ON Semiconductor Corporation (ON) Earnings Call Transcript & Summary

All right. Welcome back. I'm Joe Moore, Morgan Stanley Semiconductor Research, and very happy to have with us the management team of onsemi, CEO and President, Hassane El-Khoury, and EVP and CFO, Thad Trent.

So guys, thank you for coming. I really appreciate it. Maybe at a high level, you've described an environment that's kind of stabilizing but not yet accelerating. That's still the view and kind of what's driving your view of the world these days?

Yes. Look, I think our perspective is still very consistent where the first step of a recovery is stabilization. We're in that. We have not seen a replenishment cycle that comes next. But the positive signs that we can talk about is really a lot of the KPIs are trending in the right direction. So compared -- relatively speaking from 90 days ago until where we are today, book-to-bills improved. Our visibility has improved, not just the immediate quarter in turns, meaning less turns at this time for the next quarter, but also visibility out into, call it, the second half of the year. So all of these are not -- are new, relatively speaking, from where we were 90 days ago. And at this point, I'll take improvement 90 days ago relative any day. So things are getting better incrementally, not where we would call a recovery, but at least it's trending in the right direction.

And you are showing year-over-year growth this quarter for the first time in a while. And are you at the point where you're shipping to end demand? Or do you still think you're below that point?

Yes. So if you think about -- so in industrial, it depends on market. In industrial, we've been shipping to end demand even in 2025 because if you recall, industrial inventory drain started ahead of automotive. We also talked about being after draining the inventory and getting back to natural demand in automotive end of '25. So right now, we do believe we're shipping to end demand. But 1 thing on the growth that you talked about, I just want to remind everybody that in Q1, we're exiting about $50 million of business. So if you add that to our guide for the first quarter, we're actually -- our core business is doing -- performing much better than just seasonality.

Yes. That's a great point. So maybe looking at some of the end markets. In automotive, kind of talk through the growth drivers that you're looking at EV versus sort of zonal architecture and just how are you thinking about those dynamics?

Yes. From an automotive -- a lot of it is content. We've always been very consistent in our approach for automotive, where we're not as dependent on SAAR as we are on the content within the vehicles made. So what does that mean in numbers? The ups and downs, the inventory drain and the inventory build that we talked about in automotive, if you want to abstract all of that and normalize, if you go back to 2019, automotive revenue for onsemi, 2025 automotive revenue for onsemi, that revenue grows 70%, 7-0, which means you're about a 9% to 10% CAGR for that 5-year period. Where we said about -- that's in a flat SAAR. So our content, net content, natural demand -- so I took out the COVID and all of that, is SAAR plus mid- to high single digit, or high single digit above SAAR. That's the content. That's coming from electrification, not just EV, but plug-in hybrids, range extending vehicle, software-defined vehicles, SDV, inclusive of the zonal architecture. We're extending our power approach where we've been really servicing the ex EV in a power architecture. Now we have 10BASE-T1S Ethernet, so more communication. We have the smart FETs for, again, the Zonal architecture. All of this is new content we didn't have a few years ago. So as we deliver on that high single digit above SAAR, historically, forward-looking, we have more content coming in to support that trajectory.

That's helpful. And then cyclically, you made the point to me before that we've seen these kind of small supply disruptions that have caused line-down situations very rapidly. We had Nexperia a few months ago, which cleared up quickly, but it sort of showed how little inventory was out there. There's been some DDR4 stresses. And I've been very surprised that the memory of the automotive customers seems to be short that you're seeing those things as maybe a warning sign and it might trigger a build, but you're not seeing any indication of any kind of replenishment.

Yes, we're not seeing what I would call a structural replenishment, but that doesn't mean that the risk is not there. And it's kind of a tale of 2 cities here, where you have Tier 1s where their business model can't sustain or support an inventory build, given the capital cost. But you have also the OEMs that cannot have the risk of not being able to build. So in the management of both of them, we have some OEMs which has not happened in the past. We have some OEMs purchasing directly from us because they see the risk. We are a strategic supplier, they buy strategic products from us that are very unique. Therefore, they know they need to have that security of supply. So they know their demand, they have high confidence in their demand. So they're placing orders directly from us.

That's quite interesting. China for automotive, a lot of the innovation in automotive is happening there. You've maintained a strong position in China EV, but you do have potentially domestic competition. Just how do you think about the dynamics of that market?

Yes. Look, there's -- whether it's competition, China domestically or competition from Western competitors or European competitor -- competition is competition. Competition is good. The reason we win is superior technology. So that's the primary reason we've won so far. That's the primary reason we will continue to win, whether it's China or whether it's anywhere else. I see it no different. There are local suppliers in China. But we've also said we have 50% share in the China EV market. Why? Because our products that we ship to China are superior than not just the local -- domestic Chinese, but the European peers that we compete against in China, and we win against both. So the common denominator here is we have to maintain and advance our technology road map. As long as we keep doing that, we will keep selling on value. As soon as somebody catches up, whether it's China or somebody else, then it becomes harder to win. And that's what we invest in. That's why we have been investing in to maintain that leadership in technology.

So the markets that you sort of earmark for exit, those are the ones that just there's no differentiation.

There's no differentiation and those are not anything new. Those markets that we -- or product/market that we earmarked for exit. If you recall, we earmarked those in 2021. So our view of where value is with our product portfolio has not changed since 2021. It just took us a long time to exit. But it's still exactly the same products. In 2021, I talked about $800 million to $900 million of exits. Fast forward, inclusive of the exits in -- for the noncore exits in '26, we would have exited $900 million. The number didn't change. The timing changed.

Yes. Okay. Helpful. Industrial, as you said, you returned to growth. How broad is that recovery? Is it sort of narrowed by segments? Just -- how are you seeing growth?

Industrial recovery, I would say, it's broad. Because if you look at it also, the PMIs are trending for the first time, over 50. So that gives you more of a broader recovery. Now of course, within Industrial, we've had strength throughout even the downturn where our medical business within Industrial has been trending strong. Aerospace, defense and security, that's been trending strong. But in general, I would say, outside of just the normal seasonality, the industrial market overall is doing better.

Yes. And for Q4, it was the first quarter that we saw year-over-year growth in industrial in over 3 years. So we think that in '25, we were kind of bouncing across the bottom in industrial. Q4, that uptick has given us that signal that broad industrial, that broad set of customers is recovering, and we're seeing that layering in through the backlog and the bookings.

Okay. Great. And I mean, you've done a pretty good job of identifying these challenging situations relatively early. You've talked about weaker industrial before others, and certainly that played out. And then automotive similarly. Do you feel like -- why is it that you have? Is it the LTSAs? What's kind of giving you the visibility to it?

Well, on the way into the downturn, it was the LTSAs because when you have a contractual obligation for a certain level and then you can't fulfill that obligation. And the obligation is over a multiyear period, you're going to place the call to start negotiating early. So we started getting those calls from customers. That gave us that visibility. And because I've always been very consistent, those LTSAs are very helpful to get the call and then talk about a win-win because it wasn't our advantage to just keep shipping inventory just because we have a contract. And we've done a good job through that period. And on the uptake, if you recall every January in '23 and January of '24, and January of '25, a lot of people are talking about second half of whatever year recovery and I've always been consistent of, I don't see it. I don't see the catalyst. I don't see the signs. PMI is flat to down. Now I'm seeing it differently. So not yet a recovery, but it is different and it is stabilization and the KPIs are actually trending in the right direction. Now what I'm looking for is the sustainability of these KPIs. Is book-to-bill going to be consistent? Is the fill rate is going to be there? As we get closer to those outer quarters, our order is going to retain and go up. Those will start leading to a recovery. So that's the next step for us post-stabilization, replenishment and full recovery.

Okay. And then if you talk about the exits, the businesses that you're pulling away from because they don't meet the criteria. How much longer is that going to be a headwind? Are you going to be able to resolve that over the course of this year? Just...

I guarantee you I will not be talking about this after December of '26, okay. It will all be done before -- by the end of '26 -- so think about '26 as a transitional year. '27, we resumed growth because that's the -- because then our base business will start netting out the growth. Today, it's kind of being compressed with the exits.

And the reason the exits take longer is that the customers just keep buying after you sort of elevated the price level?

Yes. So if you recall, we "exited" these businesses by raising prices, thinking the customers will go elsewhere. They didn't. And we said at the time, we'll keep it as long as it's not dilutive. The thing is that downturn has been so long. Some of our peers have take -- have been more aggressive on their pricing. And we've always said we're not going to chase that business down. If it starts coming down in pricing and margin, we're just going to walk away, and that's what's happening.

Okay. Helpful. Can you talk about the restructurings that you've done, you've talked about a sort of a permanent efficiency gains as a focus. Can you just give us some color into that?

Yes. So there's 2 types of restructuring that we've done, just to clarify, Joe. So we've done our Fab Right initiatives, and then we've done OpEx restructuring as well. And that's because we've been driving efficiencies across the organization, we've been investing through the downturn. So even though the top line has been compressed, we've been investing. So year-on-year, our OpEx is actually going to be down in '26 a couple of percentage points. This is our new baseline at this point. We're still above our model in terms of the OpEx percent, but in terms of dollars, we're investing the right amount of dollars. So we'll grow back into that. So if you think about it, as the market recovers, there's a lot of leverage in the model because OpEx isn't going to grow at the same rate as revenue. On the Fab Right side of things that we have executed on, we took about 12% of our capacity offline between the actions that we started in '25 and that we'll complete here in 2026, that's because we're getting more efficiency out of our footprint. So the first thing we did, if you remember is we divested some fabs, then we've been driving efficiency within our existing footprint. So we don't need all the capacity, especially as we exited some of these businesses. So we've been taking that capacity offline. The impact there is for 2026 is about $45 million to $50 million of depreciation benefit in '26 versus 2025. That will hit the P&L in the second half of the year as we bleed through that inventory. So that's a favorable margin impact in the second half of the year. As we go forward, we think there's more in Fab Right that we'll be doing over the next several years. And we think there's another couple of hundred basis points of gross margin improvement that we can execute when it comes to just the Fab Right initiatives over the next few years. So we're not done. We're continuing to drive efficiency.

Yes. Okay. That's helpful. And then just can you talk about the margin framework? Obviously, utilization has been the biggest headwind there? How are you feeling about that? And it seems like you should start to improve. How do you think about it?

Yes. Yes. Look, our underutilization charges are about 700 basis points currently. So that's driven by the top line. So as the market recovers, our utilization will improve. Last quarter, we were at 68% utilization so that -- that's going to click up slightly here in Q1. I think based on projections of what we're seeing right now, we're probably going to get kind of in that mid-70% range for the year, again, helping margins in the second half. But the short-term driver of gross margins is all utilization. So every point of utilization is 25 to 30 basis points of gross margin improvement. So you can do that math and you can see where we're going to get. In addition, there's the 200 basis points that I just talked about with Fab Right. As we get more of our higher-margin products ramping over the next couple of years, there's another couple of hundred basis points there. So you start adding that up, and you can get up -- start getting up over 50% pretty quickly, which is our target -- our long-term target.

Yes. One thing, the 700 basis points he mentioned on the underutilization is not cash. So you can look at our cash flow margin in a downturn 24%. $1.4 billion free cash flow all used to buy back shares. So even in a downturn, our model is performing at peak.

Okay. Great. Maybe walk through some of the growth initiatives in some of the markets. Silicon carbide, you have a unique position. You bought the GTAT assets vertically integrated at the substrate level. The automotive market has been challenging, I guess, in that space, but there's a lot of opportunity now for silicon carbide. Can you talk about how you might use that going forward?

Yes. So let me start with -- so silicon carbide in general, we got a couple of flavors of silicon carbide. We have the traditional, call it, MOSFET silicon carbide and what we call silicon carbide JFET. From a market perspective, in automotive, you're right, I mean the automotive outlook for the market is not what it was 2 years ago. However, it remains a growth market. So it's lower growth, but nevertheless, it is a growth market, and it is a large growth market. What changed in the last couple of years to put us in this good position with the outlook of silicon carbide. A couple of things. I'll start with automotive. One is the penetration of silicon carbide into EVs. So forget about needing -- having more EVs. The number of EVs is going up year-on-year. So that's growth number one. Penetration of silicon carbide into EVs. If you take out the North America EV company, the silicon carbide penetration, the EV is only 14%, 1-4. So there's a lot of ways to go just without even units of EVs growing just more silicon carbide into EVs. Another positive dynamic that's happened in the last couple of years, a lot of people are talking about plug-in hybrids. Historically, plug-in hybrids have been IGBT base, plug-in hybrids, ranging in the 40 to 50-mile range. New generation plug-in hybrids, OEM are pushing into 100-mile range. When you get to 100 mile, now you're using silicon carbide. So even plug-in hybrids now are using silicon carbide from silicon. That's a positive catalyst that wasn't around a few years ago. AI data center power, as you get to higher -- higher and higher voltage on the PSU, you're getting more into silicon carbide JFET land. Again, that was not -- that opportunity was not there a few years ago. So all of these are -- although we talk about EV not being the growth not being to the level that we thought, it's still growing, but there's also a lot more opportunities that we didn't know about a few years ago that now is coming into our domain. We're shipping to all of these demand. That's why we still see silicon carbide as a favorable market, number one. And number two, we already talked about our advanced technology and how we position that against competition, whether it's China or elsewhere. So these 2 together, growth market and a technical competitive advantage, make this a good position for onsemi.

And the capabilities you've acquired, you talked about the JFET business, you've got vertical GaN capability should position you well in AI power, which is a market where you've been pretty small up to this point, but you're 1 of the Nvidia's partners on the 800-volt platform. Just help us understand what that opportunity looks like for you guys.

Yes. So if you think about today's AI rack, you can think about it as a 120-kilowatt power rack. The content -- serviceable content for us is about $9,500. You look at future generation or next-generation racks, when you talk about 800-volt rack 1 megawatt, that content opportunity goes up to $105,000. So a tremendous increase in content. How we service that content? We service that content all the way from high voltage to lower voltage at the core. So throughout the power treat going from 800 volts down through the, call it, 3 or 4 transitions, 400 to 50, 50 to 12, 12 to whatever core it is. As you move forward into 800-volt domain, one, the content goes up, point number one. Point number 2 is what customers are trying to do is reduce the number of conversions to try to go from 800 volts to something much lower. When that happens, that becomes an onsemi domain because we do both the high voltage and the low voltage. So when you combine them, you can't combine them if you don't do both bookends. We do both bookends with very differentiated technologies that others do not have. Silicon carbide JFET, vertical GaN, we're the only company in the world today that does GaN on GaN at 1,200 volts sampling, not some advanced R&D project. We are sampling those both in automotive and AI data center. You put those together, that gives us a competitive advantage, not just today but also forward-looking as the architecture of the rack starts to change.

And are those relationships with the power supply companies with the hyperscalers?

So it depends. When you are in the power for the rack is the power the PSU vendors and so on. As you get closer and get on the board, that's more on the compute side. So that's the, call it, the supply chain or the design in path.

Yes. Okay. So overall data center is a growth priority for you guys?

It is. For sure.

Okay. Great. Maybe talk about Treo a little bit with the product you introduced there. And what traction are you seeing? Or are you continuing to see the growth in that part of the market?

Yes. So just, I guess, to anchor everybody. So Treo is our advanced analog mixed signal platform and technology. And I say platform and technology. So it's 65-nanometer BCD. It is high voltage. It is the only 65-nanometer technology in the world that can support up to 90 volts inherent in the technology. So that puts it perfect for 48-volt applications like Zonal or AI data center. And it puts a grade for, in general, automotive. So that's on the technology. And the platform that we've introduced is an IT-based platform, which means that we can create products to service a multitude of end markets. What does that mean? In automotive, we talked about 10BASE-T1S Ethernet. That's based on our Treo platform. We've talked about our drivers for our high-power switches. That's based on Treo. Onsemi is #1 in ultrasonic sensing in the world in automotive and now in robotics. That is also based on Treo. So you see medical devices based on Treo. So it gives us a franchise that is very high margin, 60% to 70% gross margin, but very versatile as far as targeting a lot of the end markets we play in. So where is the -- where are we on progress towards that? We've given the outlook of $1 billion in revenue by 2030. Where we ended 2025 was $1 billion funnel already. We have doubled the number of products in '25 that we had in '24. So new product momentum, which is what you need for the funnel in driving for the revenue. We've delivered on that momentum. We have also put a goal out there that we were going to get first revenue at the end -- in the second half of '25. We achieved first revenue, high-volume revenue in the first half of '25. So a couple of quarters ahead. So all of these give us the confidence that, one, the technology is robust because of the volume. And two, the technology is compelling because of the momentum that we're having with the customer and the pull-in of the revenue we saw in 2025. So all of these give us higher confidence about achieving our $1 billion of revenue in 2030. And to remind you, this is all manufactured in-house. So as that ramps, it helps with the utilization that Thad is talking about.

And with very high gross margin.

With 60% to 70% gross margin, giving us that mix of products then.

And how do you go to a market -- go to market with a product like this? Is it through distribution? How do you create that ecosystem because it seems like you're sort of competing with people just pulling stuff from the catalog a little bit and they're developing something.

Yes. So we obviously go to market with our distribution partners, one, but a lot of the stuff also is design-in capability, which is a 10BASE-T1S Ethernet for automotive zonal, nobody is going to pick it off of catalog. It's an architectural design that we get involved with the architects of the vehicle. So it is an architectural cell that we have a very skilled sales and field application engineers that work directly with the customers. But to get the breadth of it, yes, we do have also products that go through distribution.

There's also a time-to-market advantage. So we can get from design or concept to standpoint in 6 to 9 months. So we can intercept designs with customers very quickly and help kind of solve their needs on a very quick basis. So that gives us a time to market advantage.

And when you talk about incremental families of Treo, is that informed by customer conversations or like this is what we want from.

So the families we define, products within these families. Some of them are -- we don't make ASICs. Our plan is not to make it. But design and feedback, whether it's on the current generation or the next generation. And the customer says, this is great. I'm designing it in. Here's my road map. Can you make sure you have the next generation that supports the customer's road map. So basically, the platform allows us to get a design in on the next generation of the customer before they start on it, which -- that's the conversation we want to be having, that's what drives the margin and the value and really the stickiness of it.

Yes. Okay, cool. So I have 1 more question and then we can open it to the audience. Really good story around cash return. You've been returning 100% of cash. You talked about how good the free cash flow dynamics of your business are. You did try to do an acquisition and the potential seller didn't accommodate it, but then you sort of moved to a $6 billion repurchase. So how committed are you to that? Is M&A still a possibility? Just how do you think about cash return over time?

So if you look at our capital allocation policy, it's very consistent. Number one, invest in our business. R&D, we talked about that, right? We've got the right investments. We've got big CapEx investments behind us in our East Fishkill, in our silicon carbide build-out, that's all behind us. So our big investments are behind us, but we -- that was priority number one. Priority #2 was balance sheet flexibility. So now we've checked that box as well. And then M&A. So we've done small tuck-in acquisitions. We've looked at some other things. So that's the third priority. And then fourth is return that capital to our shareholders through repurchases and that's what we've been doing. So over the last year, we've returned 100% of our free cash flow, 24% margin on that free cash flow to our shareholders, and we'll continue to do that. So that's after making the investments that we return it. So -- we announced in November, we announced a $6 billion buyback, and we're continuing to do what we're doing.

Yes. Okay. And if there were M&A that entered into it, how would you think about that?

Yes. So for us, M&A, if you think about it has to be strategic, it has to be complementary to our portfolio in general. And when I mean complementary to our portfolio, products that land along the same board with the same customer or a market opportunity with the SAM expansion. You're not going to see us do just M&A just to get scale. We have scale. Some of the M&A is not fixing a gap, it's accelerating. I'll give you a perfect example. The silicon carbide JFET we've acquired, we had that internally being developed. We saw an opportunity with an asset with leadership that gives us a time to market advantage and it worked out very well because now we're designed into the AI power and data center. So we're going to use it as a lever to not only fulfill some potential gaps in the portfolio, but accelerate gaps we have identified that we're working on organically, along with, of course, strategic, like I said, to expand the exposure with customers.

Great. Let me stop there and see if there's questions from the audience. One in the back.

I had a question just about if you were to look at the Venn diagram of your data center and nondata center products, to what extent are those products fungible? And to what extent maybe over the short to medium term? And to what extent kind of like we've seen in kind of commodity DRAM might you see non-AI and AI data center product competition for those chips?

I would say it's a good question. Hopefully, a lot of the non-AI customers listening. If you think about it from a technology perspective -- and from a technology perspective, it's all landing on the same technology. So call it, from a wafer technology. It's -- while we talk about Treo and AI data center on -- next to the XPU is the same Treo on the technology, same fab, same wafer technology that we do in automotive ultrasonic sensing. From a technology, it's fully fungible. From a product, call it, the SPS-type product, which is the, call it, the PMIC that sits next to the GPU or XPU, that is not fungible. All the power devices I just mentioned, our silicon carbide, silicon carbide JFET, medium and low-voltage MOSFETs, all that is the same across all of our markets. So highly fungible. Let me answer the next question that people will think about, which is, so if the market all comes back at the same time, what happens? It will be a good day.

AI guys get what they want, I can tell you this.

It will be basically the allocation conversations we'll be having in 2021, but on steroids because in '21, AI was not a contender in the capacity. Today, they are. But that, from our perspective, it's the same platform across the board for us.

We have 1 more question. Here?

Hassane, maybe help us understand the market share for you in PSUs for GaN. So if you listen to one of your European peers, they talk about process IP, thin wafer handling $300 million as their advantages. And you've got an architecture advantage in vertical GaN. So what does that mean for market share in that PSU slots?

So from a GaN-specific market share, time will tell. It's too soon to tell. We're sampling the vertical GaN. From a technology perspective, it doesn't matter if you have how thin the wafer is and how big the diameter is. And at the end of the day, in lateral GaN, which is what my peers are talking about, lateral GaN to get to 1,200 volts, you have to stack 2 of them. Vertical GaN, you do it with a single chip, which means your density is better. So from a technology perspective, high voltage, you cannot do it with lateral GaN unless you stack them, which is what everybody else -- what everybody is doing today. They tell you, you stack to 650 volts. That's the topology today. It's no -- not a secret. So the difference is the technology underlying. It doesn't matter how you manufacture it, all the thinner, the wafer thinning, all of that stuff is manufacturing. It's not a product. And 1 thing I will remind everyone is, like, in the last 5 years what we have done at onsemi is we have moved from being a manufacturing company to a product company, which means we will compete on products first, then we'll figure out the best way and most efficient way to manufacture and go to market, which is how you extract the margin that we have a target for.

Okay. Well, it looks like we're out of time. We'll wrap it up there. Hassane, Thad, thanks.

Thank you. Thanks, Joe.

Appreciate it.