ON Semiconductor Corporation (ON) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thank you for joining us. I'm Vivek Arya. I cover semis and semi cap equipment at BofA Securities. And I'm absolutely delighted to have the team from onsemi join us. Hassane El-Khoury, the President and CEO; and Thad Trent, Executive VP and CFO. And let me start by congratulating you, Hassane and Thad, on inclusion in the S&P 500. That's a -- many years ago, when we used to follow ON and we would see all the margins and pricing and all those other issues, I never thought that there would be a point at which ON would be part. So congratulations.

Thank you. Thank you. Yes, it's a great milestone for our teams, specifically after the last at least 2 years of going through the transformation. So it was a good weekend.

Yes, I can imagine. So maybe, Hassane, let's pick up on that transformation because I think that's really the most important aspect is it's more than the cycle, right? It's a more durable transformation that we are seeing in the company. So until -- you took over kind of late '20 and then Thad joined, I estimated that ON's average gross margin was like 36%. And here we are at 49%, right, knocking on the doors of 50%. So what has created such a big change? And are investors not justified in thinking that there's a lot of unsustainable cyclical aspect to this?

Yes, look, the fundamental thing, a lot of the path that we've laid out in our transformation when I joined back in the end of 2020, are still the same levers we've pulled. Now different market backdrop. But if you think about what we said we were going to do, we're going to exit businesses that are not profitable. We are going to focus our revenue on where we add value, i.e., higher gross margin. Back then, obviously, I said, we are willing to get smaller to get better by exiting those businesses. So all of these things, once we -- what I call the portfolio rationalization. Following that, once you know what you're going to build, then we go to the manufacturing rationalization, which is how we're going to build it most effectively, most efficiently. So what changed is nothing. We just executed to all of these. The market was a better market, so we didn't shrink to get better. We kept growing through it. Although we walked away from $200 million of business at an average of 20% margin in a good environment. So you can imagine what that margin was. So if you think about what drove that transformation, it is a focus that we are a technology company that adds value and therefore, we need to behave and act like it. And that drove a lot of this day-to-day decisions that the team has done about what business do we still get into, what business do we not engage in, what is our true value and how do we extract that value. So backed on the sustainability of where we are today, there are 2 components of -- the big components of the trajectory. One is pricing. And pricing on what we said, 10% to 15% of the business we want to exit because it doesn't sustain the margin profile that we want, so we said we're going to exit. One way to exit that business is you price yourself out of the market. And we've done that. So pricing for that business that we plan on exiting is better than it used to be. However, it's still dilutive. I said $200 million, we exited at 20% margin and a good pricing environment. That's highly dilutive. When we lose it, [ ours is actually ] going to get better. The rest of that business, we're talking about $600 million left, that's not quite in the 20, but think about it in high 30, low 40. Still dilutive when we exited, but that -- there's a pricing component there that -- we took advantage of it, but it's still dilutive. It means it's actually -- as a corporation, we'll get better as we lose it. That's on the pricing yourselves out of the market. There is a bigger component, which is what I call the price-to-value discrepancy. And the way I describe it statistically, like I review it inside the company, is the area under the pricing curve for a specific product. Simply stated, high-volume customers, strategic customer buys a certain product for a dollar. I have 3, 4 customers, low volume. I don't know the names, not strategic to be direct, that are buying it for $0.50, $0.60, $0.70. What's the market price for that? I would argue it's a dollar, but somebody somehow quoted and the customer had been getting a really good deal for a few years. So we raised that price to the market to reduce that area, the leakage under the curve. That's sustainable because if that product existed for $0.50, the high-volume auto guys who are paying a dollar would have probably gotten it, right, either from us or somebody else. But the market supports a dollar ASP, and we lifted everything to the dollar, that's a sustainable part of our pricing. That's the value. That's the price-to-value discrepancy. And then you add on top of that, the manufacturing efficiencies, we've been able to get more products out of our existing fab. For every additional wafer you get out, everything gets cheaper by that much, right? So we've been able to get more out of our manufacturing footprint, which helps on everything else. Those are, I guess, the biggest portion. Of course, there's a lot of blocking and tackling every day that we do, yield improvement and so on, but all of these have been a big focal point for us.

And the only thing I would add there that I think you missed, Hassane, was the favorable mix, right? So we've been mixing to higher value product exchange. In a supply-constrained world, that was easy to do, right? We're able to accelerate a lot of that mix much faster than what we thought we would do at the time that we rolled it out. So if you look at where we're focused, auto and industrial, that's where the key products have been going, and that's helped an uplift in margin.

Got it. Where are you in that transformation? Do you think that you have -- obviously, so you have a multiyear plan, where are you in terms of getting the results of that? Is there still a lot more to go?

Yes, look, I mean if you look at it in those components, right, mix is always going to be changing. We're about 63% to 65% auto and industrial. What we've said in Analyst Day is that mix is going to be about 75% of revenue come 2025. So there is a component of mix that we're still going to see and that is favorable to our margin and the expansion that we've seen. The other big component that we have executed to, but we haven't seen the results, is the fab or the fab lighter strategy. We've announced some divestitures of manufacturing sites that are subscaled for us. We talked overall our fab lighter strategy will generate about $125 million to $150 million of COGS benefit as we fully exit. It takes 2 to 3 years to exit those fabs. We've made the announcements. The transfers are happening. That's going to still happen ahead of -- that's ahead of us. But from a price-to-value discrepancy and a lot of the commentary of restabilizing our business where we are, that's [ to a first world, all behind us ]. Right now, we're just going to benefit from that mix where mix ends up in these products that are strategic to us. And in the shorter term, we talked about there's about $300 million of dilutive margin business that we're going to exit this year and another $300 million next year, so those obviously will help because they're dilutive to the margin profile today. But big structural changes is really getting the benefit of the fab lighter strategy based on the divestitures we've had as we exit the fabs over time.

All right. One quick nuance-type question is that the margins of products you're exiting, are they at those margins even after you raising the price?

Yes.

Wow.

That's exactly what I said when I reviewed it -- when I walked in the door. I thought there was a -- we were off between what's in my head and what I got. But that's exactly it.

You were basically giving them away before then?

The way I explain it is that I can ship a suitcase full of money and my margin will get better. Just don't ship products. So we had to fix it. So you can imagine -- but the key is it's not where it is today. You have to think about it in a -- let's forget about the environment we're in today. And if somewhere in the future, a normal environment, those prices are still going to go back to what it used to be. So exiting now -- because people say, "Why are you exiting? There's supply constraints." It's not about what it is today. It's about the sustainability over a longer period of time, agnostic of what the market may or may not do in the short term. So that's the long-term view we've had. We fixed it to a much better margin now, but that's going to go back to the bad margin. And we had to get out of it.

Right. Maybe one thing near term. We have seen the China lockdowns impact semiconductor companies in different ways, right? Companies that are more exposed to the consumer, PCs and phones, I think they have been impacted more, probably because there's a greater demand side. But other companies have been impacted, like the equipment company, right, because of logistical issues and -- right, and supply issues. But when you reported recently, we didn't really see that much impact from the lockdowns. Is it just too early for you to see the impact? Is it something you're already kind of diversified away from before? What has helped you sidestep from the issues?

Yes, look, so what we -- since this whole thing started, we've been -- a part of our strategy, which we don't talk about a lot externally because it's more on the execution is supply resilience. Not just supply assurance, but the supply resilience. So we did see -- we talked about a 2% growth handicap on the next quarter on our guide. So we did see that impact, but what we've been doing is -- a lot of it is on logistics and distribution from a distribution center. We've rerouted a lot of our shipments out of our China distribution center into other Southeast Asia distribution center. It added cycle time, but we were able to kind of recover. So it created a bubble that we're flushing through. So we're able to change and reroute in order to still ship, for example, to Europe. Where we -- if you can get it to Europe, you're going to recognize that revenue because there is high demand that didn't get impacted with the China lockdown. So we were able to route some things there. So we've done some logistics jumps in order to recover that. And then, of course, we've seen that ease out -- easing out in China as we speak. And then within China, we had some customers within their own manufacturing that they were operating, meaning they didn't get to 0 as long as you remain in your bubble where you just don't leave. So it was a matter of getting products in and out of it. So primarily, it wasn't a demand issue or like demand -- it was more logistical. Now if it would have lasted longer, that would be the question. Okay, does it have an impact on demand? But given that -- the length of it, it was purely the logisticals and we were able to overcome it. We had a plan walking in the quarter. That's how we reflected in our guide. And we -- I would say we've been executing to that plan. But fundamentally, is a knowledge and awareness that we have to have supply resilience planned in it. The same thing last year when you had the earthquake and you had the floods in Southeast Asia, you didn't see an impact in our numbers because we've had those plans in place and we're exercising those plans, and they worked out for us to get more proactive rather than reactive.

Got it. Has Europe been a headwind at all from a supply or not just from you directly, but do you think for your automotive customers?

No, we didn't see that. Look, I had the same concern as everybody primarily on harnesses. Everybody talked about -- I never thought I'd have to worry about harnesses and everything else we have to worry about. But what we found is before the conflict kind of started effectively. There's a lot of posturing. A lot of customers started moving equipment out. So there was some preemptive capacity move into Central Europe. And it's not that hard to move. And a credit to a lot of the people in Ukraine, a lot of the factories that were more on the Western Ukraine kept operating. So even to think the line that didn't move maybe 2 out of 3 lines moved, they were operating maybe not at full capacity, but there was output. So that recovery then wasn't as bad as everybody had anticipated because demand is so much higher, in general. But they were, again, proactive about the supply resilience side of it that they were able to move some capacity out. So we have analyzed it a lot with some of my peer -- my customers and the OEMs specifically because we're trying to figure out is there any relief, meaning if you don't want the product, I can give it to somebody else and like, no, we've adjusted, and we will keep pulling it. Because what we don't want to do is build inventory if they're not building cars. I'd rather ship it to somebody that will build a car. And they -- there was no issues there, and they did build.

Got it. One thing, Hassane, you bring a very unique perspective because you've worked in the automotive industry than kind of the auto semi industry. And do you think the auto customers are behaving differently in that they are more willing to accept higher prices? Is that again a short-term phenomenon? Or do you think this can sustain in the future, right? Like there is a tendency to say this time it's different, and it's going to be always this way but...

Look, this is not a -- it's not a one-size-fits-all. Some of them get it. Some of them are waiting for it to go back to normal. I don't know what the normal is. But that's okay, we'll figure it out. But in general, it's not about -- look, it's not about accepting higher pricing, it's about investing in value. What people realized is we got here because nobody was extracting value out of millions and hundred million dollar investment. It was a race to the bottom. And when you do that, you're not investing. We, as semiconductor, where it all starts, we're not going to invest in capacity. We're not going to invest in innovation at the rate at which they expect us to unless there's a financial -- a viable financial model. It's just -- look, it's a business. You're not going to run a business because you like it and lose money. Why? Because it's something good to do, everybody has to make money. That requires a certain level of value creation. That's why it's not about price because price is tied to value. Something -- you buy something that's a lot of money and you say, "I got a good deal," because you have that value that you're extracting. That's what people are starting to realize is if there's value, the expectation is that value should be extracted. And if the supplier that's providing that value is a credible supplier, then they will reinvest in that business and that benefits the OEM regardless. You see what I mean? And that's what we're seeing not just today, we're seeing that in our silicon carbide engagement where I do believe and so does our customer to our customers that there's value created in the silicon, the fact that we're investing heavily in that business, the fact that we've acquired a company in order to provide that supply assurance that the customers are expecting, that's all not free. So pricing, the value accordingly, is something that our customers are open to because we're able to scale with them. We have the scale, we have the willingness to overinvest. We doubled our CapEx intensity. They see that as actually valuable as a partner for them that as they become successful, we will be there along the way to make them successful. And that adds to the credibility of our position. That's why we're winning.

Right. So let's say if you were back in the automotive industry and you had to deal with automotive chip suppliers, you would say, "Okay, ON might be disciplined, right? But I have Infineon. I have ST. I have all these other companies. And they're all investing, right? Everyone's CapEx is going up significantly. So just wait. A year from now, there's going to be more than enough capacity and there's going to be a price pie." Why isn't that the realistic scenario?

So it's simple. It's -- I'm smiling because I kind of was thinking for that, how do you mitigate a lot of that, and then we ended up with -- we have LTSAs with customers, think about '23, '24. We have customers come out to us unsolicited, meaning they came in and said, "Okay, we see the LTSAs are actually working because they haven't had an escalation call with us for 2, 3 quarters since we signed," for example. They go, "We'd like to extend it." So now we're talking about extending those LTSAs to '25, '27, some of them '29 and '30. While they wouldn't do that if they're waiting for, "Oh, yes, yes, we'll hash it out when there's supply and we'll bid it all out." Because what fundamentally -- and we don't lock all our business in LTSAs. It's just the stuff that we have to invest in, the stuff that we believe we add a lot of value. Back to your question, if I'm sitting at an OEM side, not a Tier 1 side. Let's just talk about the OEM because they're the ones that paid dearly for it by lack of revenue. If I'm at the OEM side going, "So everything you're telling me onsemi is $10 more," what, I'm just making up numbers, "in order for me to sell a $100,000 car, why are we having this conversation?" If it's true that if we commit, there's no more escalation. And we, as an OEM, we'll get what we need when we need it. To me, guess what? The conversation that I would have costs more than $10. You see what I mean? That's the key. So you have to look at it as in the big scheme of things because at a procurement side, if you look at the procurement -- Tier 1 procurement, all the way, everybody's managed on, then you get 5% down from your supplier and 2% down, that's what your bonus and -- there is no big picture. The only person who's left holding the bag is the OEM at the end of the day. That's why you engage with the OEMs directly. We're solving the problem at the OEM level because that's, at the end of the day, the decision-maker and the loss maker is the OEM. And some of them, like I said, how I started, get it, and some are waiting for, "Oh, I'll just wait it out." The problem is what do you do between now and then, you don't build? That's a strategic question for them.

So does it presume that you are making more proprietary products? Or does it mean that you are investing more in supply assurance?

It's both. So we make proprietary products. I'm not talking like an ASIC proprietary like people think about or a specific micro -- when I say proprietary product, for example, a high performance FET. I'll just use a simple product. People call it, "Oh, it's a discrete." High-performance FET is a proprietary product because it's not available everywhere. It's not a mass market where it has to have an onsemi logo on it and it has to come out of onsemi because that's the spec. It's ahead of the market, and it's the best FET out there. I would call that proprietary and high value. And that will -- that commands margin that's at or above our corporate margin. So it's not all -- I'm just going to define it, it is proprietary, but it's still a mass product, it's just better than everything out there. So that's what we're doing. Obviously, for -- I don't want to forget about -- image sensing is a proprietary product. The image sensors are proprietary. A lot of software or fixed -- mixed signal analog, a lot of proprietary stuff.

Right. So you mentioned the 2 favorite words for EV investors, silicon and carbide, right, which is an industry where we are seeing this kind of dichotomy where, right, you have kind of the pure plays, the [ full speeds ] of the world investing a lot in substrate capacity and materials. And then you have vendors like yourself and your competitors in Europe. What do you think sets your strategy, right? What differentiates your strategy because you seem to be very confident you will be out of the gate by the end of it? People are going to hold you to that, right, that $1 billion number. So what gives you the confidence you'll do better than all these other companies who have been -- who have invested so much more in CapEx or have much bigger, tight and wider portfolios?

Sure. I got the triangle. In order to win, you need to have substrates, device and packaging. You can't make a high-performance, high-efficiency power product unless you have all 3. Everybody you referenced has 1 or 2, not all 3 at the level we have at onsemi. Infineon, a lot of pedigree in power. IGBT, right? They don't have the substrate. They have to depend on the open markets. So our supply assurance, they can't really give that assurance to their customers, right? Especially when I said, "Can you scale with your customers?" So what do I know about Infineon? They said -- I think they put a $1 billion revenue number in 2025 and 1/3 of it is auto, there's about $300 million, call it, $330 million. Those are public numbers. So that tells you that customers are reacting differently to making sure that you have to have the right products, of course. Nobody is going to give you business for supply assurance if your products are not good. But if your products are good and you have supply assurance, you are way more competitive than you otherwise would be. Compared to others when you have the packaging -- we have 2 decades of packaging design with IGBT and Power. We're using that knowledge and putting it with our silicon carbide go-to-market in order to extract the power at a system level than you otherwise would. That's the -- that's what differentiates us. So you have to have all 3, and you have to be competitive in all 3 in order to win, and that's why we're winning. So I am -- you're right, I am bullish about our position, and we're executing to that.

Right. So other than taking your words, how should we track that progress? Should we just wait until end of next year to see it happen? Or do you think there would be other government announcements and other kind of metrics that people can track over time.

There will be breadcrumbs along the way. Well, maybe they're candy crumbs. They're much better than breadcrumbs. They're sweeter. But look, we're going to be disclosing -- obviously, I'm very cautious about disclosures with customers and so on. But look, what we said already is we're going to double this year than we did last year. So as we progress and start delivering on all of these and setting ourselves up for that in '23, I'll be talking more broadly about it. But right now, there's so much tension. I do consider the labels that we are engaging or the logos that we're engaged with and so on as a competitive knowledge that I don't want to disclose yet because I joke about it. I'm like probably, some of that $2.6 billion that we've won is probably in somebody's funnel, so keep everybody on their toes. But we will start disclosing more as -- at the right time.

Got it. Hassane, can you give us examples of what does EV with silicon carbide mean to you in terms of content versus what you're doing with IGBTs today?

Yes. Look, I'll compare it from -- for a car -- think about silicon carbide above IGBT. What was it like? Like 3 to 5x, right? So 3 to 5x dollar content between IGBT and silicon carbide in a platform. But more importantly is the penetration of silicon carbide in EVs. Right now, RFQs that we're doing for traction inverter, about 100 -- I would say 100% are silicon carbide over the next 5 years, obviously, to mature into revenue. There are platforms that have the traction, silicon carbide, but the front axle, the non-drive axle is IGBT. And another competitive advantage for us is we can do both, right? We have both technologies. So again, we can scale with the customer, and we can go with you want 100% SiC for some high-performance platform and a mix for mainstream for cost, and we can do that, and you don't have to go to another supplier. So that is what we're getting. So one is the lift from silicon carbide because of the value that silicon carbide brings. But the flip side also is you have the penetration of EVs as a total number of vehicles, that's also increasing. So you got that double increase or the double percent growth that you would just -- by converting IGBT to silicon carbide. And that's the acceleration. That's the megatrend that we talk about. That's why I'm bullish about the EV shift as an opportunity for us because it is an outsized opportunity from SAR versus content that we keep talking about and that EV. But what I want to make sure is we don't forget about all the other stuff in -- that electric vehicles will drive. For example, today, in an internal combustion engine, you have the belt. It drives all -- most of your loads, the AC compressor and the -- all the pumps and everything mechanical, that's driven by a mechanically driven belt. Well, when you go into EV, there is no belt. All of those are going to be e-drive. You have an e-compressor. You have an e-pump. You have an e-vacuum pump. All of these are going to require products that we also make. So it's not just about the EV opportunity. Obviously, the EV opportunity from a dollar perspective, yes, it's a big dollar content for silicon carbide, but you still have that whole platform that you're still engaged in. And being at onsemi, being a broad supplier and we're able to do all of that, that is a big benefit for our customer, one-stop shop.

Got it. It's interesting that there's a lot of discussion of EVs, but I think the image sensor part of your portfolio, I mean, that is applicable to 100% of the cars, right? Not -- it's not just EVs. So what trends are you seeing there?

So what we're seeing is there are 2 trends, including penetration. The first trend is increasing resolution. Cameras with we just introduced our 8 megapixel. So cameras are getting more and more resolution in order to get more -- higher level of safety as you get there. We're referring to all of it as Level 2+. I think the days of -- you and I remember from before, Level 4 and Level 5 and 3 years, Level 2+, it's like whenever it happens, it happens, we're going to be all right. So it's Level 2+ going to more resolution and more cameras per car. We're talking earlier today, you can think about on average, you have 4 to 6 cameras that you have to have. Some cars that are already on more advanced autonomy are about 9 to 11. Level 5 robotaxi have 28. So you have the number of cameras increasing as you have more and more autonomy or more and more functionality. You have the resolution, which drives a higher ASP, obviously, on a one-to-one, and you have the penetration of more cars having that. So these 3 are what we're seeing in our image sensing or intelligent sensing portfolio.

Got it. Maybe a few financial questions. On the gross margin side, right, I mentioned very strong, right? I never thought I would see onsemi report [ 49% gross margin. Maybe just -- you were shortsighted ] perhaps. But you're getting closer to the upper end, right, of your target, so how much more headroom. But then also part B of that is what happens if, let's say, hypothetically, we have some downturn next year and the semiconductor industry just goes down, right, 5% or 10%, then what happens? So both kind of the bookends of your gross margin.

Yes, let me jump in there. So look, everything that Hassane has laid out is structural changes we've been making to the company. And we've been making those, as we've said, to make it more durable and more predictable over time, up markets and down markets. We've said from the beginning that we would hold the 4 handle on our gross margins in down markets, right? And on the last call, I said, with where our margins are now, we get -- we're even more confident we can do that. So if you look at what's -- what we've got is we've got a couple of headwinds on margin in the short term. We've got silicon carbide ramping. We got start-up costs there. That will be a headwind for the second half of this year, the first half of next year. We've got our acquisition of East Fishkill, the 300-millimeter fab. We'll be a foundry partner of the GLOBALFOUNDRIES for a period of time, and that will be a headwind as well because we're providing foundry services at a low margin, but that will wind down over time. And at the same time, we've got accelerators where as we execute the fab lighter strategy, we get benefits out of that as these other products ramp and they're accretive to gross margins. So we've always said our target of 48% to 50% is a milestone. It's not a destination. I think you can kind of read into that as well. But for the next short period of time, we're going to be in that range with these headwinds, and we'll keep executing on our strategy going forward. And again, this has all been long term in terms of the sustainability of what we're doing. The part that's not sustainable is the part that Hassane talked about, the part that we're going to exit, right? So we're going to exit another $300 million of business later this year. Margins on there are below the corporate average. That will be good long term. Yes, so these are the structural changes that we're making for the long term that just make the company healthier.

Got it. So Thad, you said that in a downturn, it will still start with the 4. I mean starting with the 4 is still a very long -- far down from -- that's a lot. So could you give us some better -- because I know in prior downturns, it would go down substantially, right? But now you have a lot of other structural factors, right, working out for you. It's a very different manufacturing strategy. So is it mid-40s? Is there some conception...

I'll tell you because it's -- to be fair, we said it starts with the 4 because your comment is, call it, 20% or whatever, it's how fast does it happen? Do you see what I mean? That's very, very different. If you wake up in the morning and it's down, that's a very different scenario that, "Hey, we're starting to see cancellation" -- because think about it this way, when you're in certain cases, 50% oversubscribed on demand, if demand goes down 30%, great. We're still not meeting it. But at least the cancellation start giving you way more runway for you to adjust what you're doing, right? But if it goes from 150% oversubscribed to 80%, so 20% under, that's a very different thing. So that's why it's -- managing it is very different, but what we've done is we've implemented all the tools for us to manage it way more effectively. The biggest one is we don't have inventory in the channel, right? So when you start seeing the demand coming, that you already buffered yourself from a quick reaction, right? Usually, it's -- you have 10, 15 weeks in the channel. You get a drop of 20%, you're done for a quarter, right? We don't have that. So we've done a lot of these -- back to Thad's point, all these structural things that any pattern change in demand, we'll be able to adjust and not get impacted 1:1. That's why timing of your question is more important than the level itself.

Right. The pace of the correction or change?

That's right.

Absolutely. Makes sense. Then, Hassane, maybe looking out next 3, 4, 5 years, like much, much longer term, how do you envision onsemi to evolve that -- you have a number of things on your plate right now, right, the EV adoption and silicon carbide and so forth. At what point do you get attracted back to one of the markets that made you successful in the past, microcontrollers, IoT? Why isn't that a natural next step for ON?

Look, because it's very distinct from what we're doing. I'm familiar with an SoC and microcontroller and so on. And then what you saw is we expanded from that into IoT, which is around it. onsemi, it's a very different technology arena that we're playing in, and it's on the power, power and sensing side. Today, there is no co-location of microcontrollers with the power domain. It's very distinct, different groups actually do all that. So from a synergy perspective, it would be a jump. I'm not saying it's not possible. But right now, the market opportunity for power over the next even 5 to 10 years is power as its own merit. And we have to be able to get a very strong position in that, sustain that position with the margin that we talked about before we get distracted with other things because the microcontroller market, to be honest with you, is crowded. It has its players. What are you going to do there? You see what I mean? You get in, now you're beating your head against big, established players. That's why it will be a distraction for what we want to do. And power is a focus point -- power and sensing. I don't want to discount sensing, but that is its own market that has huge potential. And to be honest with you, it's growing more than the microcontroller market. So that's why I wouldn't distract because you hear me talk about our strategy being one of focus, I want to maintain that.

Got it. Do you think there are opportunities to -- I don't want to use the word "consolidation," but kind of bring more capabilities, right, around the power portfolio.

That -- yes, yes, sure. And it will be either organically. We have a road map that's aggressive. We still have a road map on IGBT. We have a road map on silicon carbide. We have a road map on a lot of the controls that are required to drive that either technologies. So I talk about it organically. And of course, we are in a consolidating industry. So -- and we're -- we sit -- from a firepower perspective, we're in a good position also. So we're able to accelerate some of our own road map items through inorganic opportunities. But because we have such a strong stand-alone plan, call it, that's driven by execution, we can be very disciplined on what M&A we do and what we target. You saw us do the GTAT acquisition, which was very targeted for a very strategic intent. You'll see us do a lot of that focus.

Got it. Do you feel that companies who are investing significantly in substrate capacity, right, bigger wafer sizes of that, et cetera, that they will have some natural advantage in providing that supplier? I know you mentioned that you bring packaging and, right, you bring the incumbency on the device side. But do you think that the most important part of this triangle isn't the substrate? So whoever has control of substrate will be -- could be the leader.

Well, yes, but substrate is different than diameter. Because substrate -- again, you can have the best substrate, best power, if you can't have the most efficient package, you're going to lose it in heat. You're going to lose it before it gets to the wheel. You see what I mean? That's why, even back in Analyst Day, I kept talking about efficiency, efficiency. That's really the metric. Everything before that can be the best. If you don't get -- extract that power out in mechanical power, you're going to lose it in heat, and we've seen that, that's why we're winning. But you started your question with diameter, 8-inch and 6-inch. We have already running 8-inch, not in production because at the end of the day, I didn't have to build the greenfield fab. I already have a fab that runs IGBT. What we've done is we moved IGBT to 12-inch in East Fishkill and we're using our current power fab to run silicon carbide. Our whole silicon carbide today is 8-inch capable. I'm running 6-inch because that's already there and it's the fastest time to market. But we're already growing 8-inch substrates. We've wafered them. We have devices on them. It's just not -- I don't need to cross over now from a cost perspective and a competitive advantage perspective. I have enough competitive advantage and runway that I can monetize and capitalize on what I have today as I add more scale. But what you're going to see is as we need more scale and more volume as we win more, those are going to be more on the 8-inch, but it doesn't obsolete the 6-inch at all.

You have enough demand?

That's right.

Right. Perfect. Thank you so much, Hassane. Thank you, Thad. [ Thank you for giving us your time. ] Thanks, everyone.