ON Semiconductor Corporation (ON) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thanks for joining us on day 2 of the DB Technology Conference in Dana Point. I am Melissa Weathers. I'm one of the lead semis analyst here at DB. And this morning, we are grateful to have onsemi, join us up on stage. We've got Hassane El-Khoury, CEO; and Thad Trent, CFO. Thank you both for being here.

Thank you.

So I think the best place to start here, let's talk about the cycle and your outlook on the cycle. On your last earnings call, you talked about strengthening demand signals after kind of finding the bottom in the first quarter of this year. So can you talk about the signals that you saw in the quarter? Any kind of booking visibility of lead time trends that you'd call out?

Yes. I mean, overall -- so we talked about -- you mentioned in the first quarter, we talked about automotive kind of hitting the bottom. We do believe right now we're shipping to natural demand across all of our end markets. Natural demand is -- doesn't mean strong or not strong. It's just at least we're at an equilibrium. What makes us positive about the outlook and where we are in the cycle is really look at the metrics that drive the business. We've had our book-to-bill above parity already. We've had a much better visibility. If I remember a year ago, we're talking about we're on a good quarter. We have visibility maybe 90 days out. Right now, we have visibility -- much longer visibility into '27, sometimes into '28, depending on the product and the markets. Sitting here today in '26, we had better visibility about '27 than we had while we were in the same spot in '25 into '26. Our lead times have been extending in overall, but we do have constraints in some technologies where we see the strength across a lot of the end markets, commonalities about the end markets. All of these are signs of an improving end market demand. Again, not all of it is equal. A lot of it is driven by our AI data center, which we've taken that number -- that outlook up from doubling to more than doubling year-on-year. But however, the business health across all of the metrics that we look at from an operational side have been moving all in the right direction.

So if you had a crystal ball, as you think about kind of the slope of that cyclical core recovery, should we be expecting like a chip shortages, COVID-style, magnitude of recovery? Or like what shape do you think it's going to take?

Yes. I think -- well, that depends on how quickly some end markets wake up to what the realities are. And what I mean by that is we all know AI data center, we have the outlook, the demand is strong, and we're shipping to that demand, which is also creating some constraints in some technologies that are shared across a lot of the markets. We talked about some of our power technology, which is driving a lot of our demand in AI data center, we have some constraints. It's not broad-based concerning, but we do have technologies where we are constrained. We talked in the last quarter that we had to make some allocation trade-offs between auto and AI data center. But overall, to answer your question about the shape of it, we have the capacity. Let me just start with that. So we're not worried about capacity. You're not going to see a big CapEx cycle from onsemi. That's all behind us. We have the capacity. We're comfortable about the growth. We're comfortable about the capacity we've installed. The challenge is going to be how quickly does demand layer into the backlog. If it's going to be a snapback, there's always a cycle time. We do have some inventory in die bank. We can launch into back end. That's a 2-week cycle time but that quickly depletes if the snapback is very steep. If the snapback is kind of a gradual increase where you have the AI data center strength, and it layers in an outlook of an automotive strength over the last kind of 2, 3 quarters, then we can start building for that and we're able to support it. If we get orders today and they need them in, I don't know, October, November, and you get a snapback of orders. It's like, yes, I'll see you the -- lead times are going to extend, allocation is going to start. It's going to be back like the COVID days. it's going to actually be worse than the COVID days because back in COVID, AI data center was not a big consumer of capacity. Today, data center is one of the largest consumers of capacity. So the call to action that I've been giving our customers across auto and industrial is put in your backlog, stand behind it, and we will together manage on how to build to it because we do have the capacity.

And Melissa, just to put some numbers to what Hassane said, shape of that recovery. We exited last year with our utilization of 68%. Last quarter, we were at 83%. So in a matter of 6 months, we've taken utilization up very quickly because of the demand that we're seeing. What we think is going to happen is our cycle time, you think about from the time we launch a wafer to an end product is 4 to 6 months. So I think as we guided, we said, look, utilization is probably going to go plus or minus from here on. If the recovery gets deeper again, our utilization goes up further. That helps gross margin again. But I think just that rate of us improving the utilization shows you the strength of the business what we've seen of that order pattern just getting that much stronger that faster.

I'm trying to think back to the past cycle, where did utilization peak in the last cycle?

So we took some capacity offline. So if you think about where we were before, it was kind of in the mid-80s, fully utilized for us is in that kind of 92%, 93%. So you can see we're getting there.

Got it. And then -- so we'll get into the data center side. It's been a little while since I followed you guys closely, and I'm like, okay, on to the data center company now. But so outside of the data center, as we think about like industrial, automotive, some of the more cyclical businesses, can you walk us through A&D, those kinds of things? Can you walk us through where are the hotspots, where are you still trying to see some recovery in demand?

Yes. Even within every one of the end markets, let me start with automotive. Automotive, we talked about the stability. We have not seen a replenishment cycle nor have we seen kind of demand uptick. If you look at the SAAR overall, SAAR is kind of actually slightly down to a first order. But we expect automotive to grow about 6 or so percent year-on-year, which -- if you think about our target and the content growth that we talk about in automotive, we've always talked about high single digits above SAAR. So we're already delivering on that in a stable demand environment. Of course, electrification, which is driven today by China EVs where we have a majority share, that's outgrowing automotive in general. So again, if you look at automotive, you have the disruptors with -- that are more skewed to automotive, whether it's regional or by customer, those are doing much better than the rest of the market and much better than the rest of the automotive market, which is lifting the content for us. Industrial, same thing. We talk about industrial being kind of that, in general, over a longer period of time being the GDP kind of plus. However, within Industrial, we have secular markets, which is about 60% of our industrial market. You can think about energy storage system, energy infrastructure, AD&S, medical, a lot of these, our energy infrastructure business is growing 40% year-on-year, and that secular side of the business, I think posted 25% sequential. So you can see a lot of that strength is being driven by that. Now of course, the industrial side, the energy infrastructure, we call it the AI halo. The strength that we're getting is really a build-out of industrial that is driven by the AI data center buildout. But those are secular where we can really put a finger on and say, this is exactly true demand. It's a healthy demand, and it's a demand signal that is out in the end market, and we are supporting it. That is kind of the auto and industrial and a lot of the growth segments and the growth applications or the submarkets that we are seeing, but they're all tangible, they're all secular and they are all end market demand. But net of any replenishment or any uptick in demand, for example, in auto. That's all going to be tailwinds for us.

And just to clarify on the inventory side, whether it's distributors or at the end customers, how would you characterize the health of overall industry inventories at this point?

Look, our inventory in the channel is right where we want it to be. We want to have 10 to 11 weeks. We're in that sweet spot. We've been there for a while. We effectively managed the inventory for our distributors, right? They would take more inventory if we ship it to them. We hold it back. I think at the end customer, obviously, that's harder for us to track. I think in automotive, as said, I think we're shipping back to natural demand. So we've gotten through the inventory digestion. In some cases, automotive is still dangerously low. They haven't changed their behavior yet. But we don't think there's a lot of inventory out with the customers. Our inventory and our balance sheet is actually very healthy as well. So I think we're in a good spot, and we're lean. And what we've been saying back to kind of that utilization is we can match the utilization to the demand recovery, right, given that we don't have to bleed through inventory at our customers in the channel or on our balance sheet before we start ramping up manufacturing.

On the pricing side, can you summarize how you guys are approaching pricing at this point with some of these end markets getting a little bit tighter? Like what has been on's approach? And how do you guys plan to manage through it going forward?

Yes. So look, we did our first price action in April. We're doing another one now. We've been very clear on that. We have seen our input costs go up significantly because of just the inflation, right? And so that's already hit the P&L, where I think we haven't really seen the pricing hit the P&L yet. So this next second round, it will start to layer in over the next couple of quarters. So we've done that across the board, across the entire portfolio. We also have supply constraints on certain lanes and certain products. So we're surgically raising price in there as well. But the pricing environment is a good environment, obviously, right now, but it's primarily us passing cost on that we've already been incurring.

On the -- let's get into the data center side. Very exciting business for you guys. I think you're a little bit -- you were a little bit late to the market, but now it's growing nice and fast. So talk about your entry into this market, what parts are you most excited about? What kind of growth can we expect?

Sure. So overall, in the market, if I would describe the opportunity in the AI data center, we have our IR deck posted on our website that shows kind of the -- what we call the power tree, which is grid to core and all of the opportunities onsemi has across every one of these kind of step conversions to get us to the core. Last year, we talked about as we penetrated that market with new products, we are generating revenue across every single part of that power tree. So of course, people think about onsemi as a high-voltage power play. Yes, that's true. That's how we started. The AI data center. But today, revenue is coming in pretty nice and even from all the way to high voltage, which is closer to, call it, the plug all the way to what we call the smart power stage, which is right at the XPU. It is broad, meaning it is end customer diversified. And it's starting to be regionally diversified as other regions build out their AI data center infrastructure. So we're very happy with the baseline that we built in '25. We entered the year and said we were going to double that revenue in '26. Last quarter, the first two quarters came in ahead of where we expected at the time we guided. So we increased our outlook for 2026 to -- we're going to more than double. We haven't given a target is, of course, going to be lumpy from a growth perspective, but we do expect for the year as things are starting to ramp for the second half. So we're very excited about that. Forward-looking, the opportunity gets larger for us. Of course, the TAM continues to grow with the build-out. But what I'm excited about is on top of that baseline, strong baseline that we've done, you're going to start seeing whether it's end of '27, beginning at '28 or somewhere in that range, that transition to 800-volt. The transition to 800-volt is actually right up our alley. We've been doing 800 volts in automotive for over 5 years. We're #1 in that market. We have the technology. We have differentiated technology. No other peer has -- so as that transition gets there, we're able to deliver compelling high-value solutions to our customers, and we're starting to see that in the design and what we sample. One of them you hear me talk about is vertical GaN, which is a very different technology than any one of my peers talk about GaN. And I say that not because we have a better mousetrap. Vertical GaN as a technology, we are the only ones today in the world that is able to manufacture that because it is a very hard complex device physics and material to manufacture. We've been able to do it. We're sampling an AI data center and in automotive already. We already have the manufacturing site here in North America. So we're very bullish about the capabilities that we, as a company, not just vertical GaN, but the breadth of the portfolio of power can bring to bear as we start seeing that 800-volt transition.

I definitely want to touch on the GaN side. But just as we think about the go-to-market for like the 800-volt and for these new data center power applications, like talk about the go-to-market, talk about your engagements, how the design-in process is going and also the competitive intensity?

Yes. For the high voltage or call it, whether it's 800 volts because we're shipping 800-volt today is just not back at the rack side but in the power tree. So if you think about it at a high level, it depends on the go-to-market for our customers. anything that lands on the Board is going to be with the design in primarily with the hyperscaler or the GPU vendor, XPU vendor because that's very tightly coupled to the XPU itself. When we're talking about the power from plug to core, that's more -- you can think about it as the deltas of the world, the LITEON, the Great Wall, the Flex Power. So that's a very different go-to-market where they deliver the power conversion, call it, box that goes in the rack or on the side of the rack and so on. So the go-to-market is different depending on where -- because for us, I mentioned we're covering the whole power tree, which means that the go-to-market is very different depending on what stage we're in. Now as that transitions to an 800-volt, the 800-volt on the back plane of the rack then that's going to be more of an XPU or a hyperscaler. So it's going to shift a little bit as the go-to-market changes, but we're able to do and we have been doing today across the board. And that's part of the diversification strategy. We've had where we wanted that kind of the coverage to be much broader. We've done this in automotive already. A few years ago, you heard me talk about the customer concentration and the only way out of it is by geographical distribution and customer distribution of revenue, we're in that same playbook for AI data center, and we're happy with the strength of that business across multiple end customers, multiple end regions, that's going to continue to fuel that growth.

So those engagements have started and are...

Those engagements have started. That's what's driving more than doubling of this year, and that will continue in the next year.

On the GaN side, yes, GaN was another one that I was surprised on the GaN company too now, that was all organic -- it was all grown organically within ON's business? Or were there acquisitions associated with it?

So a couple of things. If you think about the GaN as a market, there are two different types of GaN without getting too technical. There's -- I'll just summarize it into -- you have the vertical GaN and you got the lateral GaN. Everybody in the world that talks about GaN is referring to lateral GaN, which is GaN on silicon. We do that. We're doing that with a partnership. We've announced a partnership with Innoscience and a partnership with GlobalFoundries. We're doing that because the differentiation for lateral GaN is really on the control and the driver, which is what we're doing internally with Treo. And we are partnering with very strong partners externally to get access to the lateral, the GaN on silicon devices. Again, very competitive approach that kind of the best of both. We're very strong in the control and so on because we've invested organically in Treo. We combine it with competitive GaN devices, and we go to market that way. We've actually announced the complete go-to-market at PCIM a few months ago from a power conference. So that's on the lateral GaN. We did that with partnership and organically internally. The vertical GaN, that development has been all organically. So we've done a small tuck-in acquisition that came with some of the IP. So we're very happy with the IP moat that we have and the patent moat that we have. But the whole world when we talk about vertical GaN, it depends on if you talk about people that understand the power of vertical GaN. They say this is the holy grail for power. For people that don't have the vertical GaN, they will tell you it will never work. And that's kind of the -- how it works. I'm here to tell you where we have the fab. It's up and running. We are sampling. So we have physical samples at customers on their boards being tested. So the proof of life is non-debatable anymore. And we're very happy with the results that we're getting, and it is a very competitive approach to power delivery. Now it is not -- the next question you asked is, well, what does that mean for silicon carbide. It's actually a complementary technology to silicon carbide. What I mean by that is -- if you can solve it with silicon carbide, we're going to solve it with silicon carbide. We have a very competitive silicon carbide JFET portfolio and MOSFET portfolio that's growing very nicely in AI data center. But there are segments in the market where size is actually a constraint or density is a constraint, and we need a vertical gain to be able to resolve that. So it's incremental. It gives us a much broader portfolio than any of our peers have today, and it puts us in a very innovative solution where we can engage at a much higher level with customers on forward-looking designs.

And where is that GaN fab?

So the fab is actually in Syracuse, New York in North America.

Got it. And then the competitive intensity, are there other vertical GaN players who you're...

Nobody has been able to deliver a vertical GaN device to date. And by the time they figure it out, they have to work around our patents. That's always the good first to market.

Also on the data center side, but outside the walls of the data center, I think that -- the power infrastructure outside those walls, it's harder for investors to kind of picture what the opportunity looks like there. So can you talk about like what's the TAM on the energy side? How fast is that growing? Is it bigger or smaller than within the data center?

Yes. So we're -- obviously, we'll be talking to that in a lot more detail at our -- coming up at our Analyst Day on -- if you haven't seen the announcement, we're having our Analyst Day on September 16.

I'll be there.

Which is when we're going to be talking about a lot of the opportunity and the content growth across our end markets. But specifically to your question we talked about -- that's what I refer to as the AI halo in industrial. That business -- the energy infrastructure has been strong historically for onsemi. We're #1 in energy store systems. We're extending that into solid-state transformers. But the growth is coming back specifically in 2026. That's the 40% growth I talked about, pulled by the AI halo. And that, for us, the opportunity is incremental to what we've been doing in that market. That energy infrastructure or the secular side of industrial is about 60% of our total industrial. So it's been growing nicely over the last few years to become a major part of our industrial segment, and that will continue to grow. That's -- if you think about solid-state transformers to support that 800-volt transition, historically, transformers have had no electronics content. So when we go to solid state, that's all incremental for us. Energy storage, that's a growth business. That market is already there. It started, I would say, 4, 5 years ago. And it's going to accelerate from an end demand perspective driven by AI data center. So very different on the industrial. Nevertheless, it is all high-voltage play which is where a lot of our strength already lies. A lot of things I talked about from GaN and silicon carbide and even IGBT, all of that lands into that AI halo or the industrial secular side of it that we're servicing today.

Maybe the next lag of AI people are saying is physical AI. Can you talk about what are your offerings today in fiscal AI? When do you see this market inflecting in a big way? Maybe we can tie that into Synaptics as well.

Sure. So if you think about physical AI. Today, we all consume that the opportunity for AI is in the data center or adjacencies or AI halo, but it's driven by the AI data center. And we all in this room consume AI if that's a word, I guess, consuming AI. We consume it through the computer or through tool sets. So it's a digital consumption of the AI. AI, the inflection point for physical AI, which is purely the AI capabilities going out of the walls of the AI data center, that's the physical AI, and that's going to be with an articulating application. I mean by articulating is applications that need power. They need sensing to sense the world. They need compute or capabilities of compute or connected compute and the control side. Those are the four pillars of what physical AI. And if you think about what does that describe today, the market is with robotics. I'm not talking necessarily humanoid. That's a forward-looking robotics segment. But today, robotics, we're very strong in robotics. It started with the factory automation, the robots and so on. It went to AMR, which is factory floor that required increased the level of sensing because now it's kind of going around humans. So the safety requires a lot more sensing and control. So today, onsemi's opportunity is the power sense and control. We deliver ultrasonic sensing. We deliver inductive sensing. We deliver image sensing, and we deliver the whole power domain capabilities in order to power those robots. Forward looking, of course, that's going to extend into the humanoid, and we're starting to see that. I was this morning watching the humanoid Olympics, which was a lot of fun, but you're starting to see that becoming now. Of course, the market is not going to be with robots for Olympics. This is just the capability showcase of what robotics usability of humanoids are going to be, whether it's a factory automation upgrade, AMR upgrade, that's going to deliver more content for us. Just we could have more motors, more of everything in a humanoid. So that's an opportunity moving forward. But that's -- today, we are a power sense and control play in these, and we're very happy with the access that we have to those markets and really the -- already the growth that we are seeing in these markets.

Do you have a sense of timing like when we could see that business inflect for you guys?