ON Semiconductor Corporation (NASDAQ:ON) Q2 2024 Earnings Conference Call July 29, 2024 9:00 AM ET

Company Participants

Parag Agarwal - VP, IR and Corporate Development
Hassane El-Khoury - President and CEO
Thad Trent - CFO

Conference Call Participants

Ross Seymore - Deutsche Bank
Vivek Arya - Bank of America Securities
Toshiya Hari - Goldman Sachs
Vijay Rakesh - Mizuho
Blayne Curtis - Jefferies
Joshua Buchalter - TD Cowen
Quinn Bolton - Needham
Chris Danely - Citi
Christopher Rolland - Susquehanna
Harlan Sur - JPMorgan
Tristan Gerra - Baird
Harsh Kumar - Piper Sandler

Operator

Good day, and thank you for standing by. Welcome to the onsemi Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Parag Agarwal. Please go ahead.

Parag Agarwal

Thank you, Kevin. Good morning, and thank you for joining onsemi's second quarter 2024 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 2024 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. Additional information is posted on the Investor Relations section of our website.

Our earnings release and this presentation includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to most directly comparable GAAP financial measures and a discussion of certain limitations when using non-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 will make projections or other forward-looking statements regarding future events or the 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 materially from our forward-looking statements are described in our most recent Form 10-K, Form 10-Qs, and other filings with the Securities and Exchange Commission and in our earnings release for the second quarter of 2024. Our estimates or other forward-looking statements might change and the company assumes no obligation to update forward-looking statements to reflect the actual results, change assumptions, or other events that may occur, except as required by law.

Now, let me turn it over to Hassane. Hassane?

Hassane El-Khoury

Thank you, Parag. Good morning, and thanks to everyone for joining us on the call. In the second quarter, we exceeded the midpoint of our guidance for revenue, non-GAAP gross margin, and non-GAAP earnings per share as our global teams continue to execute on all fronts. As we indicated in our Q1 call, we are seeing some stabilization in demand in our core markets. Inventory digestion persists with some pockets improving as customers maintain a cautious stance in 2024.

We don't see a change to the L-shaped curve I talked about in Q1, but we expect parts of industrial, such as Energy Infrastructure to recover in the second half. Among the regions, Asia-Pacific, namely China is recovering, driven by both automotive and industrial. During this time of market uncertainty, we have not taken our foot off the pedal and remain focused on what we can control our execution. We have doubled down on our investments to build out our strategic portfolio of Analog and Mixed-Signal and Power Solutions. We have been gaining share by securing significant design wins in power, and we have continued to improve our cost structure through ongoing structural changes. All these efforts position us very well in a recovery with top-line growth and gross margin expansion.

Our advantage remains in our comprehensive and innovative product portfolio to capture market opportunities. onsemi's intelligent power and sensing solutions have become synonymous with high efficiency and performance, which are critical to solving customer problems and the high-growth megatrends in automotive, industrial, and AI data centers.

In Intelligent Sensing, we continue to invest to sustain our technology and market leadership. We announced the acquisition of SWIR Vision Systems to add disruptive, colloidal quantum-based-dot-based short wavelength infrared technology to our portfolio to further strengthen our industrial and defense product offering. We will leverage our manufacturing and R&D expertise to accelerate the commercialization of this technology with cost-effective and differentiated products for industrial and defense applications.

On the Analog and Mixed-Signal product development, in addition to sampling our first products, we are now proliferating a broader range of product families from high-performance analog with integrated power and automotive to a low-power sensing interface in medical. This broad range of applications and products we can already offer to our lead customers highlight the competitiveness of this new technology platform. We are excited to share more detail about our Analog and Mixed-Signal product and technology roadmap later this year.

We continue building on our design-win momentum and last week, we announced that Volkswagen Group has selected onsemi to be the primary supplier of a complete powerbox solution as part of its next-generation traction inverter for its Scalable System Platform, SSP. The first-of-a-kind solution features silicon carbide-based technologies in an integrated module that can scale across all power levels from high-power to low-power traction inverters to be compatible for all vehicle categories. VW Group is the second-largest automotive OEM in the world and we expect that all VW brands, including Volkswagen, Audi, Porsche, Skoda will be powered by onsemi's silicon carbide in their next-generation platforms.

To best support VW Group and our global customer base, we have also announced a multi-year investment in the Czech Republic for a vertically integrated silicon carbide manufacturing facility. This strategic expansion provided the European Commission approves the incentive measure would enable us to meet the rising demand for our silicon carbide modules and other power semiconductors by bringing front-end manufacturing and advanced packaging capabilities to Europe.

As customers place an increasing importance on geopolitical risks to their supply chain, they value the resilience we have built into our manufacturing footprint through our Fab Right strategy. Our collaboration with the Czech government on this state-of-the-art facility aims not only to support our European customers, but also positions onsemi as a central piece of the European power ecosystem, further enhancing our supply resilient strategy.

Additionally, onsemi is a silicon carbide market-share leader in China and we are designed into nearly 60% of the BEV models from OEMs who are primarily introducing their 800-volt platforms at the Beijing International Auto Exhibition last quarter. China is the largest and fastest-growing BEV market in the world and Chinese OEMs are adopting onsemi silicon carbide solutions based on the market-leading efficiency of our modules and devices like the M3e we've just announced.

In automotive, silicon carbide will continue to outgrow the industry for many years as EVs are adopted, but also as the penetration rate in EVs increases. The latest research reports show that 22% of EVs in production are enabled with SiC, excluding the market leader, only 6% of the EVs worldwide include SiC, but all OEMs are driving adoption to improve range and cost of the vehicles.

Our success with SiC in automotive extends to the industrial market with demand expanding beyond energy infrastructure with emerging mass market applications, such as commercial heating, ventilation and air-conditioning. The use of 1,200-volt silicon carbide and HVAC applications leads to more efficient, reliable, and compact systems, ultimately reducing energy consumption, improving electromagnetic interference and operational costs. We are already working with customers looking to integrate silicon carbide into their next-generation designs with revenue over the next three to five years.

We remain on track to outgrow the silicon carbide market growth by 2x in 2024 through share gain and our geographical and market diversification strategy. Specifically on the share gains and supporting our revenue growth, our bottoms-up assessment has our growth in units outgrowing the BEV unit growth by 2x, further supporting our outlook. We also have a significant opportunity in the data center and AI market where our focus is on leveraging our silicon and silicon carbide portfolio to address the entire Power Tree.

In Q2, we released our latest generation of T10 PowerTrench family and EliteSiC 650-volt MOSFET that are being designed into various subsystems of the AI data center, including power supply units, battery backup units, and intermediate bus converters. These solutions offer superior efficiency, high thermal performance, and reduce power losses, making them ideal for data centers and energy storage systems. They can reduce energy consumption by 10 terawatt hour annually as compared to our previous generation, equivalent to powering nearly 1 million homes per year. We continue to invest in multi-phase controllers to pair with our industry-leading smart power stages, which enable highly efficient power delivery to the CPUs and GPUs.

As power consumed by AI data center racks increases from 40 kilowatts today to 120 kilowatts in 2025, our addressable content is expected to increase from $2,500 to $9,500. Our strategy to focus on the high-growth megatrends of automotive and industrial by partnering and innovating with the market leaders and disruptors has proven successful. We have been investing in power and sensing technologies to further our leadership position, and we will continue to leverage our portfolio to address adjacent market opportunities such as AI and data centers.

Let me now turn it over to Thad to give you more details on our results.

Thad Trent

Thanks, Hassane. In the second quarter, our teams once again demonstrated remarkable resilience and adaptability in navigating a challenging market environment. Our Q2 results exceeded the midpoint of our guidance with revenue of $1.74 billion, non-GAAP gross margin of 45.3%, non-GAAP operating margin of 27.5%, and 12% free cash flow margin.

We continue to deliver consistent gross margin performance against a challenging market and underutilization, once again demonstrating the structural improvements in our business model. Q2 revenue declined 7% sequentially and 17% from Q2 of 2023. This decline was driven by an ongoing inventory correction in the automotive and industrial end markets, which together contributed 79% of our revenue. While we are facing short-term demand uncertainty, our long-term outlook remains unchanged.

We are at the forefront of the fastest-growing segments of the automotive, industrial, and AI data center markets and we expect to resume our growth trajectory as end-customer inventory levels normalize. In line with our expectations, automotive revenue declined 11% quarter-over-quarter to $907 million, a decline of 15% over the same quarter last year.

From the time we embarked on our transformation in Q4, 2020, which included a strategic shift to focus on automotive, our automotive revenue has nearly doubled, largely driven by increasing content for vehicle electrification and ADAS. Our industrial revenue was $468 million, down 2% sequentially and 23% versus the second quarter of 2023. As we noted in our Q1 call, we are seeing pockets of stabilization in this market.

Looking at the split between the business units, revenue for the Power Solutions Group, or PSG was $835 million, a decrease of 15% year-over-year. Revenue for the Analog and Mixed-Signal Group or AMG was $648 million, a decrease of 18% year-over-year. And revenue for the Intelligent Sensing Group or ISG was $252 million, a 22% decrease year-over-year.

The revenue drop for all business groups was driven by ongoing inventory burn in the Automotive and Industrial market. GAAP gross margin was 45.2% and non-GAAP gross margin was 45.3% compared to 45.9% in Q1 and 47.4% in the quarter a year ago. We continue to maintain gross margins above 45% through this downturn, even as our utilization has reached a historical trough of 65%, which positions us well for a market recovery.

For reference in previous downturns, our gross margin was approximately 30% at these utilization levels. We continue to deliver on our Fab Right strategy of driving efficiency across our global operations. In Q2, we executed additional restructuring actions to improve the cost structure of our manufacturing network to support our gross margin expansion plans.

We expect our gross margins to benefit once demand begins to recover and we increase utilization back to normalized levels. This coupled with ramping of new products at accretive margins will allow us to achieve our long-term target of 53%. Now let me give you some additional numbers for your models. GAAP operating expenses for the second quarter were $396 million as compared to $319 million in the second quarter of 2023.

Non-GAAP operating expenses were $308 million as compared to $306 million in the quarter a year ago. Non-GAAP operating expenses were lower than our guidance due to active cost control and lower variable compensation. GAAP operating margin for the quarter was 22.4% and non-GAAP operating margin was 27.5%.

Our GAAP tax rate was 15.8% and non-GAAP tax rate was 16%. Diluted GAAP earnings per share for the second quarter was $0.78 as compared to $1.29 in the quarter a year ago. Non-GAAP earnings per share was $0.96 as compared to $1.33 in Q2 of 2023. GAAP-diluted share count was 433 million shares and our non-GAAP diluted share count was 429.5 million shares. In Q2, we deployed $150 million, or 72% of our free cash flow for share repurchases.

Turning to the balance sheet. Cash and short-term investments was $2.7 billion and we had $1.1 billion undrawn on our revolver. Cash from operations was $362 million and free cash flow was $208 million, representing 12% of revenue. Capital expenditures during Q2 was $154 million, which equates to a capital intensity of 9%.

We achieved our long-term target ahead of schedule due to higher efficiency resulting from the structural changes in our manufacturing footprint. We expect to remain at or below our long-term target of 11%, including the investments needed for the silicon carbide expansion in the Czech Republic.

Inventory increased by $78 million sequentially and increased by 20 days to 214 days. This includes 97 days of bridge inventory to support fab transitions in the silicon carbide ramp. Excluding these strategic builds, our base inventory increased $6 million sequentially to 117 days, which is within our target range of 100 to 120 days. Distribution inventory increased as expected to 8.9 weeks versus 8 weeks in Q1 to support the mass market, which we have underserved for the last two years.

Let me now provide you the key elements of our non-GAAP guidance for the third quarter. Today's press release contains a table detailing our GAAP and non-GAAP guidance. Given the current macro-environment and our demand visibility, we anticipate Q3 revenue will be in the range of $1.7 billion to $1.8 billion. We expect non-GAAP gross margin to be between 44.4% and 46.4% with utilization in the mid-60% range. This includes estimated share-based compensation of $7 million.

We expect non-GAAP operating expenses of $305 million to $320 million, including estimated share-based compensation of $31 million. We anticipate our non-GAAP other income to be a net benefit of $12 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP diluted share count is expected to be approximately 429 million shares. This results in non-GAAP earnings per share to be in the range of $0.91 to $1.03.

We expect capital expenditures in the range of $130 million to $170 million. And as we've previously highlighted, the acquisition of SWIR Vision Systems is not expected to have any meaningful impact on our near or mid-term financial outlook. Through this downturn, we have remained committed to our long-term financial model. We are allocating resources for future growth while continuing to execute on our strategies to enhance operational effectiveness throughout the company.

During the second quarter, we announced the consolidation of many of our facilities to improve efficiencies and accelerate time-to-market by centralizing our efforts into fewer centers of excellence. We have continued to invest in R&D to drive long-term growth and capitalize on opportunities in Intelligent Power and Sensing despite the market downturn.

We also remain committed to our capital allocation strategy. Over the last 12 months, we have deployed 78% of our free cash flow for share repurchases, significantly higher than our stated long-term target of returning 50%. Since initiating our $3 billion share repurchase program in February 2023, we have returned $814 million to our shareholders.

Finally, at, onsemi we are driven to excellence. Guided by this principle, we hold ourselves accountable not only to our financial commitment but also to our environmental initiatives. This past quarter, we published our 2023 Sustainability Report, marking another pivotal step in our ongoing commitment to sustainability and highlighting the progress we have made in the past year.

Wrapping up, I'd like to thank our employees for their dedication to excellence. Our strategy is working and we remain committed to unlocking shareholder value. We are a more resilient company with steady growth drivers, an innovation pipeline, and trusted relationships with our customers and suppliers around the world.

With that, I'll turn the call back over to Kevin to open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Ross Seymore

Hi, guys. Thanks for letting me ask a question. I guess for my first question, kind of two sneaky parts to it. But any pluses or minuses by your three segments for the third quarter guide? And then the bigger part is, Hassane, you talked about some stabilization on the Industrial side and even Energy Infrastructure potentially rising in the back half. Any sort of similar color on your Automotive business that dropped pretty significantly sequentially? You talked about some design wins in EVs, et cetera. How are you looking at that for the back half of the year?

Thad Trent

Yeah, Ross, it's Thad. To answer your first part of the question, you broke up a little bit, but I think I got it. The end markets played out pretty consistent with what we expected going into the quarter. We are expecting both automotive and industrial to be down. It played out that way. If we saw any signs of improvement, it was really in that industrials, we continue to see some stabilization there. So really played out as we expected during our guide for the quarter.

Ross Seymore

Yeah. And I guess for my follow-up question, then moving on to the gross margin side of things, Thad. You talked about some of the idiosyncratic drivers, the East Fishkill side of things as well as the fab divestitures in the past. Can you just walk us through any evolution of those? We get the utilization rate when that goes up, that's going to be beneficial. You laid that out clearly. But the 100 basis points from East Fishkill, that's a headwind this year, and then the fab divestitures, which I think is about a two-point tailwind when those kick in. Can you just walk us through how those unfold over the next kind of 6 months to 12 months?

Thad Trent

Sure, sure. So starting with utilization, which is the key driver here in the short-term, just to reiterate what we've said in the past, every point of utilization is 15 basis points to 20 basis points of gross margin improvement. So as you think about us coming off of a low of 65% going back into normalized levels, you can do the math on the gross margin expansion on that.

And you're right, East Fishkill with the global foundry business that we're running in there is about 100 basis points dilutive. We'll continue that through the rest of this year. And then we'll start to see that start to moderate in 2025. And then the other piece is the fab divestitures. We divested four fabs in a couple of years ago, and it's $160 million of fixed-cost that we'll start to recognize as demand picks up and we start manufacturing those products within our existing network. So we've got to bleed through that inventory that we've been building for those fab transitions. And as we move that into our network, we start to see that benefit.

And then the last thing is, and I noted it in my prepared remarks is the ramping of new products that accretive gross margins. And I think if you start to do that math, you can start to get pretty close into our gross margin target. The long-term target mean 53%. So we feel good. We just need a market recovery here and we have some nice tailwinds.

Ross Seymore

Thank you.

Operator

[Operator Instructions] Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.

Vivek Arya

Thanks for taking my question. I wanted to revisit the Q3 outlook question. I think at the midpoint, you're guiding is up a bit sequentially and I was hoping you could, Hassane maybe give us a sense of how you see your different end markets, especially automotive, do you expect that to be up, down, flat sequentially? Thank you.

Hassane El-Khoury

Yes. I mean, Vivek, if you look at our biggest market 79% of revenue this quarter to auto and industrial, we expect those in the third quarter to be flat-to-up slightly.

Vivek Arya

Okay. And then maybe as a follow-up, over the last few months, we have seen deceleration in battery-powered EV demand. And I'm curious if you look at your silicon carbide outlook for this year in absolute dollars or not versus the market. How do you think it has fared? Do you think -- what you thought in terms of absolute dollars for this year? Is it still on track for that or has that view changed? And then kind of B of that, I think you mentioned more optimism for the China EV market. Is your share in China EV above or below that 35% to 40% share that you think you will have globally for this year?

Hassane El-Khoury

So let me break it -- break it down. So for the silicon carbide market, I think, like you said, regionally from a BEV market, it's very different regionally. The comment and the reports that you're seeing more Western than China. But overall, we do expect the BEV market to remain healthy with a little lumpiness in the short term. But long term, we're still -- the penetration of BEV and the penetration of silicon carbide within BEV is still call it, mid-single-digit without the market leader. So having said that, I will anchor back on 2024 growth of 2x market. I'm not going to get into the absolute dollars. We have the absolute dollars that we're driving to internally. But I will anchor on the 2x market given all of the news and all the headlines that you referred to. From the China perspective, I talked about our penetration in China being over 60 -- about 60%. So in China, we're ahead of where we are with the rest of the world or overall, but that's also a timing, meaning we started in China given it's the biggest market ahead of everybody else.

If you recall, at the end of last year, I mentioned that in 2024, we do expect the ramps to start in Europe. So as the ramps start in Europe, the blend of geographical distribution of our revenue for silicon carbide will change in the second half. But overall, China is ahead of the rest of the world from our market share as well just because it's the biggest market and we started there earlier.

Vivek Arya

Thank you, Hassane.

Operator

[Operator Instructions] Our next question comes from Toshiya Hari with GS. Your line is open.

Toshiya Hari

Hi, good morning. Thank you so much for taking the question. I wanted to follow up on the SiC business as well. To the extent you're willing to share Hassane, curious how that business trended in Q2, whether it be on a sequential basis or a year-over-year basis? And what your expectations are for Q3? And then I guess for the full year, I'm guessing that the mix of your business, whether it be by application or customer has evolved over the past 90 days. Yeah, what's your outlook there by geo and application today versus 90 days ago?

Hassane El-Khoury

So, I'm not going to break out our silicon carbide on a quarterly basis given what we've been talking about the lumpiness of the revenue. That -- and really the timing of customer ramps when they start, when they peak, and when they stabilize. For that, we're only going to be covering silicon carbide revenue on an annual basis and we'll talk about it at the end of the year of where it all landed. What I will tell you is we -- externally, what I stated is the 2x market, that's where we look at. That's where we're trending.

And I added in my prepared remarks, when I look at units growth, which is a lot of it is socket of designed and share, we're also trending at the 2x further supporting our growth in silicon carbide. From a regional, we talked about China being strong for us. Europe in the second half will start seeing some ramps in Europe. That's again in line with what we talked about at the end of last year. So all that is coming in exactly as we expected. And we continue to diversify our design in with the announcement with VW Group. That's, of course, out longer in time, but still adding to the geographical distribution of our revenue over time.

Toshiya Hari

Got it. Thank you. And then as a quick follow-up, just on distribution inventory, it went up a little bit sequentially at the end of June. Curious what's embedded or what's assumed in your Q3 guidance? And as you think about the next couple of quarters, several quarters, what's your plan in terms of managing that inventory? You sound relatively still muted as it pertains to the cycle. You know, should we expect weeks to stay generally flat, or do you feel like that can go up just given how much you had underserviced that business over the past couple of years? Thank you.

Thad Trent

Yes, Toshiya, it's Thad. So we exited the quarter at 8.9 weeks, just where we expected. We talked about that mass market you referred to that we need to put inventory into the channel. So we're achieving that well. We're managing it tight still given the market uncertainty. But for Q3, I think it's going to be right in this range, let's call it, 9 weeks. And I really think through the remainder of this year and probably into next year, you're kind of looking at that type of range, 9 weeks plus or minus. We'll see how the market recovers and the adoption of the mass market. But that's our plan for the short term here.

Toshiya Hari

Very helpful. Thanks, guys.

Operator

[Operator Instructions] Our next question comes from Vijay Rakesh with Mizuho. Your line is open.

Vijay Rakesh

Yes. Hi. Just a quick question on the -- in the prior quarters, you've given your order of backlog. If you could give us some thoughts, color on what the semi -- silicon carbide backlog looks like. Thanks.

Thad Trent

The silicon carbide backlog, you know, look, we announced a few things here over the last few quarters, right. I mean that backlog is healthy, right. There's some short-term softness as it's well-known in the EV market, but I would say the backlog is still very healthy.

Hassane El-Khoury

Yes, if you look at design-in activity, whatever we feel in the market in the short term, and I call it short-term, given the trend for silicon carbide, not just in BEV, by the way, we talk about silicon carbide in industrial, proliferating further because of the benefit that it brings and even silicon carbide making its way into the power stages of the AI data center. So when we talk about silicon carbide, we're talking about a long-term multi-year megatrend. That's why we're participating in it. So in the short term, of course, we all see what the market shows. But nevertheless, customers are still investing in silicon carbide for their platforms, whether it be a car, industrial, or AI data center, as I mentioned.

This is what we can control is our design and capability on our new products, which means that as the market starts to go uptick the other way and BEV starts to proliferate further, we are in a much better position than otherwise we would be if we weren't winning today. The VW Group announcement is an example of such a large deployment of silicon carbide in a electrification platform. So if you talk about backlog as that, that's exactly what we can't control and we're working on. That same story happens in industrial, that same story happens in the AI. We're designed in. Now the ramps will support our growth.

Vijay Rakesh

Got it. And one quick question. On the 200-millimeter side, any thoughts on how you're looking at that ramp on silicon carbide?

Hassane El-Khoury

Yes, still on track to what we said we will qualify 8-inch this year, that's when I talk about qualifying, it's substrates all the way through fabs. So that will be qualified this year, starting revenue next year in line with our expectations that I outlined last year. So no change to that. Obviously, we look at the 8-inch as a -- what we've talked about earlier, 8-inch for us is a capacity expansion. So once it's qualified, we sample and we start seeing revenue. We will start increasing the share of 8-inch internal versus 6-inch as we confer -- convert our furnaces and so on in order to support the ramp. But from a capability 8-inch, I'm very happy with where 8-inch is, and therefore, we're right on track.

Vijay Rakesh

Thank you.

Operator

[Operator Instructions] The next question comes from Blayne Curtis with Jefferies. Your line is open.

Blayne Curtis

Hey, good morning, guys. Thanks for letting me ask the question. I just want to ask that you talked about only really the energy business inflecting in the second half. So just kind of curious, I mean, obviously, the auto market has come in a little bit weaker. I'm just kind of curious, you said you're sticking with that L-shaped recovery. Is it right to think though that as you look through the rest of the calendar year that you're looking kind of flat? Just wanted to understand the comment of just highlighting that one bar.

Hassane El-Khoury

Yes. I mean, L, I would say flat. So, Blayne, I have no reason to call a recovery. Now look, is there going to be some green shoots here and there, some markets within our automotive and industrial that will fare better than others? Probably, I don't have a crystal ball. That's why I can manage to what we can see and I can guide to what we can see. But what I would put it in perspective is we're not planning or seeing a -- what I would call a recovery, which is a big deviation from kind of flattish. So some recovery in certain areas that will change the course. We don't guide in the out quarters, but that's kind of my view of the market today.

Blayne Curtis

Thanks. And I just want to ask a lot of comments or questions on silicon carbide. I want to ask on Intelligent Sensing Group. So that business is down quite a bit. I mean, you have a driver with 8 megapixel in terms of ASPs. I'm sure you're working through some inventory there as well. Just kind of outlook in terms of that content driver, where that is today? And where you see that could go? And then kind of just should that follow the same trajectory of recovery?

Hassane El-Khoury

Yes. Yes. I mean we have the difference with image sensing, we do have a big market share in that -- in that market in the ADAS automotive market. So that's more on the recovery of the market itself. But like you mentioned, there is an ASP uplift that will increase our revenue disproportional from just the unit growth and also a penetration rate that as ADAS gets to more level 2+, you got more units within the base of the SAR that we're targeting. So you can think about it as SAR plus the content uplift, both ASPs and units.

Now importantly also, I do want to talk about the industrial side of that business where we don't have the same market share as we do in automotive. So there's more expansion we can do. We've had a slew of new products that we've introduced in the industrial market. The SWIR acquisition we've made adds yet another layer of that differentiation and the technology leadership for our image sensing group, that goes specifically in the industrial and the defense market. So again, same strategy of regional and application proliferation that we're doing in the power, you're seeing that kind of parallel in the imaging or the sensing business.

Blayne Curtis

Thanks Hassane.

Operator

[Operator Instructions] Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

Joshua Buchalter

Hey, guys. Thank you for taking my question and good morning. I know you mentioned that auto was kind of in line with your expectations, but I think 11% sequentially was a little worse than I was expecting and some of your peers are printed this quarter. Was that a conscious decision on onsemi's part to ship more conservatively or did something -- did anything in your customers' behavior change over the last couple of months as some of the weaker auto production came out or maybe something idiosyncratic would fit? Most importantly, does the slight growth in the third quarter that you're guiding to assume you're roughly shipping to end demand or is there any more digestion going on there? Thank you.

Hassane El-Khoury

Yes, let me start with the last part. We believe it's below end demand as I talk about the inventory burn. But as far as quarter-on-quarter guide and it's hard and I'll give you a piece of advice. It's hard to compare to peers because it's all a timing. In the short term, when I call it within a 90 day plus 90 days, minus 90 days, it's really a timing discussion of how much inventory was there, how far ahead or below end demand.

At the end of the day, you have to look at it from an end-demand. End demand is exactly what I -- what I mentioned. We don't see signs of recovery, but we do see signs of stabilization. Over a multi-quarter period, it's all going to stabilize and everybody who ships into auto is going to converge to an auto number plus their content specifically to the company.

So I don't look at it as a delta to peers or a delta to our customers. It's literally a -- where do we believe the automotive market is. Some of our Tier-1s have more inventory than others, so it will take them longer. But inventory burn is directly related to demand. Demand accelerates, inventory burns accelerate. Demand doesn't, inventory burn takes longer to achieve. So I would call it just a timing thing. There's nothing, I guess, intentional in managing to a number here.

Joshua Buchalter

Thank you. I appreciate that color, Hassane. And then thanks for the data point on the ex-market leader silicon carbide attach rate being in the 6% range. I mean, you're speaking with customers and have great insight into obviously ongoing design-wins in their product ramps. Any intermediate milestones you could give us on where you expect the stick attach rate to be maybe in 2025 or over the next few years? Thank you.

Hassane El-Khoury

Yes, look, I mean we still see a growth in silicon carbide as a market driven, of course, by the auto, industrial and AI that I talked about. So it's a broad proliferation. I think it's too early to talk about 2025. We'll have to see how 2024 exit rate is and really what the market does in 2025. If you look at a lot of the reports that are out there and talked to a lot of the customers that have reported already, it's a very broad range of what 2025 is going to look like. So it's too early to talk about 2025.

What I can talk about is the rate of design-wins that we have, because that I can't measure, that I can't control and that I can provide where we are. I'm very happy with that progress. We talked about China, and we talked about the Beijing Auto Show where literally we went through every car that got announced in the show and I can tell you exactly that we are designed into it.

As those cars ramp and as those cars become successful and the market recovers for, both in China beyond what it is and outside of China, those are the design-wins that are going to ramp for us and dictate what 2025, 2026 and beyond are going to be. So I will tell you, from a design-win perspective and a market relation perspective, we are firing on all cylinders here, or I guess I shouldn't say cylinders. We're firing on all motors today.

Joshua Buchalter

Well, thanks, Hassane.

Operator

[Operator Instructions] Our next question comes from Quinn Bolton with Needham and Company. Your line is open.

Quinn Bolton

Hey, Hassane, I'm just wondering if you might be able to give us any sense of sort of timing of the VW ramp. You mentioned you thought you'd be across pretty much all of the VW models over time. Are they staged, or do they sort of all ramped in the same general time period? And then I've got a follow-up.

Hassane El-Khoury

Typically, well, that's a question for them really. I can't disclose their plan for a ramp. But it's not an on-off switch. I guess, I can say that.

Quinn Bolton

Got it. And then just looking at the second half, it's pretty clear your message is that end-demand hasn't really started to recover yet, maybe it's stabilizing. So as you look at your L-shaped recovery comments, I guess I'm just trying to reconcile, you guys are shipping below end consumption right now as inventory is being digested. Is your L-shaped commentary really more a reflection of end demand, or of your revenue because I would think at some point as the inventory digestion process ends, you would snap back to consumption. And I would think that would put some growth into your numbers if you're currently shipping below consumption levels. So, any thoughts on that reconciliation would be helpful. Thank you.

Thad Trent

Yes, this is Thad. You nailed it, right. When we talk about the L-shaped recovery, it's really our revenue, right. We believe right now, we're still under shipping natural demand as there is an inventory digestion going on. As that inventory is got off, we think our revenue over time will increase again. But yeah, the L-shape is not demand, it's more of our revenue just given the inventory out in the channel.

Quinn Bolton

So it sounds like we've got a couple more quarters of that inventory digestion from your vantage point.

Thad Trent

Well, I think it depends on demand as Hassane said, right. I mean, if demand picks up, the inventories bled faster. If demand slows, it takes a little bit longer. But look, for what we can see for the remainder of this year, that's why we're saying L-shaped. If you look at Q3, we're up almost 1%, we'll see what Q4 does.

Quinn Bolton

Thank you.

Operator

[Operator Instructions] Our next question comes from Chris Danely with Citi. Your line is open.

Chris Danely

Hey, thanks, guys. Just a quick question on the inventory going back up. It sounds like there's still plenty of inventory out there amongst certain OEM customers. So given the L-shaped recovery, why would the disti want to take up their inventory and not keep it flat?

Hassane El-Khoury

Yes. Sure. If you recall in our last -- this is Hassane. If you recall on our last call, we talked about the mass market. So it's not really the top customers or the named customers that we have, it's more of the tail of customers that we really ourselves have starved and I've mentioned it multiple times and during the call it, the pandemic where we didn't have a lot of -- we were supply-constrained.

We prioritized all of our lead customers at the expense of the broad market or mass market. Right now, we talked about how we're starting to replenish and address the mass market. We started last quarter, so we expected that slight uptick. So it is driven strategically by us. Obviously, the metric for -- just to give you a little insights of how I look at it and why it's important for us. I look at it as new customer counts that we are adding. And that's again mass market thousands of customers. As that remains on an upward trajectory, even today, we will continue to replenish the mass market. So strategically, that's a closed-loop approach that we -- that I look at operationally to manage this.

Thad Trent

Yes. And Chris, if you look at that 8.9 weeks, there's actually a mix-shift within that 8.9 weeks, right. So more going to the mass market and less going into specifics for customers as we continue to bleed through that inventory. So we're managing that inventory extremely tight in the channel. And just keep in mind, historical levels of inventory in the channel was 11 weeks to 13 weeks. So we're significantly below where the company had been historically.

Chris Danely

Thanks, guys. That's really helpful. And then for my follow-up on silicon carbide. I know you're not given any numbers or anything, but if we look at your backlog and pricing for the year for next year, was there any volatility? Has that changed in the last three months? Any sort of changes in your own like 2024, 2025 backlog, or pricing assumptions?

Hassane El-Khoury

No. No, pricing is stable, if you recall. I mean, whether the units are coming in exactly what we had in the LTSAs or not, pricing is in the LTSA. So we've been very consistent about -- we discuss with customers on the LTSAs to reach to a win-win, but we invested based on the ROI and ROI is specific not just on volume, but also pricing. We can't control volume, neither can our customers to a first order as market dependent. So we're flexible there. But from an investment and pricing, I would say that's stable and that's really stable across all of our business. I won't just say about silicon carbide and it's seen in the margin holding where it is versus historical.

So pricing is stable. And recall, when we started on this transformation journey, I said we're pricing for value. Value doesn't change based on the market environment. If the product brings value, then the product brings value and will price accordingly, and then the volume in units will follow up with the market.

Chris Danely

Great. Thanks, Hassane.

Operator

[Operator Instructions] Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland

Hey guys, thanks for the question. Just given some of your announcements mid-quarter on data center power using SiC, I was wondering if you guys could size that opportunity. It sounded like AI in 2025 was at least $0.5 billion opportunity, just running some rough numbers there. But if you could size the opportunity to talk about kind of your expected market share, or any other details that would be terrific.

Hassane El-Khoury

Yes. I'm not breaking the AI market at that level. We will as that market really in my view, starts proliferating for us. If you recall, the same thing we did with energy infrastructure where we started talking about it from a design-win until it became a more meaningful part of revenue and more meaningful part of the market. So stay tuned. What I would like -- what I talked about today is the opportunity from a product perspective, design in and really the, call it, the SAM per -- per rack and as we make progress through these and with our new product introduction on the mixed-signal analog, not just on the power, we'll give out a little bit more detail on that.

Thad Trent

And Chris, if you go back to our Analyst Day last year, we talked about the data center growing at 22% over a multi-year period. I think with AI and data center ramping, you can think about that over a multi-year period. It's probably being higher than that.

Christopher Rolland

Excellent. Thank you. And then my second question is around LTSAs. I don't know if you have any numbers or updates there, but just kind of how are they trending? Have you noticed in terms of pushouts, renegotiations? Have those slowed? Have they become more favorable in those negotiations? Any changes over the past couple of quarters here?

Thad Trent

Yes, Chris, I would say it's pretty stable. So the lifetime value of our LTSAs are $14.7 billion. If you look at what's shippable over the next 12 months, it's about $4.4 billion, so about 30% of that. Pretty consistent with the -- with what we've been seeing as you ship LTSAs. And I think as we've said, the LTSAs, pricing is stable, it gives us that call on demand changes and why we've seen many of the market shifts prior to many of our peers. So I think the LTSAs are strategic in the way that they're actually proving value in how we manage our business.

Hassane El-Khoury

Yes, I mean, even today with the market environment that we've been talking about, we do have customers asking for LTSA because it's not -- you don't need the LTSA when the market is what it is today, they stage on needing the LTSA when the actual market recovers and they don't want to be stuck in traffic in the allocation. If the snap back is across all markets and very quick, so it's a future-proofing, it's a strategic tool and of course, it drives that discussion with the customer about what is their need based on new products and existing product ramps.

Christopher Rolland

Thank you, guys. Very helpful.

Operator

[Operator Instructions] Our next question comes from Harlan Sur with J.P. Morgan. Your line is open.

Harlan Sur

Yes. Good morning. Thanks for taking my question. Your direct customer business was down about 18% sequentially in the June quarter versus your disti business, which was up 5%. So it seems that most of the inventory-related issues are with your direct customers. And given that orders are probably the best indicator of inventory dynamics at your direct customers since you don't monitor the sell-through. Did the order trends in direct start to stabilize in Q2? And has that stabilization continued so far quarter-to-date?

Hassane El-Khoury

Yes. So first of all, on the mix-shift between disti and direct, keep in mind, most of that industrial business goes through the distribution. So that's that long tail of customers. So that's why you're seeing a little bit more there where the big automotive guys typically are direct. So you're right. As we've seen some recovery in industrial, you're seeing a little bit more of a shift to disti and a little bit less on direct. So I think it's just kind of a short-term as you go through this digestion period. Looking forward, I would say things are -- things are stabilizing here.

Harlan Sur

Great. Thanks for that. And then other of your peers in the analog and power markets have seen a pickup in China. I know in the first quarter, you had not seen the seasonal pickup post-Chinese New Year as you move through the second quarter. It looks like Asia, which includes China, you did see slight sequential revenue growth. So have the order trends also started to stabilize and improve in this region? And is it broad-based or biased more towards industrial and/or automotive?

Hassane El-Khoury

Yes. So we said in our prepared remarks, we're seeing China stabilizing. We're seeing growth there. It's both automotive and industrial. We talked about energy infrastructure as well as the second half recovery. So that would be a lot of that goes through China. But yeah, I would say it's the broader market of auto and industrial in China, and that's definitely leading the recovery right now.

Harlan Sur

Great color. Thank you.

Operator

[Operator Instructions] Our next question comes from Tristan Gerra with Baird. Your line is open.

Tristan Gerra

Hi, good morning. Thanks for letting me in. Just a follow-up on China. How sustainable do you believe this is? How would you categorize inventories in China specifically? Are you seeing any type of government incentives? Or is it just that there's a rebound after several quarters of weakness?

Hassane El-Khoury

I guess that's a tough question to posture. But that the market pickup in China, I think the demand is coming back. We've had a pretty big trough what we talked about in the prior question, there was no recovery after the Chinese New Year. We've been talking about potential regard. So I look at it as driven by end-market demand, not necessarily a specific government incentives or any of that because I haven't really seen any major announcements in China to drive their economy.

So, therefore, I would call it as a broad-based demand stabilization towards a recovery. For us with our penetration in China on silicon carbide and really on the silicon across the board, we will just benefit and we will see it. And given that we are very tight on the inventory in the channel, we will see the sell-through much quicker than having to wait to drain through large channel inventory like potentially some of our peers. So from our view, we've established ourselves in a very good position to see the uptick really quick. We started to see it in Asia, specifically in China like we talked about. But I wouldn't call it any specific incentives that may or may not be sustainable. So, therefore, as long as the market stays the way it is, I would call that sustainable.

Tristan Gerra

Okay, great. Very useful. And then as my follow-up. Maybe I missed it. What was the point-of-sales for disti in Q2 sequentially? And what was the percentage of disti of your total revenue in the quarter?

Thad Trent

Yes. All that on the website that we post. Distribution as a percentage of total increased whereas direct actually decreased, but that's all posted on the revenue trends that we put on the website there.

Tristan Gerra

Great. Thank you.

Operator

[Operator Instructions] Our next question comes from Harsh Kumar with Piper Sandler. Your line is open.

Harsh Kumar

Yes. Hey, thanks, guys. I guess congratulations on weathering the storm reasonably well in this cycle, gentlemen. Hassane, one for you. Is it fair to say that your win at Volkswagen should put all the wafer quality rumors, guzzle, conjecture, whatever you want to call it that's been going on in the last year that should be put to rest now that you've got a major win like Volkswagen?

And then the second part to that question is, is there still -- is your -- are your wins in silicon carbide still a function of wafer availability, the fact that you are -- you can make your own wafer? And did you say that you're the lead at Volkswagen for this particular set of wins?

Hassane El-Khoury

Yes. So by the way, by now, I thought the whole rumors about yields and quality and all that nonsense has been put to bed. But just for the record, if not, the answer is, of course, the answer has always been. So for the few non-believers out there, I think they're either not listening, not looking at the signs, not listening to the announcement or the head is buried in the sand. We've been very clear about our performance. Our wins have been speaking for themselves. So the answer is, of course, somebody like VW Group doesn't award on a whim. They award based on audits, reviews, and based on in-depth, on-site, and technical depth and reviews. So I'll just put it -- put it at that.

As far as the VW win, we are the primary, which is to answer your question, yes, we are the primary for that and the breadth is for the VW, a brand overall, or the VW Group overall.

Harsh Kumar

Appreciate it, Hassane. And for my follow-up. In the past cycles, Hassane, we've seen the channel recover fast, particularly when it's been starved in this manner. I guess, I'm going to put you in a theoretical spot here. Why do you think the channel is not spiking up? Is it because there is still plenty of inventory out there and they don't feel like they need to load up just yet and it's going to come or is something shifted in the way they're thinking about stocking product?

Hassane El-Khoury

Yes. Look, I mean, I can't speak for the channel in general. I can speak for what we've done in the channel. If you recall, the last few years, we've been managing the channel way tighter than a lot of our peers and really way tighter than they would want us to manage. They would take more if we ship more. But we didn't want to have a balloon in the channel inventory like some of our peers have because that puts us quarters away from seeing a recovery because even if you get the POS recovered and you have a lot of weeks in the channel, that's that latency that we didn't want to have and we want to be closely tight.

That's why I mentioned strategically, as we ship specifically to the mass market, the metric I use is customer count increasing that we ship to. So we are shipping and replenishing the mass market. And I do monitor again, it's not a quarterly metric, think about it as inventory velocity. From the time we ship it to the mass market, how long before it ships out. That velocity is monitored the number of customers is monitored. That's why I feel very good about increasing our channel inventory for the mass market. But if you talk about channel inventory for the top customers, the industrial customers or what I would call the named customers, that just follows the trend because, look half of our inventory in the channel is fulfillment. So it is demand-related directly.

Harsh Kumar

Got it. Thank you, gentlemen.

Operator

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back over to Hassane El-Khoury, President and CEO, for any closing remarks.

Hassane El-Khoury

We continue to prioritize operational excellence through the market correction and demonstrate the resilience of our business. We're very proud of our global teams for executing through the current demand environment with prudent financial management. We are a better-structured company because of the work we put in during the downturn. Thank you all for joining us today.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.