ON Semiconductor Corporation (ON) Earnings Call Transcript & Summary

Very refreshing. Well, first off, thank you all for coming. It is -- the next refreshing thing is having everybody here in person. So I thank you, and I welcome you. We have a very exciting day, a few hours. I did bring back up, obviously, my team is my main backup. However, I did bring back up here on stage. Thad will present afterwards on the financials. But more importantly, I brought some of our customers to back me up. So you'll see them covering it. Let's start with what's going on in the world. We are driving technology in the world. However, that technology is being driven by something much higher. You've seen it all in the news. The governments are asking for it. Employees are actually demanding it. We have companies are investing in it just like we are. And the shareholders are requiring it. It is about the sustainability and our responsibility of what we need to do. Those are a lot of the drivers of what needs to happen. But more importantly, it's just the right thing for us to do. It is what we should be investing in and more importantly, what our investments should enable our customers to do. But what does that translate as far as the markets that we all hear about. If you look at the greenhouse gas trend, 2/3 are from industrial and automotive, the biggest segments and the biggest markets that we also target. And if you look at and you spread it over a lot of the submarkets, you will realize that a lot of these markets that are growing that we all are excited about that's going to drive the future of electronics and semiconductor content, they are all spread. It's an exciting arena, but how could a company like ON Semi tackle all of these and maximize the value we bring in without getting all over the place. You hear me a lot talk about focus, focus, focus. How do you focus when there are so many opportunities out there. The difficulty of what not to do anymore. But there's one thing common to all of them. And that commonality is a sustainability. So if you abstract yourself from just the application in the market and you look at what is driving that growth? What is the growth coming from? Where are companies investing in their systems? And where are the companies investing in their capital? And what you will find is what's driving it is the same theme that you see in the headlines and that's the sustainability. And if you look at the sustainability, there are 2 themes that come out that relate to what we do every day. And that's the power and sensing theme. So from all of these common markets, you have the power as the new frontier. Complexity adds power requirement, compute adds power requirement. The climate and the sustainability drive is what's driving the power need, but more importantly, the innovation and power efficiency. And when you look at the auto and industrial, they both drive that same efficiency in 2 different areas, where industrial is leading in order for automotive to achieve the efficiencies they need. And on the sensing side, you'll see the same commonality where industrial automation, the efficiency in order to keep up with that demand that we are all excited about, you need to drive that efficiency from the sensing side in order to be able to properly and efficiently control the power side. And innovative companies that come up with these disruptive technologies, with the strong ecosystem are the companies that are going to win. That's the focus. That's how you bring those megatrends. You bring all of the headlines across all these markets and you synthesize them to power and sensing. And they're synergistic. One will drive the other. In order to achieve the efficiency of a power system, you need to be able to sense real time what the power system is trying to achieve and optimize it in order to deliver on that efficiency. And they go hand in hand. They're synergistic goals because you need the efficiency of power and the efficiency and the sensing on the automation -- on the factory automation side, because factories are what's going to build and efficiently deploy the automotive subsystems that we all need from a content perspective in order to drive that and keep up with that demand and more and more of the content going into these vehicles. And the value that this will bring is the value from the efficiency of it. When you drive efficiency, customers will value that. And it's not just the value when I talk about monetary value, although we're all here, and it's important, but they value because it helped them achieve that higher mission that drove that market that they're participating and winning in. And when we do that efficiently and the biggest drivers of automotive and industrial, what you will get is that same pull from the synergistic markets that we see. That's how we take a complex market with a lot of growth drivers and you maximize your exposure to these drivers by focusing on power and sensing. And that is the winning combination. That's how you drive the growth through power and through sensing, but more importantly, the growth that they drive across these markets. Now you may see, okay, how does that map to it. You add the intelligence in order to achieve that efficiency. I'll simplify and say, not anybody, but you could argue, well, you can make a power switch, and some companies do. But how do you get the intelligent power switch. That's where the cross-functionality of the technology that you apply, where you take the breadth of it, you focus it and you extract that value that customer need. And when you look at it now, the same markets, but you look at it from a technology perspective versus just the megatrend at face value of the market, you would realize that it maps exactly one-to-one to the market that are growing faster than the semiconductor market. And that's how you synthesize a complex story into a very achievable and execution story. But more importantly, it is not a small market. We are talking about $74 billion, growing faster than the rest of the market. And that is why I personally come to work every day, is to be able to achieve that and see that achievement translate into value created for customers and subsequently value created for our shareholders. Now we can look at it in a different way when I harp on efficiency, and that's what it takes to win. Everybody needs to make trade-offs. I started the whole thing with -- you've got to make some trade-offs on what markets do you go after and what markets you don't go after. But if I put myself in the customer's shoes, the trade-off here is a different type of trade-off. We trade-off cost, efficiency, and then the weight or form factor, depending on the application. But what does that mean on a power trade-off. You want to hit a cost target? Sure, you can get low efficiency power products. You'll hit the target. But what does that mean for the system when your products that are the baseline of your end goal are less efficient. You lose that power coefficient. You lose that translation from battery to drivetrain. And that kills your range if you're making an electric vehicle. Electric vehicle with a heightened range anxiety is not valuable to consumers like us. And therefore, you add the battery. So that trade-off is a losing proposition. You can save cost and efficiency, but you're going to pay for it for battery. For an EV, I don't know. I'd rather get none of these then to make a trade-off. And on the sensing is the same thing. Commercial sensors, nonautomotive, just commercial sensors are made for different use cases. Because I know the use cases in automotive are very, very different. Night driving, front sun driving. Now we have the luxury of grabbing our sunglasses and putting them on or putting the visor down. What are you going to do with the car other than putting in reverse so the camera is not blinded. You have to be able to see. Those are use cases that are not available in consumer products. The same thing with the sensing. So how do you offset that? You add cost, you add multiple cameras, different angle cameras. So one doesn't get blinded by the other and so on and so forth. You drive your cost. You drive efficiency down therefore. Now what do I see? What do the engineering communities at ON Semi see? They see the opportunity. We see the opportunity through innovation to give customers the power of the end. We want to give cost and efficiencies and weight. By having efficient technologies, intelligent power technologies, you get the efficiency that you require. And when you get the efficiency you require, you are going to get it in a compact footprint. Why? Because you will need to double up on the electronics. You get the form factor. And when you get the form factor and you have the efficiency, you get the range, and and and, that's how customers win the range battle. That's how customer win the content battle by not having to do these trade-offs. And that's the technology capability that we drive within those markets. And the same applies on the sensors. When you look at sensing and the intelligent sensing and the integration, the feature integration, and I'll talk a little bit in more detail about the features that are required in order to achieve the optimal result of all of these use cases that today, I will tell you there's not a single provider or single solution other than ON Semi sensing solutions that are able to provide the solution for all of these without the trade-off of safety. And I will tell you, autonomous cars, the last place you want to have a trade-off is in safety because that will gate the adoption. Through integration and implementing intelligent technologies is how we will be accelerating not only the adoption of these features, but the comfort of us as end users will have while deploying those features. And that is our mission for both power and sensing.

Hello. My name is Gary Hicok. I'm the Senior Vice President at NVIDIA. I think the relationship between ON Semi NVIDIA has been a long one, and that partnership has allowed it to be strong and that strength and that transparency relationship has been great in serving customers we have had in the past as well as innovating on products in the future and providing new technologies to market needs. The number one thing we always look for is performance in the solution. That solution needs to be efficient, needs to be best in class in the market. One of the key problems that NVIDIA was trying to solve is how to create an amazing computing platform for autonomous vehicles which includes both automotive, robotics, larger transportation. NVIDIA chose ON Semi, first of all because of a long-term relationship, a long-term commitment for automotive and high-quality type platforms. ON Semi partner with us in several different parts of our solution, including our drive computers. So onboard, including our Experian automobiles, providing sensors, cameras for those vehicles. ON Semi provided a unique solution by being one of the first to market with 8 megapixel sensors that were of high net quality to be used in the automotive industry. Autonomous vehicles powered by an amazing platform and efficient platform will help to grow both conserve energy, help save lives, as they have safety and provide their convenience. I enjoy working with many of the individuals at ON Semi. They have the same professional characters, the same professional high standards allow us to be effective in communication there when there's issues that need to be solved and then productivity is something that we're working. Using the combined solution of ON Semi and NVIDIA, the customer is going to have a safer vehicle with better perception and a more efficient vehicle in terms of battery life and power consumption.

Efficiency is key and being able to solve these real-life problems for our customers and our customers' customers is what you need to win. However, there is interlocking between all of these markets. If you think about the ecosystem that is evolving today, you need to take a step back away from just the auto or just industrial or charging or infrastructure. If you take a step back, one is throttled or gated by the other. If we are not able to generate the energy required to fuel the batteries and to fuel the electric vehicle revolution, the electrical revolution adoption will not happen. If we are not able to enable the charging infrastructure, you will not be able to push the boundary and the adoption and the ramp that drives the content into the electric vehicles. If we are not able to get the efficiency through power and sensing that is required to run highly capable and high-throughput manufacturing sites, all end products will not come out as efficient as we need. And if you're not able to power the complexity and the increasing power demand of the 5G and cloud infrastructure, not just automotive and industrial, but a lot of other markets, we'll not be able to grow as we see. These are the things where the balance in an ecosystem is required and that balance needs to be struck through the intelligent power and sensing. And that is the key to unlocking the value that all projections that we all enjoy, and to be honest with you, all of us are quoting are going to happen. Let me start with the 5G and cloud. Talk about the complexity, but more importantly, the power density. There's more and more density of traffic, more and more density of storage and therefore, more and more density of power. What is the solution if you don't have power efficiency? Well, there's one simple solution, double up on the building, spread it all out. Don't have a dense. While we all know that's not a solution that's viable, and therefore, that solution will gate the growth. That complexity is what's going to drive the need for innovation and the need for a new generation of power products that we do here. And not only do we do it, we support customers who are driving that evolution down through the supply chain and enabling that 5G deployment that smart factories and the e-mobility and consumer products that all need and drive through it. We cannot have a bottleneck because of power. And that is the main anchor of growth we have in the 5G and that's the push.

My name is Tammy Couture at Nokia. I'm Vice President of Technology Development. Nokia and ON Semi have been working for decades together, bringing to our customers designs that meet the customers needs. The global manufacturing strategy that ON Semi has is perfect for our alignment in bringing products to the customer in a timely manner. A key attribute for a supplier and one that ON Semi shows is honesty and transparency. Otherwise, we can't solve our problems together. Nokia and ON Semi have a strategic partner relationship, where we have bidirectional ability for technical teams and management teams to work together on our goals for the future. I feel that ON Semi's commitment to being industry-leading in their product designs is what makes them an enabler for our product designs. Customer satisfaction is key to all of us. There's a couple of areas that really we need to focus on together. One is reducing power consumption. Power consumption is key for our customers, for our environment, for our children and so on. ON Semi has clearly shown their importance of innovation in power consumption domain. And that clearly aligns with Nokia's key initiative to reduce emissions by 50% by the year of 2030. The biggest thing that any company can do is figuring out how do we have less impact on the globe? How do we use less of the natural resources, for infrastructure, power consumption et cetera. Products become orders of magnitude more complicated, but they can't use orders of magnitude more electricity and more resources. Nokia's aspiration is to design products that leave the world in a better place for our children and our children's children and ON Semi is part of that solution.

Orders of magnitude, more complex, but they cannot use order of magnitude more power. It is not a solution, and it is not a formula that is winning. And if we can't get there, we are not able to support the market growth that we're able to and is right in front of us. And that is how we win by being able to provide technology, pushing the boundary of packaging because all of these have to work together in order for us to talk about efficient, intelligent solutions that solve customer problems. And I said I was going to bring back up, you didn't hear it from me. You heard it from them, and that's how they vote. They vote with their product selection. The same thing happens on the other markets, part of that ecosystem. When you talk about factory automation, we talk about energy, infrastructure and charging, all of them are related from generation of power to distribution of power. If we're not able to get that power efficiently to the end nodes, i.e., electric vehicles, how many of us will buy an electric vehicle, if you can, within range, get a charging station, and more importantly, efficient charging station. From factory automation, there's more and more increase of throughput that is required in order for efficiency to get on the footprint. There's more and more automation and artificial intelligence and machine learning in order to get that throughput. The same power density that is required in order to harness the natural resources, whether it's solar or wind, having that efficiency, that compact, that power density through intelligent power is key to unlocking the capability and maximizing the little wind burst that happens here or a little sun that shows up in between the trees when we're at home. Efficiency matters. And energy storage is the boundary that's going to bridge that to the next level, and that's all content. And more importantly, the deployment or the delivery of the content as it relates to electric vehicles, where you can fill up gas in 5 minutes. You can't take 3 days to get to a full charge to full capacity. 30 and 20 minutes are the targets now and those we keep pushing the boundary, and you are not able to get to those unless throughout we get that efficiency. And the throughput matters when it comes to sensing. I'll take a minute here to explain what these 2 are. It's exactly the same image. It's a rotating barcode 2D and one-dimensional and 2-dimensional barcode. Same image, same speed. One is global shutter and one is a rolling shutter. Let me talk about the trade-off for a second. Obviously, we do global shutter, first off. But if you have those cameras and you're running throughput, how do you think you can get the throughput to read an undistorted image on a line when you're inspecting your product without any errors? Well, the only way is you slow down the line. So you catch up and you make this picture, look flattish or you can go to global shutter in a tiny package for some of you who are sitting in the back if you didn't notice, I guess, it's on this side, in a tiny package. Feature-packed high-resolution, efficient, integration of smart sensing is the only way you can get the throughput and you are able to maximize the output of any factory. In cars, global shutter is the only way. You can look at a driver and catch a blink. I know it seems like I catch the blink with any camera. Every time I take a picture, I only get blinking people. But to get the blink, and it's not just that somebody blink. How fast you're blinking is how alert you are. The faster you blink, your alert, the car is fine. If you're blinking -- I'll just close my eyes for 2 seconds, you're tired, the car will alert you. The difference between the 2 and the mismatch between the 2 is life or death. Who wants that trade-off in safety? You don't. But you want both. You want the end of all of them. And therefore, with the content growth that is being driven in these applications. When we look about 3,000 to 10,000 per factory, just a sprawling of the factor from robots to robot from assembly robots to logistics robot like you saw in the video earlier. For the inverter to generate the power, where you need to be able to provide both silicon-based IGBT and silicon carbide in order to get that maximum power, you need both. One is not enough. We started with IGBT. We still do IGBT. We're complementing our power position with silicon carbide because from an ecosystem perspective, silicon carbide is how you're going to get to charge a car in 20 to 30 minutes. But that's the ecosystem that you need to be able to power in order to get that content. 2,000 to 4,000 per charger. Now you've all known the growth targets and how many units and so on. Just drive in your neighborhood, figure out how many gas stations, how many pumps there are and figure out in your neighborhood, how much ON Semi content will be driven in your neighborhood. Because that's what we need. We need charges everywhere in order for cars and electric vehicles to be everywhere. Range anxiety is real. And we help customers both on the infrastructure and the automakers to remove that anxiety, which takes me to the automotive evolution, that has been fueled by all of these capabilities. Advanced safety is not new. We've been talking about it for -- well, I know I have. I've been in automotive my whole career. We've been talking about automotive safety incrementally. It's taken step functions. Governments are requiring it. You want to sell a vehicle, you want to put a vehicle on the road. There are minimum levels of safety that you need to have. And I will tell you, those minimum levels of safety were nonexistent 10 years ago, and now they are required. That is driving a content evolution if you're able to solve the problem, which we are. Systems must be able to deliver on the ASIL D, the highest automotive safety integrity level. The highest level is D. You cannot achieve it with a single product. We have the best cameras in the world. They're capable. We have the best PMICs and power subsystems in the world, they're capable. The system is only capable when you put our PMIC and our image sensor together. It's not optional if you want to be able to detect that.

My name is Jianxiong Xiao. People also call me Professor X. I'm the CEO and founder of AutoX. AutoX's long-term mission is to really democratize autonomy to make self-driving cars become part of people's daily life in China, and also around the world. AutoX just released our Gen 5 solution. This is the first, and right now, the only, truly, fully driverless Robotaxi solution in China. We are very happy to have the ON Semi product as part of the Gen 5 solution. We need to have very high resolution camera sensing and LiDAR sensing, even under very extreme weather conditions and lighting conditions. This is a very important part to help our Robotaxi to see the world clearly, so that we can drive safety. We have 28 8-megapixel cameras. We also include a lot of LiDAR compared to our Generation 3 system, which is 2-megapixel cameras. We can actually increase the resolution by 4x. This means the perception range will go twice as long as the previous generation. With the ON Semi solution on our car, now we can see much further away with longer perception range. We can see more accurately. All these are very crucial for reliable self-driving capability. ON Semi is really a very important provider for our solution, mostly because of the high resolution, high dynamic range, high quality of the sensors, as well as their very well-known production capability, in particular, meeting automotive grade is super important in our application. We can really use these to improve our transportation efficiency, also avoid traffic accidents. With the robust, better solution, very reliable self-driving technology, we can avoid those accidents and save a lot of lives. With the AutoX fully driverless Robotaxi, we can actually reduce the need for people to purchase private vehicles because ride sharing are more and more convenient and safer, cleaner. This can actually provide very good benefits to contribute to the global society as well. We are glad that ON Semi and AutoX could be long-term partners for this global mission.

I don't know about you, but when I get into a taxi that doesn't have a driver, I feel way better when I know that they're a customer of ours. Because I know where the cameras came from. And I know we're going to see everything clearly and detect every failure both on the image and the power. And that is the winning combination. Think about 4,000 different failure modes that need to be detected. And I'm not saying detected so you can shut down the car. It's detected and be overcome while not changing the integrity of the system and that is the automotive safety. So it is -- sure, it sounds like a marketing campaign. ASIL D sounds very fancy. But you have to be able to detect. And show on a system level that the integrity of the system has not been compromised, whether it's cyber or whether it - is it pixel, a single pixel on an 8-megapixel camera cannot fail. That's the level because perception is key. When you don't have a driver, the car is your eyes. I don't want to sit in a car that's driverless and not be able to do work and just hold on to the -- everybody's got a name for it, so I won't say it, but the bar. That's the comfort. We have more coverage than anybody out there. And it's the best class vision beyond what a human can see. And the numbers don't lie. Our capability today and our customers today and the number of cars on the road, ON Semi is saving 9 lives per hour. That is our responsibility, and that is our pride to be able to do that through technology. So if you look at what does it mean? That's the 8 megapixel Professor X was talking about. Why does it matter? Because we need to be able to detect a car out in the distance with the brake lights on, a boulder, that boulder is a foot, 185 meters in broad daylight. Now you may say, okay, what if I tell you, we need to be able to detect the same thing. And oh, by the way, the pedestrian forgot about him or her. 185 at night with the same camera, same car with just your headlights, that high dynamic range is life or death, not just for the driver, but for the pedestrian. Side-by-side is no trade-off. Side-by-side is where efficiency, side-by-side is where intelligent sensing happens and side-by-side is the feature integration that I'm talking about. But there are other cases where visually, how do you resolve visually, meaning what about the things that the eye cannot see. When I talk about 100x better than what you and I see, we can argue 15/20 vision, 20/20 vision, glass doesn't matter. Take the 100, I'll give you credit 80x, still 80x better. 100x better than the vision, that's all great. What if you can't see it. Fog or smoke is when we cannot see. Forget about autonomous driving. Here's a car driving into a smoky patch. The greater image is what the computer sees. I just lost visibility of the car. I'm driving behind it. I don't see the car. I'm coming up to it. I need my autonomous vehicle to see even what I don't see. Now we've seen some of those cars with the big rotating tower, okay? I don't know about you, but I like cars without a big rotating tower. And we solved that problem. If we see in 3D and we can adjust, then why does the car not see in 3D? Why is LiDAR have to be so cumbersome? Why does safety cost weight, it cost inefficiencies and it cost cool car to look not so cool. You have to be able to solve that problem and we solve it with our technology with the LiDAR. This little thing solves that perception of what we cannot see. Sensing and power and powerful packages that show integration are the only way we, as technology providers do not gate the potential opportunity that the markets provide for us. And it's our responsibility to make sure we do it in order for it to fuel that growth and fuel that capability that the cars have. And when you look at advanced safety, we talk now about Level 2+, which is a broad range, but the content creation, when you talk about cameras or image sensors and when you talk about LiDARs, when you talk about ultrasonic, when you talk about all of these applications that have to be packaged together in order to service that need and the use cases that I talk about, one cannot do it without the other. And the opportunity for us between 200 and 1,000 and it's orthogonal to power. Safety is growing, even on internal combustion engines. It's growing. That content is happening. It's happening today. And we are enabling that content and we are participating, and we are leaders in that content. Now that content in cars is going to get another boost outside of just the safety and that's the electrification of the vehicle. The push of electric vehicle is happening. It's happening today, literally today. A lot of us have heard and saw the article about at least North America today, with the push of being 50% electric vehicle by 2030. It is happening. We can't ignore it. However, we can't let it happen without removing all of these gates that prevent it from growing. The governments are requiring it, and OEMs need to invest in it to stay relevant and stay competitive. Everybody is doing it by 2025, 2030. We talk about strength in the market. I'm talking about strength for multi-decades of rollout of these technologies in the market. You want to develop a strategy that is sustainable. You develop a strategy on a megatrend that's going to last decades. And therefore, we're just getting started. If you look at it, we're not going to get to the 50% mark of vehicles sold until 2028 for EVs and any type of EV. So the opportunity is there. I just described the content. The opportunity is going to start growing. Let me give you the -- an example of why people talk, what about the units, how much do you think the units of -- number of cars are going to grow every year? Does it matter? If the units are flat, and the penetration of electric vehicle happens and the content created in electric vehicles is what I'm telling you it is, the market with ON Semi, and for us in automotive, it's going to grow, and it's going to grow above the market. So it's all relative, but the growth is compelling. And the growth is more compelling when you have the breadth of content that you need in electric vehicles. And everybody focuses on the traction inverter, yes, that is what makes or breaks a car, electric vehicle. But what about all the other power that I've been talking about, the joint power with the sensors, the power that you need for your [ seed ], all of that power that is required to get a car sold. My daughter is 9. She got in the car. I have a very old car, '60s car. She got in the car and asking, how do you open the window, I'm like I say, a little handle here. You can't have a car without electronic content. You need it to be relevant. So it's on top of the electrification and our breadth of product offering and our breadth of technologies and our breadth of packaging from the large to the small is what makes that breadth of product relevant and what makes ON Semi powerful in this market to capitalize on that growth in the market and let the units do whatever they want, which I believe are going to grow. The growth is on top of that. Because the breadth is important. Today, 10 years ago, we talked about MOSFETs. Then we talked about IGBT going up the power curve. And now we're talking about silicon carbide. Sure, you can throw a dart and say, I'm only going to do here. Well, let me give you an example. And I hope some of you saw it downstairs. If not, afterwards. We're open all day, downstair -- customers today to get that trade-off between cost and efficiency and packaging have an axle with IGBT and an axle with silicon carbide. So what happens if you don't offer both. And not only that, if you don't competitively and efficiently offer both, they're going to go to somebody who is able to offer both because I need it in the same car, forget about 2 car models, same car, 2 axle, 2 different technologies, you need both. And you need to be the best at both. And that is what we are and where our investments are going to keep us, which is in the lead of the power evolution in order for us to not just capitalize on the market but to allow our customers to capitalize on that market and enable their ramps and their transformation to electric vehicles. We're doing it today with silicon, and we will keep doing it with silicon carbide. But technology is foundational. We need the depth. You can't be a traction inverter. Power semiconductor is very, very different. than an onboard charger, maybe same power, same density and same -- but it's different. It's very different than a 48-volt system that you also need. It is very different than a 12-volt. Pick your difference, it's different. And the ability to be able to scale all of these is a competitive advantage. It is not something that build it, they will come, it is something required and something fundamental for a company to be able to leverage that and win in the market, and we do. Now even better. What about scalability? Now you have all the technologies, you have all the packages, you have all the form factor. Well, what happens if you're going from a sedan 100-kilowatt to an SUV 300 kilowatt. Well, if you're going to have the scalability, then you're talking about years and years of development between this and that for the same OEM. Where midsize sedan, and obviously, I love pictures, but I more importantly, love this. The scalability of it. 150, 300 car SUV. You want to talk about efficiency. Can you tell the difference. Well, maybe you guys in the front. But it is a -- I'll do it in millimeter because -- 3-millimeter difference, 2x the power, same size. That is efficiency. That is breadth, that is technology. and that's scalability. The same OEM will get the same. The only difference is a plate. Two rows, one row. That is not something you do because you stumble on it. That is something you do because it's fundamental to what customers demand. Now I did ask for a competitive one or a competitor's one, but I can lift it. So I didn't bring it. So you just have to stick with the 300 and the 150 that I brought. That matters. Think about it. These 2 drive a car and drive an SUV. You can see the delta on a naked eye if I didn't point it out. That is between winning and losing an opportunity that scalability. You need to be able to win it for the whole gamut of models for the OEM in order to meet the fundamental requirement they have, which is commonality. Because electronics and commonality on the drivetrain, drive commonality on the onboard charging, drive commonality on the charger. Commonality is efficiency, maybe not efficiency of technology, but efficiency of deployment and efficiency of deployment drives the volume that this is going to drive. And when drives the volume, it drives the content. And you have to keep innovating. And of course, I'm excited about what I just showed you, but that is excitement in one point in time today. We have to keep the investment going. We have to keep that aggressive in this case, the silicon carbide improvement at a technology level to keep that cost and efficiency and weight curve push towards what is capable on a technology level. We need to keep the packaging, the focus on weight on packaging. The more efficient we make the power and the more efficient we make the silicon carbide, the smaller the package could be because it's less power dissipation and weight wins. And on a device level, if you need to do from 4 switches today and go to 2, I don't have to do the math here. You have to keep innovating. That is what we do. That is what every person, every engineer at ON Semi does when they wake up in the morning and go to work. It's what we do, and I am very proud to say it is what we do best. And you heard it from some customers. But we don't stop there either. We have to get that intelligence in there. We can get efficiency on a technology level to a certain point, where you need to add intelligence and need to go from power where we talk about the switch, whatever technology and package that switch is with all of its supporting content externally, and we have to bring it in. And we have to bring it in through integration and through package development in order for us to be able to squeeze that power efficiency out and by having an intelligence, power, module, be able to detect its own operational performance and parameters real time and adjust because it cannot fail. And that drives our content, more than $750. Between everything I showed you, the content is there. The market is growing. The switch from ICE engines, combustion engines to electric vehicles is happening and our content is growing. And we're winning because of the breadth and the power and the intelligence we put in that power. I talked about both, and I talked about them orthogonal. They're not dependent. For us, it's the opportunity. When you look at an ICE engine and Level 0/1, most common vehicles, talking about $50 of drivetrain, drivetrain content. You fast forward, 48 volts and Level 2+, that content goes up [ to 80 ] over 5x. When you get through EVs and all the way to Level 4 and 5, but let's not get to 4 and 5. I don't want to get ahead of ourselves. Let's talk about where we are today. EVs and Level 2+. And we're talking about $750. Now I'm sure a lot of you looked at the bottom and said, this is our own addressable content based on our own view of the market. I had the same question. And I'm very, very trusting, but I'd like to verify. So I said, go get me one customer that has all of these. And in 2019, same customer. I'm not going to name them, you just have to take my word for it, same customer, combustion engine, Level 1, [ $131 ]. In '19, same customer in 2020, [ $160 ]. They went up a notch on safety. Same customer, 2022, starting to ramp 2022, electric vehicle, still Level 2+ on shipped content, [ $715 ]. Now for credibility, there's another customer that didn't have the history and they started XEV and Level 2+ $843. And therefore, it's the greater than that I inserted in there. Content is happening today and ON Semi is winning that content today. I don't have to wait 10 years for the safety to be Level 4 and 5. It is today. It is happening today. The design wins that we have today are growing and will fuel the trajectory that Thad will talk about. And that is providing us with 30x more content than we otherwise would in this. A lot of people ask me, well, what's the content multiplier when we get to electric or we get to Level 2+, 30x. And that's why I'm comfortable stating that we will grow even if SAR stays flat, which I said I don't believe it would. Units are growing. Our content is growing. Our content is growing 30x. And I'm not waiting 2 years to say, I hope so. I'm saying today. Based on today and the ramps are happening because electric vehicles and automotive safety is happening, the content is growing.

My name is Alan Zeng. I'm a VP at the NIO site, CEO at XPT, which is a NIO subsidiary. Shape a joyful lifestyle is our mission, to deliver high performance, high value EV product is our challenge. We started working together since the year 2017 on ADAS camera product. Recently, the 2 companies have been engaged on 8 megapixel CMOS product and also silicon carbide module for the 8 megapixel CMOS. On Semi product is the first one that can meet our program timing which is important. Range anxiety is still the #1 for one reason for users to say no on EV. To develop a longer range with an affordable price is important. In the middle of 2020, we evaluated all the potential solutions in the market, ON Semi's product is the best, which provided us 4% NEDC improvement from a range perspective. Silicon carbide module has a longer range, which means high efficiency and finally reduce the CO2. We have been looking at the product roadmap to find opportunities where the 2 companies can work together. When we find issues, the 2 engineering teams working closely, solve the issues one by one. So this teamwork helps us to really move forward on the product development. The China local team is every week in our office. So we are really more like a big team working closely. We never put ON Semi as our supplier. They come in without notice, so it's more like a come back home. NIO is a young company, and a new brand. We cannot afford any kind of market failure. Reliable quality is critical to us. ON Semi's product is the leading position in the market. That's the foundation for us to select On Semi.

They evaluated every product in the market and picked ON Semi. If you didn't leave anything I said so far, you can take that one home. That's why we win. And that's how that ecosystem is interconnected. A bottleneck in one due to technology or investment or anything like that is going to prevent maximizing the value across the rest. So when you take all of these markets and you take that growth and you take all the excitement of CAGRs and all that stuff and you synthesize them, to what does it take to capitalize on all of them. It is the intelligent power and intelligent sensing. And the combination of both are what we strive to have as our new mission in the company. It is through pushing that innovation, that boundary to maximize that intelligent power and sensing in order to allow our customers to achieve what they need by solving their most complex problems and therefore, them achieving their mission. Because it's all interconnected. It is the powering the electrification. It is enabling the experience with our sensing. It is through the industrial evolution that is no longer just machines and open loop, it is with robots and efficiency and high accurate, reliable and quality output. And it is through enabling that because Industry 4.0. What we all talk about is what is going to allow all of that content to be built into vehicles. We are at the center of all of this. This is the new ON Semi. This is it. We start with the people that drive all of these before we even get to all the exciting technology and the capability and what you need an intelligent power, intelligent sensing, there's a layer, which is our teams, some of whom are here. They built overnight, all that stuff you saw downstairs. And I'm sure they saw and got a lot of problems and they solve them to see what you saw downstairs in our immersive room. The people enable through our targeted investments, this power, intelligent power and tangent sensing. And below that, you have the manufacturing. You'll have the module, you have integration, and more importantly, you have the channel. There is a module, trust me. It just didn't show up. But that's what you need. You need the people, you need the technology to back them up, and you need to be able to deploy it to our customers in the breadth and depth of technology, packaging and pushing the boundary of innovation. But you have to play to win. You don't dabble. You pick your markets or the ecosystem. We picked the technology that maximizes the market. It just happens to overlay on automotive and industrial, great markets. You just double down and you bet on the technology because I will tell you, I will bet on my team any time. And I'll bet on them by allowing them to innovate in the markets that we need. And you implement structural changes from where we were in order to deliver on that new one, new strategy. You have to remove complexity. You have to have people innovate. You have to push the boundary. You have to streamline manufacturing. We're no longer a company that has manufacturing and we go run after everything to fill that manufacturing. That is not what we do. We will run after innovation, we run after technology and manufacturing is there in order to support. We're turning the historical ON Semiconductor table and creating a path for ON Semi to deliver on the promise that we're all here making today. And we capture the value. We're not going to be everything for everyone. We're going to be the partner for the disruptors and those who value innovation. And that's how we will deliver on our margin promise, and we will execute. And we will execute the way you saw us execute. I'll take the last 2 quarters. We have been executing. This is not new. We have a team that is able to execute on a transformation. We have a worldwide team that is able to execute on the technology, and we will deliver what I am talking about here today and we will reward our employees for it because that is how we are creating and rewarding with shareholder value and customer value creation as well. Now all of this is going to lead to a financial result. But I said I brought back up, and that backup is for Thad, our CFO, to take and synthesize what this means for us as a new company? What does it all translate to with all the markets? Not if, but when, and that when started 2 quarters ago. And the results that we're going to sustain and sustain over the next 5 years will be outlined by Thad. And with that, I'll have Thad go through the financials. [Presentation]

All right. Great to see everyone. It is great to be back in person again after 1.5 years of being out. So it's nice to see everybody face-to-face. Like you heard from Hassane, you heard from our customers, and I'm going to now take that and show you what it means for our financial model and how we're going to create shareholder value out of that. I also have a few friends that I brought along as back up as well. So you'll see that as well. So let's jump into this. So I think Hassane did a great job of talking about the megatrends in industrial and auto. Those are our focused markets, they'll continue to be our focus markets. We are not dabbling, we are doubling down. The next one is gross margin expansion. We'll go into this deeper, but we've got the manufacturing and optimization. We've got a mix. And we've got a portfolio rationalization that we're going through as well. The third one is generating free cash flow. And with this becomes a shareholder-friendly allocation model that I'll take you through as well. And the fourth one is a new leadership team that's focused and has a history of execution. And you're already seeing it and as Hassane said, on Monday, we announced record revenue, record earnings and record free cash flow for the second quarter. So we're seeing early signs of this transformation taking shape, which is great to see early. And then the last one is, as we execute we're going to drive sustainable results. We're going to take the volatility off the P&L and I'll walk you through how we're going to do that as well. So let's dig into each one of these. So the first one is the revenue growth. We're looking at growing revenue 2x the semi industry.

Our fifth generation eDrive technology is based on the design principle of a current [ excited ] rotor and therefore requires no materials classified as [ waste ]. Power semiconductor solutions from ON Semi provide a technical solution behind the scenes to achieve this. They help us fulfill our promise of sustainable electric vehicles. We are also working closely together to make our vehicles safer using image sensing, ultrasonic sensing, [ statures ] and power management solutions from ON Semi. We are counting on the performance and high quality of these solutions.

All right. So you're starting to see the deep relationships we're having with our customers. So let's talk a little bit about the intelligent sensing and intelligent power and the market growth we have ahead of us. So starting with 2021. If you look at our projections and where we've been so far in the year, we're estimating that we'll finish the year just under $6.6 billion of revenue. As we look forward to a 2025 target, I'll walk you through the growth rate here. So we're looking at about a 7% to 9% growth rate over this time horizon. This is 2x the industry. The industry is forecasted to grow 3.5% to 4% over the same time frame. And if you break down the individual components, starting with the intelligent power, we're growing at 15%. That market, as Hassane showed you, is projected to grow the market rate to 6%. So this is the electrification. This is the factory automation driving that market. On the Sensing, we're looking at 13% on Intelligent Sensing versus a market growth of 10%. So in both cases, we're outgrowing the market, and again, here, ADAS, advanced safety, autonomous driving and factory automation driving that as well. And then last piece is the other pieces of our business, which represent today about 40%. Well, looking at that decline, I'll come back and touch on that in a minute and explain the decline there. But that business is actually very attractive from a cash flow standpoint. So it generates a lot of cash and critical to us. It includes some connectivity and some other products in there. So I'll come back to the growth rate on that one in a second here. So let me talk by end market. Auto, Industrial, as I said, is -- are the focus markets. They'll fuel the growth. Again, starting with '21, just under $6.6 billion. We'll step through each one of these. So like at the 7% to 9% growth, starting with Other. So Other on the markets here are consumer, compute, communications. In here, we also have our cloud and 5G business. That's forecasted to grow at 11%. So definitely above market there as well, another growth driver for us. It's in our -- in that bucket. On Industrial, Industrial is forecasted to grow 7% for us. That's our estimate here. That market overall is growing 4% to 5% over this time horizon. So again, taking market share, outgrowing the market and the industrial side of the house as well. And then on the Automotive, growing 17%. Over this time frame, SAAR is forecasted to grow low to mid-single digits. So we're growing at 17%. Hassane talked a lot about the electrification and the drivers there and the sensors. And so obviously, that's a big opportunity for us. Today, the Auto and Industrial represents about 60% of our business. As we go forward, that will move to about 75% by 2025, as we focus on those markets. With that, obviously, becomes gross margin expansion. We'll come back to that, but it's a very positive move for us as we see more and more Auto and Industrial business ramping. So we look at our business in 2 categories. We look at it as noncore and strategic. Our strategic products, where we're going to double down, we're going to continue to invest. And then on our noncore businesses, we'll look to exit that business. And so today, in 2021, there's about 25% of our revenue is what we consider noncore. Over this time frame, we're going to exit about half of that, which we consider low-margin, highly competitive markets and products that we choose not to play in. So if you think about it from an overall revenue standpoint, it's about 10% to 15% of our overall revenue that we'll exit between now and the next couple of years. And so that's going to mute our top line a little bit for the next 2 years in '22 and '23. Now at that same time, although we're going to give on the growth rate, we're going to focus on operating margin expansion. And I'll come back to that again when we talk about gross margin. But you will see a little bit of a muted growth. And then in the outer years, after '23, you're going to see the growth accelerate and then achieve that 7% to 9%. So if we think about our strategic business, it's growing at about 13%. That's the basket of everything else other than noncore. This is where we'll invest 100% of our R&D dollars, and we'll double down there. And then that will drive the margin expansion. And then again, you'll see that 7% to 9% growth, a couple of years muted growth, as I said, in '22 and '23, but 10% to 15% will roll off over time here. Then if you think about -- we've shown you a lot of videos here with customers and their engagement with that. Let's talk a little bit about our customers. So our top 20 customers represent 35% of our revenue. They tend to be highly diversified across all geos, across all products. They tend to be very sticky. We have no 10% customer as well. And because we align on technology road maps, we're seeing more and more stickiness with these customers. And then at the same time, we're engaging with our customers on long-term agreements, which gives us better visibility, allows us to plan better and plan our capital allocation and our investments in capacity. And then we also have a channel, a very broad channel. We have about 23 distributors across the globe today. It represents 60% of our revenue today. It is a customer base that's highly diversified and highly profitable for us. So a channel that we want to continue to invest in. It also strengthens our presence in the industrial market. The industrial market is broad, lots of customers, and we need the distribution channel to serve those customers and achieve that growth. So we look at that as a competitive advantage. And if you look at who we engage with, we're engaging with all the marquee names in our focused markets. And we've got deep engagements with the disruptors. And if we look at our top 20 customers, our top 20 customers on average buy 24 product families from us each. So this is the breadth of our products that we provide multiple solutions to our customer. We're not a one-trick pony. We're actually providing a broad range of products to those customers. And Hassane talked about the various aspects of that product/so deep relationships, product breadth, strong channel gives us an advantage over many of our competitors and being able to go to market. So let's do a deep dive on gross margin here. I've talked about the manufacturing, consolidation, the optimization and the mix, but let's walk through the drivers here. The execution is going to drive to a 45% gross margin target here for us by 2025. We've done a great job of executing so far, and let's go through the components of it. So we're forecasting to end the year right around 38.6%. And how do we get the 45%? Let me walk through the components. So the mix shift. This is shifting more and more to Industrial and Automotive, as we see 75% of that business becoming Industrial and Automotive. More and more of it becoming more proprietary. That helps improve gross margins. Portfolio optimization. I talked about walking away from the 10% to 15% of our business. That will give us a margin bump just by exiting that business. And then the last one, which represents about 50% of the gross margin improvement is on the manufacturing side here. So this is optimizing our manufacturing, driving efficiency, exiting fabs, talking about fab-liter, I'll go deeper here. And that's what gets us to the 45%. So shifting to fab-liter. So we've said we're not fab-lite. We're not fabless. We're actually going fab-liter. So if you look at what we've done historically, we've been a legacy IDM focusing on fab fillers, we had to chase revenue to fill up the fabs. We are always running to catch up to that. We had excess of capacity. So we are investing in capacity before the demand was there, and we had to chase that back to the fab filler capacity. And then we have many subscale fabs today. So through acquisitions and various sources, we've got subscale fabs, footprints very broad. And then as we've invested capital, because of that broad footprint, it's caused a low return on the invested capital. So as we think about moving to fab-liter, let's talk about what that means. So the first thing is moving from a fab filler to going more and more flexible manufacturing. This will lower our fixed cost footprint, it drives higher gross margins, and it reduces the variability and the volatility on the gross margin line as we move that way. On the excessive capacity, we're going to invest our capital into differentiated products and differentiated solutions. We're not going to invest in common technologies where we can go outside. So we'll flex outside to take advantage of those technologies, and then that gives us a competitive advantage that we'll continue to benefit from. On the subscale fabs, we'll exit those. There's a cost advantage to that. We'll take fixed cost out. We've got a 300-millimeter fab that we'll continue to invest in. And then on the back end, we'll also provide -- we'll go more into a flexible-manufacturing back end as well. So today, we use about 34% of our back-end manufacturing is external. By 2025, we think that will be about 45%. That gives us a cost advantage as well, gives us that flexibility. As market dynamics change, we can flex inside and outside. And then, as I said, we'll optimize our CapEx by really investing in power, silicon carbide into differentiated products. So all of our capacity expansion will be where we differentiate versus common platforms, and that will help us maximize the returns on those investments. So that's our fab-liter manufacturing strategy that we've talked about. Now let me go a little bit deeper into what it means for ON Semi and how we look at it. So if you think about the number of fabs we have today, we've got about 10 fabs around the globe. We've said we're going to exit a couple of them. We publicly said which ones they were. But over this time horizon, we plan on exiting more. So you can see what's going to happen here. Our number of fabs will decrease over time. And as we exit those fabs, over this time frame, there's $125 million to $150 million of fixed costs that will come off the P&L. And that goes right to gross margin, obviously. So reducing the number of fabs, positive for us. As we think about capacity and the capacity for -- per factory, that goes up. Now we bring on the 300-millimeter fab in East Fishkill, we get capacity there. And we're reducing the subscale fabs. And as we do that, we increase that capacity in those fabs. It actually lowers the unit cost as well, not just taking off the fixed cost but we actually get a cost advantage in the 300-millimeter fab. So capacity per factory goes up. Then if you look at our total capacity, we have the opportunity with this footprint here to increase our capacity 1.3x. And that will all come in power, silicon carbide in areas that we can differentiate again. And with our engagement with our customers and our long-term agreements that we're putting in place, we can plan much better on the capacity needs multiple years out. And we'll build the capacity based on the demand that we see based on commitments from our customers rather than build it and they will come. So this will give us an advantage as well, and again, as I've said, be much more capital efficient for the company. [Presentation]

So he talked about integration, packaging, scaling, our new fab-lite strategy will allow us to support and scale with a company like DexCom. And that's where we'll go as we go forward. Free cash flow, another big focus for the company and will drive shareholder value. We're looking at 20% to 25% free cash flow margin. So if you start with where we are today, we're projected in the year right around $1 billion of free cash flow. That's 15% free cash flow margin. And we think we can double that by '25, going to roughly $2 billion, and that becomes 20% to 25% free cash flow margin. So it will be a focus for the company. Again, we'll be maximizing the return on the investment of the capital and driving incremental margin. And this shows the leverage in our business model. So we're going to increase our free cash flow at 2x the rate of revenue, again, the leverage in the model. If we start looking at the capital expenditures, which we do have, we're going to invest in the 300-millimeter capabilities, as I talked about, that drives a cost advantage for us. It allows us to consolidate our fabs. We're going to invest in silicon carbide. We'll continue to expand our die capacity and our competitive advantage in modules, continue to make investments there. Again, we can differentiate on product leadership. And then power and packaging will be the areas. So all of our CapEx, you'll see in these areas going forward. And this will give us a competitive advantage in packaging, as well in unique power capabilities. So our capital intensity over the next couple of years because of our great opportunity ahead of us is about 12% for '22 and '23, and then will moderate back down to 9% by '24. So then the next logical question is, so you're going to create $2 billion of cash, what are you going to do with it? And how do you -- what is your capital allocation strategy? So the first thing we're going to continue to do is invest in our organic business for growth. We're going to invest in product-differentiated and gross margin-accretive products. The -- all of the investments will be ROIC based as we think about which choices we have. We'll also look at M&A that is adjacent and complementary to what we're doing today, or it accelerates an initiative that we have going on inside. And all of our M&A activities will be accretive to our financial model. And then we'll maintain the financial flexibility to support both of those initiatives above. Our target leverage ratio on a net basis will be 1.5 to 2x, and we plan on maintaining our current credit ratings as is. And then with the excess cash flow, we're going to take 50% of our free cash flow and return it to shareholders in the form of share repurchases. So a strong return of capital policy going forward over the long term. So let's talk about sustainable results. I've showed you a lot of good numbers there, but how do you do it consistently. So our operating margin, again, was going to grow 2x the revenue growth. And again, the leverage in the model is highlighted there. In order to drive that, there's a number of things that we've got to drive. So we're going to focus on profitable growth. We're decoupling the gross margin from revenue. We're going to achieve our gross margin regardless of revenue. We're going to exit volatile and highly competitive markets to take that drag on the gross margin off. We've got long-term service agreements that give us better visibility with our customers to plan our capacity and our capital allocation. The fab-lite strategy reduces the volatility on the P&L in terms of gross margin and investments. And then we'll have tight cost controls across the company. So we'll actually invest in OpEx significantly behind the revenue growth. So that will give us an opportunity there. And then our R&D will be in product leadership in areas that we can generate high returns. And by doing that, we believe we'll be able to have more sustainable and consistent results in good markets and bad markets. And that, obviously, drives shareholder value as well. So the '25 target model, I've hit on a few of them. We'll walk through it. Let me start with where we are in '21. I've touched on a few of these. I said we'd close the year just under $6.6 billion in revenue. Our gross margin is 38.6%, is estimated to be there. Operating expenses are coming in around 19%. And CapEx intensity is around 8% today. And our free cash flow margin is roughly 15%. So as we look forward into '25 and we look about what we can do here, we talked about the 7% to 9% CAGR, growing 2x the semiconductor industry; gross margin at a 45% target, this is the optimization of our manufacturing, the mix, the portfolio optimization; OpEx about 17%, and as I mentioned, it will grow slower than revenue and lag revenue growth; and that will give us operating margins of 28%, and that's growing 2x the rate of revenue growth. CapEx will be 9%. And as I said, the next couple of years will be a little bit higher at about 12% as we're investing in the 300-millimeter fab in silicon carbine and power technologies. And our free cash flow is at 20% to 25%, and we'd be generating $2 billion of cash in 2025. So we talked about sustainable results. We've also got to do our part, and we're going to be climate responsible as we go through this. Over the last couple of years, we've won a lot of awards on -- as we focused on sustainability and ESG. ISS has rated us Prime in our ESG activities. Barron's rated us in the top 10 for the most sustainable companies in the U.S. And over the last 6 years, we've won consecutively being a part of the world's most ethical companies. So it's in our DNA. It's in our culture to drive sustainability. Our customers are doing it. We're doing it as well. We're doing it because it's the right thing to do. And because it's the right thing to do, as we go forward, we're committing to being net zero by 2040. Again, it's the right thing to do. So we believe what this will do, not only by driving what's right for the environment, it drives alignment with our customers. Our customers are asking for it. Our employees are asking for it. And this drives tight alignment, and you'll see it by here -- by listening to the customers here. [Presentation]

All right. So just to bring it home, I'm going to end with the same slide that Hassane ended with. He talked about playing to win. He talked about implementing structural changes, capturing value and executing. And we think all of this together drives shareholder value. With that, we're going to open it up to Q&A.

[Operator Instructions]

Thanks for hosting the day. And Hassane, those are some amazing shoes. I love them.

They're comfortable.

Tons of slag. I guess I don't even know where to start here, but maybe I'll start with incremental gross margin. Previously, we were thinking -- the last management team was thinking there was a 50% fall-through. But now with your long-term model at 45%, and it seems like you're structurally moving to higher gross margin end markets here, I was wondering if you could potentially give us an update there. And just secondly, maybe for Hassane, you guys are walking away from 10% to 15% of revenue. Have you gone to these customers? I assume the first move here would be to raise prices. And have you talked to these customers about price increases? And is it your belief that they will -- that they won't take those price increases. And so is that why -- I guess, what are the details around the 10% to 15% that you think you're going to lose? Have you already gone to them with price increases?

Let's start that.

Yes, start with the gross margin.

Okay. So on the gross margin, look, I don't think about it as fall-through because as we rightsize that manufacturing and shrinking that, it's a different scenario than what it has been historically, where we look at every dollar that would fall through. As we shrink, the cost structure changes drastically. So what we actually look at is the contribution margin of every incremental dollar in terms of just product cost and product margin on it rather than fall-through. So what we're more focused on is the ability to drive sustainable long-term margins on every product we sell versus quantifying that in a fall-through. Again, we'll rightsize the manufacturing to fit the size of the company. And then from there, we'll continue to grow. So we don't look at it as we're having to chase that revenue and what's that incremental dollar going to do. It actually could be much higher in some cases.

That's -- yes, I echo that. I mean that's the argument of moving away from what I called over -- on the call, the fab filler. When you're chasing that, how do you do it? You just keep pumping revenue. And that's not the model we're going. For the next question you asked, as far as have those been communicated? The answer is yes, in multiple ways. Some are -- were -- can't support it today. It's a good environment to be in, in order to accelerate a lot of these decisions. Now when I say accelerate, there's growth in all areas of our business, including the gray bar, the 25% of the -- it's all growing. What we're having to make choices today and communicating those choices with the customers are -- we can't scale all of them. So what we're doing is we're reducing capacity, therefore, forcing that decline and moving that capacity today to where the growth is not just this year, but in that strategic product that fab showed. We're fueling that growth today because of the environment and accelerating it. Therefore, we're taking away from, I'd call it, the legacy or the noncore businesses. And those are intent to have been communicated. The latency between making the decision and fully executing it, Thad talked about a 2-year, is there's migration that we need to do. We're also a -- there's an ease of doing business component of it, some of those customers we supply other things to, and therefore, you can't just say, effective tomorrow, we will no longer ship. So there is a transition, and that transition is already ongoing. And as we -- they either ramp a different product from us or they ramp a different product from somebody else, if we don't have that product as far as value-driven product delivery, then we'll part ways. We'll keep focusing on the strategic. They will go somewhere else, but it's that transition that we are into now, and that will take between 1 and 2 years depending on the customer and also depending on the market recovers.

Gary Mobley, Wells Fargo Securities. Thanks for hosting this event, very informative. I wanted to start by asking Thad about the target. So 2025 target, 7% to 9% compound annual growth, for us, to try to figure out what that magical revenue threshold is. But is that from a base that is 10% to 15% lower from 2021, and then from there, 7% to 9% growth? And then for Hassane, the China EV market is critically important for any U.S.-based semiconductor company. But it is largely, I guess, internally sourced, in particular, with Shenzhen ON expanding their silicon carbide capacity and having a state-of-the-art manufacturing facility. It seems like they're very content with their own supply chain. So how difficult is it going to be for you to tap into that market?

Yes. So let me start with the baseline of the 7% to 9% growth. So the 7% to 9% is off of our '21 projections, which is just less than $6.6 billion, which includes the roll off of the 10% to 15%. So when you think about what I showed on the strategic products growing 13%, they're actually going to grow much faster in the short term to offset the decline that we're going to see as that business rolls off on the 10% to 15% over the next 2 years.

Yes. As far as China, look, today, your question is about silicon carbide, but let me abstract out of that. Every 3, 5 years, that same question could have been asked about any -- whatever technology was the new technology that's upcoming. So I'll answer it that way. There's one way, and it's not about China or Europe or North America even, it's about -- it is our responsibility to invest in value in order to stay ahead, and therefore, providing the value is not a decision, well, I wake up today, and I want to do silicon carbide. We know what it takes to do silicon carbide. But I hope -- I showed and I explained that it's not just the device. It is -- the technology is one thing, the breadth, the portfolio, the packaging, there's a lot of investment, but more importantly, a lot of innovation that has to happen. And that's our pedigree. That's where we came from because of the IGBT position we have. We're going to contain -- continue that push in order to maintain that leadership, and capitalize on the silicon carbide conversion as customers introduce it, whether in 1 axle or 2, as I explained. So it's not about somebody deciding to do it because it could be anybody. If we don't keep pushing that envelope, it doesn't matter who you're going to lose to. First, you're going to lose on margin, which is not something you heard from Thad, and our direction is not something we are going to let happen. And second, you're going to lose on competition, efficiency. So we have to maintain both. We're going to keep both, and I welcome whoever is going to decide. And you saw from the backup I brought where the Chinese customers are with ON Semi. And these are not legacy. There are new disruptors. So just look at where they are betting their power infrastructure today, even with all the news that you highlight. So I'm very comfortable in our ability. However, you have to keep innovating. You have to keep shrinking that value. You have to keep reducing that weight. You have to keep pushing that boundary in order to always get that less range for the customer, it's that's how you win.

Thad and Hassane, good to see you guys again in person and great show here. I had two questions. Thad, you made a very interesting statement that you expect to achieve 45% gross margin regardless of the revenue growth. So if I was to dream the dream and say that we get revenue growth on top of your ability to achieve 45%, in case of dreaming the dream, do I wake up at 45% or do I keep going after that? That was the first one. I got one for Hassane after that.

Look, we've got a path to get to 45%. You've seen us execute over the last couple of quarters. We've said all along, this is a journey. It's not going to be a step function, getting to 45%. We also said it's not going to be a hockey stick in the last couple of years. We have a path to get there. We'll continue to execute it. We'll rightsize our manufacturing to the growth of the company. Right now, we're projected at 7% to 9%. We'll get to 45%, and then we'll talk about it more after that.

Fair enough. And for Hassane, I think you highlighted 2 themes as the key themes, power and sensing. Could you tell us what the basic fundamental gross margin range for those products are in power and sensing?

Look, it's not -- the gross margin, obviously, varies just like any company, where you have some above your corporate targets, some below the corporate target. And as a company, you get there. It's not about the power and the sensing. There's that breadth below it, whether it's by market or by technology or by generation of technology. That's what we're focusing on. So I'm looking at the blended has to be accretive. Now forward-looking investments, back to how we make decisions on R&D dollars and how we invest them, that's going to be more driving into that accretive margin. I mentioned multiple times since I joined the company, where one of the biggest pleasant surprises I got is when I looked at the distribution of revenue. It is not a tight distribution around the corporate margin, whatever the corporate margin was at the time. It was a pretty wide distribution, which allows us to start shifting that mix even as we stand here today, and you saw the results of that. So mix shift is going to be one, and new product is going to be the other. But we are going to shift the mix. We're going to do the manufacturing. All these are, what I call, self-help. That's why they're disconnected from the top line because that's a shift in the mix as you grow that mix. And then growth will come on top of that, and we have to make sure and that's our responsibility on the R&D allocation of putting that growth with new products now accretive to that margin target that we want. So over the run, again, the 45% will be the milestone.

I actually had 2 or 3 kind of clarifications. First, I appreciate you gave us the '25 vision. For better or worse, we often focus on the nearer term than that. And I think Thad, you mentioned that the growth in '22 or '23 might be muted. We understand those are kind of the transformation years. So if you could just give us some bookends of how we should be thinking about sales growth and free cash flow in calendar '22 or '23 to the extent you could give us some range around that so we can calibrate our models? And then I had a follow-up for Hassane.

Yes. No, and for '22 and '23, as I said, I think we're going to grow at market, right? We're not going to outgrow the market as we will in '23, '24 and '25. So I would look at -- you tell me what the market's going to do, and I'll tell you where we're going to come in there. But I think that's -- we should be pegged in the market as we roll off that 10% to 15% of noncore.

Got it. Next thing is, Hassane, when I look at a lot of your competitors, right, especially the ones in Europe, they also have a microcontroller portfolio, right? And some of those microcontroller portfolios, I assume, you know very well. Does one need to have a breadth across power and across micros to be successful in the Automotive market? Do you think just staying on the power side is sufficient for you to achieve your targets in this market?

Yes, that's a great question. So if you look at the efficiency, that is the first question that is asked. If efficiency is equal, then the BOM coverage is the next thing that customer look at is, okay, you have the power because that is the make or break from the value that they provide, our customers provide to their customers, whether it's range, wage or cost. If the efficiency is there, then you go to next level, which is breadth of the bill of material and breadth of the portfolio. Can I engage with ON Semi on here? And I got these 200 other parts that I need to engage on. How much of that can I get not just on a system? So that's the main one. Now I'll say efficiency is not the same. So we have that competitive advantage. So the rest of it doesn't matter because they don't get to the next level. And the fact that we're able to do the maximum coverage of the BOM based on the breadth and the depth of our offering is a very sustainable and a sticky model. So we're going to keep that and keep that efficiency. So it doesn't get to the next one. From a -- however, I'll answer it also from a system-level perspective. At a system level, you've seen those systems, they're liquid cooled, right? Whatever liquid the customer decides, but they're liquid cooled, and they're high power density. A microcontroller does not live in that environment. A microcontroller is a different module. And therefore, the BOM or the integration or the cross-selling is not as critical or critical enough to supersede the efficiency. You lose way more on the efficiency than a $3 microcontroller. So that's not a make or break for the strategy. The strategy is sound, and we stress tested it based on that.

Vivek, I'm sorry, but I missed the second part of your question. I just want to clarify on that as well. You asked about cash flow and operating margins. So as the top line is muted in '22 and '23, we'll be focused on operating margin expansion. And we still believe during that time frame, we can keep our free cash flow margins in the mid-teens.

Ross Seymore from DB. One question for Hassane, one question for Thad. Hassane, somewhat pivoting off of what Vivek just had asked, how does cyclicality come into this equation for you? What if revenue growth is not 7% to 9%? We've heard big CAGRs for content gains from a lot of companies over the years. And if you look far enough out, it happens. But in the meantime, we have a lot of volatility in this industry. So what happens if the 7% to 9% doesn't occur? How does your business model adjust to that? Is it more variable now? So as Thad just said, some of the margins can still come through. Talk a little bit about that scenario.

Sure. So if you look at -- the answer I gave earlier is the mix shift and the self-help are what's going to reduce that volatility. So the comment where you're tying, and a lot of companies do that, is you have to grow at that rate. You have to reach x billion dollars or x top line in order to achieve your model, but we're disconnecting it from there. The growth that we have even on the growth -- without winning the new designs, the growth fundamental that is ramping even today is growth. So the mix shift is going to happen. Of course, we will look at what the market is doing as we resize our manufacturing, where I said the strategy is going to fuel the manufacturing. But that increase, that expansion is based on self-help. Because designing products today, if you think about it in the Automotive market, that's not going to generate -- think about a 3-year design cycle. If we just launched today, you're talking about 3 years. So we are basing our push on the products we already have, legacy is going away or the noncore is going away, and then we're going to push on what we already have ramping. And we're just going to do it very effectively and reduce the volatility because of the manufacturing footprint. Those are what's going to help disconnect that from the market. And that's how we did it relative to the market. Whatever the market does, we're going to adjust, but there's fundamental growth going there. And the drive of EVs is happening. And I said it may not happen like the graph shows over the next 10 years, but even just penetration of EV and no more cars made, that will give us the growth. Because the content that you have to look at is that 30x, and the 30x is based on what we have today. And that's why I wanted the credibility of showing what a customer is shipping today from '19, '20 and '22 and that acceleration that's happening.