Ladies and gentlemen, thank you for standing by and welcome to the ON Semiconductor Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Mr. Parag Agarwal, Vice President of Investor Relations and Corporate Development. Thank you. Please go ahead.

Thank you, [Dillon]. Good morning and thank you for joining ON Semiconductor Corporation's third quarter 2020 quarterly results conference call. I'm joined today by Keith Jackson, our President and CEO; and Bernard Gutmann, our CFO. This call is being webcast on the Investor Relations section of our website, at www.onsemi.com. A replay of this webcast, along with our 2020 third quarter earnings release, will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. The script for today's call and additional information related to our end-markets, business segments, geographies, channels, share count, and 2020 and 2021 fiscal calendars are also posted on our website. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are included in our earnings release, which is posted separately on our website in the Investor Relations section. During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words "believe," "estimate," “project,” "anticipate," "intend," “may,” "expect,” “will,” "plan," "should" or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially from projections. Important factors which can affect our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our Form 10-K, Form 10-Qs, and other filings with Securities and Exchange Commission. Additional factors are described in our earnings release for third quarter of 2020. Our estimates, or other forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other events that may occur, except as required by law. During the fourth quarter, we plan to attend two virtual conferences. These include NASDAQ's 43rd Virtual Investor Conference on December 1 and Wells Fargo TMT Summit 2020 on December 2. Now, let me turn it over to Bernard Gutmann, who will provide an overview of our third quarter 2020 results. Bernard?

Thank you, Parag, and thank you everyone for joining us today. During the third quarter, we saw strong recovery in business conditions due to sharp acceleration in global economic activity, especially in the automotive market. Order activity has picked-up meaningfully across end-markets and geographies. Manufacturers are striving to meet the upsurge in demand, which was previously disrupted by COVID-19 pandemic. Along with the strong macro driven recovery of our business, momentum in our key strategic growth areas in industrial, automotive, and cloud-power end-markets is accelerating. Our design wins are accelerating and design funnel is expanding at a rapid pace. As we stated earlier, gross margin improvement is the primary strategic priority for the company. We are on track with our manufacturing consolidation plans, and discussions are ongoing with various parties regarding the previously announced intended sale of our fabs in Belgium and Niigata, Japan. In the near-term, revenue tailwinds from the ongoing recovery in business conditions and favorable end-market mix shift should help drive margin expansion. Now, let me provide you details on our third quarter 2020 results. Total revenue for the third quarter of 2020 was $1.317 billion, a decrease of 5% as compared to revenue of $1.382 billion in the third quarter of 2019. The year-over-year decline in revenue was driven primarily by a slowdown in global macroeconomic activity due to the COVID19 pandemic. GAAP net income for the third quarter was $0.38 per diluted share, as compared to a net loss of $0.15 per diluted share in the third quarter of 2019. Non-GAAP net income for the third quarter of 2020 was $0.27 per diluted share as compared to $0.33 per diluted share in the third quarter of 2019. GAAP gross margin for the third quarter of 2020 was 33.5% as compared to 34.4% in the third…

Thanks, Bernard. Let me first update you on our manufacturing optimization plans, and then I will provide an update on the current business environment. We are in discussions with various parties regarding the planned sale of our Belgium and Niigata fabs. We are working diligently to get quick resolution on these fabs, but we do not have an announcement to make at this time. The process for ceasing operations of our fab in Rochester, New York, is progressing as per plan, and we expect to begin seeing annual savings of $15 million starting in the first quarter of 2021. We achieved a major milestone in the third quarter as we recognized our first revenue from our 300mm products. We continue to make solid progress in our manufacturing transition to 300mm fab in East Fishkill, New York. As I have indicated earlier, yields for our 300mm manufacturing processes have been spectacular, and we expect to see a meaningful positive impact on our gross margin as our 300mm manufacturing ramps in the coming years. Additionally, our 300mm manufacturing capability in East Fishkill fab has afforded us significant flexibility, which has enabled us to optimize our network. We continue to make substantial progress in our key initiatives to expand gross margins. We are driving shift towards higher margin products by aggressively winning designs in automotive, industrial, and cloud-power end-markets. At the same time, we continue to optimize our portfolio to drive margin expansion. The fundamentals of our cost structure remain unchanged. With ongoing recovery, as our revenue and factory utilization increase, we expect to see meaningful increase in our gross margin. The benefits from manufacturing optimization, mix shift, and portfolio optimization should be additive to fall-through we see from incremental revenue. Now, let me comment on the current business environment. We have seen…

Thank you, Keith. Based on product booking trends, backlog levels, and estimated turns level, we anticipate that total ON Semiconductor revenue will be in the range of $1.3 billion to $1.4 billion in the fourth quarter of 2020. For fourth quarter of 2020, we expect GAAP and non-GAAP gross margin between 32.9% to 34.9%. We expect total GAAP operating expenses of $315 million to $333 million. Our GAAP operating expenses include the amortization of intangibles, restructuring, asset impairments, and other charges, which are expected to be in the $32 million to $36 million. We expect total non-GAAP operating expenses of $283 million to $297 million in the fourth quarter. The expected increase in our fourth quarter operating expenses as compared to those in the third quarter is driven by the planned reinstatement of salaries and benefits that were reduced due to decline in our business resulting from COVID-19 pandemic. In our 2020 operating expenses, the variable component of compensation was not significant. However, as we enter into 2021, we plan to accrue meaningful variable compensation with the expectation that 2021 will be a strong year. Consequently, we expect an increase of about $25 million to $30 million quarter-over-quarter in our operating expenses in first quarter of 2021. We anticipate fourth quarter of 2020 GAAP net other income and expense, including interest expense, will be an expense of $41 million to $44 million, which includes the non-cash interest expense of $9 million to $10 million. We anticipate that net other income and expense, including interest expense, will be an expense of $32 million to $34 million. Net cash paid for income taxes in fourth quarter of 2020 is expected to be $22 million to $28 million. For 2020, we expect cash paid for taxes in the range of $52 million to $58 million. We expect total capital expenditures of $100 million to $120 million in fourth quarter of 2020. We are currently targeting an overwhelming proportion of our CapEx for enabling our 300mm capability at an accelerated pace. We expect share based compensation of $16 million to $18 million in fourth quarter of 2020, of which approximately $3 million is expected to be in cost of goods sold, and the remaining amount is expected to be in operating expenses. This expense is included in our non-GAAP financial measures. Our GAAP diluted share count for the fourth quarter of 2020 is expected to be in the 425 million to 426 million shares, based on our current stock price. Our non-GAAP diluted share count for fourth quarter of 2020 is expected to be 413 million shares, based on our current stock price. Further details on share count and earnings per share calculations are provided regularly in our quarterly and annual reports on Form 10-Q and Form 10-K, respectively. With that, I would like to start the Q&A session. Thank you and [Dillon] please open the line for questions.

Thank you, sir. [Operator Instructions] I show our first question comes from the line of Ross Seymore from Deutsche Bank. Please go ahead.

Hi guys, congrats on the results, and thanks to let me ask you a question. I want to focus both my questions on margin. So, the first one is on the gross margin side of things, I see that you're guiding to about a 50% incremental gross margin in the fourth quarter. Given that you're not changing utilization, I understand that, but I guess first, why aren't you changing utilization given the strength in the business? And then if we go beyond the first quarter, can you just talk about how the fab closures, the utilization increases, and the 300 millimeter ramp all layer in to the gross margin? Because I would assume that would need to be above that 50% incremental that you've guided to historically and even in the fourth quarter.

Hi. Thank you Ross for your questions. This is Bernard. We are also intending to continue working on our inventory in the [indiscernible]. We don't plan on increasing our utilization substantially to keep working on that. And you're correct as we start getting the benefits of the factory closures. We have talked about $75 million of annual savings coming from those closures or sales. The Rochester closing is on its way to be to being completed. And as a result, we expect to get about $15 million of that of annual savings starting in the first quarter of 2021. The other two is a function of when we end up and up what we ended up negotiating with the intended buyers of these fabs, and that's ongoing and in progress right now. So, yes, the answer is yes, we should expect to see better than 50% fall through as we go throughout 2020.

Great, thanks for those details. And then as my follow up question, again, sticking on the margin front and moving to the effects side of things. I think everybody understands why you had variable comp down this year, and why it would step up sequentially in the first quarter. But if I look at a year-over-year, it's basically flat is what's your guiding, there might have been some COVID-related impacts in the first quarter of 2020, but given the structural changes and cost cuts you guys announced earlier this year, I'm still struggling to figure out why the guide for OpEx in the first quarter of 2021 would be flat year-over-year.

So as we said in the prepared remarks, we have no variable comp in any orders in 2020, as well as 2019. So, we're basically, we did take significant cost reduction actions, some temporary and some permanent. And right now the variable comp will be layered. Obviously that depends on the distance result [if the] next year points in the direction of being a strong year, which is what our assumptions are then we should have a significant addition on variable comp, if obviously, the year is not in that direction, then we will not.

Thank you.

Thank you. I show our next question comes from the line of Chris Danely from Citigroup. Please go ahead.

Hey, guys, just a quick clarification on the gross margin. So, why was it 50 basis points better than the guide? Was that all revenue upside or was there some mixer pricing or something else that was driving it higher?

Mostly revenue upside.

Got it. And then any update on the CEO search?

It's ongoing and there's nothing to announce at this time.

Okay, thanks.

Thank you. I show our next question comes from the line of Chris Caso from Raymond James. Please go ahead.

Yes. Thank you. Good morning. Just a question on inventory, and you know, what you're planning on doing with production. Could you give us a sense of where you would like both the channel inventory and your internal inventory to get to before you would increase utilization? And generally, what's the reason for the more cautious approach to inventory right now?

So, the inventory we have on the channel, we said in prepared remarks, we took it down two weeks where we are within our comfort range, so we feel good going into next year that we’ve been at an appropriate level for that. In general inventories, we peaked in the second quarter to 140 days, decreased to 233 days in the third quarter, and we think there's still room to continue gradually decreasing it into the fourth quarter.

All right. As a follow-up on the automotive market, I guess that now you're running in a sort of down, you know, mid-to-high single-digits year-on-year. Last quarter, you talked about anticipating that the customers would be running at full production in the second half of the year. Could you give us an update of that? Where are your customers running regarding, you know, their own production? And I guess with that, what's the gap between, you know, if the customers are kind of getting back to normal and you're still down year-on-year? What's the delta there? And once you kind of get you back to, you know, flat, year-on-year and then eventually [grow]?

Yes. So, we believe that the auto customers will be largely running at pre-COVID levels, excuse me, here in the fourth quarter. And really the only difference, if there was any, would be change in inventory in the supply chain. There was definitely some caution in the supply chain as that COVID-19 went in and I would expect it in 2021 it would start replenishing even above our [own rates].

Thanks.

Thank you. I show our next question comes from the line of Raji Gill from Needham & Company. Please go ahead.

Yes. Thank you and congrats as well on solid results. Regarding the momentum in the automotive business, you talked about outgrowing auto production by a wide margin. Obviously, we're going to see a rebound in auto production post-COVID, but on top of that, what's driving the wide margin commentary specifically in sensors and EV? Any color there would be helpful in terms of how much semiconductor content you're going to layer on top of that rebound production?

Yes. So I think you know the two topics. From an ADAS perspective, we're seeing a significant amount of the production move to level two, which has quite a bit more dollar content. It kind of goes from $10 at level one to $150 at level two, so we're seeing that transition would drive very significant growth above the SARS rate. And then, on the electric vehicles, now, there will be more electric vehicle still dominated by internal combustion, but nonetheless, more vehicles. And again, the content there goes from, you know, $40, $50 bucks up to $500. So those – if you look at both of those things, there were an order of magnitude change. And so, as a result of that, we would expect a very significant outgoing.

And just for my follow-up, I know you can't provide more guidance, but if we're looking at gross margin trajectory, if you look at the margins in 2019, you know, they were kind of at 36% for the year. And obviously, it took a big dip in the first half of this year because of COVID. But you're kind of moving back. So, how do we think about, you know, the margins in 2021 getting back to kind of normal, maybe more normalized levels, what we saw in 2019, and then, kind of moving beyond that? Is there really going to be a function of revenue? I know you talked about the closure of that [indiscernible] fab, but should we be expecting to get back to kind of 2019 levels and beyond as we progress into 2021?

It depends on a lot of factors, but the same premises that we have put forth in the past holds true. We do expect the 50% fall-through on just a few of revenue changes and expect that the 2021 will be a good year in terms of revenue. We will layer on top of that mixed savings with the premise that our revenue growth in automotive and industrial and cloud power, which all have better than corporate average gross margin. We’ll contribute to be taped to [tailwind] some gross margin and as mentioned earlier, in response to another call – question, we do expect to get the savings from the [factor sale] or closures that we have announced previously. And last but not least, we do still have some lingering COVID costs in our numbers. We expect that most of those will take a while to get those [indiscernible] mainly logistics and freight costs, as the pressures on that eases out, we should also get a little bit of tailwind in addition to what I just mentioned.

Thank you.

Thank you. I show our next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead.

Yes. Hi, good morning, guys. Just a couple of questions here. On the disti side, I know you talked about September quarter disti inventory coming down two weeks. Typically 4Q inventories go down and I was just wondering what you're seeing in terms of distributor inventories exiting 4Q versus where normal levels are? Thanks.

I'm not sure I got all of that question. Audio issues on our side, but we brought the disti inventory down in the third quarter to kind of the low-end of our normal operating ranges. So, we're not looking to take it down substantially from there, but kind of hold it toward that lower end. We think this does give us more flexibility, particularly if the market is more robust than we're seeing right now. So that's the plan. Did that get your question Vijay?

Yes, it does. Thanks a lot. And one other question here. On the gross margin side, obviously, you know, there's some near-term costs, logistics, COVID-logistics costs and operational costs. Just wondering what the headwinds from those are? And do you see those subside as you go into first half next year? Thanks.

Yes, definitely much less than what we had in the first and second quarter. The lingering costs are more logistics. It will normalize when we see airlines flying again, so that's mostly commercial. So that's a big question mark. So, probably, it’s going to be more protracted. But it's much less than what we had seen in the first half of the year. So, it's just some lingering headwinds, not significant.

Thanks a lot.

Thank you. I show our next question comes from the line of Christopher Rolland from Susquehanna. Please go ahead.

Hey, guys. Thanks for the question. I guess first following up on the automotive side of things and silicon carbide, can you talk about the pipeline there after your win on silicon carbide? And then, also, how we should think about IGBTs and your position there?

So, we continue to see wins for both IGBTs and silicon carbide. You know, it's maybe oversimplified, but in the lower lifetime or smaller cars, the IGBT is still the dominant solution. In the more powerful cars, who are designed with much longer range silicon carbide is becoming the predominant solution. So, we have wins at many different Tier 1s and OEMs at this stage for both IGBT and silicon carbide.

Great. And I was wondering if you could give us an update on your footprint consolidation. I guess, any update on Belgium and any other updates in terms of targets or potential opportunities?

In Belgium, we are having, what I would call, the final round of negotiations right now, and expect that we – during the quarter, we'll be able to find solutions there. In Niigata, there's still process ongoing, you know, probably [ease] into the New Year.

Great. Thanks.

Thank you. Our next question comes from the line of Craig Ellis from B. Riley Securities. Please go ahead.

Yes. Thanks so much for taking the questions. And I'll just ask a couple of follow ups. First on gross margins, so it's clear that it's hard to handicap the exact timing of a fab sale, but, gentlemen, I'm wondering if you can just help us scope the amount of the $75 million in COGS efficiency gains that you'd expect to get in calendar 2021, not by quarter, but just overall? How much of that could be realized in 2021? And then, how much would come through in calendar 2022?

It's a tough question, Craig. Definitely, we can talk about the Rochester one, which is the [first] the $50 million that will start immediately in Q1. The other is still a function of what we end up negotiating with the buying parties in terms of [MSA] that will drive what those savings are. Typically the closure of a fab takes somewhere in the 18 months to 24 months, but obviously, we have been already working on it.

Got it. And then, if I could just bundle two follow-ups together, Bernard. The first is to Ross' question, beyond the first quarter, which not only would include discretionary comp, but also things like FICA, what should we expect from 2Q through 4Q? Do you actually get some OpEx decreases in the back half of the year as FICA goes away? And then, with the debt pay down in the fourth quarter, the convert, what should we expect for interest expense in the first calendar quarter?

Let me start from the last question first. Interest expense, we tend to continue paying down debt as we generate the good amount of free cash flow next year, so it's just a function of how much that debt paid down. Definitely, the pay down of the $690 million will be a little bit of interest away. So, I expect the trend of interest expense to go down over time.

The OpEx?

And then, OpEx?

The OpEx trend, we expect this step function improvement or increase in OpEx in the first quarter. And indeed, you're correct. In addition to that, there is within that assumption a timing or seasonality of FICA in other U.S. based payroll expenses. So, I don't expect that the expenses will go up more materially for the rest of the year. They may trend mostly flat.

Got it. Thanks, guys.

Thank you. Our next question comes from the line of Matt Ramsay from Cowen. Please go ahead.

Hi, this is Josh Buchalter on behalf of Matt Ramsay. Congrats on the results. And Keith, congratulations on your retirement. I guess I wanted to start on the – on the last call, you mentioned you weren't expecting to see any under utilization charges in the second half. Can you confirm it, you know, this is still the case given you're keeping utilizations flat and inventory sounds like they are going to trend downwards?

Yes, obviously with the disclaimer that we don't control what governments do. So, at this stage, we don't expect there is no mandated shelter in place – mandates from governments. So if that continues, which we expect it to we will not see any additional COVID-related expenses [indiscernible].

Okay, thank you. And then, I guess a bigger picture question. When you made the plans to invest in the 300-millimeter fab, it was obviously a very different environment. I'm just wondering if any of your strategic assumptions or plans changed for the new environment of you know, porting volumes through this fab since the deal was announced a year and a half ago. Thanks, and congrats again.

No. We continue to be excited about that addition to our network. And so, from that perspective, we continue to get qualifications of products, processes, and customers [in] there, and continue to enjoy the ramp that we envision. The only change I would get is maybe a little more acceleration on closure of some of the other factories that has been brought about by the overall lower environment that COVID brought.

Thank you. I show our next question comes from the line of Toshiya Hari from Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking the question. I had two as well. First of all, you guys talked about geopolitical factors having impact on your business in Q3 and I do believe in your Q4 guidance as well. If you could confirm how meaningful the headwinds were associated with geopolitical factors in Q3, and what's embedded in your Q4 guidance, that would be helpful? Thank you.

In Q3, there certainly was an impact, but, you know, primarily in Q4 until licenses are granted, the answer is there's no business at all and they were one of the top customers.

Got it. And then, as a quick follow-up, I wanted to double click on gross margins as well. In the past, you guys have talked to a 40% plus long-term target for gross margins. I guess is that still the case? Is that still very much intact? And to the extent it is, I was hoping you could rank order the drivers that get you there? I think throughout this call, you've talked about, obviously, Rochester, which is done. You've got Niigata, Belgium. You're rationalizing or optimizing your portfolio. You've got the 300-millimeter transition. And obviously, you've got the COVID costs, which hopefully go away over time, so if you can rank order some of the drivers as you think about gross margin expansion over the next couple of years that would be helpful. Thank you.

Pretty much summarize that very well for us. Thank you. Definitely, when we did our model, which actually was 43%, and we, you know, predicated on a $7.1 billion revenue, we believe that, that still holds true. So, we do have a good amount of catch-up from different levels of 5.15 to that level with the fact that we have a good [fall-through] on that that still holds true. The footprint consolidation as well as the benefits of the 300-millimeter in the [indiscernible] will also be a significant factor and mix, as a third one is the one that will help us get there.

Thank you.

Thank you. Our next question comes from the line of Harsh Kumar from Piper Sandler. Please go ahead.

Yes. Hey, guys. Congratulations first of all, two questions. First of all, would you be able to give us some color on particularly the automotive and industrial markets? I know you said they should be up, but maybe help us think about how we should think about modeling them? And then, another part of that same question, you talked about distribution and mentoring auto, how many weeks excess do you think, if at all, there is in the system, particularly in auto?

Okay. I'll start with auto, I believe that distribution and entire supply chain there, there is no excess going into fourth quarter. I think that's largely been taken care of. In fact, if anything may have undershot and set us up for next year having to do replenishment. So, that market, the supply chain there is lean at this stage and I don't know any pockets of [badness]. As I mentioned earlier, we expect auto production rates in Q4 to be largely back to where they were in 2019. So, again, by – quarter-over-quarter, that is showing improvement from Q3. From an industrial perspective, you know, we're seeing recovery there. We think, again, largely the excess supply is out of the channel, but there's no rebuilding that we can see, so moderate recovery on industrial.

Understood. And then, your closure of fabs, you mentioned started three, I think, in total. Maybe help us understand where is this production going to? Is it going to Fishkill? And, you know, on a scale of 1 to 10, if you say, you know, prior to you getting control of Fishkill, if 10 is kind of like where you want to be, where do you think you are at this point in time?

So, most of the production in those two particular factories are going into our other internal fabs. And what we're doing is taking selective high volume runners out of the other internal fabs and moving into East Fishkill, so a little bit of a two-step process to get in [indiscernible]. And relative to – you know, [10] is full ownership and full running. We are at this stage down around two. We're just starting our ramp in the manufacturing there in the third quarter and ramping from there.

Thanks guys.

Thank you. I show our next question comes from the line of Mark Lipacis from Jefferies. Please go ahead.

Hi, thanks for taking my question. I had a question about the process of shutting down or selling a factory. When you're transferring parts from your old facilities to your new facilities, can you describe what the qualification process is like? How long does that take? Or is it a matter of practice for you that, you know, [indiscernible] primarily make it one factory? You also are always qualifying them at other factories just for redundancy sake and that's not a big deal to re-qualify parts. That's the first question, I have a follow-up too.

Okay. So for the first one, most of our high volume processes have more than one factory to run in, just from a supply chain risk perspective. For those products, in essence, take the specific products that you're running, that may not be in the alternate factory, you have to run some reliability tests and you have to run those by your customers. And for those processes, it's anywhere from 182 days to a year. For other processes that don't have as much volume, you do have to first bring up the process in the new factory. That can take anywhere from nine months to a year, then you have to run the same qualification, so that gets you kind of out in the two-year range for that. We had started moving things for the factories that we're talking about here, before we announced those transactions. And so, we're well into that second phase now of getting the customers qualified. By the selling of the factories, in our customer agreements, there will be some amount of time required. We will still take product from those factories, but you're now down into that kind of 18 months or so range.

Got you. That's very helpful. And longer-term, Keith, to you – as you work your way to your gross margin bogey, did you think that translates to a higher internal mix of or a higher outsource boundary mix on the front end [multiple speakers]?

So, the front end, yes, the front end part will become more external, but that's less to do with consolidation and more to do with some of our fastest growing products [use nodes] that we use boundaries for.

Got you. Thank you very much, very helpful.

Thank you. Our next question comes from the line of Harlan Sur from JP Morgan. Please go ahead.

Morning, and thanks for taking my question. Has the East kill fish – has East Fishkill fab in auto grade qualified? And if not, when you guys expect to achieve qualification? And then, in terms of revenues today from Fishkill, what products and end-markets are you shipping into?

So today, we're shipping primarily into industrial with some automotive content out of EFK. So, we are qualified for both.

Great. And then, Keith, with 13-weeek to 15-week lead times on average, you know, you guys are booking into the March quarter. You also have a good view on customer forecasts as well. I believe normal seasonality for the team is flat to down a couple of percentage points in March. You talked about above seasonal demand trends near term, wondering if you're seeing this in the orders for the March quarter.

Yes. Orders are good and the comments we've made on above market, the seasonality will extend past this year.

Yes. Thank you.

Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Please go ahead.

Yes, thanks. So let me ask the question. Keith, maybe just a follow on there to Harlan’s second question, when you think about the calendar first quarter, is there enough leverage above seasonal revenue growth and gross margin leverage that you can have op margins be flattish, despite the increase in OpEx? And if that's not the case, why isn't variable comp more tied to profitability? Why not wait until later on in 2021 to re-establish some of the variable comp?

So, we really don't want to give guidance for Q1. We do it one quarter at a time. What I will tell you is certainly, we would expect revenues to continue to increase nicely throughout next year. And the way accounting works, you have to accrue for the entire year at the expected rate for the year even though you may have a quarter somewhere in there that doesn't fully meet the objectives.

That's all fine. And back to the auto side, when you look calendar year 2017 to 2018, SARS was down a little bit in 2018. But you guys significantly outgrew the market almost by under 10 percentage points. I'm just kind of curious given how weak the auto sector has been for you and the overall semi-market since really, the end of calendar year 2018, 2019 was down, 2020 is going to end up being down, how are you viewing your outgrowth to SARS as we go on into calendar year 2021? And do you have kind of a view you can give us on what you think SARS growth will be next year?

So, the answer is, yes, we [indiscernible] wide margins. As I mentioned in my comments, very significant with the drivers being more level 2 cars on ADAS and a higher percentage of EV. From a SARS perspective, we tend to try and be conservative on that and look for kind of 2019 levels next year on a SARS basis. But again, we think we have been outperforming the overall SARS in 2020. We think the supply chain did lean out, which took some of that margin away. But in 2021, as I mentioned earlier, right, we think there may have to be some re-stocking to hit the [four levels] as appropriate.

So, Keith, if an 2018, you outgrew SARS by 10 percentage points, so you think 2021 setting up to be an 2018 [indiscernible] for you?

I think the opportunity for double-digit outperformance is there.

Thank you very much.

Thank you. I show our next question comes from the line of Kevin Cassidy from Rosenblatt Securities. Please go ahead.

Thanks for taking my question. Just going back to factory utilization, is there any more efficiency coming in? Can you get higher gross margin at the same utilization, you know, say compared to a couple of years ago?

There is some help that comes from mix as we have talked about, but definitely we depend on – a lot on revenue increases. The…

I would just add that as we're looking forward, the other traditional lever is pricing. And, of course, 2019 was not necessarily a good year, but as we're seeing our 2020 – excuse me, not a good year, but 2021 is shaping up to be a little better pricing environment.

Okay, great. And just one follow-up kind of on that qualification process, you know, you can have your internal qualifications, does your customers – has there been any change in the qualification process relative to the customers? Do they just agree with your data from your manufacturing or do they want to test the parts too?

Most of them agree with our reliability data. They don't need to duplicate that. But they do need to verify the products are still functioning exactly the same way in their applications, so that takes them. You know, that's part of the six month kind of check that they've got to do on their side.

Okay, great. Thank you.

Thank you. I show our next question comes from the line of David O'Connor from Exane BNP Paribas. Please go ahead.

Great. Good morning, and thanks for taking my questions. Maybe to go back on the 10 points outperformance, Keith, that you mentioned, you talked about ADAS and EV as being the main contributors. As we exit 2020, can you give us a sense of how big these are now for the business? And I have a follow up.

So sensors, the ADAC sensor is about 20% of our total automotive. The electric PC is smaller, but we haven't disclosed how much it is, but we know it's going to ramp up at a very strong and fast pace in 2021 and beyond.

That's helpful. And then, maybe as my follow-up, on the [200-millimeter] East Fishkill fab, you know, you talked about the spectacular yields there, which are those high volume products where you're seeing these yields? And is there an opportunity to pull in the ramp up there giving you seem to be ahead of schedule? Thanks.

Yes. So, our first products to ramp there are medium voltage MOSFET, and then, followed by our IGBTs and we are ramping that pretty much at the pace our customers are qualifying at this stage.

Thank you.

Thank you. I show our next question comes from the line of Tristan Gerra from Baird. Please go ahead.

Hi, good afternoon. Given the lead times of still somewhat elevated in parts of your business, at least industry wide, and given your utilization rates below normal level, are there opportunities for you to gain actually market share because your utilization rates being below, will actually be an opportunity to [indiscernible] in areas where some of your competitors may be tight? Or am I not looking at just the correct way?

No. I think we do have some upside opportunities with extra capacity in the factories where actually the inventory positions we're taking or really ensuring that that excess capacity can go directly to the customers that may have opportunity to grow a little faster. And I mentioned earlier, the ADAS and EV side of it, particularly those we think may be due for some additional inventory in the channel.

Okay, great. And then, just a quick follow-up. I know you haven't quantified the dilution from Quantenna. Is it fair to assume that it's now worse than the initial dilution that the business was incurring right after the close? And are you giving any consideration to taking additional action on that business besides just waiting for the new [product ramp]?

So there's not been appreciable decline in that business, if that's where you're headed. So, not sure where that came from, so we're not seeing additional declines and we are seeing the backlog and design pipeline picking up, so…

Great, thank you.

Thank you. I show our next question comes from the line of Vivek Arya from Bank of America. Please go ahead.

Thank you for taking my question. Keith, I had a conceptual question on gross margins. You know, when I look at gross margins in the power discrete industry, they tend to be at best around high 30%, even for the largest companies in the space, you know, such as Infineon who have been running 300-millimeter fabs for quite some time. And when I look at [on history], gross margins have never really exceeded 38%, 39%. And even then, quarterly revenues were much higher than current levels. So, how much of the gross margin dynamics are just a result of selling certain kinds of products, which says that, you know, there is a limit to how much you can expand gross margin, regardless of revenue levels or fab closures or 300-millimeter capability, so I just wanted to run this [hypothesis by you]?

So, simple answer there is when we gave our expectations for being able to reach 43%, it fully comprehended the product mix and market mix that we see here. And while there was some number of bips, which we disclosed on mix per se, but from a product perspective, we still think we can get over 40. It does take a leaning out of our manufacturing, which we are in the process and getting the utilization rates up. But we don't think inherently that power business is stuck in the 30s. We definitely think we can get that into 40s. The other piece of that equation is a lot of the new EV stuff is in modules and there we think the opportunity for the modules is for a better margin than the discrete devices.

Got it, very helpful. And, Keith, as my follow-up, in terms of the competitive landscape, just given U.S. and China trade tensions, do you see any headwinds to gaining share in China i.e., that share perhaps going more to your European or Japanese competitors? Like have you – other than Huawei, have you seen any effect of trade tension so far? Or do you anticipate any effects going into next year? Thank you.

I think there will be more reluctance for customers to accept sole source positions from U.S. based companies as a result of the trade tensions. I still think they're very wise economic buyers and they're going to do the best thing for their company, but they certainly don't want to be completely reliant on the U.S. supplier.

But do you see shares shifting to European competitors?

We certainly saw at the account you mentioned elsewhere. We have not seen it.

Okay, thank you.

Thank you. I show our next question comes from the line of Shawn Harrison from Loop Capital. Please go ahead.

Hi, good morning, and thank you for taking my question. Keith, for you, are you seeing anything either on the raw material supplier kind of – I guess the foundry supply as well given kind of [indiscernible] speak to distributors. You're reading in the press about some pre-buying of either, you know, materials or capacity next year just given the trade tensions?

So, we've seen some tightness and some things like substrates in the communications market. I think that's fairly widespread. I think the expansion there is slower than the market itself [has been] growing. And there's certainly some tightness in spot areas in the foundry market. But overall, the supply chain is in a pretty good shape.

Very helpful. And Bernard, as a follow-up, just if you can speak to how you're thinking about the return of the share buyback in 2021? What's either maybe a leverage ratio you're looking at or some type of metric before a share buyback could return?

Sure, Shawn. So historically, what we have done is we have focused on paying down debt until we reach about a two times net leverage. And obviously, we need to get concurrence from our Board to continue the strategy, but that would be the general approach towards a share buyback.

Thank you.

Thank you. Our next question comes from the line of Nik Todorov from Longbow Research. Please go ahead.

Yes, thanks. Good morning, everyone. Once you guys complete three [indiscernible] fab optimizations, can you maybe talk about approximately what revenue level you'll be at full utilization of your non-300 millimeter footprint?

That's a difficult question. I’m not sure I have the answer for that because a lot of it will depend on the mix. Definitely it was upwards towards sweet spots of [indiscernible] which is where we like to operate at.

Got it. Thanks.

Thank you. Our next question comes from the line of Craig Hettenbach from Morgan Stanley. Please go ahead.

Yes, I had a question on silicon carbide. Naturally, a lot of the discussion is around EVs, but Keith, from an industrial perspective, can you talk about any interesting applications or opportunities you see in the industrial market?

Yes. We're seeing big pickup in solar energy. The pickups that you get there from an efficiency perspective are pretty significant. We have an opportunity for about $650 worth of silicon carbide there. And then, in EV charging, so not the traction inverters, but actual charging stations, we're also seeing opportunities for up to $500 there.

Got it. And then, just a follow-up on just the geopolitical issues with the customers, is that something that you expect? Ultimately, revenue will go to another OEM and that could be opportunity at some point next year?

The way the rules are written, it's unclear. Anyone can ship without a license. And so, that's at least our interpretation. And so, I think right now, the license process is most critical to answering who might be providing this [indiscernible], and we should benefit the [indiscernible] to other customers of ours. There is the opportunity for us to also take advantage of that and widen, get that wider in our approach.

Got it. Thanks.

Thank you. I show our next question comes from the line of Craig Ellis from B. Riley Securities. Please go ahead.

Yes, thanks for taking the follow up questions. Keith, I wanted to start just going back to some of your end-market commentary. You mentioned that in cloud power, there should be some [indiscernible] share gain and content gain. So, I wanted to see if we could get some specifics around that for calendar 2021? And then also in cloud power, what is your interaction with base station customers signaling for base station production next year? And what does that mean for growth in that part of cloud power?

Okay, so one is kind of share gain and generation change cloud power content, and then, the second one is what kind of ramps we're seeing in base stations if I got that correct?

Right, yes.

So, you know, kind of going from the backbone, the base station, basically China, is driving most of that growth. And we do see some significant growth there in China. U.S., you know, maybe late in 2021, moving into 22 will become much more substantial. From a cloud server perspective, we get about $60 out of the current generation in our content, and it goes to 75 with the VR fourteens, which are coming out next year.

That's great. And then the follow up is on IMM, so it seems like right now, medical, military and energy efficiency are good areas of strength, but we know that in industrial their areas of weakness to energy extraction, etcetera, etcetera. No different than 2009 when industrial broadly was probably the last end market to come off the bottom. The question is this, when do you think that segment broadly will be back to good growth? Is that something that could happen in the first half of 2021 or is that really something that would happen later next year? Thank you.

Yeah. Okay, so the broad base piece of it should improve. We've always seen that kind of following the GDP in general. What we do see different industrialist Craig is the automation has actually been, I believe, accelerated by COVID-19 and the experiences companies had they're. They're looking for much more automation, both in assembly and in their warehouses to kind of make its dependence on people less and so that would be you know, kind of like in automotive we see electric vehicles and [ADAS] being a supercharger. I think, in this case, automation is the supercharger for industrial.

That's helpful and congrats on the retirement Keith.

Thank you.

Thank you. I show no have further questions in the queue. At this time, I'd like to turn the call back over to Mr. Parag Agarwal, Vice President of Investor Relations and Corporate Development for closing. Please go ahead, sir.

Thank you, everyone, for joining the call today. We look forward to seeing you at various virtual conferences during the fourth quarter. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.