse, there will be other actions that would be along the same line. We continue to focus on cash, and we also — not that much on the gross margin. But across the spectrum, we took some temporary actions to shore up our numbers. We had announced $150 million previously of permanent restructuring actions, and then we announced at this time, another $50 million of various tactical actions that will show up the cash. If conditions continue worsening, we’ll be ready to take more actions.

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Christopher Brett Danely, Citigroup Inc, Research Division – MD & Analyst [9]

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And then as my follow-up, just to go along with the restructuring actions. Can you give us a sense of how these things are supposed to trend in terms of OpEx versus cost of goods for the rest of this year? And then will there still be some savings next year? Will you realize all the savings by the end of this year?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [10]

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For the $150 million that we announced earlier, we expect to achieve the exiting velocity in Q4. It is primarily OpEx driven. There is a little bit — a small piece of it that goes to COGS, but most of it is OpEx driven. The $50 million of temporary actions is, by nature of being temporary, just between now and the end of the year. It’s about close to $50 million heavier focus on OpEx, but there is still a good participation of COGS that will help us.

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Operator [11]

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Next question comes from the line of Chris Caso with Raymond James.

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Christopher Caso, Raymond James & Associates, Inc., Research Division – Research Analyst [12]

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Just a question on the supply disruptions, and you talked about that was pretty severe in the second quarter. What’s — one, what’s the status of that — I’m sorry, as you go into the second quarter, what’s the status of those supply disruptions? What’s a percentage of your capacity that’s back online? And then naturally, when you have those supply disruptions, there’s some incentive on the part of customers to layer in some orders they might not necessarily need, what’s your visibility on that? I know it’s always something difficult to judge, but how are you, I guess, judging down the orders that you have to avoid the potential of double ordering?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [13]

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Yes. So the supply disruptions have improved as we got into May. They were still quite severe in April, and we don’t expect to be a full capacity until the end of this week. So it’s a very sizable part of the second quarter has already been impacted. Relative to the demand things, I will just tell you that the orders we have make sense based on the end market data that we’re getting. We don’t see anything that’s abnormal relative to what’s going on in end market. So the areas that are weak or weak in our backlog in the areas that have picked up primarily due to China coming back online are the ones that have picked up.

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Christopher Caso, Raymond James & Associates, Inc., Research Division – Research Analyst [14]

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Okay. As a follow-up, with regard to CapEx, and I understand there’s some elevated CapEx right now because of what you’re doing with the Fishkill facility. Can you talk about how long that continues? At what point is the spending on Fishkill over? And then once that’s the case, what’s a more normalized level of CapEx spending that we should expect when Fishkill is over and presumably as we go into 2021?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [15]

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So basically, we have said once we made the acquisition of this Fishkill that our long-term goal is 6% to 7% on CapEx. We will be moving towards that target as time goes by. I’m not sure it will be exactly at the beginning of ’21, but we’ll be moving towards that as we go in time.

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Operator [16]

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Our next question comes from the line of Raji Gill with Needham & Company.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division – Senior Analyst [17]

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A question on the comment about the gross margin stepping up significantly in the third quarter, how are you stepping up? Wanted to kind of discuss that in a little bit more detail, obviously, the underutilization charges will go away. But what else will drive that step-up function? Are you expecting a better mix shift in the third quarter, if auto comes back online? Any other details in terms of what you think will be the drivers for the step-up in margins in the back half of the year?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [18]

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So as Keith mentioned earlier, we are seeing better demands for the back half. So we expect a help from incremental revenue and the call flow should be pretty nice. We also should be seeing mix as our markets that drive better gross margin should be coming back up, particularly on boarding.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division – Senior Analyst [19]

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And in terms of the end markets, you had mentioned that Europe and the U.S. are starting to bring back manufacturing online. This is based on the commentary from those companies that you cited. In terms of tangible evidence from your perspective, on the automotive side, how would you characterize the orders in automotive as we go into kind of — if you look at the third quarter? And then also, has there been any delays of more advanced ADAS programs because of the drop in demand? Any thoughts there in terms of the current ADAS programs or the EV programs that are on track?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [20]

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Yes. We saw a very steep decline in demand from automotive as we got through the first quarter and into the first part of the second quarter. That free fall, if you will, has leveled off and is no longer declining. So that’s certainly a good sign. And then we have specific requests from our large OEMS, letting us know that they are expecting to have more demand in the second half, and we need to be ready. From a demand on things like ADAS and electrification, those continued quite on track. And what we’re seeing is that some companies are using this location in the market to kind of reposition themselves upscale with both their electric vehicles and their ADAS content. So we’re actually seeing potentially an accelerator in those 2 parts of automotive as it recovers.

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Rajvindra S. Gill, Needham & Company, LLC, Research Division – Senior Analyst [21]

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And just last question on the smartphone side. You mentioned the drop in smartphones going to offset partially by 5G infrastructure. There’s been indications that smartphones are recovering in China. I just wanted to get your thoughts on maybe your dollar content opportunity in smartphones and any view there in terms of how we think about the second half?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [22]

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So dollar content is around $9 for smartphone. We have indeed seen a pickup in China, but only with the China brands at this stage, but we are expecting to see global brands launching new models in the second half. So our expectation is that the second half will be much better for smartphones than the first half.

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Operator [23]

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Our next question comes from the line of Jay Rakesh with Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [24]

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I know you guys mentioned some long lead orders that came in for the second half. Just wondering if it’s slanted disproportionately to automotive or industrial? Or how you’re seeing that?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [25]

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Yes. It’s very broad in the second half. Demand there is looking good. We just mentioned smartphones look like they’re going to be up. Automotive is up from a very low number. So it’s — I don’t want to get too excited. But the industrial piece continues to build and our server and cloud business continues to show great strength.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [26]

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Got it. And on the 5G side, I think you mentioned it’s growing sequentially into the second quarter, is that infrastructure or base station both coming from China? Or is it — do you see a second half pickup in the U.S., Europe, et cetera?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [27]

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So China is certainly the strongest pickup there, but we really never saw much of a decline outside of China. So it continues to be healthy.

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Operator [28]

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Our next question comes from the line of Christopher Rolland with Susquehanna International.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [29]

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I know we might be a ways away from M&A, but it’s been a focus of yours in the past. And you guys have previously talked about doing something more strategic or higher gross margin. But given the underutilizations and growing footprint that you guys have, have you shifted at all towards a belief that you need more volume across your infrastructure? And maybe if you can talk about any other levers you can pull there in terms of underutilization you’ve talked about reducing your older footprint, but how about bringing more external, internal, for example? Is that a sole year?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [30]

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So I guess 2 questions on that. From an M&A perspective, we’re not sure this is a prudent time. And so really nothing new to report there. And as far as utilizing the network, we clearly are looking at bringing more manufacturing inside. Those are actions that are underway and should help us in the second half of this year.

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Christopher Adam Jackson Rolland, Susquehanna Financial Group, LLLP, Research Division – Senior Analyst [31]

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Got it. And then on to Fishkill, that was some nice commentary you guys had around ramping yields there. I guess, since things are ramping a little bit better than expected, how does this compare to your original expectation? Are there any changes to the model positively? And then secondly, what’s going to be your strategy since yields are so good in terms of bringing bulk volume from other fabs? Are you going to bring them immediately and leave those other fabs somewhat empty? Or is it going to be more of a controlled process in which you’re doing at one fab at a time?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [32]

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Yes. So a couple of commentary. One, the products we’re putting into EFK first on the power products, supporting most of our automotive and cloud power type applications. And so the good news is those volumes continue to grow. And so we feel pretty good about that. We have intended to ramp that in not empty other factories, and we continue to think that we’ll be able to keep our factories full while ramping EFK. And from on track or ahead of schedule perspective, it’s roughly looking like we’re about 6 months in advance of where we thought we would be, and we work with customers that are specifically growing power content with us to qualify those factories and start running here in a matter of weeks.

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Operator [33]

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Our next question comes from the line of Craig Ellis with B. Riley.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division – Senior MD & Director of Research [34]

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Yes. And I’ll just ask a follow-up to the last question. So if you’re getting good engagement with customers on East Fishkill, Keith, what would you expect the percent upon production to be out of that facility exiting this year? And if you have another 6 quarters under the belt exiting calendar ’21, what’s the percent of total sales that could come out of East Fishkill with its lower cost footprint than what you have elsewhere?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [35]

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So I don’t actually have prepared quarter-by-quarter breakdown for you, Craig. We talked about having the ability to do about $2 billion of revenue from the factory. That won’t happen in ’20 or even ’21. But by the time we get to ’23, we should be able to do that.

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Craig Andrew Ellis, B. Riley FBR, Inc., Research Division – Senior MD & Director of Research [36]

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Okay. That’s helpful. And then auto, obviously, has been a big focus on this call as it has many others given the impact to units this year. As we look at auto, I think we’re probably in the second quarter, going to be tracking about $120-ish million below prior highs. How much of that volume can be made up with increased content over the next year or 2, Keith? And how much of what had been automotive volumes in the factory network will need to be absorbed by things like cloud power or other growth initiatives or areas where you’ve got secular content in?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [37]

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Yes. So the — I mentioned before, the things we’re watching carefully are the electric vehicle ramps in China. They put back incentives to focus there. The content, as you know, is several hundred dollars higher in electric vehicle. And so the simple answer is if they really ramp mostly electric — as we go forward in China, there’s a substantial opportunity to overcome any unit losses. And then ADAS, similar kinds of situation there. They’re becoming — consumers are more safety conscious, and so we’re seeing the contents there go up $20, $30 a car at a time. And so I think the question will be as we come out of this downturn, what’s the strategy is going to be? And right now, at least we’re looking at more electric vehicles and more focus on safety. So we think most of that, if not all of that will be offset as we exit this year.

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Operator [38]

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Our next question comes from the line of Ambrish Srivastava with BMO.

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Ambrish Srivastava, BMO Capital Markets Equity Research – MD of Semiconductor Research & Senior Research Analyst [39]

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I just wanted to come back to the gross margin side, Bernard. And I’m sorry, you were cutting out when you were answering the question, at least for me. I wanted to understand the bridge between Q1 and Q2? So how much of the cost would go away? How much of it is onetime in nature? And then kind of related to the recovery part is you talked about fall through and you’re also talking about a step function increase and then there’s a bigger third factor coming in, which is your 300-millimeter fab. So what’s the right way to think about fall through as margins recover as a result of revenues coming back? That would be helpful. So A, just kind of help us bridge the gap? And B, how should we think about fall through?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [40]

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So the bridge for Q1 to Q2 is pretty straightforward. It’s mostly the decremental fall through of 50% on the revenue going from $1,278 million to $1,180 million at the midpoint. The one-off period charges that we saw in Q1 will continue in Q2. Keith mentioned the fact that we had during the month of April continued shelter-in-place mandates, government mandates in most of our locations, and then we expect to be getting close to being out of that at the end of this week. So it has had a significant impact in this quarter, which is going to be similar in nature. Maybe it had a bit less but similar in nature to what we had in Q1. That’s the one that when we go into Q3, assuming that there is — that the — all these supplier issues, i.e., the mandates from the government would have been eliminated. That approximately $20 million goes away completely as we go into Q3. And then we have the normal fall through on whatever revenue comes through. That’s the high level.

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Ambrish Srivastava, BMO Capital Markets Equity Research – MD of Semiconductor Research & Senior Research Analyst [41]

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And how does fall through change because 300 should be helping you? And this is not a question for this year, obviously, you just started to ramp it. But steady state, how should 300-millimeter have a positive impact for margins?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [42]

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We definitely see that the unit cost of our — for mass cleaner per wafer will be better at the East Fishkill. Obviously, it will be depending on the speed of the qualification from our customers. And as we go into that, and it’s more of a longer term ’21, ’22 time frame, and we expect any significant direct impact in 2020 as it relates to gross margin. And we’re also relying a lot on what we’re seeing. Others have done as they go into 300-millimeter, and we expect that we’ll have something similar in nature.

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Ambrish Srivastava, BMO Capital Markets Equity Research – MD of Semiconductor Research & Senior Research Analyst [43]

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Okay. And my quick follow-up, Keith, sorry. On your comment about Q-over-Q increase the second quarter, I was a little bit surprised about industrials, especially given the macro backdrop. Is that primarily related to China recovery or sell in? Just can you please expand on that, please?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [44]

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Yes. China is certainly the biggest driver of the increase there. As you remember in the end of last year, it had been severely curtailed in China. It was very, very weak. And so that has been recovering. We also have the medical business in that industrial category, and they’ve certainly seen an uptick globally. And so those are kind of the big ones there.

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Operator [45]

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Our next question comes from the line of Matt Ramsay with Cowen.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division – MD & Senior Technology Analyst [46]

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I just wanted to follow-up, Keith, on a couple of other questions that folks asked about assumptions for manufacturing at East Fishkill. Just assuming, given what’s going on in the macro, that revenue levels for the industry and the whole company will be maybe lower exiting when you take — coming into the point where you take over full ownership of the facility, are you guys basically kind of saying that through different optimizations of the rest of your factory network and a little bit more in-sourcing that the overall volume and dollar content of what you might put through Fishkill at the point that you take over ownership, we should just assume is roughly what it was when you signed the agreement? Or are there any sort of big picture changes to those assumptions that we should think about given all that’s going on?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [47]

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Well, the way we look at things is kind of twofold. One, the amount of power that we’ve got as a percentage of the company, we expect to continue to expand for all the reasons we’ve been explaining. And so when we take over in 2023, we would certainly expect that power piece of the business to have grown substantially. We don’t think COVID is with us forever. And then secondly, from a factory perspective, I mean we did view that expansion, frankly, because our outlook for the growth in electric vehicles and the growth in the 5G infrastructure and the cloud power was going to be such that, that specific set of technology nodes would need that expansion. So really, nothing has changed on that perspective from the 2023 look, but certainly has had a major interruption here in 2020.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division – MD & Senior Technology Analyst [48]

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Got it. That’s clear and helpful. Just wanted to follow-up, obviously on, Bernard, on the OpEx side, there’s some actions you guys have laid out. Anything in particular to call out in R&D that might be changes to different programs that we should pay attention to? Or is it no real change to what you guys announced last quarter and just some, obviously, additional belt tightening, given what’s going on globally?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [49]

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So no additional from what we announced last quarter. We did — we aligned some of our investments to make sure we are targeting the highest growth markets and the ones we think about. But most of these additional actions we built are more tactical in nature and therefore, don’t change our view of R&D.

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Operator [50]

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Our next question comes from the line of Gary Mobley with Wells Fargo Securities.

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Gary Wade Mobley, Wells Fargo Securities, LLC, Research Division – Senior Analyst [51]

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Just need time, I’ll pose both of my questions now. I know in the past, you were planning on becoming more vertically integrated in power devices with some silicon carbide materials. I wonder if that’s still in the cards for you guys? And Bernard, could you give us some, I guess, benchmark on what the OpEx run rate can be as we exit the year, is $290 million in that fourth quarter, the right number to think about?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [52]

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Okay. On the continued vertical integration, we continue to be on track there. And we will have a network, as I mentioned before, of internal supply and external supply for the wafering as we do with silicon today. And so we continue to invest in that and are making good progress.

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [53]

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And on the OpEx question, we do intend to continue reducing our OpEx in absolute dollars throughout the year our current levels and from our Q2 midpoint of $305 million. So with the actions, that the temporary and permanent actions we’re talking about, the $290 million seems to be an appropriate number.

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Operator [54]

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Our next question comes from the line of Harlan Sur with JP Morgan.

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Harlan Sur, JP Morgan Chase & Co, Research Division – Senior Analyst [55]

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The operational and logistic challenges in Southeast Asia are certainly impacting your lead times. I think to recall that normalized lead times for the team is around 8 to 12 weeks, but you guys seem to have very good order visibility for Q3, second half. So it does look like lead times are higher. Can you guys just give us a sense on where the average lead times are today? Just wanted to see how much order and backlog visibility you guys actually have for the second half?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [56]

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Yes. So it’s around 14 weeks. But what you see from an order pattern perspective is our industrial and automotive customers and even the cellphone customers, our handset customers will give us a much longer look and actually much longer orders, particularly as they see they’re planning on ramping in the second half. So a piece of it is lead times and a piece of it is just the nature of the customers we serve.

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Harlan Sur, JP Morgan Chase & Co, Research Division – Senior Analyst [57]

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Great. And then on the lower — on the utilization charges this quarter, just given the better second half order book, manufacturing lead times, are you guys actually starting to take up wafer starts in your fab now? Or do you have enough better dye supply and just hope to supply the better demand initially from an improvement in the back-end operations?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [58]

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Yes. Most of the increase, all of the increase has really been in the dye supply — for our inventories have been dye supply here in the first quarter and as we go into the second quarter because we were back-end constrained. So we really haven’t had to ramp the front-end jet because we’re still playing in a constrained back-end environment. As we get to Q3 with higher revenues then we can start to look at that.

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Operator [59]

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Our next question comes from the line of John Pitzer with Crédit Suisse.

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John William Pitzer, Crédit Suisse AG, Research Division – MD, Global Technology Strategist and Global Technology Sector Head [60]

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Keith, I’m just talking that you could quantify what you think the supply impact was from COVID in the March quarter? And what’s embedded in the June guide? I’m just trying to get a sense that if you weren’t having these issues in Malaysia and the Philippines, how much higher do you think revenue could have been in March? And how much higher do you think it could be in June?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [61]

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Yes. I guess I will try and get as quantifiable as I can. We would have made our original guidance in the first quarter, and we not had the supply disruptions. And you can figure out that’s a pretty significant number. And actually, in the second quarter, the supply constraints have at least as big of impact, if not slightly more because it is for a much longer period of time in the second quarter than we had in the first.

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John William Pitzer, Crédit Suisse AG, Research Division – MD, Global Technology Strategist and Global Technology Sector Head [62]

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That’s really helpful. Keith, and then I want to go back to your comments about content growth in autos, helping kind of take some of the sting out of units being down 20% to 25% this year. I guess when you look back at calendar year ’19, your business contracted about as much as SAARs did. And I understand that ’19 within the auto space was also an inventory digestion period. But I got to believe with units being down this much, that it’s more likely that the supply chain continues to take the inventory down in calendar year ’20. So why more optimistic about content growth this year than last? Are there company-specific drivers that you could touch to?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [63]

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Twofold. One, we really do think that inventory situation is in better control this year. The orders came down on us quite dramatically in automotive during the first quarter and into the second quarter. So we believe they’re being very prudent, but they are now getting to levels of inventory that I think that actually concern our customers a bit. They don’t want to go lower than that from a supply perspective. And there’s still certainly some memories out there of 2010 from a lot of them. So I guess the first order would be, we don’t expect more inventory contractions this year.

Second piece is looking at the electric vehicle content and particularly in China, we do think that, that mix will go up much nicer than it was in ’19, very significant increase there. And so that piece of it, as we mentioned earlier, opens up a couple of hundred dollars or more of content per car. And if you have an increase in EVs in China a couple of percent, it would certainly offset a weakness of the SAAR that’s been projected.

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Operator [64]

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Our next question comes from the line of Tristan Gerra with Baird.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division – MD and Senior Research Analyst [65]

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Just a quick follow-up question to John’s question. So what type of point-of-sale is built into your Q2 guidance, given the supply disruptions that you’ve mentioned? And is it — should we assume that inventory level at this — these are going to come down in Q2 and potentially rebound in Q3 as a result of your supply coming back in the second half?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [66]

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So we are assuming an increase in our POS on a sequential basis. We expect that on a week’s basis, we’ll be trending back down to the 11 to 13 weeks that we have in our normal operations mode.

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Tristan Gerra, Robert W. Baird & Co. Incorporated, Research Division – MD and Senior Research Analyst [67]

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Okay. And then any quick update on the Quantenna in terms of new product development and any type of potential savings that you’re doing there?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [68]

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We continue to make good progress on our client devices that we talked about at the time of acquisition. Obviously, no revenue here in 2020. We’re not expecting those devices now until next year. But the balance of the business has held up quite well in these environments, folks are still doing the infrastructure investment similar to 2019.

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Operator [69]

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Our next question comes from the line of Shawn Harrison with Loop Capital.

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Shawn Matthew Harrison, Loop Capital Markets LLC, Research Division – MD [70]

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Keith, I was hoping to make sort of getting a finer point on the automotive content. I think you outperformed production by maybe 17 points in the first quarter. The past couple of years, you’ve seen, I don’t know, anywhere from 5 points of outperformance to 10 points of outperformance. Do you think second quarter maybe you more mere production and then you start to see that type of potentially high single digit, double-digit outperformance versus production for 2020?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [71]

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Yes. Again, as we’re expecting in the third quarter as things begin to ramp again, you’ll see more of the leverage. And then as I mentioned several times, particularly as the mix shifts more electric, you should see an acceleration of that delta.

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Shawn Matthew Harrison, Loop Capital Markets LLC, Research Division – MD [72]

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Okay. But the second quarter would more maybe mere global productions have outperforming?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [73]

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Yes. We’re — I’m not looking for any outperformance in the quarter. Again, everybody is shutdown and yes, I would not expect to outperform this quarter.

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Shawn Matthew Harrison, Loop Capital Markets LLC, Research Division – MD [74]

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Great. And then Bernard, just the incremental $90 million of cost out. I know the first $25 million was more focused than on R&D. I think you were implying that the majority of this $90 million is SG&A related versus incremental R&D. I just wanted a clarification on that, please.

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [75]

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No, it is — the remaining $90 million spread across the whole OpEx, P&L geographies, including R&D, but also all the other sales and marketing G&A and a little bit of COGS.

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Shawn Matthew Harrison, Loop Capital Markets LLC, Research Division – MD [76]

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Okay. And maybe relatively equal?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [77]

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Probably as a percent, yes.

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Operator [78]

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Our next question comes from the line of Vivek Arya with Bank of America.

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Vivek Arya, BofA Merrill Lynch, Research Division – Director [79]

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I just wanted to, for the first one, nail down gross margin. So if, Bernard, let’s say, Q3 sales are flat versus Q2, what’s the gross margin? And if, let’s say, sales grow 10%, what’s the gross margin, assuming some seasonal mix?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [80]

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So definitely, on the — the revenues are flat, I would still expect the approximately $20 million of period expenses going away, that should be the primary improvement in gross margin and assuming no change in revenue or mix. And if we have a 10%, you pretty much have to take about a 50% fall through on that incremental 10%.

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Vivek Arya, BofA Merrill Lynch, Research Division – Director [81]

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Got it. And then I was wondering, did you talk about the distie resale activity in June? What are your expectations? And just kind of what we should think of your balance sheet inventory and distribution inventory exiting June?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [82]

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So let me start with internal inventories. We expect those to be flattish to slightly higher, to Keith’s comment about, depending on how strong we see the third quarter, we might have to restart some of the fabs at a higher level and build to more die. On the distie inventory, as I mentioned earlier, we expect to trend back down to that 11 to 13 weeks with stronger resale sequentially than in the first quarter.

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Operator [83]

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Our next question comes from the line of Craig Hettenbach with Morgan Stanley.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division – VP [84]

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Just a question on automotive and understanding the quarterly trends to be noisy, but in the full year, in the context of, if auto production is down 20% to 25%, what would you expect to be kind of a rough growth for on in 2020?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [85]

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So we expect that the unit — the content growth will be just like we’ve talked for a long time, in that 7% to 8%. So you can see that whatever the unit is offset by a 7% to 8% content growth offset.

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Craig Matthew Hettenbach, Morgan Stanley, Research Division – VP [86]

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Got it. And then just a follow-up on the 300-millimeter, really in the context of consolidating other fabs. Can you just talk about maybe a rough time line of how that plays out over the next couple of years?

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Bernard Gutmann, ON Semiconductor Corporation – CFO, Executive VP & Treasurer [87]

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So we’ve announced the divestiture of one of our factories now, closure of a second one there in Rochester, New York, have both been announced those will be actioned sometime in the next year. And then we have no further ones to announce today. But clearly, the demand picture in ’21 will give us some more direction on timing.

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Operator [88]

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Our next question comes from the line of Nik Todorov with Long Beach Research (sic) [Longbow Research].

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Nikolay Todorov, Longbow Research LLC – Analyst [89]

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I just want to go back to the industrial comments and specifically the strength in China. I was wondering if you can give us some more color. I think you mentioned indications of increased automation and robotics, do you see the current pandemic kind of essentially putting the seeds to a secular change in that industry and to your point, seeing that increase in automation, if you can comment? So what level of the demand in China and industrial is coming back to compared to pre-COVID levels?

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Keith D. Jackson, ON Semiconductor Corporation – CEO, President & Director [90]

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Yes. So first, I’ll talk about trends. We do see this pandemic as accelerating people’s thoughts and investment in automations. And so we are seeing that industrial automation piece pick up quite nicely. And we think that, that will be a continued trend because, again, just from a rational business perspective, the biggest impact we’ve had is on people. So the more I mention we have the less expectation for the disruption. But broadly, beyond just that secular trend, we do see a pick back up. And the factories closed in the first quarter in China, the orders completely stopped. And what we’re seeing now is just to return to a more normal environment that we had pre-Chinese New Year. So not excessively greater than we had in pre-Chinese New Year, but very similar to that.

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Operator [91]

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Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.