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ON Semiconductor (ON -0.62% ) Q2 2022 Earnings Call Aug 01, 2022 , 9:00 a.m. ET
Good day, and thank you for standing by. Welcome to the Onsemi second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session.
[Operator instruction] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal, vice president of investor relations, and corporate development. Please go ahead.
Parag Agarwal -- Vice President of Investor Relations
Thank you, Liz. Good morning, and thank you for joining Onsemi second quarter 2022 quarterly results conference call. I'm joined today by Hassane El-Khoury, president and CEO; and Thad Trent, our CFO. This call is being recorded on the Investor Relations section of our website at www.onsemi.com.
A replay of this webcast along with our 2022 second quarter earnings release will be available on our website approximately one hour following this conference call, and the recorded webcast will be available for approximately 30 days following this conference call. Additional information is posted on the Investor Relations section of our website. I want to mention this, and this presentation includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, and the GAAP financial measures are included in our earnings release, which is posted separately on our website in the Investor Relations section.
During the course of this conference call, we'll make predictions or other forward-looking statements regarding the future events, or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that could cause actual results to differ materially from predictions. Important factors that can affect our business, including factors that could cause actual results to differ from forward-looking statements are described in our most recent Form 10-K and Form 10-Q in other filings with the Securities and Exchange Commission, and in our interviews for the second quarter of 2022. [Inaudible] on the forward-looking statements may change, and the company assumes no obligation to update forward-looking statements to reflect actual business change assumptions or agreements that may except as required by law.
Now let me turn it over to Hassane, Hassane.
Hassane El-Khoury -- President and Chief Executive Officer
Thank you, Parag, and thank you, everyone for joining this call. Nearly a year ago to the day, we unveiled our strategy to deliver intelligent power and sensing technologies for the sustainable ecosystem fueled by high growth megatrends in automotive, industrial, and plug power. This meant that we would not only provide differentiated solutions for our customers, but that we would execute on our commitments to our shareholders. Today, we announce another quarter record revenue, gross margin, and EPS, and it could not be prouder of the progress we have made.
We achieved our first ever $2 billion revenue quarter with record revenue in the automotive and industrial end markets. As compared to last year, second quarter, our total revenue increased 25%. Our non-GAAP gross margin expanded by 1130 basis points, and our earnings per share more than doubled to $1.34 per share. In the face of challenging business conditions, our employees have maintained steadfast in their education to our customers, and I want to thank them all for their continued hard work and tenacity.
Despite ongoing geopolitical and macroeconomic uncertainty, demand for products in our focus areas remains strong. Our automotive and industrial revenue now accounts for 66% of our overall business. and combined grew 9% quarter-over-quarter, and 38% year-over-year. This performance was driven by increasing adoption of our market leading intelligent power and sensing solutions in the fastest growing applications.
We have seen a slowing demand in our non-core end markets, but demand from automotive and industrial continues to outpace supply. The volatility in energy markets and supply chain disruptions across the globe are driving an accelerated adoption of electric vehicles, alternative energy, and industrial automation. Our market leading portfolio, coupled with the differentiated performance of our products and end to end capabilities as distinguished on semi as a premier source for intelligent power and sensing solutions. And our customers are increasingly relying on us to enable their roadmap in a rapidly evolving market.
While we are optimistic about our outlook, we remain sensitive to dynamic market conditions. The structural changes we implemented over the past 18 months to rationalize our product portfolio, and optimize our cost structure have reduced the volatility in our financials, and we have positioned the company to be more resilient in our business environments. The nature of our customer engagements has evolved into strategic partnership to support our customers long-term technology roadmaps, advance capacity planning, and supply assurance. Customers continue to expand the scope of their LTSA to include Onsemi's entire portfolio of intelligent power and sensing solution, which accounted for 66% of our total revenue in the second quarter, up from 62% a year ago.
We have signed LTSA covering up to 200 parts across our entire portfolio, and for existing LTSA customers are still requesting additional near-term volumes, and extending the duration of our agreements in some cases through 2029. For their longer term demand, they are co-investing with Onsemi capacity expansion to secure their supply, which in turn improves our demand planning. We continue to make progress in our transformation journey to structurally improve the gross margin of the company. We have redeployed capital to high margin, high growth areas such as Silicon Carbide.
And over the last 12 months, we have exited approximately $210 million in revenue at an average gross margin of 24% of which $36 million occurred in the second quarter at an average gross margin of 34%. Despite a deliberate loss of non-core revenue, we have been able to grow at an impressive pace, and offset these losses with new product revenue, which increased 35% year-over-year and favorable gross margins. Our intelligent power revenue grew by 31% year \-over-year, and 10% quarter-over-quarter, driven by the market leading efficiency of our solutions. The superior performance of our Silicon Carbide and IGBT has enabled us to engage directly, and sign LTSA with leading automotive OEMs and EV disruptors across the globe.
They rely on Onsemi Silicon Carbide expertise, and end-to-end capabilities to help them achieve their electrification goal. Although internal combustion engine vehicle sales were nearly flat in 2021, EVs grew by 94%, and are expected to grow at a CAGR of 22% to 45% of total light vehicle units in the next five years. Electric vehicles require up to $700 of incremental Onsemi content for drivetrain and onboard charging, as compared to an internal combustion engine car. As the transition continues to accelerate from ice vehicles to electric, we expect to see steep growth in our intelligent power revenue for automotive.
Our progress to our Silicon Carbide leadership is one that I'm especially proud of. We are seeing a steep acceleration in our Silicon Carbide gram, and have doubled our Silicon Carbide revenue quarter-over-quarter in the second quarter. We had forecasted to double last year's Silicon Carbide revenue in 22. And thanks to our global team's impressive acceleration of our capacity expansion plans, and our latest customer engagement, we're confidently raising our annual projection to triple last year's Silicon Carbide revenue in 2022 and exceed $1 billion in revenue in 2023.
Towards that end, we have also secured more than $4 billion of committed Silicon Carbide revenue through long-term supply agreements for the next three years, as compared to the$2.6 billion we had previously disclosed. To support the steep acceleration in our Silicon Carbide revenue, we are rapidly expanding capacity across our sites. By the end of this year, we plan to quadruple our substrate output on a year-over-year basis, and we are adding capacity for wayfaring, AP, and modules, and our various sites around the globe. Furthermore, we are adding 200 millimeter Silicon Carbide capacity at our existing fabs, and we are on track to double our front end wafer capacity by the end of 2023 as compared to that at the end of 22, and further double that capacity by the end of 24.
Our energy infrastructure business is also growing at a rapid pace. With a year-over-year revenue increase of 61% in Q2, we are on track to exceed our 2022 target, a 50% growth year-over-year. As I indicated earlier, volatility in the global energy supply is driving rapid adoption of a third wave energy. And with our broad portfolio of high efficiency Silicon Carbide and IGBT modules, we are the key enabler in this market.
We expect the alternative energy market to be a long-term driver for our business. As utility scale power plant installations grow rapidly worldwide, reducing both fossil fuel dependence, and associated climate impacts. The top ten solar inverter suppliers have more than 80% of the global market share, and Onsemi has signed long-term supply agreements with seven of them, totaling more than $1 billion in revenue. Beyond the LTSA, we continue to expand our footprint in the internal energy market, and in the second quarter we secure the design went for Silicon Carbide module for solar inverters with a leading global industrial OEM.
While Silicon Carbide is the fastest growing part of our power business, our silicon power products remain integral to our intelligent power portfolio with year-over-year growth of approximately 30% in our IGBT and [inaudible] revenue. This growth was primarily driven by automotive and industrial, where higher efficiency of products is a key differentiator. Our intelligence sensing revenue grew by 39% year-over-year, and by 10% quarter-over-quarter. The growth in our intelligence sensing was driven by both automotive, and industrial end markets, which grew by approximately 60% and 30% respectively year-over-year.
The steep growth in our automotive image sensors is driven by an increasing number of cameras per car, and mix shift to or higher toward higher resolution, and higher ESP sensors, and accelerating penetration of ADAS. One of the primary drivers of increasing number of cameras for cars has been the efforts by traditional OEMs to match to ADAS and related safety features offered by the disruptors and the new EV models. We are seeing an increasing use of our image sensors to enable safety through the replacement of traditional mirrors by camera enabled digital mirrors. We secured a design win for a digital mirror that incorporates four cameras for the rear and outside of use.
This mirror overcomes obstructions caused by passengers, headrests, and other objects and provides integrated rear view, side view for blind spot monitoring. We signed another LTSA to supply image sensors for a vision system to replace mirrors with cameras in commercial trucks. The system provides the driver with a more complete view of operating conditions over traditional mirrors, and delivers improved driver vision and blind spot elimination. We entered into an LTSA with a leading manufacturer of agriculture equipment to supply our new super exposure, flicker free, high dynamic range image sensor for targeted spray systems in weed elimination.
A vision system comprising more than 30 Onsemi image sensors identifies weeds, and signals a nozzle control system to precisely spray herbicide in just the right quantity. This application sustainably eliminates the indiscriminate use of agricultural chemicals, enables savings of more than 75% of herbicides, and helps protect the environment. In industrial iron market, our growth is driven by industrial and warehouse automation applications. Our scanning business grew by 70% year-over-year, driven by strong traction of our image sensors in industrial and warehouse applications.
This growth is driven by expansion and increased automation of warehouse by global e-commerce leaders. Our proprietary global shutter technology, which enables high speed capture of images, and low light performance coupled with strong technical support, are the key drivers of our leadership in this market. Our transformation journey is well underway, and we are aggressively hiring worldwide to keep up with our growth, Onsemi's, driving disruptive innovation, and route energy in the semiconductor space. And the work we do matters for our customers, our employees, and for the environment.
We play a good, great role in the most exciting megatrends that will define our future, such as electric vehicles, autonomous driving, robotics and automation, and alternative energy. There's no better time to be part of a growth story like ours, and I invite anyone interested in joining our talented team to apply online. Now I will turn the call over to Thad, to provide additional details on our financial guidance, Thad.
Thad Trent -- Chief Financial Officer
Thanks, Hassane. Another quarter of record results clearly demonstrates our accelerating momentum in the fastest growing semiconductor market and the progress we have made in our transformation. We are a stronger company today, after having focused first strategy, redirected our investment, and doubled down on intelligent power, and sensing solutions for the automotive, industrial, and cloud power markets. We rationalized our product portfolio by [inaudible] price sensitive products in favor of highly differentiated, intelligent power, and thinking solutions.
Our worldwide teams are focused on operational efficiencies, reduce cost, while we continue to make progress toward our fab lighter manufacturing strategy with the announced divestitures of two subscale fabs. The structural changes we have implemented over the last 18 months have significantly improved the predictability of our financial results, and position the company to consistently execute in dynamic market conditions. Our discipline execution resulted in record financial performance for the last five consecutive quarters, and we are thrilled that the results of our transformation are being recognized by the financial and business communities. In a noteworthy milestone, Onsemi inclusion the S&P 500 Index, and recognized as a Fortune 500 company.
We could not have achieved these results without the dedication of our worldwide team, and I continued to be impressed with their operational excellence quarter-after-quarter. To our employees around the world, thank you for your unwavering commitment to ensuring the success of our customers. We are seeing unprecedented demand for our products driven by accelerating megatrends, vehicle electrification, ADAS, factory automation, and energy infrastructure. In Silicon Carbide alone, we have LTSA sales of more than $4 million for the next three years.
Our customers value the market leading performance of our solutions, the breadth of our intelligent power and sensing portfolio, and our manufacturing capabilities, and choose Onsemi as the strategic partner to enable their long-term technology roadmaps. Our focus markets of automotive and industrial grew by 41% and 34% respectively year-over-year to account for 66% of revenue as compared to 59% a year ago. We expect continued strength in the automotive and industrial end markets amid growing demand for our no-core businesses, parts of which we are exiting to further achieve our transformation goals. We're also making progress on our sustainability initiatives.
Last quarter we published our sustainability report, in which we reiterated our commitment to achieving net zero by 2040. We recognize the importance of doing our part for the environment as we deliver cutting edge technologies that enable our customers to create a sustainable future. In 2021, approximately 75% of our revenue with sustainable product revenue, we significantly reduced our water consumption compared to the previous year, and we are already making progress in reducing our greenhouse gas emissions. Our intelligent power solutions for electric vehicles, easy charging, and energy infrastructure are helping to slow the pace of climate change.
And our intelligent sensing solutions enable automation and efficiencies, which in turn reduce energy consumption. Turning to results for the second quarter. As I mentioned, Q2 was another quarter of record results. Total revenue was $2.085 million, an increase of 25% over the second quarter of 2021, and 7% quarter-over-quarter.
This increase was driven by strength in our automotive and industrial businesses, which grew 38% year-over-year, and 9% quarter-over-quarter. Our Q2 revenue was above the high end of our guidance range, as we navigated the China lockdowns and recovered the impacted revenue late in the second quarter. Revenue from both intelligent power and intelligent voting was at record levels. Intelligent power grew by 31% year-over-year to 48% of revenue, and intelligent sensing grew by 39% year-over-year to 18% of revenue.
All three business units reported record revenue in the second quarter. Revenue for the Power Solutions Group, or PFG, was $1.06 million, an increase of 25% year-over-year and achieving its first million dollar quarter. Revenue for the Advanced Solutions Group, or ASG was $716.7 million, an increase of 18% year-over-year. Revenue for the intelligence sensing group, or ISG for the quarter was $311.3 million, an increase of 44% year-over-year.
GAAP and non-GAAP gross margin for the second quarter was 49.7% Non-GAAP gross margin improved 30 basis points quarter-over-quarter, primarily driven by a favorable mix in automotive and industrial markets. And despite a proactive slowdown in our wafer starts, which reduced our utilization from 81% in Q1 to 77% in the second quarter. Six quarters, our transformation to better control of our operational levers, to optimize efficiency, maximize output, and deliver for our customers, and our shareholders. GAAP operating margin for the quarter was 28%, and non-GAAP operating margin was a record of 34.5%.
GAAP earnings per diluted share for the second quarter was a $1.02, as compared to [inaudible] in a quarter a year ago. Non-GAAP earnings per diluted share was a $1.35 as compared to $0.63 in the second quarter of 2021. We relaunched our share buyback program, and for the first time in over two years, repurchased 1.5 million shares or $89.7 million at an average price of $59.76 per share. This represents 44% of our free cash flow for the second quarter, and there is $1.2 million remaining on unauthorized repurchase program.
Now let me give you some additional numbers for your model. GAAP operating expenses for the second quarte were $453.1 million, as compared to $357.9 million in the second quarter of 2021. Non-GAAP operating expenses were $317.7 million, as compared to $314.2 million in the quarter a year ago. Non-GAAP operating expenses increased by $14.9 million sequentially, driven by hiring to support our growth.
As I indicated in previous calls,[inaudible] will continue to trend higher as we bring in additional talent to support our growth. As we guide in the path, our non-GAAP tax rate will increase in 2022, as we have substantially utilized or in a well attributed. For the second quarter, our non-GAAP tax rate increase to 16.3% from 4.6% in the fourth quarter of 2021. This change, accounting for $0.18 of EPS dilution in the second quarter, and $0.34 year-to-date.
Our GAAP diluted share count was 447 million shares, and our non-GAAP diluted share count was 441.6 million shares. Please note that we have an updated reference table in the Investor Relations section of our website to assist you with calculating our diluted share account and various share prices. Turning to the Q2 balance sheet, cash and cash equivalents was $1.79 million, and we had $1.5 million undrawn on our revolver. Cash from operations was $420.8 million, and free cash flow was $202.7 million, and free cash flow on an LTM basis was 17% of revenue.
Capital expenditures during the second quarter were $218 million, which equates to a capital intensity of 10.5%. As we indicated previously, we are directing a significant portion of our capital expenditures toward the capacity expansion of Silicon Carbide, and enabling our 300 millimeter capabilities at the [inaudible] We expect to see a higher level of capital intensity in the second half of the year, as we continue to invest in equipment and capacity expansion to support our growth. Accounts receivable was $1.1 million, resulting in a [inaudible] of 50 days. The sequential increase in AR was due to non-linear shipments, as we recovered revenue late in the quarter from the China lockdowns.
Inventory increased $67 million sequentially to $1.56 million, and days of inventory decreased by 3 days to 136 days. We continue to build inventory to support our fab transitions in ramping Silicon Carbide. Distribution inventory decreased approximately $12 million quarter-over-quarter, and remains consistent with Q1 at 7.1 weeks. We continue to maintain distribution inventory at historically low levels to hold more inventory on our balance sheet for our customers needs rather than building inventory in the supply chains.
Total debt with $3.2 million, and our net leverage remaining remains well under one. Turning to guidance for the third quarter. Demand continues to outpace supply in our targeted automotive and industrial end markets. While there are pockets of softness in our non-core markets.
Given the uncertainty in the macro environment, we are taking a conservative stance and turning down demand in our guidance for the third quarter. A table detailing our GAAP and non-GAAP guidance is provided in the press release related to our second quarter results. Let me now provide you key elements of our non-GAAP guidance for the third quarter. We anticipate revenue will be in the range of $2.07 million to $2.17 million.
We expect non-GAAP gross margin to remain between 48% to 50%. This includes share based compensation of $3 million. Although we continue to focus on long-term gross margin expansion and sustainability, our rapidly accelerating Silicon Carbide ramp will be dilutive to gross margins by 100 to 200 basis points over the next several quarters, due to the incremental start-up cost as we scale the operation. We expect non-GAAP operating expenses of $319 million to $334 million to include share based compensation of $21 million.
We anticipate our non-GAAP, [inaudible] will be $24 to $28 million. For the remainder of 2022, we expect our non-GAAP tax rate to be in the range of 15.5% to 16.5%, and non-GAAP diluted share count for the third quarter is expected to be approximately 440 million shares. This results in non-GAAP earnings per share to be in the range of $1.25 and $1.37. We expect capital expenditures of $265 to $295 million in the second quarter as we ramp up our Silicon Carbide production and invest in 300 millimeter capabilities.
In summary, the transformation of the company has enabled us to deliver outstanding financial results, and at the same time reduce the volatility in our financials. With leadership in intelligent power and sensing solutions for the fastest growing applications in automotive and industrial, we are well positioned to deliver sustained long-term financial performance for showrooms. With that, I'd like to turn it back over to Liz to open up for Q&A.
[Operator instruction] Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Ross Seymore -- Deutsche Bank -- Analyst
Hey, guys. Thanks for let me ask you question. I guess my first question is on the general macro trends, and how you're reacting to them. You talked about a little bit of weakness in your non-core businesses, Hassane, and then Thad just talked about the utilization actually coming down sequentially.
So how do I in general reconcile demand being greater than supply in your core businesses, weakness in your non-core? And kind of what does it mean to the ability to backfill on that, given your utilization is dropping?
Hassane El-Khoury -- President and Chief Executive Officer
Yeah. Look, this is Hassane,. Not all capacity is fungible, obviously. So what we're doing is we're being very cautious in our inventory management.
You know, you've seen our inventory go down and days. We're focusing our inventory on the strategic inventory in our core business and Silicon Carbide and fab transition. So that will remain that side of the utilization as well. But as we see the softening in the and the economic and you know, that's our cautious outlook on the macro, which is built into our guide.
We're taking measures as part of our resilience of our model that we've been talking about in good and bad times. And these are kind of the things we're focusing on to get through this and come out stronger.
Ross Seymore -- Deutsche Bank -- Analyst
OK. Thanks for that color on, I guess that one for you. And a little more specifically on the gross margin side of things. You talked about a bunch of different moving parts in your third quarter guidance and even over the next few quarters with Silicon Carbide being a point or two headwind to gross margin.
Can you just walk us through the puts and takes? And I believe at one point you thought you could keep the gross margin relatively flat at this kind of 49% level for the next few quarters, even into the first half of next year. Is that still true?
Thad Trent -- Chief Financial Officer
Yeah. Look, we're in our targeted range of 48% to 50% in our guidance. You know, I noted that they got a headwind of 100 to 200 basis points resulting from Silicon Carbide. As as I mentioned, the Silicon Carbide is is ramping faster than we anticipated even 90 days ago.
And that's causing the dilutive impact of Silicon Carbide products at scale are at or above the corporate average that we're comfortable that we're continuing to achieve. Our goals there is primarily just the lumpiness of bringing capacity, and supporting that growth that gives us a headwind here. But we are still very happy that we can maintain margins at this level within our target range as we ramp Silicon Carbide. Bringing utilization down slightly, offset some of the inventory that I talked about as well.
I think, again, that shows the resilience in the model.
Ross Seymore -- Deutsche Bank -- Analyst
Our next question comes from Christopher Danely with Citi. Your line is now open.
Christopher Danely -- Citi -- Analyst
Hey, thanks, guys. Just to follow on Ross's question. So, theoretically, when would gross margins bottom for both the Silicon Carbide and for the overall company?
Thad Trent -- Chief Financial Officer
Well, we think we're at our range, right? We think we're there. There'll be some puts and takes over the next few quarters. We think we'll be able to maintain that range, plus or minus. But, I would call this kind of the rate at which you should be modeling.
Christopher Danely -- Citi -- Analyst
OK. And then as a follow-up, you talked about some macro issues in the non-auto and industrial business. Can you just expand on that? And are you guys predicting that they will get any worse or have we seen the worst there? And does this have any impact on overall pricing for the company?
Hassane El-Khoury -- President and Chief Executive Officer
Yeah. This is Hassane. Look, I don't know about getting better or worse. They're non-core.
We've always said a lot of that business are the areas we want to exit. So we're taking utilization down as part of our strategy. It's not going to have an impact on margin from a dilutive side, because I've always said that I've been very firm even on these calls prior. We're not going to chase that pricing down.
We are planning on exiting that business and therefore, you shouldn't expect any dilution on the margin because of it.
Christopher Danely -- Citi -- Analyst
Thank you. Our next question comes from Vivek Arya with Bank of America. Your line is now open.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Thanks for taking my question. I wanted to dig in to your very strong disclosure on the Silicon Carbide side. If I got it right, I think, Hassane, you mentioned, $1 million for next year. I think in the past you said $1 million exiting 23, and then probably, more than $2 billion and perhaps 24, and then $4 billion in terms of run rate or pipeline.
I forget the exact word you used. And I think that number used to be $2.6 million. So I'm curious, what has driven the upside to your silicon Carbide numbers to this extent? How much of this is autos? How much of this is expanding relationships with existing customers versus new customers? And then I had a follow up.
Hassane El-Khoury -- President and Chief Executive Officer
Sure. Look, I've always said the strength of our Silicon Carbide starts with technology, and when I talk about technology, devices and packages, we have differentiated solutions that matter at the end system. Meaning it translates into longer battery, longer range, whatever tuning the OEM would like for that specific platform. So that's consistent.
That's now proven in the results that we've seen already extending beyond what we projected, but also in the outlook that we said. And you're right, the first disclosure I put is I've always said we're going to double our Silicon Carbide in 22. I changed that to triple and 22 based on the strength that we're seeing already even in the second quarter. So we're going to exit 2022 at a higher run rate than we expected.
And then we're going to continue that growth in 23, which leads to the updated number that I've given on the Million dollar in 23. Now on the $4 billion, that's a mix of existing customer. I started ramping came back and deployed additional platforms on our LTSA and some of them extended the LTSA. But also within the quarter, we have extended the LTSA with new customers and new platforms.
So it is broad, is geographically, and it's customer diverse. And some of it includes OEMs directly, and that's the level of strategic partnerships we have had. About 90% of it is automotive. And then you saw me talk about the solar side of it or the renewable energy side where we've also had LTSA with the top seven.
That's a slower ramp obviously than automotive, but nevertheless that keeps pushing. So 90% of automotive strength and stickiness because of our technology across the board. And of course, we can't underestimate the end-to-end capability we have for the supply assurance.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
And for my follow up, how should we think about the percentage of in-sourcing versus outsourcing of substrates that it would take to achieve your $4 billion target over time? Maybe if you could give us a sense for how much of the substrate requirements are being met internally. And then how do you see that ratio go through time, and what that implies for your capital intensity over time? Thank you.
Hassane El-Khoury -- President and Chief Executive Officer
Yeah. So, look, our capital intensity already has a lot of the expansion that we talk about. And I've always said we're going to exit this year with a quadrupling of our substrate capacity after the acquisition. We're on track of doing that.
That's going to fuel the growth in subsequent years. And of course, as we put that capacity online, the percent of internal is going to keep increasing into what we want, which is the majority and internal. We're always going to have an external component of it because, you know, we don't build capacity for a max speak of a ramp, we build capacity for a steady state. So we're going to use external substrate if we need to to flex during a ramp.
But other than that, I would expect the majority will be from our internal and that's already taken in our CapEx numbers.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Thank you. Our next question comes from Toshi Hari with Goldman Sachs. Your line is now open.
Toshi Hari -- Goldman Sachs -- Analyst
Hi. Good morning. Thank you so much for taking the question. I've got two as well.
First on gross margins, I guess a multipart question. Thad, you mentioned that the gross margin headwind from the associated ramp over the next several quarters to be 1 to 2 percentage points. I'm curious how the progression of that will look like, meaning should we expect 25 to 50 basis points of headwind every quarter? Or is it more back out loaded? Any sort of shape of that headwind would be helpful. And then how should we think about EFK from an accounting perspective, how much depreciation would hit here [inaudible] and what are the implications for gross margins in first half of 23?
Thad Trent -- Chief Financial Officer
Yeah. So this is Thad. Let me take those in reverse order. So EFK comes online in 2023, so you're likely to see an impact in Q3 and Q4.
Obviously, as we bring on the fab, we'll be providing foundry services to Globalfoundries for the next three years, which will wind down, as we've said, there is revenue associated with that foundry agreement, which is low margin. You can think about it as being foundry margins in the mid to high single-digit range, you can think about for 2023, is that being a headwind of somewhere around 40 to 70 basis points on a quarterly basis? And that's the impact of that. The rest of it, we feel like we can offset it. Obviously, we get the efficiency of a better cost structure as we move more and more product into that over time as well.
On the Silicon Carbide, as I said, 100 to 200 basis points of headwind. It is a little lumpy depending on the the revenue and the timing of the equipment. We do believe we can keep the margins in this range of 48% to 50% for the next several quarters. Even with that headwind, you may see it move around a little bit, plus or minus 50 basis points here and there.
But we think we can be in that tight range even offsetting those margins. But it isn't necessarily linear from this point to 200 basis points. It's a little more fluctuation. And like I said, you'll see a little bit of fluctuation on the gross margin line.
But we don't think it's material, and we think we can offset it with other efficiencies.
Toshi Hari -- Goldman Sachs -- Analyst
A quick follow up, Thad, on the 40 to 70 basis point headwind from the EFK. Should we expect you to hold the current range on gross margins even with that headwind? Or could that drive another leg down in in 2022?
Thad Trent -- Chief Financial Officer
No. We believe we can offset it with other gross margin expansion initiatives in our fab later strategy. So, even though it's ahead when we feel like we can still maintain our margins in this range.
Toshi Hari -- Goldman Sachs -- Analyst
Okay. Great. And then as my follow up just on capital allocation, it was interesting to see you buy that stock in the quarter just given sort of the CapEx round you spoke to in your in your SIC business going forward. Can you remind us how we should be thinking about the balance between investing in your business versus returning cash to shareholders? And remind us how much cash you'd like to have on your balance sheet.
Thad Trent -- Chief Financial Officer
Look, I don't think anything really changes with our capital allocation. We'll continue to invest back into our businesses, R&D, CapEx, and obviously investing for our long-term growth. So that's our number one priority. We've always said we want financial flexibility for M&A.
If there's some opportunity out there for us, one that fits our model and then we would return cash to shareholders through or through the buyback. We will obviously pace each of those depending on the requirements. We've got a lot of CapEx requirements over the next several quarters. So, we will be very disciplined when it comes to the capital allocation.
Toshi Hari -- Goldman Sachs -- Analyst
Thank you. Our next question comes from William Stein with Truist. Your line is now open.
William Stein -- Truist Securities -- Analyst
Great. Thanks for taking my questions. Thad, I think you said that your CapEx plan includes some funding from customers. Can you perhaps detail how much of your CapEx plan includes such advancesm and how that influences your thinking about spending?
Thad Trent -- Chief Financial Officer
Yeah. So our CapEx, doesn't change rate. We said we run around 12% for the next few years and I think we'll still maintain that funding from the customer to offset that. But you don't see that through the CapEx or, CapEx intensity doesn't necessarily change because we still report it that way.
We do have customers that are co-investing with us for capital, in some cases seminaries and things like that, to invest in Silicon Carbide and other capacity that we're bringing online, that makes those customers much more sticky. And it's a good it just improves that relationship with that customer on a strategic basis.
William Stein -- Truist Securities -- Analyst
And my follow up, if I can, relates to the business that you intend to exit. Can you remind us how much of that is left after the current quarter? What's left to exit and maybe the pacing and margin of that, please.
Thad Trent -- Chief Financial Officer
Yeah. Good question. So we've got roughly $600 million left to exit. We've always said that would be market driven.
We're pricing it at a position that as capacity comes back on and it's the price sensitive part of our portfolio that we would likely exit it. We haven't been exiting as fast as what we anticipated. Originally, we thought we'd exit about another $300 million in the latter half of this year. We think we're probably going to exit about half of that.
So roughly about $150 million between Q3 and Q4. And then that obviously leaves a big slug for us next year as well in the 2023. iI the market gets softer, faster, we could exit that faster. We've always said, faster is better for us.
We'll right size our manufacturing, and reallocate that that capacity into automotive industrial. But you can expect roughly, kind of even, I think $75 million a quarter between Q3 and Q4.
William Stein -- Truist Securities -- Analyst
And the margin on that. Can you remind us?
Thad Trent -- Chief Financial Officer
Yeah. That margin is what we exited last quarter, I think it was about 34% margin. You can think about most of that today is kind of being in the low 40% range. But that is the stuff that is highly price sensitive.
William Stein -- Truist Securities -- Analyst
Thank you. Our next question comes from Rajvindra Gill with Needham and Company. Your line is now open.
Rajvindra Gill -- Needham and Company -- Analyst
Yeah, thanks for taking my questions and congrats on navigating through this uncertain environment, was really a good results. Another follow up on the gross margins. If I add up the EFK headwinds of -40 to -70 basis points a quarter, plus the Silicon Carbide start up cost of -100 to 200. You're talking about anywhere between -140 to -210 basis points through the headwinds to gross margins over the next several quarters.
Stripping that out, what would put your gross margins above 50% on a more normalized basis? So my question number one is that's still a significant headwind if you combine the two, and yet you're kind of still talking about a 48% to 50% range. So specifically, what are the drivers to offset that headwind, especially the fact if utilization rates are going to be dropping for some of the noncore core business? I'm curious how you're able to offset those kind of several headwinds over the next several quarters?
Hassane El-Khoury -- President and Chief Executive Officer
Yeah, look, this is Hassane. In the short term, obviously, those are the headwinds that we're offsetting through efficiencies that we have internally. I talked about new products ramping, so new products ramping outside of Silicon Carbide are accretive to gross margin. So we have a lot of these, I always said thousands of line items that we keep working on in order to offset that.
And over a longer time, that's going to take itself out with our Silicon Carbide ramping. The dilution effect will get less and less as we ramp into that capacity. And the same thing with EFK where our foundry business to global foundry will be reduced year-over-year and quarter-after-quarter, which will reduce that headwind. So in the short term, it's operational efficiencies that we are driving in longer term structural as we grow into it.
And while we do that, we're navigating the market like you've seen us do using utilization very carefully to balance between utilization and inventory build.
Rajvindra Gill -- Needham and Company -- Analyst
And thank you for that ,Hassane. And just for my follow up, if you look at your auto business, it was $784 million in Q2 versus $556 million in June of last year. Taking out 2021 in 2020, which was during the COVID years, it's still almost 80% above where it was at pre-COVID levels. So $440 million in June of 2019.
Now you're doing $784 million if you look at it from that perspective. So obviously, the units units have been kind of declining since since 2019. I know the content is very strong, but just wondering how you're able to get this kind of outsized growth even from kind of pre-COVID levels. What's happening with respect to pricing, and how much of that pricing scenario is going to be sustainable as we go into next year? Thank you.
Hassane El-Khoury -- President and Chief Executive Officer
Yeah, that's a very good question because that's something I look at internally. So from the units perspective, you can't really linearize the units because a lot of the things we have been exiting. Also when we talk about not just the non-core market but also non differentiated products, a lot of it is that very, very high volume, very, very low ASP business that we have been exiting, which some of it is going into automotive. So from a unit decline, I review that the only thing I look at that is how to balance the manufacturing into our fab lighter strategy.
So that's one thing here. But a lot of the new products that we are shipping are higher ASP, but not as much volume. Think about IGBT modules, think about Silicon Carbide module, much higher ASP and much lower volume. The second part of the growth is if you compare the EVs built back into if I go back to 18, if you want to do that as the baseline, EV units are much, much higher percent of total units built than they were three years ago, even when they were last year.
So a lot of that is the content. Then of course, you have the pricing stuff, which I've always said is some of it is we're pricing ourselves out of the market and that's the stuff we're not going to chase down. And that's sustainable as far as margin, not sustainable from a price perspective. And that's expected.
But the price to value discrepancies that we have been doing is sustainable. And the way I monitor that is one, the exchange that customers are signing, which include volume and price over the length of the LTSA. And even on my in my prepared remarks, I talk about customers coming in and wanting to extend those LTSA beyond the original kind of timeline that they had. And now LTSA is not about image sensor or silicon carbide or highly constrained.
It's, you know, some of them have 200 parts from Onsemi. So customers are valuing the whole portfolio. They're valuing where we are economically, even with the price to value discrepancies because we started way below market and that is sustainable. One from the LTSA side, and two, I know kind of a feel of where we are versus the market and we're not an outlier.
Rajvindra Gill -- Needham and Company -- Analyst
Thank you. Our next question comes from Gary Mobley with Wells Fargo.
Gary Mobley -- Wells Fargo Securities -- Analyst
I believe that was me. Gary Mobley, Wells Fargo Securities apologizes otherwise. But I had a multipart question on Silicon Carbide. And so I'm wondering what your view is on Silicon Carbide contribution to gross margin over the long-term.
Will it be at corporate gross margin when that business is $1 billion plus next year? And with respect to silicon carbide materials, capacity or supply, I believe there's a constraint situation in that market today. And and so I'm wondering if that's contemplated as well into your fiscal year 23 outlook.
Hassane El-Khoury -- President and Chief Executive Officer
Yeah. The Silicon Carbide, as we said, is at or above the corporate average gross margin at scale. We believe for the next several quarters, we're going to have the headwinds of 100 to 200 basis points. But I think, you know, if you think about late next year, we will that headwind should be behind us and um, you know, we will be achieving those gross margin targets at that time.
Thad Trent -- Chief Financial Officer
Yeah. From a look from a supply demand perspective, it's hard to make Silicon Carbide and it's sure as heck harder to scale it at the pace we are scaling it. Based on the acceleration of the EV penetration into total vehicles made. We do see, and I think that comment is supported by some of the industry analysts out there.
Silicon Carbide is going to remain constrained in the foreseeable future. And that's why our focus is on investing heavily into that capacity, ramping that capacity as hard as we can and supporting our LTSA customers. And that's the reason we have seen an increase in LTSA, customers that are signing up with committed revenue because they want to get that capacity. They want to have us invest in that capacity.
So we are there when they need to ramp versus them having to scramble. The last thing they want is announce the EV aspirations and not have the main event that drives the car. So we're working with our customers to support their EV ramps, and we do that through LTSA, and we do that through heavy investments in order to increase the pace. That's what we need.
Gary Mobley -- Wells Fargo Securities -- Analyst
My follow up. I want to ask about what's embedded in your third quarter guidance with respect to some of the end markets that may be, you know, showing some some softness in particular. I'm curious to know what your exposure is currently between consumer PCs and smartphones. Can you remind us of that?
Thad Trent -- Chief Financial Officer
Yeah. Look, when we think about the guidance going forward, we believe that auto and industrial continue to be supply constraints. So we believe that auto is up more than that, our guidance. We think that industrial is flat to up, and we think the other markets are potentially down.
And that's that's the conservative in our our guide there. We don't break out between those various markets that are not strategic to us. And, you know, part of where we're seeing the softness in the non-core business that we're hoping to exit. So if that does get softer, faster, that that could allow us to exit even quicker.
Gary Mobley -- Wells Fargo Securities -- Analyst
Thank you. Our next question comes from Joseph Moore with Morgan Stanley. Your line is now open.
Joseph Moore -- Morgan Stanley -- Analyst
Great. Thank you. Same with the Silicon Carbide topic. You know, I had Kind of the numbers you're talking about, and I look at the numbers that your top four or five competitors are talking about.
We're getting the numbers that are much larger than kind of the third party estimates for Silicon Carbide. So I assume that's that the market is growing faster than third parties, if that's what I would have thought. We were constrained by battery capacity and just kind of the general EV and battery power capability of your customers. So you do you think the market is expanding that much more rapidly versus on success within the market? And do you think some people may be overly optimistic about where how big this could be?
Hassane El-Khoury -- President and Chief Executive Officer
Yeah, look, one thing history has taught me is actuarial reports are accurate, backwards looking, not so much forward looking. The numbers I'm putting together, and I'm sure some of my peers do that. Our bottom firm, for us, I can speak specifically their bottoms up number. They are numbers that are under-long term supply agreements.
And remember, we always talk about those are committed revenue. It's not I don't talk about funnel. I don't talk about projections of what conversions is going to be. These are long term supply agreement, contractual documents between us and the customer, stating by year and some of them by quarter about what the rent profile and we have identified vehicle platforms that we're working on with the customer where that silicon carbide is going to go into show.
From the onsemi side. I can speak very comfortably about the the ramp that we are seeing because that's what we're working on. Now from what the risk, the ramp, and the market in general is the geographical and the customer flash platform diversity that we have engaged in where, you know, if there's one model that doesn't ramp the way they expect, there will be another model that will ramp faster than they expect. Because for us at the LTSA, especially the ones with an OEM are at an OEM level, not necessarily at a model level.
So that's how we balanced the risk. A lot of the strategic that we are working with, we always look at overall capacity from a battery perspective because that will be kind of the secondary bottleneck. A lot of these OEMs have committed battery capacity and you know, they've made their own disclosures. So I won't comment on that.
So from a ramp perspective, it is ahead of where we even thought there is an acceleration in Silicon Carbide that we have seen in our current revenue, and have seen our line in our projection with the long term supply agreements. But we're ready for it and our customers have everything else they need to ramp up that volume.
Joseph Moore -- Morgan Stanley -- Analyst
Great. Thank you very much. And just a quick follow up for more of a housekeeping thing. Is the treatment of the start-up expense in Silicon Carbide, sort of similar GAAP versus non-GAAP? Are there any big differences we should be aware.
Hassane El-Khoury -- President and Chief Executive Officer
All of our start-up costs are in our non-GAAP results, so we don't exclude anything.
That's great. Great. Thank you so much.
Thank you. Our next question comes from the line of Harsh Kumar with Piper Sandler. Your line is now open.
Harsh Kumar -- Piper Sandler -- Analyst
Yeah. Hey, guys, I had a quick one. When I talk to investors that are negative or bearish on the stocks, they often bring up the fact that you guys might have been involved in raising prices a lot more aggressively than some of your other competitors. I was curious if you could walk me through how things work in real life in a business.
Is that even possible that you are super aggressive in raising prices and maintain business with customers? Or do you risk losing business? I was just curious. You can give me puts and takes on that angle. And then I've got a quick follow up.
Hassane El-Khoury -- President and Chief Executive Officer
Yeah. Look, I'll give you. I've been very straightforward about this. There's two components of this.
I'll start with the easiest one. First, we've always been very straightforward and direct about the fact that a non-core business that we planned to exit, we priced ourselves out of the market. That's one way to exit that business is by pricing yourself out of the market. So that, I would say, if that's where you're hearing it from, that would be true.
And there is it's not a risk of losing business. It's the intent of losing the business. And we've had that intent, and we even disclose it in our prepared remarks of how much we lost and how much we intend on losing. So that's one side of it.
The other side, which is more on the value strategic. As I talk about the price value discrepancy, I don't think there's a risk of losing that business, especially with the fact that a lot of these products, the value products that we supply to our customers after the price actions that we've taken, we still remain committed to them and we have them under LTSA with our customers. That tells you that our pricing is not out of line. Otherwise, why would the customer want to sign up for it? One and two? Why would they want to come back and extend that? Now, relative and it's all relative.
Maybe the percent that you hear that we rate higher, maybe higher than as a percent than some of our peers have done. I don't know what they've done. I don't know what torque is in the market. But you also have to remember where we started from.
In a lot of areas and I have that data that we're acting on. We have been pricing way below market. So getting it back to market maybe a bigger percent, but it doesn't mean that you're above market, and the data and the commitments from our customers prove that from an external view.
Harsh Kumar -- Piper Sandler -- Analyst
Thank you very much, Hassane. That was very helpful. And then as a follow up real quickly, there's a lot of chatter, a lot of talk not from you guys, but from everywhere else about a Tesla contract, possibly. Are you willing to talk about that at all? And it's not a part of the billion dollar 2023 goal.
That's another question we get from investors a lot.
Hassane El-Khoury -- President and Chief Executive Officer
Look, I will maintain my policy of not commenting on specific customer engagement or customer ramps. So I'll leave it at that.
Harsh Kumar -- Piper Sandler -- Analyst
Fair enough. Thank you. Congrats, guys. Thanks.
Thank you. Our next question comes from Matt Ramsay with Cowen. Your line is now open.
Matt Ramsay -- Cowen and Company -- Analyst
Thank you very much. Good morning. I wanted to ask on on the Silicon Carbide business as you get to sort of this billion dollars in scale and continue to scale beyond that, Hassane, you mentioned that this is going to be sort of a historically quick volume ramp of a new technology that's no doubt complicated to get to yield and to scale. So, what I would like to understand a little bit more about how your agreements with your customers, obviously, if there's upside to your ability to scale yields and volumes, then great, you'll be able to fulfill all that.
But is there any sort of I don't know what the right term would be, risk sharing in some of these agreements in case the yields maybe don't come through as you guys planned. It's great that you're winning all this business. I'm just trying to figure out how you might risk mitigate some of the volume ramps, and the yield ramps as this technology scaled. Thanks.
Hassane El-Khoury -- President and Chief Executive Officer
Let me put it this way. We have enough data and we've been in this business for long enough to have a very solid baseline and a very solid learning. Call it slope. Whether it's yield.
Whether, well growth, whether it's ramp, etc.. I'm very, very comfortable with our commitments to our customers, with I would say, the way we look at it is equal upside downside, I'm not concerned about. My main focus is not on the technology and what the technology is outputting right now, it is having putting the equipment in place, ramping that equipment, and we've done a great job at that so far, and we're going to continue to do that. But the biggest thing for us is ramping the baseline that we've already established.
We have a great product and very good yield that has been, and already is in production.
Matt Ramsay -- Cowen and Company -- Analyst
Oh, thanks for that. That's great to hear. I think that from my conversations anyway, I think that's sort of the last hurdle to get investors across is just the confidence in those metrics.
Hassane El-Khoury -- President and Chief Executive Officer
Yeah, I'm not I'm not worried about the metrics. I personally review those metrics. I'm a technology person other than a CEO, and we have a solid outlook with the solid financials that had projected.
Matt Ramsay -- Cowen and Company -- Analyst
Thanks very much. A quick follow up for that. I got a couple of questions this morning on the receivables and DSL lines jumping up a bit in the quarter. If you had any context there, I'd appreciate it.
Thad Trent -- Chief Financial Officer
Yeah, absolutely. As I mentioned in the prepared remarks, we recovered the from the China lockdown. So if you look at our revenue for the quarter, it wasn't linear because of that. So it was very backend loaded which caused our AR to go up and DSL to go up.
But it's temporary, just as you know, it takes time to collect that cash but that natural in terms of if you look at the slope of linearity throughout the quarter being back end loaded, I don't expect that to continue now that we fully recovered that revenue and from the China lockdowns and we're not seeing any impact going forward. Knock on wood here. But that's the reason, purely temporary.
Matt Ramsay -- Cowen and Company -- Analyst
Thanks, guys. Congrats on all the progress.
That concludes today's question and answer session. I'd like to turn the call back to Hassane El-Khoury, President and CEO, for closing remarks.
Hassane El-Khoury -- President and Chief Executive Officer
Thank you all for joining us today. We delivered outstanding results in the second quarter. And I again, want to thank our worldwide teams for their commitment to excellence as we execute our strategy. While we have exceeded our expectations, we are nowhere near the full potential of Onsemi with accelerating growth in our silicon cart is growing megatrends, we are on a path to deliver sustained above market revenue and earnings growth.
We look forward to seeing you at various investor events during the quarter. Thank you.
Parag Agarwal -- Vice President of Investor Relations
Hassane El-Khoury -- President and Chief Executive Officer
Thad Trent -- Chief Financial Officer
Ross Seymore -- Deutsche Bank -- Analyst
Christopher Danely -- Citi -- Analyst
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Toshi Hari -- Goldman Sachs -- Analyst
William Stein -- Truist Securities -- Analyst
Rajvindra Gill -- Needham and Company -- Analyst
Gary Mobley -- Wells Fargo Securities -- Analyst
Joseph Moore -- Morgan Stanley -- Analyst
Harsh Kumar -- Piper Sandler -- Analyst
Matt Ramsay -- Cowen and Company -- Analyst
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