Ladies and gentlemen, thank you for standing by, and welcome to the ON Semiconductor second quarter 2020 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 will need to press star one on your telephone keypad. And if you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker for today, Mr. Parag Agarwal. Sir, please go ahead.
Thank you, Jay. Good morning, and thank you for joining ON Semiconductor Corporation second quarter 2020 quarterly results conference call. I am 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 webcast, along with our 2020 second 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. The script for today's call and additional information relating to our end markets, business segments, geographies, channels, share count, and 2020 and 2021 fiscal calendars are also posted on our website. Our earnings release and this presentation includes certain non-GAAP financial measures.
Reconciliation of these non-GAAP financial measures to the most directly comparable measures and GAAP are included in our earnings release, which is posted separately on our website in the investor relations section. During the course of this conference call, we'll make projections or other forward-looking statements regarding future events or future financial performance of the company. The words believe, estimate, project, anticipate, intent, 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 actual 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 statement 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 second 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. We plan to host our Analyst Day on March 5, 2021. At this time, our intent is to hold the event virtually. If conditions improve and risks related to COVID-19 pandemic subside substantially, we will hold the event in person in Phoenix, Arizona. We will provide additional information on the event in due course. During the third quarter, we've participated in up four virtual conferences.
These include KeyBanc Capital Markets Future of Technology Series on August 11th, Jefferies Virtual Semiconductor, IT, Hardware, and Communication Infrastructure Summit on September 2nd, Citi Global Technology Conference on September 10th, and Deutsche Bank Technology Conference on September 15th. Let me turn it over to Bernard Gutmann, who will provide an overview of our second quarter 2020 results. Bernard?
Thank you, Parag, thank you everyone for joining us today. During the second quarter, we saw a moderate improvement in business conditions as macroeconomic activity picked up across the world. We are seeing improvement order activity across most end markets and geographies as the global community adjusts to changed business and social conditions brought about by the pandemic. The COVID-19 pandemic continues to be a significant headwind to our results. Through strong execution and unwavering commitment from our employees, customers, and supply chain partners, we believe that we are successfully navigating the current environment. Despite near-term challenges, long-term drivers of our business remain intact. We're seeing strong momentum in our key end markets, driven by accelerating design wins for our power, analog, and sensor products. At this time, improving our gross margin is the primary strategic priority for the company.
As evident from our most recent press releases, we have accelerated our plans to optimize our manufacturing network. In addition, we're making strong progress in ramp of our 300-millimeter manufacturing processes at East Fishkill fab. Keith will later provide additional details regarding our progress on the manufacturing front in his remarks. Let me provide you with details on our second quarter 2020 results. Total revenue for the second quarter of 2020 was $1.213 billion, a decrease of 10% as compared to revenues of $1.348 billion in the second quarter of 2019. The year-over-year decline in revenue was driven primarily by a slowdown in global macroeconomic activity due to the COVID-19 pandemic.
GAAP net loss for the quarter was $0.00 per diluted share as compared to a net income of $0.24 per diluted share in the second quarter of 2019. Non-GAAP net income for the second quarter of 2020 was $0.12 per diluted share, as compared to $0.42 per diluted share in the second quarter of 2019. GAAP gross margin for the second quarter of 2020 was 30.8%, as compared to 37% in the second quarter of 2019. Non-GAAP gross margin for the second quarter of 2020 was 30.8%, as compared to 37.1% in the second quarter of 2019. The year-over-year decline in gross margin was driven primarily by lower revenue, as discussed earlier, and COVID-19 related costs. Second quarter 2020 gross margin included approximately $24 million of COVID-19 related costs.
These costs include approximately $13 million related to the underutilization of our factory network in the first half of the second quarter. At this time, we do not expect to incur this underutilization charge in the third quarter of 2020 and beyond, consequently, we expect to see a substantial increase in our gross margin for the third quarter. Other COVID-19 related costs in the second quarter included higher logistics costs and costs related to the implementation of enhanced health and safety protocols for our employees. Our GAAP operating margin for the second quarter of 2020 was 3.6%, as compared to 11.7% in the second quarter of 2019. Our non-GAAP operating margin for the second quarter of 2020 was 7.4%, as compared to 15.7% in the second quarter of 2019.
The year-over-year decline in operating margin was driven largely by lower revenue and lower gross margin due to the COVID-19 pandemic. GAAP operating expenses for the second quarter were $331 million, as compared to $341 million in the second quarter of 2019. Second quarter GAAP operating expenses include approximately $11.8 million associated with our previously announced restructuring programs. Non-GAAP operating expenses for the second quarter were $284.6 million, as compared to $288.2 million in the second quarter of 2019. The year-over-year decrease in non-GAAP operating expenses was driven primarily by strong execution of the cost runs and by restructuring and cost saving measures taken on the way by the company. Second quarter free cash flow was $81.2 million, and operating cash flow was $154.5 million. Capital expenditures during the second quarter were $73.3 million, which equates to a capital intensity of 6%.
Given the current macroeconomic environment, we're directing most of the capital expenditures towards enabling our 300-millimeter capabilities at the East Fishkill Fab. We expect total capital expenditures for 2020 to be approximately $400 million. We exited the second quarter of 2020 with cash and cash equivalents of $2.06 billion as compared to $1.982 billion at the end of the first quarter of 2020. At this time, with cash balances of approximately $2 billion, we're very comfortable with our liquidity position. At the end of the second quarter, days of inventory on hand were 140- days, up by nine days as compared to 131- days in the first quarter of 2020. The increase in days of inventory was driven primarily by our expectations of recovery and demand in the second half of the current year.
In addition, we want to ensure that we have significant inventory on hand to support our customers in case of any supply disruption. In the second quarter, distribution inventory decreased marginally in terms of weeks of inventory. Now, let me provide you with an update on performance of business units, starting with the Power Solutions Group or PSG. Revenue for PSG in the second quarter was $618 million. Revenue for Advanced Solutions Group for the second quarter was $427 million, and revenue for our Intelligent Sensing Group was $168 million. Now, I would like to turn the call over to Keith Jackson for additional comments on the business environment. Keith?
Thanks, Bernard. I will start with structural changes we are making to drive margin expansion, then I will provide an update on current business environment. To drive gross margin expansion, we have accelerated the pace of our manufacturing footprint optimization. We announced a plan to explore potential sale of our 6-inch fab in Niigata, Japan. Production from the Niigata, Japan fab is expected to be transitioned to other fabs in our network. This announcement comes on the heels of our announcement in February regarding our plan to transition production from our 6-inch automotive centric fab in Belgium. With manufacturing optimization plans we have announced thus far, we expect to see significant improvement in our manufacturing cost structure and gross margin. Our 300-millimeter manufacturing capability in the East Fishkill Fab has afforded us significant flexibility, which has enabled us to optimize our network.
During the second quarter, we started our first 300-millimeter wafer production at the East Fishkill Fab. We are currently sampling our 300-millimeter products to customers, and we expect to recognize our first 300-millimeter revenue in the third quarter. As we've noted in our earlier calls, we are very pleased with our accelerated progress in ramping our 300-millimeter manufacturing processes. The yields have been spectacular, and we expect to see a meaningful positive impact on our gross margins as our 300-millimeter manufacturing ramps up in the coming years. We've made substantial progress in key initiatives for driving gross margin expansion. We have launched new products and built a robust design win pipeline in automotive, industrial, and cloud power end markets to drive richer mix. We continue to optimize our portfolio to ensure healthy margins for the company. We've accelerated the optimization of our manufacturing network.
In addition, we will continue to work on expanding our gross margin through operational improvements within our network. As our revenue recovers, driven by global macroeconomic recovery and a ramp-up of design wins, we expect to see strong operating leverage and robust gross margin expansion. Let me now comment on the current business environment. We are beginning to see moderate recovery in the business environment. Improvement is broad-based, with improving order activity across most end markets. Unlike in the second quarter, we have not seen any meaningful push-out or cancellation of orders. Based on the current outlook, we expect to see improving business trends through the rest of the year. Improvement in our business is driven not only by improving global macroeconomic environment, but also by our accelerating design wins in automotive, industrial, and cloud power end markets.
Our customers are restarting their factories and are engaging with our teams on ongoing projects. Our factories are resuming normal operation. At this time, we don't expect to see any meaningful supply constraints in the current quarter and beyond. From a geographic perspective, we are seeing recovery and demand from Americas and Europe as economic activity has improved in these regions. We are very encouraged by improving PMI numbers from both Europe and the U.S. We are beginning to see signs of recovery in automotive demand from Europe and the U.S., while demand from China and Asia remains healthy. Despite the disruption caused by the COVID-19 pandemic, we continue to make progress towards our strategic and financial goals. Key secular megatrends and long-term drivers of our business remain intact.
We are seeing accelerating momentum in key strategic initiatives for electric vehicles, robotics, factory and warehouse automation, cloud power, and ADAS. Customers are increasingly relying on us to provide enabling technologies in power, analog, and sensors, and they value the differentiation in technology and quality our products offer. Now I'll provide details of the progress in our various end markets for the second quarter of 2020. Revenue for the automotive market in the second quarter was $327 million and represented 27% of our revenue in the second quarter. Second quarter automotive revenue declined 26% year-over-year. The year-over-year decline in automotive market was driven primarily by the closure of automotive production factories in various parts of the world due to the COVID-19 pandemic. Although the COVID-19 pandemic caused a temporary slowdown in our automotive revenue, key secular drivers powering our business have remained intact.
Our content in the fastest-growing automotive applications continues to grow at a healthy pace. Based on our design win pipeline, indications from customers, and revenue trends, we believe that we are gaining significant share in the most attractive segments of the automotive semiconductor market. We're beginning to see recovery in the automotive market in the U.S. and Europe. Conversations with customers indicate that we should see ongoing recovery in the third and in the fourth quarter of the current year. We are seeing strong momentum for our silicon carbide and silicon products for electric vehicles. We recently won a very significant design with one of the leading global automotive OEMs for our silicon carbide power module for traction inverters for electric vehicles. We expect to start seeing revenue from this win a year from now.
Based on our current engagement with various automotive OEMs, we expect to win multiple designs in the near to mid-term. With a broad portfolio of silicon and silicon carbide products and industry-leading module capabilities, we believe that we are uniquely positioned to be a strong leader in power semiconductor market for electric vehicles. We expect to see strong revenue growth in our IGBT modules for EV traction inverters as our design wins ramp in China this year. In ADAS, we continue to win designs for our CMOS image sensors with leading global OEMs. Our competitive position in automotive CMOS image sensors remains solid, and our customers value our technology leadership and breadth of product offerings in this market. We are seeing strong customer interest in our recently introduced backside illumination image sensors for automotive applications.
We are making strong progress in LiDAR, and we expect to commence commercial shipments of our LiDAR products in mid to late 2021. During the second quarter, we also secured major design wins for surround vision applications. We expect to begin seeing revenue from these wins in mid-2021. Our ability to integrate our automotive sensor products with our analog and power products, coupled with our deep automotive systems expertise, has provided us with a very formidable competitive advantage. Customers continue to place very high value on our ability to provide complete solutions for various automotive sensor applications. Revenue in the third quarter of 2020 for the automotive end market is expected to be up strongly quarter-over-quarter as we expect to see worldwide recovery in automotive production. The industrial end market, which includes military, aerospace, and medical, contributed revenue of $348 million in the second quarter.
The industrial end market represented 29% of our revenue in the second quarter. Year-over-year, our second quarter industrial revenue declined 3%. This decline was driven by a reduction in global industry activity and supply constraints due to the COVID-19 pandemic. We are seeing strong traction for our silicon carbide products in industrial power applications with an expanding base of customers. Recently, we announced a win with Delta for our silicon carbide power modules for solar inverter applications. Demand for industrial automation continues to grow at a rapid pace. We've secured major design wins for our image sensors for industrial applications, and we expect revenue from these wins to be recognized in late 2020. We continue to secure design wins for our large format sensors in diverse industrial applications. We are engaged with leading global players on many warehouse automation and robotic delivery products.
We expect that e-commerce customers will be a key driver of our growth of industrial revenue in a year's timeframe. As is the case in the automotive market, we leverage our broad company-wide portfolio and customer relationships to secure design wins for our sensor products in the industrial market. We continue to make strong progress in industrial IoT space and are on track to launch our first industrial IoT connectivity product incorporating Wi-Fi technology from our Quantenna acquisition within a year. Revenue in the third quarter of 2020 for the industrial end market is expected to be down quarter-over-quarter. Geopolitical issues related to a specific customer have adversely impacted our third quarter industrial revenue. We don't expect any further meaningful decline in revenue from this customer beyond the third quarter.
The communications end market, which includes both networking and wireless, contributed revenue of $255 million in the second quarter and represented 21% of our revenue during the second quarter. Second quarter communications revenue increased by 3% year-over-year. We saw strong year-over-year growth in our 5G business in the second quarter. On the smartphone front, we continue to increase our content in most popular platforms. Revenue in the third quarter of 2020 for the communications end market is expected to be down quarter-over-quarter. Our third quarter communications revenue has been impacted by delayed launches of certain platforms and geopolitical issues related to a specific customer. We don't expect any further meaningful decline in revenue from this customer beyond the third quarter. The computing end market contributed revenue of $158 million in the second quarter.
Computing end market represented 13% of our revenue in the second quarter. Second quarter computing revenue increased by 14% year-over-year due to strength in both server and client businesses. Revenue in the third 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 the computing business. The consumer end market contributed revenue of $126 million in the second quarter. Consumer end market represented 10% of our revenue in the second quarter. Second quarter consumer revenue declined by 22% year-over-year. The year-over-year decline was due to broad-based weakness in consumer electronics market due to COVID-19 pandemic and our selective participation in this market. Revenue for the third quarter of 2020 for the consumer end market is expected to be up quarter-over-quarter due to normal seasonality.
In summary, gross margin expansion is a key strategic priority for the company. We've accelerated the pace of our manufacturing footprint optimization with the goal to drive significant gross margin expansion. Ramp of our 300-millimeter manufacturing processes at East Fishkill Fab should further help in gross margin expansion. In the near term, the expected decline in COVID-19 related expenses and impact of cost realignment measures should help expand margins. We've seen moderate improvement in business conditions to date, and we expect that this improvement should continue in the near term. We are seeing broad-based recovery across most end markets and geographies. Key secular megatrends and long-term drivers of our business remain intact, and we are excited about our medium to long-term prospects. We are seeing accelerating momentum in our key strategic initiatives for electric vehicles, robotics, factory and warehouse automation, cloud power, and ADAS.
As COVID-19 related impact subsides, we expect to see meaningful improvement in revenue growth and margin expansion. Now I'd like to turn it back over to Bernard for forward-looking guidance. Bernard?
Thank you, Keith. Based on product booking trends, backlog levels, and estimated turns levels, we anticipate that total ON Semiconductor revenue will be in the range of $1.2 billion-$1.33 billion in the third quarter of 2020. Our third quarter revenue has been impacted more heavily by geopolitical issues related to a particular customer. At this time, near to mid-term expectations related to this customer have been de-risked to a large extent, and we don't expect to see any further meaningful decline in revenue from this customer beyond the third quarter. For the third quarter of 2020, we expect GAAP and non-GAAP gross margin between 32%-34%. Our third quarter gross margin outlook includes COVID-19 related costs of approximately $11 million. We expect total GAAP operating expenses of $307 million-$327 million.
Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be $30 million-$34 million. We expect total non-GAAP operating expenses of $277 million-$293 million in the third quarter. We anticipate third quarter of 2020 GAAP net other income and expense, including interest expense, will be an expense of $42 million-$45 million, which includes a non-cash interest expense of $9 million-$10 million. We anticipate our non-GAAP net other income and expense, including interest expense, will be an expense of $33 million-$35 million. Net cash paid for income taxes in the third quarter of 2020 is expected to be $17 million-$22 million. For 2020, we expect cash paid for taxes to be in the range of $54 million-$60 million. We expect total capital expenditures of $80 million-$90 million in the third quarter of 2020.
We are currently targeting an overwhelming proportion of our CapEx for enabling our 300-millimeter capability at an accelerated pace. For 2020, we expect total capital expenditures of approximately $400 million. We also expect a share-based compensation of $17 million-$19 million in the third quarter of 2020. Of which approximately $2 million is expected to be in the cost of goods sold, and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial measures. Our GAAP diluted shares for the third quarter of 2020 is expected to be 460 million shares based on our current stock price. Our non-GAAP diluted share count for the third quarter of 2020 is expected to be 411 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. Jay, please open the line for questions.
Thank you, sir. At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw the question, please press the pound key. Thank you. First question comes from the line of Ross Seymore of Deutsche Bank. Your line is open.
Hi, guys. Thanks for letting me ask a question. First question I had is on the gross margin line. It's good to see no negative surprises on that for the first time in a couple of quarters. I just wanted to look at, in the near term, how you expect those COVID-19-related charges to trend. You still have a bit in the third quarter. Do they go away in the fourth quarter? Then much more importantly, longer term with the Belgium fab and the Niigata fab potentially being sold or shut down, how do we think about the long-term gross margin potential? When do those benefits come in? What's your new target, et cetera?
Thank you, Ross. Let me first address the COVID-related expenses. It is a little bit difficult to predict exactly when those are going to go away. As we said, a lot of those are related to freight expenses, which are at a premium right now, as well as safety protocols that we have put in place. Obviously, it will be a function of how the COVID pandemic progresses over time, and we expect those gradually to come down. We are projecting that those will continue during the third quarter. We have typically assessed the savings associated with a 6-inch fab to be in the $25 million-$30 million of fixed costs that go away per year. The timing of the savings is really a function of business dynamics, and we do not have a perfect timeline.
From the time we conclude a sale, it will still take us probably about a year- to- year and a half until we get full savings. That depends on really when we get these deals concluded. Long term, we still are aspiring and still are targeting to achieve our long-term goal of 43% that we enumerated in our 2019 Analyst Day, albeit probably a little bit delayed with the fact that the 2019 and 2020 were obviously not very good years from a top-line point of view.
Got it. Thanks for the color on that. As my follow-up, I just wanted to hit on the revenue side. In the last couple of quarters, you talked about supply disruptions, and I think everybody understands that, but they were in the first quarter a bit over $100 million. I think it was about the same in the second quarter as what you originally said. Did you have those supply disruptions impacting revenue in the second quarter? Potentially more importantly, if you don't have any in the third quarter, are those revenues just gone? Like so many of your peers, are you actually expecting to catch up on some of the formerly delinquent shipping?
We did continue to have supply constraints or pandemic-induced supply constraints in the second quarter. That was reflected in the total numbers. They are much less in the third quarter. We're hopeful that there will be none before the end of the year. At this stage, again, everything is still unknown. If there's flare-ups or changes around the world, there's still risk.
Thank you.
Thank you. Next question comes from the line of Chris Danely of Citigroup. Your line is open.
Thanks, guys. First question is, you managed to do a really good job keeping the OpEx down in Q2, and you're giving us some good guidance for Q3. How about longer-term trends in OpEx with some of these restructuring plans? What can we expect for the next, I guess, several quarters?
Indeed, we did take some significant actions that helped us overachieve our second quarter and third quarter guidance. In the long run, we are still targeting to achieve a 21% of OpEx as we have enumerated in our Analyst Day. However, we have to be aware that at some point in time, depending on business conditions, some of the temporary actions as well as some of the variable comp will come back, and will cause a temporary blip that will be gradually leveraged through as we increase revenues.
Got it. For my follow-up, any commentary or color on the Koch Industries investment? Why did you adopt the shareholder rights program, and do you expect them to be a passive or active shareholder?
They have indicated publicly that they're a passive intent as a shareholder and had no further communications.
Okay, thanks.
Thank you. Next question comes from the line of Chris Caso of Raymond James. Your line is open.
Yes, thank you. Good morning. I'm wondering if you could comment on the linearity of bookings through the quarter. It sounds like you're expecting some improvements as you go through the end of the year, if you could elaborate on that a little bit more. Thank you.
We had good linear pickup through the entire second quarter. We continue to see good activity here in the third. At this stage, we don't know when they stop ramping, but so far it's been quite strong since the middle of the second quarter.
What about with regard to Q4 seasonality? I guess, given all the ups and downs we've had this year, I'm not sure that normal seasonality generally applies, but any thoughts on how we should be thinking about the quarter in light of all that's going on right now?
Yeah, in our comments, we mentioned we expected conditions to continue to improve. We really only give guidance one quarter at a time, but we see no reason to believe there should be any retraction of the current trends.
Okay, thank you.
Thank you. Next question comes from the line of Rajvindra Gill from Needham & Company. Your line is open.
Yes, thank you for taking my question. Congrats on the accelerated transition to 300-millimeter. I think that's very good progress. If you could remind us the potential cost savings as you transition to 300-millimeter. I believe that 12-inch facility has a revenue capacity of about $2.2 billion or about 40% of your revenue. Just wondering if you could maybe outline what would the cost savings be once you ultimately transition to 300-millimeter. Given kind of the accelerated timeline you've had, and you're starting to see revenue from 300-millimeter customer in the third quarter, should we expect the transition to happen a little bit sooner than later? Thank you.
The first question on the long-term benefits of East Fishkill, definitely a 300-millimeter fab gives us a sizable good improvement in gross margin in somewhere in that 20%-25% of full finished goods cost. Obviously that is when you have a fully loaded fab. In the interim period, we are paying a foundry cost, so the savings that we get are simply the function of the price that we're getting. We do and are very excited about loading this fab as Keith mentioned in his prepared remarks. We're seeing wonderful yields as we are running it through. We expect to have first revenues in the third quarter. However, meaningful revenues will come in the years to come. Having said that, even the foundry cost that we're getting from them is quite attractive.
Okay, thank you. As for my follow-up, we're starting to see a recovery in automotive, particularly in U.S. and in Europe. Wondering if you could discuss kind of what your view on global auto production ending this year, and are there any thoughts in terms of what the rebound could look like in 2021?
Yeah, I guess we don't have any firm opinions on 2021 yet. I would expect that if you don't have the shutdowns that we had in 2020, there's a very significant improvement year-on-year for next year. We're looking at something in the -20% for end automotive sales decline year-on-year in 2020. Time will tell, but all of our customers are telling us they're pretty much back to full capacity sometime during the third quarter of this year.
All right. Very good. Thank you.
Thank you. Next question comes from the line of Vijay Rakesh from Mizuho. Your line is open.
Hi, guys. Just a couple of questions. One on the automotive side, I think you mentioned LiDAR will be shipping in 2021. Just wondering what your expectations are there to second half. Also on the EV silicon carbide, now that it's ramping, are you still trying to go internal silicon carbide wafers, or would this be mostly all external? How do you see that ramp into next year given it looks like multiple catalysts or subsidies on the EV side going forward? Thanks.
Okay. Yes. Automotive LiDAR would be in the launches for vehicle OEMs in the second half of next year with the new launches they've got after the summer. We do expect to see a significant contribution. On the EV side with silicon carbide, our intent is to have both internal and external supply on an ongoing basis. This year and next year, it should be mostly external supplies. As you transition to 2022, a larger % of internal supply.
Got it. I think you mentioned one customer delay with geopolitical tensions. Is that the same customer that's impacting you on the industrial and the comms side? That's it. Thanks.
Yeah. It's a very large customer in China that is a broad-based customer, and it impacted several of the segments.
Great. Thank you.
Thank you. Next question comes from the line of Christopher Rolland from Susquehanna. Your line is open.
Hi, guys. Some questions about Niigata, I guess. What is the revenue contribution there? How are you guys looking at the odds of successfully selling that facility? Thank you.
We actually are expecting to have success there. We've seen good progress with interest in our Belgium factory. These assets still have interest in the marketplace, and we're expecting to have good results. Percentage of revenue, I'm not sure I have that number.
Well, we probably don't have a precise number. It is a relatively small facility compared to the total footprint. As I mentioned earlier, the savings that we'll get from that facility is around $30 million per year.
Understood. For the remainder of your capacity, you still have quite a bit of extra there. Have you considered serving new products, some sort of fab filler product or something like that? Growing out of your footprint organically, or have you even considered the foundry model? I know you're doing that on a temp basis at Fishkill. I wonder if you could also give us an update on those temporary foundry customers that you have. Have they actually decided to continue with you as well? Yeah, how you can fill that extra capacity would be great.
Yeah. I'll try and get at what I think your question is. We do foundry services for many customers. They're generally specialty processes that use our analog and sensor capabilities. They're not temporary. They're permanent relationships that we have with those customers, and we continue to be excited by servicing them. As far as looking at low margin products to fill up factories, we're not looking at that. We don't think we need to look at that. We think the demands that we've talked about coming up for their power products and our sensor products will more than meet the needed amount of ramp over the next few years. The trends in electric vehicles, in factory and automation, et cetera, we've been talking about, we think are more than sufficient.
With the closure of two of our wafer fabs, we believe the balance in the medium term will be quite good.
Thanks, guys.
Thank you. Next question comes from the line of Craig Ellis of B. Riley FBR. Your line is open.
Yeah. Thanks for taking the question, guys, thanks for all the color on cost initiatives. I just wanted to follow up on a few of the fab sale questions. Keith, from your last question, can we deduce that there are no other fabs that the company would sell if we don't have a strong recovery? Are there some things that you could execute on if we had a lackluster rather than a strong recovery?
Yeah. We have no current plans. The outlook that we've got right now, we think the remaining network is appropriate. As always, we will see what the future holds.
Got it. Perhaps touching on two end market issues with one question. One, it looks like compute in the third quarter will be back to record highs. Can you give us a sense for how the mix of PC versus server power is evolving therein? With auto, I know you don't want to give a specific outlook for calendar 2021. Do you feel with all the design wins you have in your secular growth areas that exiting 2021, that business could be back towards prior record levels? Thanks for the help, guys.
Yes, we're seeing good results there, and I think I would give kind of two pieces of color. One, the infrastructure piece for the cloud continues to grow, and we see very sharp growth there. We think there was certainly some COVID-related acceleration on the client side. We don't see that diminishing here this year. We think that continues with a lot of the remote learning and remote interactions that are going on. People continue to upgrade various parts of their client systems. I would say as we enter into the first quarter of next year, we still see a strong compute environment and should expect next year to be as good, if not better from a growth perspective.
on automotive?
Automotive, certainly what we've seen, major interruptions, as you know, in the first part of the year with manufacturing. As I mentioned, our customers are telling us that they are full steam ahead here as they've gone into Q3. In each of those major customers around the world, their efforts in electric vehicles are accelerating, and their efforts from an ADAS perspective are accelerating. We are expecting to see a return to the above market growth for our products in automotive next year.
That's helpful. Thank you.
Thank you. Next question comes from the line of Matthew Ramsay of Cowen. Your line is open.
Thank you very much. Good morning, everybody. Keith, I wanted to follow up on some of the PC and server power stuff. There's been some fairly big disruptions with one of the big microprocessor suppliers there and the future roadmap, and I just wonder, maybe you could step back and tell us how you guys are aligned on the server power side regardless of chip vendor or of OEM or ODM mix, and if that might change any of your forward outlook there. Thank you.
We're well aligned with the various processor options for PCs and servers, and very well aligned with the rev model changes that they have in their portfolio. We frankly think that it does change things for them, but from our perspective, all of them still need power, and we're well positioned.
All right, great. Thanks for the help there. Just as a follow-up, I guess you're one year on from closing Quantenna now. If you just kind of step back and look where the design win traction has been and maybe the revenue trends since you closed the deal, just kind of level set where you were versus your expectation, I think that'd be helpful. Thank you very much, guys.
Okay. On the Quantenna, we are not achieving the revenue growth we had hoped. Certainly, the market events have had an impact on that. We are quite excited about the progress we're making with our new combination products for the client market. The teams there on the engineering side trying to drive a low power combination product for that market are making great progress. What we're seeing out there is good excitement for the future designs, but less revenue than we'd hoped for originally.
Thank you. Next question comes from the line of Harlan Sur of JP Morgan. Your line is open.
Morning. Thanks for taking my question. Within the Intelligent Sensing Group, we tend to focus on the automotive piece, which is the largest segment growing at a double-digit CAGR, but looks like the industrial and edge applications are seeing strong adoption, robotics, machine vision, smart retail. Excluding some of the legacy businesses, do you guys still see a double-digits growth CAGR in industrial and edge over the next few years? What's the current mix of industrial and edge within ISG?
We do see a lot of strong growth coming. It's been offset by our pulling back from some of the very low-margin, consumer-like security business, security cameras for homes, et cetera. That's masked some of the great growth. We are seeing the adoption there, in the industrial area, in the automation area, and in the robotics area, actually pretty exciting. We are expecting double-digit growth for all of those portions of the market and of course in automotive to continue. After seeing the COVID-19 impact this year, plus some retraction from some of the security business, I would expect to see that double digits returning in 2021.
Yeah. Thanks for the insights there. On the cloud power, obviously benefiting from the strong cloud server spending trends, but especially in servers, you guys are seeing a strong pickup in dollar content. I think it's been about like a 15% CAGR on dollar content over the past four years on the server platforms. You've got Sapphire Rapids from Intel ramping next year. I think you guys were anticipating about 25% dollar content step-up on the upgrade. Is that still how you kind of see dollar content improvements on a go-forward basis?
Yeah, we're seeing it go from about $60-$75 next year, is our expectation.
Great. Thank you.
Per server. Mm-hmm.
Thank you.
Thank you. Next question comes from the line of John Pitzer of Credit Suisse. Your line is open.
Yeah, good morning, guys. Thanks for letting me ask the question. Keith, I'm just kind of curious, you talked about the impact of the geopolitical in Q3. Can you quantify it? In your prepared comments, you said that you think it's now been fully de-risked. Is that customer effectively now zero? Are you concerned that to date, the U.S. has just been targeting a single entity in China? What are the risks if that broadens out?
Yeah. We are very concerned about some of the increasing tensions on global trade. Very much believe that global trade is essential for technology and the growth of semiconductors. Clearly would not like to see further there. We don't get comment on specific customers, but the answer is no, it's not zero, our revenue expectations from China or those customers. The pieces that look likely to be impacted, we think, have all been impacted at this stage.
That's helpful. Keith, as you guys ramp the 300-millimeter Fishkill facility, I'd be curious as to what end markets we should think about that fab supporting. You've been a longstanding member of the SIA. I'd be curious to get your view of the CHIPS Act. Post the sale of the fab in Japan and in Belgium, what percent of your capacity is going to be U.S.-based, and how might that help you in the future if the CHIPS Act's passed, especially around tax rate?
Okay. Two separate questions there. On the 300-millimeter, the markets there, we're ramping up initially power products. All of the server and automotive and industrial applications that we talk about growing are going to be filling that up with power products. That will be followed afterwards with more and more sensor and analog products. The CHIPS Act, we think, is an important part of balancing out the supply chain. For ON Semiconductor, we actually have several facilities already here in the U.S., and with the addition of East Fishkill, the vast majority of our wafers will be coming out of the United States.
Thank you.
Thank you. Thank you. Your next question comes from the line of David O'Connor of Exane BNP Paribas. Your line is open.
Great. Good morning. Thanks for taking my question. Maybe one or two follow-ups from some previous answers. Keith, you spoke about improved order activity in most end markets and geographies. Which are the end markets that are still impacted or still seeing pockets of weakness? Also on orders, the long lead time orders, has visibility there improved too, or is it more just the short lead time orders? I have a follow-up. Thanks.
Yeah, I'll start in reverse order from a lead time orders and impact we're seeing there. Clearly, customers are using those lead times to place their orders. We don't see any increase in long-term orders from a normal pattern. In fact, if anything, a little bit less of that and more of the order as our lead times dictate. Relative to where we still see some softness, in general, as I mentioned, the handset business looks like it's going to be ramping later this year rather than earlier. Some of the business I mentioned earlier with security and industrial in China is a little bit softer than it was in Q2.
Thanks. That's helpful. Maybe as my follow-up, it sounds like you're accelerating traction on the silicon carbide with some of the inverter wins that you mentioned. When you look at your overall design wins on silicon carbide, what's the phasing of those wins when we look out over the next maybe three years starting in 2021? Is the bulk of those wins ramping 2022, or is it more spread out over the next three years? Thank you.
Yeah, we have ramps every year, and they accelerate, I would say, a significant acceleration in 2022. We're actually starting to ramp here at the end of this year through all next year, but I'd say the biggest impact is 2022.
Thank you. Next question comes from the line of Tristan Gerra of Baird. Your line is open.
Hi, good morning. Longer term structural question on gross margin. I understand the low utilization rates and the COVID-related charges, but your gross margin earlier this year came down below the 2011/2012, which I think was around 32% at the time, and yet your revenue base was about one-third lower than it is now. Is that mostly attributed to ramping capacity in 2018, or are there mix of pricing effects as well? What was the pricing decline year-over-year and quarter-over-quarter in the just reported quarter?
We attribute the impact mostly due to COVID-19 and due to the underutilization that's driven by as a result of that. Long term, we still are aiming, and we are confident that we can achieve that long-term goal of 43%. We don't see any pricing issues as we go through. Pricing has been pretty healthy. I think that's it.
Okay. Any update that we should get on your acquisition strategy? Is that something that is basically going to remain unchanged with what we've seen in the past decade, or is there any changes as a result of the environment and the manufacturing shift that's ongoing right now at the company?
No change in basic philosophy. When the time is right and the opportunities are right, we certainly will be an interested party. At this stage, there's no activity.
Great. Thank you.
Thank you. Next question comes from the line of Kevin Cassidy of Rosenblatt Securities. Your line is open.
Thanks for taking my question. When you announced the acquisition of the East Fishkill fab, you had said it was about $300 million in investments you're going to make into the fab. Out of the $400 million in your CapEx for this year, how much of that is going towards the $300 million for East Fishkill?
It is a significant portion of it that we are devoting, and that should really give us the ability to ramp up in a faster and more meaningful way.
Okay, great. In the Niigata fab, what process nodes were being run there?
Those were mostly analog nodes for various mixed signal products, and the markets for that were everything from automotive to consumer.
Okay, great. Thank you. Congratulations on the progress.
Okay, thank you.
Thank you. Next question comes from the line of Gary Mobley, Wells Fargo Securities. Your line is open.
Yeah, thanks. Good morning. Thanks for fitting me in, everybody. In the interest of time, I'll pose both my questions. I'm curious to know how the potential divestiture sale of the Niigata fab might impact any relationship that you have with some Japan-based automotive OEMs. Bernard Gutmann, you mentioned that distributor inventory was down a little quarter-over-quarter. Remind us of by how far you need to go before you're back into your long-term range goal. Would you expect that distributor inventory to decrease again in the third quarter?
Yes. I'll take that question before. We are at the high end of our guide, so we're not really outside of our bounds. We also build the inventory in anticipation of a recovery, so that should help us to serve customers during the fourth quarter.
On the relationships, we clearly value our customers. We're going to make sure that the transitions there do not impact them. We have a much larger 8-inch facility in Aizu, Japan. What we intend to do is use that for those customers in Japan that need that continuity of local supply.
Thank you. Next question comes from the line of Nikolay Todorov of Longbow Research. Your line is open.
Hi. Thanks, guys. I think last quarter you announced a $50 million cost-saving program. I just wonder how much of that has gone through and how much is left to go.
We did accelerate and did that, so our guidance for the third quarter shows that we are continuing to be at the low point that we achieved in the second quarter. For the most part, it's done.
Okay, great. To follow up quickly, I think the free cash flow generation was much stronger than expected. I wonder if you have any thoughts on how should we think about 2020 outlook for free cash flow, any thoughts on resuming the buyback?
At this stage, on the prudent way, we still keep the share buyback program on hold, and we are still prudent on that front. That will be for later on. The free cash flow, we talked about our CapEx being $80 million-$90 million for the third quarter and $400 million for the year, and the rest should come directly from the P&L. Don't expect any other significant disruptions in the free cash flow. It should be mainly a result of the P&L minus the CapEx of $80 million-$90 million in the third quarter and $400 million for the year.
Got it. Thanks.
Thank you. Next question comes from the line of Vivek Arya of Bank of America Securities. Your line is open.
Thanks for taking my question. I think, Keith, you mentioned that automotive customers will be at full production rates in Q3. I just wanted to make sure if I heard that properly, or the real question behind that is, how far below do you think your auto customers are below their prior peaks of production, and how does that compare to your automotive sales versus the prior peak?
Yeah. My comment there is that during the third quarter, they should all reach full production. They weren't all full production from day one, it's going to vary a bit by end customer. Like I said, they're all bullish of getting back to what they consider full production during the third quarter.
If they are at full production, then why are your automotive revenues still 15%, 20% below your prior peaks?
Yeah, I'll try again. They aren't full production for the entire quarter. They're achieving full production rates during the quarter. They're still ramping, I guess, is the simple way to interpret that.
Got it. Thanks. As a quick follow-up, if, say, conceptually, your Q4 sales are flattish, should we assume that gross margins also stay flattish, or are there other trends that could take them higher or lower?
I'm not postulating on revenues in Q4, but you should see continued improvement on the gross margin front as the expenses around COVID go down and we continue to get traction in our factories from Q2 levels.
Okay. Thank you.
Thank you. Next question comes from the line of Shawn Harrison of Loop Capital. Your line is open.
Hi, good morning, and thanks for taking my question. Keith, I want to go back to auto as well, but more of, it looks like in the first quarter, auto outperformed production by about 15 points. It's about 20 points in the second quarter. It looks like you picked up $5-$7 content per vehicle on average this year. Just maybe you could highlight where you're seeing the content increase year-over-year, and do you expect I know it's typically a high single-digit outperformance of production, but it looks like you'll be well ahead of that down 20% for the year if this content trend continues.
Yeah. As I mentioned, the two trends on electrification and the ADAS, the safety side, continue to drive more dollar content for us. As you pointed out, I think it's showing up in less declines than the marketplace overall as opposed to big gains. Hopefully as the market turns around, you'll see those turn into big gains. It really is electric power in the EV side and all of the ADAS applications starting to grow that continues to drive those trends.
Okay, thank you. Bernard, do you say you would expect internal inventory dollars to decline sequentially in the third quarter? Or was that just distribution?
We expect distribution down, and we expect to remain probably flattish in terms of inventory dollars in the third quarter, but down in terms of days.
Okay, thank you very much.
Thank you. Next question comes from the line of Craig Hettenbach of Morgan Stanley. Your line is open.
Yes, thanks. Keith, just a question on EVs, since you do both IGBTs as well as silicon carbide. I just want to get a sense of how you're seeing that market develop, and as particularly from a silicon carbide adoption. What are some of the signals you're getting from customers that they're moving forward versus that trade-off with IGBTs?
We're still seeing the predominance of the lower cost vehicles go IGBT and the high-end vehicles going silicon carbide is the trend that we're seeing, a very definite bifurcation going on there. That is geography independent. We think there will be good growth in both sectors going forward.
Got it. Just to follow up to some of the questions that have been asked on the geopolitical issues, do you have a rough sense or you can quantify roughly for Q3 what the impact is to the guidance? Do you think there were any pull-forwards ahead of that before some of those issues arose?
I'll start with the end of that. We're not expecting any additional issues there. We think that the new rule giving is kind of at a pause for a bit. I'm not expecting any further impacts or surprises on that number. I don't know that we've got a number we're prepared to handle because it is a specific customer, and we don't share that type of information.
Thanks.
There are no further question at this time. Presenters, you may proceed.
Thank you everyone for joining the call today. We look forward to seeing you at various conferences during the quarter. Goodbye.
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