Good day, and thank you for standing by. Welcome to the onsemi third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal, Vice President of Investor Relations and Corporate Development. Please go ahead.
Thank you, Liz. Good morning, and thank you for joining onsemi's third quarter 2022 quarterly results conference call. I'm joined today by Hassane El-Khoury, our President and CEO, and Thad Trent, our CFO. This call is being webcast on the investor relations section of our website at www.onsemi.com. A replay of this webcast, along with our 2022 third quarter earnings release, will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the investor relations section of our website. Our earnings release and this presentation includes certain non-GAAP financial measures.
The consolidation of these non-GAAP financial measures to the most directly comparable GAAP measures and the GAAP financial measures are included in our earnings release, which is posted separately on our website in the investor relations section. During the course of this conference call, we'll make projections or other forward-looking statements regarding future events or future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our most recent Form 10-K and Form 10-Qs in our other filings with the Securities and Exchange Commission and in our earnings release for the third quarter of 2022.
Our estimates or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions, or other events that may occur, except as required by law. Now, let me turn it over to Hassanee. Hassanee?
Thank you, Parag, and thank you everyone for joining the call. We have closed our sixth consecutive quarter of record financial results with revenue of $2.2 billion and a non-GAAP EPS of $1.45 in the third quarter. Onsemi is now a very different company. Our strategy has proven successful, and our employees are the one to thank for their commitment and dedication to excellence through these changes. Congratulations to our worldwide teams. I am proud of your steadfast and consistent execution, and I'm confident we will continue to deliver on our long-term growth plans. Now let me address the current demand environment. In the third quarter, we saw continued strong demand in the automotive and industrial end markets, with revenue increasing sequentially 11%, 5% respectively.
As we noted last quarter, we saw softening in our non-strategic end markets of consumer and computing, with both markets declining mid-single digits sequentially. We expect the weakness in these markets to persist and extend to some legacy areas of industrial, while demand and design activity remain robust for EV, ADAS, and energy infrastructure. Today, more than 30% of our revenue is generated from the sales of new products at accretive margins, and the third quarter new product revenue was a record for the company. Over the last 18 months, we have taken a concerted approach to improve the predictability and reduce the volatility of our business. We have transformed the company into one with a sustainable long-term growth outlook, an attractive financial profile, and a resilient operating model. We made proactive structural changes to prepare us for eventual headwinds.
We rationalized our product portfolio and exited $277 million of business to eliminate our exposure to price-sensitive, non-differentiated products at dilutive gross margins. We addressed price-to-value discrepancies and instilled the discipline in the company to capture the right value of our products. We executed our fab-liter strategy with planned exits of four fabs to reduce our fixed costs. We secured long-term supply agreements that provide committed and transparent supply assurance against long-term customer demand. We decreased wafer starts by 20% from the peak in Q1 to limit the inventory build, with distribution now at an all-time low, under seven weeks. We drove efficiencies and streamlined operations to control OpEx below our 17% target. These changes set onsemi apart from the legacy ON Semiconductor, and we are now well-equipped to navigate through the coming quarters.
While we are planning for short-term uncertainty, long-term demand for our highly differentiated Intelligent Power and Sensing solutions continue to grow, with Q3 design wins increasing 19% quarter-over-quarter. Our Intelligent Power revenue grew by 35% year-over-year and 6% quarter-over-quarter, driven by the accelerating momentum in electric vehicles and alternative energy. In these markets, customers are increasingly relying on us to enable their long-term product road maps with the market leading efficiency of our solutions and our end-to-end supply chain capabilities. Our progress to our silicon carbide leadership is accelerating. As compared to our exit rate in Q4 of 2021, we tripled our silicon carbide revenue in the third quarter, and we continue to install capacity across the entire supply chain.
We just passed the one-year mark since acquiring GTAT, and we remain on track to expand our Boule capacity by five times year-over-year exiting 2022. We have also increased silicon carbide wafer fab starts by 3x this year to keep up with our Boule output, a number which we plan to double again next year. We remain on track to triple our SiC revenue in 2022 and deliver $1 billion of revenue in 2023 based on committed revenue from LTSAs. To limit our long-term CapEx investments, most of the silicon carbide equipment we are installing around the world is 200-mm capable, and we are on track for 200-mm wafer qualification in 2024 and related revenue ramp in 2025. Our energy infrastructure revenue is accelerating with a year-over-year increase of 70% in the third quarter.
For 2022, we expect our energy infrastructure revenue to grow by 60%, exceeding our target of 50% year-over-year growth. The volatility in global energy markets is driving an accelerated transition to alternative energy, and with a broad portfolio of silicon carbide and silicon power modules, we have emerged as a leader in this market. The top 10 solar inverter providers in the world collectively have a market share of 80%, and we have now signed LTSAs with eight of them. As countries around the world strive for energy security and lower greenhouse gas emissions associated with fossil fuels, we can expect to see strong long-term growth in our alternative energy business. Traction for our silicon carbide solutions is complemented by continued growth in our silicon power business.
A key differentiating advantage for onsemi is our ability to offer silicon and silicon carbide solutions across a wide range of power and voltage requirements. Many EV customers use our silicon carbide solution for rear axle and a silicon solution for the front axle. Similarly, solar inverter customers choose our silicon carbide or silicon solutions based on power and efficiency requirements. Customers who use a combination of power solutions value our ability to offer a complete range of products, which enables us to gain market share across both technologies. In the third quarter alone, our IGBT and MOSFET businesses grew 37% year-over-year, driven by high growth mega trends in automotive and industrial. Our intelligent sensing revenue increased 43% year-over-year and 11% quarter-over-quarter.
The growth was driven by additional semiconductor content required in automotive and industrial applications, as well as an increase in units shipped. The number of sensors per car will continue to grow and the level of sophistication delivered by the latest generation systems is also driving ASPs higher. Safety rating requirements for new vehicles continue to increase, such as a broader field of view and higher resolution sensors, accelerating the shift from 1-megapixel image sensors to 8-megapixel sensors for ADAS applications. onsemi was the first to market with 8-megapixel automotive-grade sensors that provide both high detection range and a wide field of view, delivering consistent performance across all temperature and lighting conditions.
Based on this industry-leading dynamic range, dark noise performance, and the LED flicker mitigation feature of our sensor, we are winning new designs, and in the third quarter, we displaced the large incumbent at local Japanese automotive OEMs. We expanded the internal back-end capacity to ensure we support the growth of our business and enhance our margins. Demand has been outpacing our ability to supply, but our early investments in capacity expansion allowed us to deliver 38% more automotive sensors in Q3 than in the quarter a year ago. In addition to our technology advantage, we are the only image sensor supplier with internal and external capabilities across every manufacturing stage of the supply chain for automotive and industrial sensors. We are a much stronger company today because of our commitment to our transformation and the structural changes we have implemented over the last 18 months.
We have executed our strategy in one of the most challenging environments we have ever seen, not only for our industry, but for the world, and we've set ourselves up for the leadership position in our target markets. Driven by exposure to secular mega trends of vehicle electrification, ADAS, energy infrastructure, and factory automation, we are well positioned to continue to outgrow the semiconductor market. Now I will turn the call over to Thad to provide additional details on our financials and guidance. Thad?
Thanks, Hassane. Our third quarter results clearly demonstrate the success of our transformation strategy with record revenue, operating income, and free cash flow. The steps we have taken to strengthen our operating model will not only enable us to get through short-term market volatility, but also propel us to scale in the long term. Defining our primary areas of focus has enabled us to double down on Intelligent Power and Sensing technologies and lead where we bring differentiation to the automotive and industrial markets. Our customers now choose ON Semiconductor as a strategic partner to enable their success in emerging and disruptive areas such as electric vehicles, ADAS, energy infrastructure, and factory automation. Customers are entering new agreements with us, while others are expanding the scope and duration of their existing LTSAs to secure even longer supplies.
Revenue committed through our LTSAs increased $5.3 billion in the third quarter and now totals $14.1 billion of LTS revenue over multiple years and often includes hundreds of parts. As Hassane mentioned, we also made additional structural changes to improve the sustainability of our margins by rationalizing our product portfolio and eliminating our exposure to price-sensitive, non-differentiated products. So far, we have walked away from $277 million of revenue at an average gross margin of 25%. $39 million of this revenue was in the third quarter at gross margin of 35%. We continue to execute our fab-lighter strategy through the rationalization of our manufacturing footprint.
Following the sale of our Belgium and South Portland fabs in the first half of the year, we closed the sale of our 8-inch fab in Pocatello, Idaho, in October, and we also entered into a definitive agreement to sell our 6-inch fab in Niigata, Japan. We expect the Niigata transaction to close in the fourth quarter. Exiting these four fabs will reduce our annual fixed cost by $160 million, exceeding our target of $125 million-$150 million. The full benefit of these divestitures will be realized over the next several years as we transition production to other fabs in our network, further supporting our long-term gross margin expansion plans. Turning to results for the third quarter. As I mentioned, Q3 was another quarter of record results.
Total revenue was $2.2 billion, an increase of 26% over the third quarter of 2021, and 5% quarter-over-quarter. We reported record revenue for our strategic end markets of automotive and industrial, which together accounted for 68% of revenue as compared to 61% in the quarter a year ago. Weakness persisted in our non-strategic end markets of computing and consumer, offset by sequential growth in automotive and industrial of 11% and 5% respectively. Revenue from both Intelligent Power and Intelligent Sensing is also at record levels. Intelligent Power grew 35% year-over-year, and Intelligent Sensing grew by 43% year-over-year. Additionally, all three business units reported record revenue in the third quarter. Revenue for the Power Solutions Group, or PSG, was $1.12 billion, an increase of 25% year-over-year.
Revenue for the Advanced Solutions Group, or ASG, was $734 million, an increase of 20% year-over-year. Revenue for the Intelligent Sensing Group, or ISG, was $342 million, an increase of 45% year-over-year. Gross margin, GAAP gross margin for the third quarter was 48.3%, and non-GAAP gross margin was 49.3%. Our non-GAAP gross margin declined as expected by 40 basis points quarter-over-quarter, primarily due to an accelerating ramp in silicon carbide and lower factory utilization at 75% as we proactively slowed wafer starts by 20% from the beginning of the year. As indicated in previous conference calls, we expect silicon carbide startup costs to be 100-200 basis points dilutive to gross margins during the initial revenue ramp.
GAAP operating margin for the quarter was 19.4%, and non-GAAP operating margin was a record of 35.4%, an increase of 90 basis points quarter-over-quarter and approximately 1,100 basis points year-over-year. GAAP earnings per diluted share for the third quarter was $0.70, flat as compared to the quarter a year ago. Non-GAAP earnings per diluted share was at a record high of $1.45 as compared to $0.87 in the third quarter of 2021. Now, let me give you some additional numbers for your models. GAAP operating expenses for the third quarter were $634 million as compared to $322 million in the third quarter of 2021.
Non-GAAP operating expenses were $304 million as compared to $296 million in the quarter a year ago. Non-GAAP operating expenses were below our guidance due to a pushout of certain programs into the fourth quarter, delayed hiring, and proactive management of discretionary spending across the company. For the third quarter, our non-GAAP tax rate was 15.8%, and we expect to remain in the 15.5%-16.5% range. Our GAAP diluted share count was 449 million shares, and our non-GAAP diluted share count was 441 million shares. We repurchased 1.2 million shares for $80.1 million in the third quarter.
Please note that we have an updated reference table in the investor relations section of our website to assist you with calculating our diluted share count at various share prices. Turning to the balance sheet, cash and cash equivalents was $2.45 billion, and we had $1.5 billion undrawn on our revolver. Cash from operations was $1 billion and free cash flow was $731 million at a record level of 21% of revenue on an LTM basis. Capital expenditures during the third quarter were $271 million, which equates to a capital intensity of 12.4%. We are directing a significant portion of our capital expenditures towards silicon carbide and enabling our 300 millimeter capability at the East Fishkill fab.
Accounts receivable of $857 million declined by $281 million, and DSO of 36 days declined by 14 days quarter over quarter. Days of inventory declined by 7 days to 129 days from 136 in Q2. This includes approximately 23 days of bridge inventory to support fab transition in the impending silicon carbide ramp. Distribution weeks of inventory declined to 6.9 weeks, down from 7.0 in Q2, as we proactively manage inventory at historically low levels for our distribution partners. Total debt was $3.2 billion. Turning to the guidance for the fourth quarter, a table detailing our GAAP and non-GAAP guidance is provided in the press release related to our third quarter results. Let me now provide you elements of our non-GAAP guidance for the fourth quarter.
We continue to see strong demand from our automotive end markets driven by electrification and ADAS. We are beginning to see softening in certain industrial applications, and we expect increased weakness in our non-strategic end markets that we plan to exit as we continue our portfolio rationalization. Given the macro uncertainty, we are taking a cautious stance in our guidance for the fourth quarter. As such, we anticipate revenue will be in the range of $2.01 billion-$2.14 billion. We expect non-GAAP gross margin to be between 47%-49% due to lower factory utilization and the dilutive impact of ramping silicon carbide. This also includes share-based compensation of $3 million.
Due to the delayed hiring and project spending in the third quarter, we expect non-GAAP operating expenses to increase to $305 million-$320 million, including share-based compensation of $21 million. We anticipate our non-GAAP OIE will be $22 million-$26 million. We expect our non-GAAP tax rate to be in the range of 15.5%-16.5%, and our non-GAAP diluted share count for the fourth quarter is expected to be approximately 441 million shares. This results in non-GAAP earnings per share to be in the range of $1.18-$1.34. We expect capital expenditures of $300 million-$330 million in the fourth quarter.
As we continue to ramp our silicon carbide production and invest in 300-millimeter capability to support our long-term growth, we expect our capital intensity to be in the mid- to high-teens % range for the next several quarters. In summary, our transformation strategy has made onsemi a more resilient and sustainable company. We have recently been named to Investor's Business Daily's 100 Best ESG Companies for 2022 as we drive to net zero by 2040. We are well positioned to invest in our business and deliver long-term financial performance for our shareholders while extending our competitive lead. With that, I'd like to turn the call over to Liz to open up for Q&A.
As a reminder, if you'd like to ask a question at this time, please press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for letting me ask a question. I guess the first one's assigned on the revenue side and the demand side of the equation. You mentioned uncertainties, and then you talked about auto staying strong, but weakness in other places. Can you just talk a little bit about the linearity of demand, and maybe dive a little bit deeper into what you're seeing in the industrial market? I think people understand your other segments have been weakened markets and aren't strategically a focus for you, but the industrial side is. A little bit of color on those metrics would be helpful.
Sure, Ross. At a high level, automotive, we see the strength. We see the strength in orders, and it's supported all by the LTSAs that Thad and I have been talking about, including the renewed LTSAs and the extended LTSAs that cover the demand outlook that we have, and that's what we're building capacity for. You've seen the strength in our business even this quarter as we ramp the electrification, as we ramp ADAS. Those are the megatrends that are driving our automotive demand. We don't see that changing in the outlook we have. On the industrial side, you know, you see factory automation, you see renewable energy. That strength will remain, including our medical business.
Where we see a little bit of softness in the industrial is really in the segments that are closer to the consumer. Think like white goods or so. We see that. Obviously, it's a macro-driven softness. We're watching it, but that's kind of the pockets that we see softness in the industrial.
In the linearity side of the equation, just the back half of that question.
It's up and to the right.
Thank you for that. I guess as my follow-up one for Thad on the gross margin side of things. It's good that you guys are still sticking with the 1-2 percentage point headwind from the silicon carbide ramp, but.
Mm-hmm.
We've heard a number of your competitors talk about the difficulty in that ramp. Could you give us a little bit more color on what gives you the confidence in maintaining that hit as you're ramping so significantly? If the revenue side of the equation and the demand side is up as high as it is, doesn't the CapEx have to rise accordingly, if you're gonna do over $1 billion in revenues, how is your capital intensity staying roughly the same? Shouldn't those two lines move in sync?
Yeah. Look, I'll cover the first part of that as far as the difficulty, and let Thad talk about the CapEx. Look, yes, this is hard stuff. I sympathize with our competitors because it's not easy stuff to do. We've been facing, you know, standard ramping challenges, but we're able to leverage our scale worldwide and the worldwide manufacturing scale that we had and the experience to address these issues as they come up. We have an excellent and very experienced operations team, and that's what they do every day. We have mature processes. We have a very strong scale of manufacturing playbook. Any, you know, excursion, if they do happen, we're able to tackle it quickly, we're able to resolve it quickly, and that impact is always minimal.
That's why you've seen us, you know, always focusing on the ramp and more importantly, our confidence in our ramp against the difficulties of what that silicon carbide ramp will bring in. Our targets that we've been giving and our targets that we've been talking specifically on the revenue ramp are all within our capabilities, and we do believe, strongly believe the risks are very manageable for us.
Yeah. Ross, on the capital intensity, as I said in my prepared remarks, we expect our capital intensity to go up to the mid- to high teens over the next several quarters. Clearly, we're having to place orders for equipment further out, you know, to support this revenue ramp, but we do expect our capital intensity to go up.
Thank you.
Our next question comes from the line of Chris Danely with Citi. Your line is now open.
Hey, thanks, guys. As part of this weakness, have your pricing expectations changed for 2023? Do you expect the weakness to bleed over into the automotive end market as well?
This is Hassane. No, we don't see any movement on pricing. Obviously, we've been talking about the LTSAs that we have in our strategic products are based on the value of the products, and that does not change based on the outlook and the demand. The LTSAs provide that certainty of both volume and pricing, as we've said in the past. I don't expect that to be any place in the equation, not even in automotive and industrial. Obviously, where the pricing would be potentially volatile is in the businesses that are non-core that we plan to exit, and that has always been part of our exit strategy that would actually be favorable to margin. We're not worried about the pricing environment at this point.
Chris, the one thing I would add is, as we see input costs going up, we are passing that on to our customers, and we'll continue to do that as well. The pricing environment is very stable.
Great. For my follow-up, have you seen or are you seeing any change in your lead times? As part of that, are there any shortages existing for the products, or are those all gone?
Lead times is flat, very consistent. As far as shortages, yes, we do have technologies that are remaining in short supply versus the demand that we have, and we expect those technologies to remain supply constrained even through 2023. Those are the ones we're covered with LTSAs with our customers to make sure we cover the whole BOM for our customers in order to sustain our ramps in new products next year.
Great. Thanks, guys.
Our next question comes from the line of Vivek Arya with Bank of America. Your line is now open.
Thanks for taking my question. Hassane, I just wanted to follow up on the question Chris also asked, which is on just the supply-demand balance on the automotive side. You know, there is a concern that automotive could be kind of this next shoe to drop in this rolling correction in semis. What are you hearing from your auto customers about are they building inventory right now? You know, what is the supply-demand balance when you look at OEMs and the Tier 1s, especially towards the first half of next year?
Look, the visibility we have, there is no inventory. You know, are there small pockets because, you know, the golden screw problem? Yeah. We work with our customers to make sure, you know, when we batch build something, we will give them a few weeks or 2-3 weeks ahead, and then they drain it over the next few weeks. So those I'm not worried about because we work with our customers directly. If you look at the demand environment and where our growth and our demand is coming from, it's coming from EVs. No matter what report you look at or what customer you talk to, an OEM, you know, pure play EV OEM or a broad OEM, they, there's one thing consistent. No matter what the SAAR does, they will build more EVs next year than they do this year.
That's where our growth is coming from, both power, and then more and more safety is getting into cars. That's where our sensing comes in. Between those two mega trends, our content is going to grow and remain, you know, growing even through 2023, no matter what the SAAR does in this case, based on, you know, a lot of the prediction. That's what gives us the confidence. Again, we have secured that outlook with LTSAs, so I'm not worried about that part of it. You know, is ICE engine gonna have some softness because of, you know, rates going up or, demand, you know, going down? You know, potentially.
Again, the EV plans are the ones that we focus on and the ones that our OEMs want to make sure they secure their EV penetration or they're gonna lose share. That's what we work on. It is not because of any inventory. If anything, it's potentially just demand. At this point, we don't see it for our business given our exposure to EV.
Got it. For my follow-up on the gross margins, Thad, I think on the last call you said you feel comfortable staying in this 48%-50% range. When I look at the Q4 outlook, you are at 48% already. How should we think about the puts and takes from a calendar 2023 perspective? 'Cause you'll be taking on the East Fishkill fab, right, which you have outlined some headwinds from, and then of course, silicon carbide ramps. There is some headwind and, you know, your utilization right now is 75%. Can you stay in this 48%+ kind of range for next year? Just what are kind of the puts and takes of gross margins for next year?
Yeah. Look, for 2023, and by no means am I trying to provide a guidance here, but for 2023, you got a couple headwinds, as you mentioned, right? The 100-200 basis points for silicon carbide. You've got, you know, 40-70 basis points for the East Fishkill foundry business, that will be dilutive for next year. I think, you know, more than anything, this will be driven by the market dynamics, you know, in terms of what our margins will do. You know, we're very comfortable in pricing for next year. I think it really comes down to utilization. You know, in this environment, I think we're going to be very cautious. We're already seeing the steady-state utilization and starts down already.
As we go into next year, you know, I think we're modeling it very conservatively, but you know, we feel pretty comfortable sitting here based on what we can see today that you know, there's a floor on our gross margins in the mid-40% range. Now, you know, that will be driven by the market more than anything.
Thank you.
Our next question comes from the line of Matt Ramsay with Cowen. Your line is now open.
Hey, guys. This is Joshua Buchalter on behalf of Matt. Congrats on the results, and thanks for taking my question. I wanted to ask about CapEx. It seems like at least next year or the next couple quarters it's gonna be running materially higher than the initial 12% outlook. You know, can you walk us through what's driving the increased spending and, in particular, why the uptick now? Thank you.
Yeah. The uptick is to support the LTSA revenue that we continue to lock in. You know, I referred to the increase that we had in Q3, but clearly we are locking up more and more silicon carbide wins, and the ramp will go out further years, and that requires additional capital. And that's the reason that we continue to make investments.
Obviously, you know, Thad mentioned the equipment lead time. We wanna make sure we stay ahead of it, so that's forcing us to place order materially earlier than we typically would need to. We don't wanna run the risk of not being able to support our ramp, so we're being very proactive given the environment and the lead time of equipment vendors.
Thanks. I appreciate the color there. You know, you sort of mentioned the issue at one of your competitors with the yields that we found out about last week. You know, since then we've been getting a lot of questions on is there any read-through into your own internal substrate ambitions? Can you walk us through your thinking there? You know, is this sort of just a normal part of coming up the yield curve, or was it, from your view, something specific to design decisions that they made? Thank you.
Look, I can't comment on what decisions or what assumptions they made. I can only comment on our business and what we're doing. We've always given the same outlook for our business, as far as the ramp, as far as the margin targets at scale, and the headwinds from the ramp with the startup cost that we include all of them in our reported results. Those have not changed, and we've been very consistent over the last few quarters since we started disclosing them. That should give you an idea that, and really the confidence from our side, that the numbers and the models we're giving are all well within our capabilities, inclusive of any challenges we may or may not have.
We've had all those baked in because, as I mentioned, we have a very strong process and a very strong playbook given our scale of manufacturing of power products over the last two decades with IGBTs.
Our ability to scale power products and walk through all the yield and production ramp challenges that we have, we're still at exactly where we were since we started disclosing those numbers. We're meeting both the top line and the margin, and at scale, those margins will be accretive. There's no change from our side.
Got it. Thank you, guys, and congrats again. Thanks.
Our next question comes from the line of Toshiya Hari with Goldman Sachs. Your line is now open.
Hi. Good morning. Thank you so much for taking the question. Thad, you mentioned that you guys exited from $39 million in revenue in Q3. Three months ago, you talked about, I think $150 million in the second half of this year and an incremental $450 million in 2023. Is that still the plan, or given the weakness in the consumer end markets, could some of those initiatives be accelerated?
Yeah. You know, we've always said that, the exit would be market-driven, and the faster we could exit, the better off we'd be. We exited $35 million, as you referred to. As we look forward to Q4, you know, we think we're gonna exit somewhere between $65 million-$75 million in Q4. For 2023, we still think we're on track, and again, this will be market dependent, but, you know, we think it will be in that neighborhood of $400-$450 exits for next year as well. We think we're on track for that. We think the softness in this market, you know, kind of supports this exit, allows us to reallocate that capacity somewhere else that's more valuable to us.
You know, those are the numbers that we have line of sight to right now.
Great. And then as my follow-up, another one on gross margins. I'm curious what your plans are from a wafer start or utilization rate perspective into Q4. You said 75% utilization rates in Q3. I'm guessing it continues to move south, but curious what the assumption is there. In response to another question, to a prior question, you said you expect the mid-forties to be a floor for gross margins. In making that statement, what kind of volume and pricing assumptions are you making for 2023? Thanks so much.
Okay. Look, you know, coming back, I'll start in reverse order here, on the floor of what we think is the mid-40s% in a downturn next year. You know, pricing remains very steady in terms of next year. You know, we think the business is. Well, I'm not gonna provide the guidance on that one. You know, we'll let you guys figure out what that is. It's gonna be more market-driven. You guys will model it the way you model it. What was the first part of the question? Gross margin, of course.
Utilization rates in Q4-
Oh, utilization.
what the plans are.
Yeah.
Yeah.
Yeah. Thanks for the reminder. Q2, we were at 77%. We dropped to 75% here in Q3. As we look forward into Q4, again, we assume incremental softness here, but we think it's, you know, flat to down slightly in Q4 is our assumption.
Got it. Thank you.
Our next question comes from the line of Rajvindra Gill with Needham. Your line is now open.
Yes, thank you for taking my questions. Question on the guidance on the top line. Can you give us any kind of direction by the non-strategic versus strategic?
Yeah, Raji, let me break it out by end market. Auto, we think, is gonna be up kind of low single digits. We think industrial is down kind of mid-single digits, and we think our other category, non-strategic, is down kind of mid to high single digits. That's the way that we think about the guidance there.
Got it. On the industrial, you know, being down mid-single and kind of seeing a deceleration in kind of the year-over-year growth rate quarter by quarter, the growth rate has been decelerating. Obviously, we've heard commentary about softness in industrial from some competitors. I'm just curious if you think this softness in white goods is just kinda, you know, relegated to that particular market, and that seems to be even if it is relegated to that small segment of the market, it's still a relatively decent percentage of your industrial if you're seeing kind of a mid-single decline quarter-over-quarter.
Just wondering if that's the case, or are there other kind of indications that you're seeing with respect to your customers outside of alternative energy? Are you seeing slower industrial production in medical or other different segments?
No. Look, the industrial, the factory automation, alternative energy is gonna be up. You know, the white goods, I gave it as an example of what we call legacy industrial, meaning the industrial segment that is the closest to the consumer and that is driven by consumer spending or even real estate. You know, the industrial market is very broad, and we're starting to see the softness kinda in multiple of these legacy industrial areas.
Our focus specifically is on factory automation and alternative energy, and that's what we really have been investing in driving new products through, and that remains strong and that remains growing. Obviously automotive or industrial is a very broad market.
Just for my follow-up, I appreciate the insight, Hassane. Just that on the OpEx, it's been kind of volatile quarter by quarter based on kind of pushouts of programs. $312.5 for Q4, as you kind of go into 2023, wondering how you're thinking about the OpEx ramp. Is there gonna be continued investment in R&D? Just curious if you obviously are managing an OpEx system that's going to be you know, conducive if the demand environment slows down, same thing with where you're managing inventory. Just curious how you're thinking about the OpEx controls into calendar 2023. Thank you.
Yeah. Look, you know, we've already been managing discretionary spending very carefully. Some of the lumpiness, as I mentioned in my prepared remarks, was the timing of some R&D projects. What you'll see us continue to do is reallocate some of the spending into R&D as we grow. As we think into next year, you know, we've set our model at 17%. We've been running well below that. I think, you know, kind of too low at this point. As I look into next year, I don't think we're gonna get to 17%. I think we're probably gonna be somewhere around 15.5%, maybe max out at 16% on the top end. That would be my thinking for next year.
Perfect. Thank you so much.
Our next question comes from the line of Tore Svanberg with Stifel. Your line is now open.
Yes. Good morning. This is Jerry Kwan calling for Tore. I guess just two quick questions here. The first, regarding your long-term supply agreement, are there any, you know, upfront cash commitments or pre-pays associated with this? Just wanna get a sense of, you know, any kind of financial commitments that your customers have given.
Can you repeat the first part of your question? You broke up a little bit.
Sorry about that. Yes. The Long-Term Supply Agreement, just wondering if there's any prepayments associated with these.
Oh, yeah, absolutely. I mean, our customers have been co-investing with us. You know, we've been saying that for a while. That's you can think about that as being prepayments. It can be payments for capital. It could be, you know, co-investing in R&D. That's very typical.
Any chance you can quantify that for us?
No. They vary by agreement and duration, so I wouldn't wanna try and put a number on it.
Got it. Okay. Just circling back to the pricing question, you know, is there anything that you might wanna highlight in terms of maybe the timing of these price increases that you're passing along versus, you know, the price increases that you're seeing in your supply chain? You know, any way to quantify this as well?
No, we're not giving quantifying because we're just passing whatever we get. From the outlook and from our margin, you can think about it as being neutral. As we get it, we pass it on.
Okay. Thank you.
Our next question comes from the line of Harlan Sur with JPMorgan. Your line is now open.
Hey, good morning. Thanks for taking my question. Your Intelligent Sensing Group, you know, primarily image sensor solutions, which is where you have quite a bit of the portfolio which is outsourced. I remember it was capacity constrained back last year. This business has been outperforming this year. I think it's up, like, 41% for the first nine months. I assume you guys are getting better capacity allocation from your foundry partners. Is image sensor demand still tracking higher than supply? Can you just give us an update on the insourcing initiatives?
Yeah. Look, I'll give you the demand environment. Obviously, demand still outpaces supply based on a lot of the penetration that we see in ADAS for automotive, which is agnostic of, you know, EVs or ICE engines. So very healthy demand environment and more importantly, very healthy position that we hold in that market. We also have a lot of new products that we've launched, both in automotive and industrial, that are fit for purpose for these markets individually, and that is driving some of our new product ramps as well. On the supply side, we have been getting incrementally more supply over time. You know, every quarter, we get incrementally more as our roadmap with our foundry partners are.
Internally, what we've been doing also is expanding that I mentioned in my prepared remarks, increasing some of our capacity for backend in order to get closer to the demand environment as we get more wafers from our foundry partners. Both of these have enabled us to increase our units as well as our revenue because of the higher ASPs given the technology advancements that I talked to you about in my prepared remarks. We don't see that slowing down. We're gonna keep increasing our capacity. We're gonna keep getting more wafers from our foundry partners. That's gonna keep driving the growth in that business even through next year.
Great. Thanks for that. Hassane, you also talked about this a little bit in your prepared remarks. You know, being a leader in power, you guys have a pretty broad portfolio of solutions, right? In addition to the silicon carbide traction inverter for EV and onboard charging, like how successful has the team been in also pulling in, for example, the gate driver module, which uses your MOSFET portfolio, the front-wheel drive IGBT traction inverters? This, I assume, is not included in the $4 billion pipeline, but it does sit alongside your silicon carbide solutions and represents sort of further content gain opportunity. How successful has the team been in sort of, you know, attaching these other components to your silicon carbide pipeline?
That's a good question, Harlan. The team has been very successful. What I refer to as cross-selling, it's something that our sales team drives with the business unit and that I track as well. Just to give some more specifics, you know, the $4 billion committed revenue we talked about in—for silicon carbide, that's purely on the silicon carbide. You know, Thad talked about our LTSAs in general, being north-
Mm-hmm
of the $14 billion and increasing more than $5 billion last quarter and including hundreds of parts. You can think about that's the cross-selling at a customer, where we wanna make sure that everything on that BOM that the customer need is secured in the LTSA. The worst thing you can have is 99 parts and you're missing the golden screw from us also, and we can't ship the 99. We have the full content on per BOM. Per new designs, we pull a lot of our other content that will support that system-level sell. You know, I've mentioned in the past we do that even with image sensors, where new
Mm-hmm
You know, highly advanced image sensors also carry a PMIC with them. It's not just power within power. We carry power, even our intelligent sensing business, as a cross-selling. We do that as a matter of day-to-day. Our sales team is focused on it and our business units are focused on it.
Thank you.
Our next question comes from the line of Timothy Arcuri with UBS. Your line is now open.
Hi. Thanks. I wondered if you could quantify in Q4 the gross margin headwinds from the underutilization and then maybe help us think about does that get better in Q1 or worse?
No, look, you know, the way we're thinking about the market right now is we think it remains soft. I think utilization kind of stays in the level, maybe even goes backwards slightly, as we go into Q1. I don't expect that to improve just based on, you know, what we're all seeing in the news. In terms of the quantification, you know, we said silicon carbide is 100-200 basis points, diluted there. You know, the utilization is a factor in addition to that.
Okay. I guess can you help quantify? You just talked about the LTSAs, and it sounds like most of the increases, you're kind of, you know, sweeping other content inside of the silicon carbide business, given the importance of that. Can you just talk about how much of the $2.2 billion right now is moving inside of LTSAs? I guess the question really goes to there's just a lot of general skepticism typically around LTSAs, and maybe can you just talk broadly about any change in customer behavior inside of an LTSA versus revenue that moves outside of an LTSA? Thanks.
Yeah. Look, you know, as I said, customers are extending their LTSAs. You know, they are coming back and increasing them as well. I think the behavior has been very consistent with our customers trying to lock up long-term supply. Just to clarify, our LTSA, our committed revenue in LTSA over a multiyear period is now over $14 billion. It was up over $5 billion, $5.3 billion in the third quarter. You can see that, you know, this is customers you know locking in supply on silicon carbide, but beyond that as well, you know, across the entire portfolio. What we're not doing is we're not doing LTSAs on the business we're looking to exit, obviously, because you know, we don't wanna have a commitment there.
Thanks a lot.
Our next question comes from a line of Tristan Gerra with Baird. Your line is now open.
Hi. Good morning. Just a follow-up on this. In industry-wide in analog, outside of LTSAs, we know that analog companies had implemented earlier this year non-cancelable orders to distis. Are those holding into next year or at least into the first half of next year, in terms of how you're dealing with distis or outside of your LTSAs?
Yeah. Look, it's not about just the disti, it's also with the end customers. Obviously, LTSAs is a broader view, and it's a multiyear. As far as NCNR, you know, it depends. We have NCNRs that extend up to 12 months of backlog, but it always remains our cautious outlook, even if you have an NCNR order, but there's inventory at the disty, will you still ship it? You know, you've seen us be very, very disciplined on the disty inventory and trying to make sure it doesn't balloon out of control. We've kept it around the seven weeks. We're comfortable with the visibility we have at that.
We have the NCNR orders to support all of the demand that we have, but we are very cautious and disciplined about how much we ship and when we ship it, 'cause we have to ensure that it does POS at the end of the day during the quarter, so it doesn't get above our expectations as far as weeks of inventory with our partners.
Yeah, Tristan, I would add that, you know, of our $14.1 billion of LTSA, it does not include the NCNR orders. When you combine the two, we have very good visibility into our backlog and what we're truly gonna ship.
Okay, that's great. For my follow-up, it looks like, based on the specs provided, on your website, your silicon carbide products are rated at 650 volts. I know, there's some silicon carbide products from other suppliers out there going all the way to 1200 volt. Could you talk about this in terms of specs and, you know, what's your expectation? 'Cause I'm assuming that increasing the voltage also increases your TAM, within EVs.
Yeah, I don't know where you're referring to, but we have 1,200 volts already in production and supplying to customers. I'm very comfortable with our roadmap and the breadth of our portfolio, both in silicon and silicon carbide. Our 1,200 volts is already in production, and it has been.
Okay, great. Very useful. Thank you.
Thank you.
Our next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open.
Yeah, hi guys. Just a quick question. On the silicon carbide side, obviously it's seeing pretty solid traction. Just wondering if you could give us an idea of what dollar content you're getting in per car in terms of, you know, or a range if you can, as you go from a dual motor to quad motor, et cetera.
Yeah, look, Vijay, I'll give you a couple, because it depends on how much power for the drivetrain or the inverter and so on, so it's a broad range. Just to give you an idea for an equivalent reference, for us on EVs, you can think about incremental content is about $700 for an EV versus an ICE. Obviously, the majority of it is from the traction inverter. You add onboard chargers and so on. As far as the ASP, you can think about it as the silicon carbide ASP is about 3x that of an IGBT. That gives you kinda an apples to apples as far as, you know, if you normalize it on a specific power output.
Got it. The second question is, as you look at your design win pipeline is growing very nicely. You talked about how you're displacing some legacy suppliers as well, incumbents. Just wondering if you could kind of go through, you know, what are the top three things that are helping you drive the design wins? I think that'd be very helpful. If you had an updated backlog, silicon carbide backlog number there as well. Thanks.
From an overall, you know, obviously there are two things driving a lot of our design wins and the new product revenue and you know, all of the forward-looking revenue confidence. One is this always starts with technology. Our technology in a lot of our focus area and our strategic area is compelling, and it's very competitive against what's in the market today. Obviously, we've talked about silicon carbide and why we win, both on the technology and the packaging as far as module. You know, getting more power in a smaller and smaller module, reducing costs and so on, improving efficiency. That's on the silicon carbide. You know, image sensing, I'll give you a few examples.
LED flicker mitigation is a great example of where our superior technology meets a market need, where a lot of the signs are LEDs in a standard camera or competitive camera cannot detect an LED sign. We have technologies that address that. You know, global shutter is what is needed for occupant detection and/or factory automation. You know, every single strategic market we are going after, we have products that are tailor-made with specific technology to address real problems that the customers have. That's what creates value, and that's what, number one, puts us in the lead for new designs and also puts us in the lead when there's a refresh in the design for us to capture share. But it always starts with technology and capability.
Got it. Thank you.
That concludes today's question and answer session. I'd like to turn the call back to Hassanee El-Khoury, President and CEO, for closing remarks.
Thank you all for joining us today. Our teams have yet again delivered outstanding results in the third quarter. I'm excited about our future, as we have not yet reached our full potential, and we have everything we need to lead in the fastest-growing markets. Superior technology, committed customers, and a talented workforce that will continue to expand to support our long-term growth. As always, we remain consistent and committed to executing with the highest degree of excellence. We look forward to seeing you at various investor events here in the quarter. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.