Thanks for coming, everyone. Next up is one of our top picks in the whole semiconductor space, On Semiconductor. We've got the dream team here, Hassane El-Khoury, the CEO, and Thad Trent, CFO extraordinaire. Why is it one of our top picks? An absolutely amazing turnaround story, architected by these guys to my left. You know, gross margins, 10 points above the previous peak, operating margins more than 15 points above the previous peak. You also have a very nice growth aspect with the silicon carbide and just the general automotive market. Guys, thanks for coming. You know, why don't we start there before we dig into the 17 million questions on silicon carbide that I'm sure myself and the audience will ask?
And by the way, this is intended to be interactive, so if anybody has any questions, feel free to ask them. But let's start with automotive. You know, automotive's been strong for you guys all year. How are things going? And we've had a number of your competitors say everything from, you know, the previous company said automotive is great, it's gonna be up, no issues, and you've had other companies say automotive is, you know, correcting a little bit. So where does ON stand on the automotive spectrum? And we'll jump in from there.
Yeah, from an automotive perspective, obviously we still see that as a positive end market for us, for a few things. The biggest growth driver for us is electrification.
Yep.
And from an EV perspective, you know, you can see a little bit on the global. From an EV, the numbers of units are going up, and that's gonna drive the growth for us. But even if I take outside of the silicon carbide growth that we're seeing, automotive has grown. Now, obviously, it's not at the same rate as we've seen in the last few years, but there was still growth. And that's the content that we keep referring to, where apples to apples, we have more content in newer cars than we had in previous cars.
Yeah.
It's not, you know, a lot of people that look at it from the glass-half-empty of, "Well, you know, we've been building premium vehicles, so content is higher." Well, name one entry vehicle that doesn't have more power than it did last year. You know, more screens. Every car today has power windows, power seats, power steering. You know, the key term is power-
Mm-hmm
... which is what we do. So all of that is net incremental content for us. So any new car, being built, is going to have more content, and every new EV being built is gonna have almost 14x more content just on the drivetrain.
Yeah.
Because if you think about the content for on a drivetrain in an internal combustion engine, On Semiconductor has about $50 worth of content. That same car turns into an EV, that's $750. So you have $700 incremental dollar per vehicle that converts from ICE to EV. That's where the underlying strength in our business is, and we see that continuing.
Hassan, maybe you could take us through, you know, what your sort of current average and peak content is in, like an ICE versus a hybrid versus an EV car, and give us a sense of... You know, you talked about your content's gone up even in an EV car over the last few years. Like, how much has your content gone up over the last few years? And then maybe give us a sense of your content per each one of those three, you know, models.
Yeah, look, I mean, the plug-in hybrid, it's very subjective, so I'll focus on, you know, the two extremes-
Sure
... because that's really where, where the focus is. And that content has, you know, look, in 2022, what we talked about in, our last, not this Analyst Day, but the prior one, when we deployed our strategy, we had a vehicle that went into production with $841 worth of content. Not bad. That's not the, not just, from a power perspective, because, you know, tangential to the electrification, there's something we can't really forget about because ON Semiconductor is a very big player in automotive also, is the ADAS side of it.
Mm-hmm.
You know, every vehicle now has cameras in it for some level of autonomous driving. Whether you believe in Level 4, Level 5, or when we will achieve full autonomy, let's talk about just Level 2+, which is from surround cam, you know, the surround view, which at least requires four cameras, to adaptive cruise control, to lane departure, and. All that is driving content in automotive, you know, orthogonal to electrification, because you have that same trend happening in internal combustion.
Yeah.
So when I talk about content for ON Semiconductor in automotive, I'm not only referring to just the power semis, which is, of course, a big growth. That's the $700.
Yeah.
We got almost $1,000 on all the other stuff. So net net, that's why we always talk about we're not pegged to SAR or units sold-
Yeah
... it's more on the content that is going into these units.
Mm-hmm. And then how do you, looking into 2024, how do you guys feel about the automotive market there?
We feel pretty good.
Mm-hmm.
Obviously, you have the continued execution, continued growth in silicon carbide.
Mm-hmm.
But even outside of silicon carbide, we're going to see, you know, some of that more content. You know, we, you know, some people may not know we're number one in LED drivers for automotive. You know, anecdotally, LED is the new chrome, right? Every car identity is now has more LEDs than, you know, in the 1960s and 1970s was chrome.
Yeah.
That's more content. Ultrasonic sensors, image sensors, power, all that content is driven by megatrends that OEMs are using to differentiate their product from every other product.
Mm-hmm.
That's where they put the value, and that's where we pull into that demand. So we're very comfortable and very excited about, you know, the future of automotive, including in 2024 and beyond, and led by, of course, the continued ramp in silicon carbide.
With this increasing content and increasing growth in the automotive market, has the margin profile for your automotive business changed over the years? Has it gotten better, or do you sort of, you know, price to some sort of margin, and any implications going forward?
No, so we don't, we don't price from a cost plus to hit a certain margin. What we, what we've... Maybe that historically was, you know, how the company did, but-
Yeah
... you know, you said we've been in a very-
Different mode
... a very different mode. Right now is value. So as long as we create technology and we create products that add value to the customer, we're going to extract that value, and that's across all the products. From a margin profile, of course, if you look at the last two years, our margin profile, like you said, you know, went up, you know, almost 20 points.
Yeah.
But, uh-
We like that, by the way.
That's right. We do too-
Yeah
... because it allows us to invest in more competitive technologies, and reinvest in our business. That, at the same time, our auto and industrial has become about 80% of our revenue. So we've driven a fundamental mix shift in the business on the end market, and the products and the value that we create for our customers in these markets, and the value that we extract with our product. So that's been all the, you know, the multi-pronged transformation of our strategy, that we're not done with it yet.
Mm-hmm.
You know, we put out a target of a financial target over the next five years at 53% gross margin.
Yeah.
You know, we feel comfortable with it, given everything that we have executed to, but yet we have to still execute to. And that's a lot of it is new products and the scale that we will be able to achieve. So that's all been positive. So we're not stopping at, you know, where we've delivered. We actually upped it, and we've always talked about our financial target as a milestone, not a destination.
Yep.
That's how we run our business.
Just to give you a funny anecdote, I saw a friend of mine yesterday who retired five years ago from Wall Street. We were talking about onsemi, and he goes, "Yeah, so is onsemi still trading between, like, $8-$15? Where is it in that $8-$15 range?" "It's still higher, buddy.
YEP, very different company.
Add a zero. Before we move on out of auto, could you just touch on the sensor business a little bit? To me, this is a bit of a unsung hero. You know, you've made some key acquisitions there. It's a pretty nicely growing business. Just give a sense of like, you know, size, growth rates on the sensor business.
Yeah. From the image sensing business in general, you know, a lot of us focus on the turnaround and the new financial performance of the company. But within the financial performance of the company is a very successful turnaround of our image sensing business, where, you know, margins are around the 50%. You know, they, they reach 50% from a kind of the same level as where the corporation was. New products, so we're leveraging our new products into the new market. So what does that mean? The last five years, the number of cameras per car has doubled. We expect that number of cameras to double again in the next five years.
Yeah.
So there's unit growth just from a penetration and more cameras per car going forward, but also more cars getting that Level 2+ functionality in it. So that's one. The other trend that's helping this business is the megapixel or the resolution for these cameras.
Yeah.
When we talk about now, the future is 8 megapixels versus, you know, 1, 2, and 3 megapixels in the last few years. 8-megapixel camera is about 2.5 times the ASP.
Mm-hmm.
So again, there's an ASP uplift, more unit, that's what's gonna accelerate the growth.
Yeah.
So net-net, you know, I go back to the prior comment about automotive. When we talk about content driving growth, just one camera going from one resolution to the next give you more than 2x the lift.
Yeah.
That's growth, even with the same number of vehicles-
Mm-hmm
... just by changing the resolution. So these are things that we are indexed to more than the number of vehicles itself.
Yeah. Great. Let's touch on the industrial business. This is another, you know, fairly large business for you guys. Just talk about the trends there and what you see over the next, I guess, year, prospects for 2024.
Yeah, so the same as automotive. We see, I would say, overall, stability.
Mm-hmm.
You know, we've seen some softness exiting last year. I think, you know, that's behind us. We see stability in the industrial market. That's the general industrial market. But within that, what's important for us is what end markets within the industrial we anchor on. That's renewable energy, energy storage, you know, energy conversion-
Mm-hmm
... and energy distribution. So think about it as solar, wind for generation, energy storage systems, and chargers for the deployment.
Yeah.
All three of these have seen the exact same growth because they're driven by what I call the sustainable ecosystem, by the e-mobility.
Yep.
So when EVs ramp, you need the infrastructure and you need the charging. The charging is gonna ramp when they see the EV, so that combination is uplifting both markets.
Mm-hmm.
You know, that business for us in the renewable side has grown in the last two years about 70% year-over-year. That's tremendous growth, and it's not small business. It's a meaningful part of our company, and that's gonna be also growth.
Mm-hmm.
So that's gonna overshadow any, you know, flatness or, or call it short-term, market,
Yeah
... fluctuation in industrial, but over the long term, it's gonna drive industrial above, you know, GDP plus-
Yep
... that we look at.
... Yeah, one question I get is, you know, "Hey, the downturn's hitting everybody else, why isn't it hitting ON?" And if you look at your non-silicon carbide, I guess your core semi business, you have seen some fluctuation and perturbation in there. You know, maybe touch on that and the preemptive measures you guys have taken as far as keeping inventory low and utilization rates?
Yeah, and just in terms of the markets and what we've seen, I mean, Hassane did a great job of covering the EVs, alternative energy, which are, you know, growing nicely. What we saw, really, Q2 of last year was those other soft markets.
Yeah.
You know, we saw consumer and compute, small piece of our business, but we saw that getting soft. We saw the consumer side of industrial, getting soft as well. I think we saw that decline for a couple quarters, and it's basically gone sideways, since then. Now what we've done, starting back in Q2 of last year, is we started taking utilization down pretty hard.
Yeah.
We've taken our utilization down from, you know, 83% down to 70% this last quarter. At the same time, our margins are holding, right? So it shows the structural changes inside the company. We've managed our disti inventory extremely tight. You know, we've, we've got it at, you know, seven weeks, we've been running in that range for, you know, really two years. We'll continue to run there. Historically, the company ran, you know, 13, 15 weeks, right? I mean, so-
On a good day.
... we've proactively managed that, and the distributors would take much more inventory if we'd ship it to them. We're actually not shipping it to them. So the LTSA coverage that we have is actually protecting us, and we're building the LTSAs.
Mm-hmm.
That's allowed us to take that utilization down and not... and kind of starve the other markets. As I think we go forward, you know, we're assuming, other than the secular drivers, we're assuming this market kind of goes sideways for a period of time. If we're wrong, there's a nice tailwind behind us-
Yeah
... as we take utilization back up and start cranking again.
Yeah. Two questions on that, Thad. Number one, can you talk about internal inventory at ON, where it is right now and what the ideal range is?
Yeah. So, we've been building inventory for two reasons: one, silicon carbide-
Yeah
... with the ramp of silicon carbide, and I know you're gonna hit on that. The other piece is we divested four fabs, and we've been going through fab transitions. If you exclude that and you look at the base inventory-
Yeah
...excluding that inventory, our inventory was actually down 6 days last quarter. So on total, I think we're about 163 days.
Yeah.
Clearly, we'll be below that at steady state once we get through these transitions and the SiC ramp. But, but that's another indication of just how we've been managing. We've been trying to take inventory down and keep it lean as well.
Mm-hmm. When do you think you could be at the ideal inventory level, barring anything, you know, flipping out up or down in the market? Is it 2, 3 quarters out, or-
No, I think we're further than that, just because of the silicon carbide ramp, right? We've still got a ramp for next year, for 2025 as well.
Got it.
It'll take a while to burn through that. The fab transitions take three years anyways.
Yeah.
Right? So those are strategic builds for long-term, long-term support for customers.
Great.
Yeah, one thing, just on the LTSAs, you know, Thad mentioned, we're not, we're not building to backlog. We haven't built to backlog for the last two years or so. We've always said we're under shipping demand.
Yeah.
You know, fast-forward to now, it puts us in a much better position because we haven't really been shipping to demand. Whether you believed it or not, we've always been under demand. So as demand kind of readjusted, the gap got smaller-
Yeah
... versus it got under our supply, and that's why we're in a much more or better position than some of our peers, because we didn't blindly ship to backlog while trying to figure out what is real, what is not.
Yeah.
We pegged it to LTSAs. The decision we made also over the last few quarters when we were talking, you know, Thad and I talking about the structurally, how are we gonna get ready for the uncertainty in the, in call it, the next coming quarters, whether it's two, three, four, whatever the number is, we had a choice of, okay, do we bring lead times in and get utilization up? We thought it would be way more cautious and much better set up for whenever the recovery happens, to actually take utilization down and keep lead times where they are, because there's no business value of bringing lead times in, given that most of our business is under LTSA. We're getting that visibility.
Yeah.
Lead time is an artificial number at this point, because customers are booking to what they need. So we're more proactive about not focusing on, you know, building inventory and do that for the lead time, rather than structurally getting us set up for whenever the recovery happens.
Yeah.
Like Thad said, all that turns into tailwind.
Mm-hmm. Actually, two, two questions on that. Number 1, on the utilization rate: so whenever the utilization rates go back up, what would be your, your gross margin? Especially, you know, by then, I would assume that silicon carbide is back to, like, corporate average at least, or a little bit better. What would the, what would the overall gross margins look like when you guys are back to, say, 85%-90%?
Yeah. So, so a couple things. So silicon carbide will exit this year at corporate average for silicon carbide.
Yeah.
So that dilutive impact peaks here in Q3. When you think about utilization, we've got a couple things going on. So it's not just utilization, it's what we call Fab Right. So we went through the last two years doing Fab Liter, divesting those four fabs, shrinking the footprint, bringing on the East Fishkill fab for capacity, and now it's a matter of getting the mix right-
Yeah
... across the network, finding the optimal structure, driving capacity by actually doing that at the same time. But rough rule of thumb, and it depends, obviously, what ramps, right? So it's, it's hard to give an exact number, but if it was like for like, you know, similar mix, every point of utilization is about 15 basis points of margin improvement.
One in five?
Yeah.
Yeah. Okay, great. And then on the lead time comment you made earlier, Hassan, can you give us a sense of, you know, where lead times, where and when your lead times peaked, and where they are right now, and how you see that going forward over the next year or so, or six months, or whatever time horizon you wanna provide?
Where the obviously average lead time peak mid- to high 40s, right?
Yeah, I mean, we're still about there.
Yeah. Yeah.
I'm sorry, what was that again?
We're about high 40s.
High 40s?
We're still-
That's average, right?
Yeah.
Yeah.
Yeah, yeah, average.... we're still about there, you know, maybe a few weeks off. You know, there's some areas where we did bring it in, but to a first order, we're still at that level.
Yeah, and you said you're gonna try and keep them there as long as possible? Is that-
Until we see consistent sign of recovery. Yeah.
Okay. And then what would be your ideal lead time? Not the customer, 'cause they want it tomorrow, but what would be the, the ON ideal lead time?
It depends on the business. It depends on the product type.
Mm-hmm.
So we have targets by every product type and every product technology. Not to get into the weeds, because if we have one customer, one product, that's gonna be built to order-
Yeah
... longer lead time. If we have, you know, a broad range of customers, it's gonna be shorter because we can kind of repurpose it.
Mm-hmm.
That's the level we go to when we're architecting our lead time, where we wanna land.
Yep. Yep.
So strategically, we have those targets. We're just not... There's no reason to get there yet.
Okay. And, is the shortage situation fixed? So is everything within, like, some sort of band around that 40-something weeks, or would you say that you still have some, like, shortages out there in terms of-
We have some that, you know, technology based, there are some that are still constrained, where even now with demand where it is, we're still not able to support.
Mm-hmm.
Of course, you know, that we have capacity coming online as we convert from, you know, the businesses that we exited.
Mm.
That takes time.
Yeah.
But there are some technologies, if a customer comes in today and says, "You know, I need 10% more," there's not 10% more.
Yep. Yep.
We're able to support the demand we have now. It's just upside.
Yep.
You know, like silicon carbide, for example, we've always said we're building two LTSAs.
Mm-hmm.
We're not overbuilding capacity and hoping to fill it, because that never works. You always fill it-
Yeah
... you may not just not like how you fill it. So we're signing LTSAs, and then we go build capacity, and that is the cadence we're going through.
Great. One more thing on the lead times. So we've had some of your competitors here, and they've talked about, "Oh, yeah, we brought lead times down. You know, our orders fell off. We brought lead times down." Is there any fear or concern, Hassan, that, you know, if you're going to a customer right now and saying, "Hey, we can get you that product in whatever, 42 weeks," then you have Company X that says they can get them that product in 20 weeks, would that be a competitive disadvantage? Do you ever run into that at all?
No. So two things. One is, the products are not fungible. The, you know, the fungible product where I can get it from you or from A or B, where they don't care whose logo's on it, that's the stuff we've been exiting.
Yeah.
That's fine. If they can get it somewhere else or they can get it cheaper, knock yourself out.
Yeah. You don't want that product.
I don't want that product anyway because there's no differentiation, back to my point on we focus on value. So that's the primary driver. Number two is, it's not about lead time. You know, our customers have five-year LTSAs. We know what they want. They know what they need from us over the next five years. Whether my lead time is 13 weeks or 40 weeks, I know what they want for five years.
Yeah.
So that's what we build to. It's not about when it hits the backlog, you know, we start scrambling-
Mm
... to build. It is that long-term visibility, and that's the value of the LTSAs that we have.
Yep. And, in terms of the LTSAs, how do you feel about your, backlog coverage for 2024 in terms of LTSAs, and is there an ideal number? Do you want, you know, 80%, 90%, 110%? What, what's the-
Yeah, right now we're about on a 12-month period, we're about 75.
Yeah, 75%-80%.
Yeah.
Yeah.
So-
Plus NCNR orders on top of that.
Plus NCNR.
Yeah.
So we're pretty well covered. And that's where we want it, 'cause you always want the flexibility, right? You don't wanna tie everything because, you know, in the case a customer does come in and wants, you know, 3%, 4% because they're seeing strength, you don't wanna be the bottleneck-
Yeah, exactly
... and say, "Sorry, I tied it up elsewhere." So we have... It gives us that flexibility, so we're comfortable with the coverage where we are.
Okay. Yeah, if you guys are the bottleneck in autos, you don't, you don't get a call from Mary Barra, you get a call from Joe Biden. That's not good. Provided he could speak. So on pricing, has the LTSAs, you know, provided you a nice sort of pricing blanket for next year? And if you could compare, you know, on average, what pricing has done for ON this year in terms of how much it's increased, and would you expect the same sort of increase next year? Will that ease a little bit, or could it be higher?
So there's no increase. All the benefit that... Think about it, 2022 even and 2023, there's no pricing, quote, unquote, "pricing benefit" 'cause it's all in the baseline already from prior to that period.
Got it.
Everything here is all new product, operational excellence, self-help, gross margin, thousands of line item-
Yep
... is all our execution internally on getting more out of our footprint. You know, back what Thad mentioned, the Fab from a manufacturing site, Fab Right to Fab... or Fab Liter to Fab Right. Any additional wafer we get out of each one of these fabs, all cost structure drops for all wafers-
Yeah
... 'cause you got one more wafer out. That's the focus that we've had. So pricing is not a factor. Mix will be, because as we've always talked, all new products are at or above our target margin.
Mm-hmm.
So as those products go to revenue and become a more material portion of that revenue-
Yeah
... of course, ASPs are gonna be better and margin's gonna be better, but it's not apples to apples price increase that's helping us. That goes back to why we always focus on why our results are sustainable, 'cause it's been two years of that self-execution-
Yep.
and the sustainability of the results, even in a, in a softer market.
Okay. One of your illustrious competitors was here, maybe speaking with a German accent, talked about some expedite fees that had really helped them, and have now gone away. Do you guys... Any expedite fees for, for-
Sorry, I'm laughing 'cause somebody brought up-
That's my goal, is to crack you guys up a little bit-
Somebody brought it up-
At the beginning of the day.
... earlier in the day. I was like, "I'm sorry, I never, you know, I never counted on expedite fees to hit the margin target.
Yeah.
Because we've always said, you know, we're gonna-
It's funny how they never mentioned that before they went away.
So, it's a little bit funny, but, you know, we've said... We did have expedite fees, by the way, but we've always said, and we've been very transparent about, we're passing the costs on to our-
Yeah
To customers. So if we're not getting an expedite fee, there's nothing to pass on to customer. So it wasn't a margin... It was margin neutral for us. We did it just because, look, those are real, we got an expedite. The customer had a choice.
Yep.
Do you really want it tomorrow, or can it wait for five days, and we ship it USPS?" You know, whatever. That's the conversation we had with the customer, so it was a customer choice.
Yeah.
We never forced it because we were trying to hit a target model. So it's like nothing changed today-
Yeah, not germane to the ON situation.
Um, yeah.
I'll take that.
It's got no impact.
Sure. So, one question on the long-term contracts, how ironclad are those? I mean, I would imagine that in the part of your business, like industrial, that had somewhat of a correction, there might have been some renegotiations going on there. Are these, you know, tough noogies, guys, you said you were gonna take the product, this is how much product you're gonna take? Is it, "Okay, well, you know, you don't have to take as much product, but we'll charge you, you know, some sort of cancellation fee," or something like that? Or how does it work?
Yeah. So look, if you, if you rewind even the last year, year and a half, and people always ask the question about, "Well, really, you're gonna go after your customer if they wanna get out of it," and so on. And I've always said one thing very consistently, "If I get one thing from the LTSA, I'm gonna get a phone call as soon as the customer sees softness." That's it. I want a phone call because that's the conversation I wanna have. Historically, backlog disappeared 30 days before I ship it-
Yeah
... and you're left holding the bag. So the LTSAs, you know, somebody's gonna get the bat phone and call and say, "We got a problem. Six months, nine months from now, let's have a conversation." So we'll have the conversation, but it has to be a win-win. What does that look like? Look, if demand is down, it doesn't really help us, maybe in the short term, but it doesn't help the company in saying, "Well, you gotta take it. I don't care. Put the inventory on your shelf.
Mm.
It doesn't help anybody to have inventory at the customer if demand is not there. So we'll have the conversation about, "Okay, well, we know we have 50% share on this product. Can we increase the share, you know, offset the gap?" And so on and so forth. So we have those conversations. From a company perspective, we would rather ship product any day than have, you know, fees and... Because those are one-time benefits.
Yeah.
I really don't care for-
Yep
... them, right? I like the sustainability of it, which is, "Okay, let's talk about revenue, let's talk about share gains. Hey, maybe we extend the LTSA, and you bolt on more. Here, let's put more products that you maybe are not buying from us, but we can qualify because we have a new product.
Yeah.
All of these are win-win. Now, if the customer is not interested in a win-win but a win-lose, that's where it's ironclad.
Yeah.
It's a legally binding agreement that both parties, in a win-win, will renegotiate an amendment. Net of that, we're not gonna be left holding the bag.
Yeah.
And so far, I will tell you, conversations with the customer have been very, very productive.
Great.
Yeah, and the one thing I would add is pricing is locked-
Yeah
... right? So it's not a pricing discussion. It can be a quantity discussion-
Mm-hmm
... just if demand is changing.
Yeah.
But it's not a pricing discussion.
Yeah.
You know, even over the last couple of years, we couldn't even keep up with LTSAs, so we couldn't commit to the full volume that that customer wanted. So in some cases, we've been under-shipping demand as well.
Yeah.
But pricing's locked, and, you know, these things, on average, are 4 or 5 years, and we've got them going out 10 years. That's good visibility on pricing.
Yeah, and to your point, it's not all the conversations are not all negative because, you know, there are customers where we didn't have enough, so we were shipping 70% of what they really wanted. So now they're coming back and saying, "Okay, can you at least go to 80%?" So some of them are net positive. They want more because we haven't signed up for more, because we couldn't really... When we have supply assurance in the LTSA, I'm not gonna sign up for something I can't deliver to. Well, now they're coming in. Or other customers that we didn't have capacity to even give an LTSA to, they've been looking at it from the outside. They're in now and saying, "Okay, I want an LTSA for the next, you know, five years.
Yeah.
Whether the product is constrained or not, they see it as a competitive advantage and a benefit for them.
Yeah.
You know, last quarter, we added $4 billion in LTSAs. You would say, "Okay, that's all net, like, incremental." So that tells you that customers now see the value as a tool versus as a protection.
Yeah. Great. So let's, let's talk about happier times, if they could get any happier for you guys, silicon carbide. I have to ask the obligatory, you know, how are things standing on the, you know, billion-dollar revs for the year, and the gross margin goals? I think you, you answered part of that earlier. It's funny, you know, Parag and I, commiserate every quarter. You guys have a, an illustrious competitor in silicon carbide. They blow up every quarter. I don't wanna mention their name, it rhymes with bullweed. But, you know, our phone lines light up. We spend three days saying it's not gonna hit on, and then you guys have a good number, and it gradually goes away, but it's like, it's like clockwork.
So just wanna ask you, still on track for the revenue-
Yeah
... margin targets?
Everything is, you know, when it comes down to operational. I can tell you that's. I control operation and execution every day. I can't do anything about the market-
Yeah, yeah.
I know that we'll have to navigate it, but when it comes to our team's execution, our team is executing greatly, and I appreciate every day they come in and deliver the results that we have, including on silicon carbide. You know, last two quarters, we talked about how silicon carbide is actually ahead of where our own targets were.
Yep.
Look, haters can hate, that's fine.
What sort of-
Results don't lie.
Yeah. What sort of, you know, growth rate or margin ramp could we expect for the next, you know, year or two, beyond the short term?
For
silicon carbide.
Yeah. So what we talked about last quarter, you know, we said silicon carbide margins doubled, and we delivered, you know, high teens operating income.
Yeah.
Now, of course, the reason we delivered both, 'cause you can say, the haters can say, "Well, you doubled from 1%-2%." Well, okay, but when you give the operating income-
Yeah
... it's not 1%-2%, it's actually meaningful. We're still on track to exit the year, with the dilutive impact, you know, at the corporate average-
Yep
... for silicon carbide, so, you know, progressing very well. That's been our target since we started this journey-
Yep
... and we're on target. The other target we will also on track to meet is majority of our substrates will also be internal.
Mm.
That's also a testament to our execution with our GTAT acquisition, that there's a lot of, you know, negativity around, but we've proven that we're executing very well to that, and that's on track to deliver a majority of our, of our substrates. And that will, you know, because we're adding more capacity, you're gonna see that margin kind of stay with the corporate, average. But then as we get the scale and we get that absorption from the capacity side for silicon carbide specifically, you're gonna see that business at or ahead our, our target.
What sort of revenue growth should we-
Yeah
... be looking at? Will you guys grow sort of market average, better than the market after this year?
Yeah, so our focus for silicon carbide, you know, if you expect the market to grow by, you know, 30%-35%, we expect to be about 2x the market.
Wow, I'll take that.
So that's, that's the growth we see over the, you know, next five years. Obviously the trajectory is not, you know, straight line because you have ramps.
Yeah.
It's a new product ramp, just like anything else.
Mm.
It's always, as you add more and more customers and as you ramp LTSAs. We have the LTSA secured for that performance, so it's a bottoms-up performance.
Yep.
Right now, it's in execution mode.
Can you talk about the competitive environment? We had your two biggest competitors here earlier in the week present, and then it seems like, you know, every other month, China's got some, you know, silicon carbide startup. It's like Whack-A-Mole or something like that popping up. They're nowhere near commercial viability, but I'm sure you get this question all the time.
Yeah, yeah. Look, so I don't look at... As a company, we don't look at China any different than we look at, you know, European competitors or North American competitors. We look at the competitive landscape with the, exactly that, the competitive landscape, no matter what regions they're from.
Mm.
Every region's got a different dynamic. We need to be able to win against all of them.
Yeah.
And the only common denominator to win against all competitive threats is technology. As long as we have the best technology and we execute like we have been on that technology, we're gonna win. I guess the proof is the LTSAs that we've had.
Yeah.
You know, we have $11 billion of LTSAs on silicon carbide, and that's what we're gonna be delivering to. So you don't hear me talk about funnel and pipeline and, you know, all of that.
Yep.
It's literally contractual agreements that we have with our customers to do just that.
Great. Two quick questions on gross margin for Thad-
Yeah
... 'cause I know we're running out of time. So you guys are increasing the CapEx. I would imagine that's going to increase depreciation. Thad, when do we think depreciation peaks, and is that gonna be much of a headwind to gross margin over the next, you know, two, three years?
No, you know, the way we look at this is we're building the capacity to support the LTSAs, right?
Yeah.
So it's not like we're not gonna have revenue associated with that. So if you look at our depreciation today, it's, you know, 5%-6% of revenue. As we go forward, we project that to stay basically in that same range, even as we're adding capacity. So we're gonna... Our capacity or CapEx is gonna be, you know, high teens this year and next year. And then it starts to taper down to 10%-11% over the next four years. And that's, at the same time, we're bringing on additional capacity, even at that time, because we go to 8-inch on silicon carbide-
Yeah
... which is a capital-efficient move for us because most of the equipment is retrofittable.
Yep.
So, but no. Short answer, about the same percentage of where we are today.
Then, last question on East Fishkill, the latest diamond in the rough you guys are buying and polishing. Give us a sense on how things are progressing there and what the margin ramp should look like.
Yeah, look, we've got a 250 basis points headwind that's in the numbers right now.
Yep.
The cost structure in that fab is much higher than we anticipated. It's blocking and tackling. We know exactly what we have to do. We have a whole fab network. We know how to benchmark material cost, you know, cycle times, everything. So we've just got to go work on that. The challenge is, the fab is fully loaded today, so it's hard to go take cost out when a fab is fully loaded.
Mm.
You have to be really careful that you don't break the fab. So we think by the time we exit 2024, we'll have that dilutive impact back under control and back at the corporate average.
Great. With that, we're out of time. Thanks, everyone. Thanks, guys.
Thank you.
Thank you.
Appreciate it.