ON Semiconductor Corp (ON) — Q1 2025 Earnings Call Transcript

Thank you Kevin. Good morning and thank you for joining Onsemi’s first quarter of 2025 results conference call. I am joined today by Hassane El-Khoury, our President and CEO, and Thad Trent, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast along with our first 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. Our earnings release and this presentation include certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and a discussion of certain limitations when using non-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 will make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution that such statements are subject to risks and uncertainties that will cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that could cause actual results to differ materially from our forward-looking statements are described in our most recent Form 10-K, Form 10-Q, and other filings with the Securities and Exchange Commission and in our earnings release for the first quarter. Our estimates or other forward-looking statements might change, and the company assumes no obligation to update forward-looking statements to reflect actual results, changed assumptions, or other events that may occur, except as required by law. Now let me turn it over to Hassane. Hassane?

Thank you Parag. Good morning and thanks to everyone for joining us on the call. Despite a challenging macroeconomic landscape, we delivered Q1 revenue of $1.45 billion and non-GAAP earnings per share of $0.55. Both exceeded the midpoint of our guidance, with a non-GAAP gross margin of 40%. Our focus remains on streamlining our operations through our Fab Right approach and investing in R&D to deliver differentiated products to our customers. Both initiatives aim to deliver gross margin expansion as the market recovers. In an uncertain geopolitical environment, our manufacturing network is a source of competitive advantage as we have proactively established a flexible and geographically diversified supply chain for our customers that not only enhances supply resilience but also reduces our risk exposure. With 19 front and back end facilities in addition to our external network, we are well positioned to respond effectively to tariff-related concerns. Based on our understanding of current tariff policies, our expectation is that there will be minimal direct impact to our business. At this time, we expect no major issues in servicing our global customer base and are assisting these customers to minimize their impact by optimizing our supply chains. Although we began to see early signs of stabilization with favorable booking trends towards the end of the first quarter in certain parts of the industrial market, inventory digestion persists and customers remain cautious, as I described last quarter. While customers optimize their working capital in this extended downturn, we have used pricing to defend or increase share in strategic areas over the long term and expect low single-digit pricing declines in certain parts of our business. On the revenue side, following a strong Q4, our automotive revenue in the first quarter declined 26% sequentially, in line with our expectations. Our industrial revenue was better than expected, decreasing only 4% sequentially. The traditional parts of the industrial market are starting to show signs of recovery. You’ll recall this was the first part of industrial to show signs of weakness going into the downturn. Medical and aerospace and defense also increased sequentially, and our AI data center revenue, which we report as part of our other bucket, more than doubled year-over-year in the first quarter. Our differentiated intelligent power and sensing solutions enable us to deliver the performance and power efficiency that our customers need to thrive in their space. Through the downturn, we continued investing to diversify our portfolio and deliver differentiation as the market landscape continues to evolve. In automotive, while inventory digestion persisted in the first quarter, leading OEMs are adopting our silicon carbide in their next platform architectures. We have extended our technology leadership with our fourth generation EliteSiC MOSFET devices based on trench architecture. We have already secured a new 750 volt plug-in hybrid electric vehicle, or PHEV, designed with one of our major U.S. automotive OEMs. This signals the beginning of a transition from silicon to silicon carbide in new PHEV platforms to extend vehicle range and reach a broader customer base, adding to our penetration in full battery electric vehicles, or BEVs, where we continue to gain share over incumbents. Based on the latest electric vehicle launches in China, most of which were unveiled last week at the Shanghai Auto Show, we expect to have our silicon carbide in nearly 50% of the new models. Most of these new models are set to ramp in late 2025, including a PHEV with our silicon carbide. Broader adoption of SiC in PHEVs is expected over the next few years as OEMs redesign hybrid platforms to meet tightening global emissions standards and capitalize on the performance offered by silicon carbide technology to extend the range. We are also winning with our image sensors in automotive applications, which continued to be a differentiator for Onsemi. The superior performance of our technology makes Onsemi the partner of choice for top automakers. In the first quarter, we began shipments of our 8 megapixel image sensor to the leading OEM in China with a global footprint, where we expect to be designed into ADAS systems for their low, mid and high-end vehicles. Another OEM based in Asia has selected our 8 megapixel image sensor for their next generation ADAS platform. In AI data center, we continue to make progress in our strategy by leveraging our strengths in intelligent power. Silicon carbide and silicon-powered devices anchor that strategy and are instrumental in every branch of the power tree. At the entry point of power into the data center, we are capitalizing on the transition to modular UPS systems with our EliteSiC power module solutions, delivering higher efficiency and power density than traditional silicon solutions. We are shipping to the three largest UPS suppliers and with a new platform win that began ramping in Q1, we expect our revenue for UPS to grow between 40% and 50% for the full year over 2025. Within the power supply unit and the battery back-up unit, our silicon carbide JFET combines with our T10 trench FETs to create a winning high power AC-to-DC solution. SiC JFETs are essential in the transition from 3 kilowatt to 5 kilowatt PSUs required in the next-generation architecture, and only Onsemi has this distinctive technology. SiC JFET is superior in these high current solutions because it offers the lowest ON resistance in a given footprint. Similarly, our T10 MOSFETs offer industry-leading ultra-low RDS (on) and reduced switching losses. We are ramping with a large U.S. hyperscaler, securing the majority share in their PSU and BBU. We are expanding our portfolio of power solutions using a combination of FETs and power management ICs to address the intermediate bus conversion and Vcore branch of the power tree. With the launch of our Treo platform last November, we introduced our expanding portfolio, including voltage translators, LVOs ultra-low power analog front ends, ultrasonic sensors, multi-phase controllers for clients, and single pair Ethernet controllers for automotive zonal architecture applications. Advancements through the Treo platform are enabling us to accelerate development and deliver innovative solutions to our customers across automotive, medical, industrial, and AI data center markets at accretive margins. We have already recognized the first production revenue from the Treo platform and are well on our way to doubling the number of products available year-over-year as we build the franchise towards delivering on our $1 billion commitment by 2030. As we look ahead, while the semiconductor industry is navigating complex macroeconomic factors, there is an increasing need for semiconductors to include power efficiency and sensing capabilities in rapidly evolving sectors like AI data centers, automotive, and industrial. Through this downturn, we have maintained our strategic direction and we have continued to deliver value to our customer base on the performance of our technology. We are focused on operational excellence and are well positioned for a recovery with gross margin expansion as we continue to realize the benefits of our Fab Right initiatives. Let me now turn it over to Thad to give you more detail on our results and approach going into the second quarter of 2025.

Thanks Hassane. While it was a challenging start to the year, continuing to focus on operational excellence has allowed us to drive costs out of our operations to focus on free cash flow generation. We exceeded the midpoint of our guidance with revenue of $1.45 billion and non-GAAP earnings per share of $0.55, while Q1 free cash flow increased 72% year-over-year. We increased our share buyback to 66% of free cash flow, repurchasing $300 million of shares in the first quarter. With our large capital investment behind us, we are confident in our liquidity and strong balance sheet and believe returning capital to shareholders is the best use of capital. For 2025, we intend to increase our share repurchase to 100% of free cash flow. As of today, there is approximately $1.5 billion remaining on our repurchase authorization, and we expect free cash flow will remain strong with the cost control actions we have taken, aggressive working capital management, and limited capital investments. Last quarter, I told you that we would be moving aggressively and with urgency in making structural changes to expand gross and operating margins and generate strong free cash flow in the future. In the first quarter, we took two significant steps to benefit the company in the long term and better position us for a market recovery. First, as part of our Fab Right initiative, we reduced our internal fab capacity by 12% through our manufacturing realignment ramp to lower our fixed cost structure. These actions will reduce our ongoing depreciation costs by approximately $22 million on an annualized basis, and we expect to see the benefit on the income statement in Q4 of this year. We will continue to rationalize our manufacturing footprint, driving gross margin expansion towards our long-term target and providing greater leverage in our business model as the market recovers. The second action in Q1 was a company-wide restructuring initiative. We made the difficult decision to reduce our global workforce by 9% and further reduce our non-manufacturing sites, driving sustainable efficiencies across the company. These actions are expected to generate approximately $25 million of savings in Q2 versus Q1 with an additional $5 million per quarter of savings realized in the second half of the year. These actions are structural rather than temporary and will drive incremental leverage in both gross and operating margins for the long term. Coupled with our lower capital intensity, we remain on track to our targeted 25% to 30% free cash flow margin for the year. Turning to financial results for the quarter, a slowdown in demand across all end markets resulted in revenue of $1.45 billion, above the midpoint of our guidance. Automotive and industrial accounted for 80% of revenue in the first quarter. Automotive revenue was $762 million, which decreased 26% sequentially driven by weakness in Europe and seasonality in Asia, mainly in China due to Chinese New Year. Revenue for the industrial was $400 million, down 4% sequentially, while our medical and aerospace and defense businesses continue to grow, traditional industrial remains stable. Outside of auto and industrial, our other businesses increased 1% quarter-over-quarter, mainly driven by client computing business offset by normal seasonality in wireless. Looking at the first quarter split between the business units, revenue for the power solutions group, or PSG was $645 million, a decrease of 20% quarter-over-quarter and 26% year-over-year. Revenue for the analog and mixed signal group, or AMG was $566 million, a decrease of 7% quarter-over-quarter and a decrease of 19% year-over-year. Revenue for the intelligent sensing group, or ISG was $234 million, a 23% decrease quarter-over-quarter. ISG revenue decreased 20% over the same quarter last year. Turning to gross margin in the first quarter, GAAP gross margin was 20.3%, which includes restructuring charges as a part of our manufacturing realignment program. Non-GAAP gross margin was 40%, down 530 basis points sequentially and 590 basis points from the quarter a year ago. Non-GAAP gross margin declined in line with guidance due to the lower revenue and under-absorption, with lower utilization levels over the last few quarters. Manufacturing utilization increased slightly from 59% in Q4 to 60%, which does not include any impact from our capacity reduction actions. Now let me give you some additional numbers for your models. GAAP operating expenses for the first quarter were $868 million as compared to $328 million in the first quarter of 2024. GAAP operating expenses increased sequentially as it includes restructuring charges of $539 million. Non-GAAP operating expenses were $315 million compared to $314 million in the quarter a year ago. GAAP operating margin for the quarter was negative 39.7%, and non-GAAP operating margin was 18.3%. Our GAAP tax rate was 13.5% and non-GAAP tax rate was 16%. Diluted GAAP earnings per share for the first quarter was a loss of $1.15 as compared to earnings of $1.04 in the quarter a year ago. Non-GAAP earnings per share was $0.55 as compared to $1.08 in the Q1 of 2024. GAAP diluted share count was 421 million shares and our non-GAAP diluted share count was 422 million shares. Turning to the balance sheet, cash and short term investments was $3 billion with total liquidity of $4.1 billion, including $1.1 billion undrawn on our revolver. Cash from operations was $602 million and free cash flow increased 72% year-over-year to $455 million, representing 31% of revenue. Capital expenditures during Q1 were $147 million. Inventory was down quarter-over-quarter on a dollar basis by $164 million and increased by three days to 219 days. This includes 100 days of bridge inventory to support fab transitions in silicon carbide. We expect this inventory to peak in the second quarter. Excluding the strategic builds, our base inventory is healthy at 119 days. Distribution inventory declined another $27 million with weeks of inventory increasing to 10.1 weeks versus 9.6 weeks in Q4. Our plan to support the mass market has continued to pay dividends, resulting in another 29% increase in customer count year-over-year. We do not expect a material change in the weeks of inventory over the near term. Looking forward, let me provide you the key elements of our non-GAAP guidance for the second quarter. As a reminder, today’s press release contains a table detailing our GAAP and non-GAAP guidance. First, our guidance is inclusive of our current expectation that there is no material direct impact of tariffs announced as of today. Given our current visibility, we anticipate Q2 revenue will be in the range of $1.4 billion to $1.5 billion. Our non-GAAP gross margin is expected to be between 36.5% and 38.5%, which includes share-based compensation of $8 million. Our second-quarter guide includes 900 basis points of non-cash under-absorption charges, and we expect utilization to decline slightly in Q2. Approximately half of the sequential gross margin decline is from the increased under-absorption in Q2 and the remaining is attributable to unfavorable pricing, as we are seeing low single-digit price declines. Moving onto non-GAAP operating expenses, we expect opex to be in the range of $285 million to $300 million, including share-based compensation of $29 million. We expect our non-GAAP other income to be a net benefit of $11 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 16% and our non-GAAP diluted share count is expected to be approximately 419 million shares. This results in non-GAAP earnings per share to be in the range of $0.48 to $0.58. We expect capital expenditures in the range of $70 million to $90 million. We took difficult steps in the first quarter to right-size and refocus the company on the key drivers to achieve our long term ambitions. By continuing to lean into our Fab Right strategy and focus on higher value product lines, we are committing to building a solid foundation that will be a tailwind when the macro environment becomes more robust. In the meantime, we will remain cautious in our approach and position ourselves to capitalize in the future on strong customer relationships with our intelligent power and sensing platforms.

Hi guys, thanks for letting me ask a question. I guess my first one, on the revenue side of things, you guys have been consistent with your conservatism, but the flat guide seems to be a bit below the up low single to high single-digit sequential growth that your peers are seeing. Is there anything structurally different at ON that would keep you from experiencing the same sort of upturn that others have started to allude to?

Hey Ross. No, it’s not really structural. It’s really depending on the end markets that we versus our peers are exposed to. As you know, we have a big focus on automotive for EVs specifically. EV outside of China still has not seen the recovery. China, as I have mentioned, we’ve gotten a lot of the wins - that’s where most of the ramp is happening in the second half of 2025, so other than just within the markets, whether you’re broad or more focused on sub-markets, like we are for the EV, that’s the only thing I could point to.

Great, thanks. For my follow-up, perhaps with Thad on the gross margin side of things, the charge that you took and then generally looking forward, what are the metrics we should use to think about gross margin? You’ve been very overt with your second quarter, but what do we think about, say second half or relative to revenue growth? How much of it just utilization based, absorption based, or are there many idiosyncrasies that ON has? Just any metrics to help us hone in on that would be great.

Yes, as I mentioned, we took around 12% of our capacity offline late in the first quarter, so its impact was not noticeable then. Moving forward with this new structure, the improvement in gross margin is now tied to utilization; for each point increase in utilization, we see a boost of 25 to 30 basis points. This has improved from the previous range of 20 to 25 basis points due to the reduced capacity. We anticipate about $22 million in annual depreciation savings, which will start reflecting in the profit and loss statement in Q4, although there will be a delay due to the inventory transition. In the short term, gross margin expansion will hinge on utilization, and as the market begins to recover, we expect utilization to increase. While we anticipate a slight decline in utilization for Q2, we're optimistic about signs of stabilization and recovery, expecting to see improvements later in the year, with a more significant impact anticipated in late 2025 and into 2026.

Thank you.

Thanks for taking my question. I had a question on pricing. I think, Hassane or Thad, in the past you had mentioned you are pricing to value, right, and suggested that pricing could stay more resilient. But now, I think you are suggesting that pricing could be a headwind, that it could go down low single digits, and I’m curious what has changed, if anything? Is it a geographic issue, is it a product, is it a competitive headwind? Just what has changed on the pricing side, and how much of this flat Q2 sales is because of pricing and then how much is pricing a headwind when we look at the back half of the year?

Yes, we've been experiencing a prolonged downturn, and we need to adapt to the market conditions and competitive pressures. Some competitors are lowering their prices, and we too will adjust our pricing strategy to protect and grow our market share in upcoming initiatives. I'm not suggesting a return to past pricing strategies; we will reevaluate the situation in the first and potentially the second quarter. I cannot provide specific quarterly plans or projections for the second half. We are viewing pricing as a strategic tool. We have upcoming programs that could enhance our gross margin, so our pricing decisions today will be essential in defending our position and gaining market share. However, the environment we're navigating is different, it’s not limited to specific regions or products. We're taking a more opportunistic approach. Regarding revenue, I wouldn’t overanalyze the Q2 revenue figures; they are more influenced by demand rather than pricing changes.

Okay, and then my follow-up question, I think Thad, you mentioned something on gross margin. When we look at Q2, the low end is 36.5%, and I think you mentioned that some of it was because of under-absorption and some of it was pricing. If we start to hypothetically see sales grow from Q3 and Q4, what should be the new range of gross margins that we should be thinking about for the back half of the year, like even a broad range, I think would be useful in aligning the model. Thank you.

The impact of utilization typically experiences about a two-quarter delay before it reflects in the profit and loss statement, as it requires approximately 200 days of inventory to deplete in order to see that benefit. We anticipate a slight decline in utilization during Q2, which will pose a minor challenge. Looking at the remainder of this year, we expect to remain in a range aligned with the midpoint of our guidance. We believe this situation is temporary and primarily driven by utilization. Considering the 900 basis points of under-absorption, when factored into our guidance, it provides insight into our standard margin and near-term sustainability. For the rest of the year, we foresee remaining within a tight range, with potential improvements expected as utilization picks up with the market recovery in the latter half of the year. Consequently, we project our margins over the next couple of quarters to hover around 37.5% to 38%, contingent on utilization.

Thank you.

Hey, thanks guys. Given the pricing environment and you’re saying you’re using pricing to defend market share, can you just give us an update on that $350 million to $400 million non-core business that you are going to exit? Is that still the plan as the size of that changed how rapidly you think you’re going to exit that this year, or will you try and defend your market share and use pricing on that business? Thanks.

Yes, regarding pricing, we still plan to exit that. We've always mentioned that it's more dependent on the market than anything else. I do account for some pricing adjustments to balance short-term utilization, but this does not pertain to the non-core exits we are planning. We are not trying to defend it to the extent of wanting to retain it. You can view it as a means to assist with utilization; we'll adjust it in the short term, but our expectations remain steady.

Yes, and Chris, I would add in the first quarter, we walked away from about $50 million of that business. We still think that $300 million is probably the likely number for the year. It will be market dependent. If we can hold margins on that in a favorable range, we will keep it, so I think it’s really going to be dependent on how the market plays out and the recovery plays out.

Okay, great. For my follow-up, it sounds like there’s some nice momentum on silicon carbide exiting this year. Any update on, I guess, the long-term growth rate you’re expecting there, and then how about the gross margin range, do you still think you can get that business to 50%?

Yes, while we are not providing specific guidance for the long term, we do anticipate growth and aim to be the market share leader in this sector, based on the traction and achievements we have observed so far, along with the promising outlook for future wins, not just those scheduled for ramp-up in 2025. I noted the trends towards plug-in hybrids featuring silicon carbide, where we are gaining traction that will ramp up in the coming years, so our outlook remains consistent. We remain very optimistic about the potential of silicon carbide in this market and the position we will maintain and enhance. Regarding gross margin, we believe that the current gross margin is significantly influenced by under-utilization. As you may remember, we added capacity for a market that did not materialize as expected. We adjusted some of the capacity we kept operational, but from a standard margin viewpoint, we continue to focus on pricing based on value. As we leverage the installed capacity, we believe we have the most competitive cost structure in the industry.

Okay, thanks Hassane.

Hey guys, thank you for taking my question. For my first one, I kind of wanted to look backwards. Entering the year, you guys called out that demand had gotten appreciably worse. It looked like in the quarter, things tracked to where you were expecting, but your peers didn’t really flag all that much of a demand deterioration in the quarter. Can you maybe look back and reflect on what’s happened over the last few months in particular for Onsemi, and in particular, was this in your view an inventory issue that you guys needed to clean up, or were there legitimate pockets of demand that weakened? Thank you.

Yes, the quarter played out pretty tightly to what we expected. We were above the midpoint of our guidance. The industrial was more favorable than we expected. Automotive was right on to what we expected going into the quarter. Our other business, a small piece of it, a small piece of the total was favorable as well, being up 1%, so I think in terms of what we saw within the quarter, it pretty much came in line with what we expected. We did see some early signs of stabilization in the industrial market, specifically the traditional industrial side of that business. There are some pockets that are still down, but we took that as a favorable sign coming out of the quarter. Now, there is uncertainty given the tariff situation, but there are some early signs of stabilization which gives us some hope.

Thank you. I was hoping you could explain what is included in the $283 million restructuring charge that impacted gross margin. Was it mainly due to inventory write-downs? Also, could you share your thoughts on your ON book and channel inventory? Thank you.

Yes, okay, there’s a lot there. On the restructuring, we did a restructuring and then we also did a capacity reduction as well, so an impairment of some of our assets. What hit the gross margin line is a part of the manufacturing realignment program. We did take inventory out as we took capacity out in some of the areas as we’re de-focusing there and as our manufacturing footprint changed, so we had some consumables and other inventory that we took as a part of that charge. What hit the opex line, obviously, was restructuring charges associated with more of the restructuring activity, rather than the Fab Right activities.

On the distribution, there’s no change in our distribution. Obviously we’re taking a very disciplined approach to channel inventory, although the weeks are, call it flattish around the 10, which is the sweet spot of where we believe we’re going to be long term - you know, we said between 9 and 11 weeks. We actually drained dollars out of the channel as we remain cautious on the outlook. Obviously for our distribution inventory, we’re always cautious not to ship in more than what we can see demand for, and we’ll remain disciplined on that, so no change and no impact in the DC inventory.

Yes, and then on the inventory on the balance sheet, we have 219 days. It did go down by $164 million - part of that is the write-off that we took as a part of the restructuring activities. But if you look at our base inventory, exclude the fab transitions in silicon carbide, it’s at 119 days, so it’s healthy. Our target has always been 100 to 120 days, we’re within that target. I expect inventory will be peaking here in the second quarter, and we’ll start to drain in Q3 and Q4 as the fab transitions continue to get executed and we stop buying from the divested fabs that we divested a few years ago. Inventory should be peaking here.

Okay, thank you. I apologize for my three-for-one question.

Hi, this is Crawford Clark on for Blayne Curtis with Jefferies. Thanks for taking my question, and congrats on the results. I wanted to ask about the industrial segment - I think you’ve talked a little bit about it thus far in response to some other questions, but it sounds like some of your competitors are talking about maybe a little bit more of a broad-based recovery in their end markets. I know you mentioned some strength in aerospace and defense and medical, but was hoping you might be able to put a finer touch on some of the trends you’re seeing outside of those two sub-segments. Thanks.

Yes, obviously I can only focus and comment on the markets, or the sub-markets in industrial we’re focusing on strategically and not as a broad base, because we’re not a broad-based industrial supplier. I would say outside of some of the energy infrastructure, everything is up, so I would say broadly it is starting to see signs of recovery - that’s what Thad said, including some of what we call the consumer side of industrial. If you recall, that was the first one that actually went into the downturn, so we’re starting to see signs of recovery there. From a green shoot and a stabilization perspective, we’re actually more positive about industrial now. There are a few pockets, but again there is still uncertainty given the geopolitical environment and the tariffs. Outside of that, we do see stabilization and we do see signs of that recovery.

Got it, very helpful. Then if you could just talk a little bit about your expectations for demand within the automotive segment by geography - I know people are calling out strength in China, obviously first quarter was a little bit tougher given some trends related to Chinese New Year, but if you could talk again about your expectations for demand in auto by geo. Thanks.

Yes, same thing - we do see strength in China automotive specifically, driven by EVs, and for us it’s driven by new ramps for silicon carbide, as I mentioned. Coming out of the Shanghai Auto Show, we do see the models that we are in, the models that are going into production. We’re about 50% of these new models that are ramping, and we expect that to start ramping in the second half and therefore our automotive market, China specifically. Other regions, we’ll see, but from a positive outlook, I would say automotive in China EV is the focus, and we see that as remaining favorable.

Yes, and let me give a little more color to your first question on the guidance going forward. We expect industrial and the other bucket both to be up mid to high single digits quarter-on-quarter. We think auto is going to be down, again just as Hassane talked about, kind of in that high single digit percentage as well. But to your point, we’re seeing industrial strength and we’re seeing it continue in the second quarter.

Great, thanks guys.

Hey guys. I think before your capacity actions, you guys had sized the business to have a 45% gross margin, at one point $7 billion of revenue at a 65% utilization rate. Post the fab capacity actions you’ve taken, are there new metrics you can give us just to help level set, you know, as demand recovers, utilization recovers, where gross margins could go over the next year or two?

Yes, earlier I mentioned that each point of utilization translates to a 25 to 30 basis points improvement in gross margin. Currently, we are around 60% utilization, and we expect a slight dip in the second quarter. However, if we reach 85% utilization again, you can calculate the potential gains. Additionally, I pointed out that our gross margins in Q2 will be negatively impacted by 900 basis points due to under-absorption, so in the short term, gross margin will largely depend on utilization levels.

Got it, but the standard, I guess then, utilization or standard gross margin would be about 46.5, right? If I take the midpoint of the range, add that 900, that’s where you would get back to as utilizations increase, but is that utilization getting back to 65%, 75%, or should we just use the 25 to 30 basis points of utilization and assume that’s pretty linear?

Yes, that’s right. That’s right. The 25 to 30 basis points is the right move. The 900 basis points is assuming you get back to fully utilized, right, so that will take us a while to get there, but your math is absolutely right.

Okay, great. Thank you.

Hi guys, thanks for taking my question. Hassane, you’ve highlighted a couple times the 50% win rate for silicon carbide based models introduced in the Shanghai Auto Show recently. It sounds very impressive, but maybe if you could just establish a little more context in terms of what market share position you’re coming from. Obviously that’s a huge market opportunity, so just sort of size the dollar impact that that could eventually translate into, and did you have to concede on pricing against some of the China suppliers to win that business?

From a market share perspective, we anticipate capturing 50% in China, which is currently the only EV market expanding due to the 800-volt focus and the corresponding 1,200-volt silicon carbide devices. We are maintaining and even increasing our market share. While I cannot provide financial guidance until customer orders begin to ramp up, we are already seeing a significant increase this second quarter, which is expected to extend through the latter half of the year, indicating that our programs are gaining traction. Our backlog reflects our preparations for upcoming shipments, and we believe we have established a strong presence in the market. This situation is not about pricing; it revolves around our product capabilities. In China, our competition primarily consists of our global peers rather than local vendors, as we outperform them in terms of performance. I briefly mentioned our trench technology during the call, and we expect to start generating revenue from it in 2026, which enhances our robust roadmap for silicon carbide. The focus is on product performance, which ultimately provides substantial cost savings for our customers in system-level operations, whether through more efficient batteries or reduced system costs. This is why we have been able to maintain and grow our share in China, which remains a significant area of focus for us.

Thanks Hassane. Just a quick follow-up, it sounds like, and correct me if I’m wrong, that opex could trend down maybe another $5 million per quarter off that $292.5 million base that you’re guiding to for the second quarter.

Yes, that’s right - you’ll get about $5 million per quarter in Q3 and Q4.

Yes, hi Hassane and Thad. I have a quick question about pricing. Is the pricing you mentioned specific to ON or is it what you're observing in the industry? Also, could you provide some insight on silicon compared to silicon carbide? I have a follow-up after that.

I don’t believe the pricing is specific to our company. Many of my peers have addressed this issue, particularly in the context of annual price negotiations. I view it a bit differently; I see it as a pricing strategy to maintain or even grow our market share, especially considering the current situation with our customers. This is not something specific to silicon or silicon carbide, and I'm not breaking it down to that level because we are using it as a strategy. Additionally, it’s important to note that along with any minor pricing declines we've mentioned, we are also working on cost improvements for our products that typically align with or exceed that range. Looking ahead, as we gain market share and ramp up, we expect to offset most price declines with cost measures. This is why we feel confident doing this in the short term to sustain and grow our share. Historically, we have always countered pricing discussions with cost actions, and you've seen some of our recent cost initiatives, such as fab or capacity realignment. We will continue this approach. I don't see any alarming trends or signs that concern me, and it doesn’t alter our gross margin trajectory. We still have strong opportunities for gross margin expansion ahead, which is how we are positioning the company, and as the market recovers, you will start to see the benefits reflected in our financials.

Got it, thanks. Just a quick follow-up regarding the orders. The high single-digit percent decline sequentially, are you experiencing any challenges due to auto tariffs or auto parts? Can you provide us with more details on that? Thanks.

Yes, look - we said we don’t have direct impact from the tariffs for our business. That’s the only thing I can comment on at this point, because the tariff is one day yes, one day no. It’s too soon to talk about any impact, indirect impact, meaning to us, therefore an impact to our customers. That’s too soon to call that. That’s where in our guide, we talked about we remain cautious based on what we know today There’s no direct impact, however there could be indirect impact, but that is a time-based question which I don’t have an answer to, therefore the best thing I can give you is our cautiousness in the guide and our outlook.

We also haven’t seen any material pull ins or push outs as it relates to tariffs, so as Hassane said, no direct impact. Indirect over the long term, we’ll see what happens; but in the short term, we haven’t seen any customer activity that would give us concern.

Good morning, and thanks for taking my question. Your shipments to direct customers were better for the second consecutive quarter; in fact, over the past two quarters, your direct business is up 3% versus your disti business is down about 34%. Do your direct customers just have less excess inventory and therefore maybe you guys are shipping more towards consumption trends? Any color on the large divergence would be helpful.

No, not really anything to read into that. A lot of our distribution business is going to customers that we deal with directly, while the other half is more focused on fulfillment, so I wouldn’t assign much significance to it. We did mention that some areas of inventory are decreasing, which is leading to better than expected performance in industrial. I view all these factors as an overall indication of market conditions, but not specifically related to distribution or direct channels.

I appreciate that. Then part of the weaker dynamic back in Q4 was a lower book of turns business. You saw better booking trends towards the end of this particular quarter, or the reported March quarter. Did that include your turns business, and what’s in your guidance for this quarter, June quarter, are you guys assuming similar, higher, lower turns percentage versus Q1?

Yes Harlan, I would say we saw strength, right? We saw strength late in the quarter in terms of order patterns, right, and specifically on the industrial side of the house. As we look into Q2, we still need turns, right - I mean, I think customers are booking at lead times, just given the uncertainty, but we still need turns, and I would say it’s pretty consistent with how entered the first quarter as well, so no material change other than order patterns, I think have gotten a little more stable, a little more predictable.

Yes, thank you. I had a longer term question on Treo - Hassane, you reiterated the $1 billion for 2030, and you did talk about some design wins. Could you help us a little bit - you know, where are you getting these design wins, and could we start to see already some material revenue in Treo next year?

Yes, that’s a good question. First off, our exposure with Treo is really very broad. I gave some examples that span from automotive, from AI data center, and from industrial, medical. The beauty of the platform is it’s very versatile as far as going from high performance analog to high power drivers and high power PMiX and so on, so overall we’re very pleased with the traction. I talked about we remain on track to double the number of products year-on-year - that remains on track and a focus for the team, and really we’re starting to ship revenue this year. As far as material revenue, of course, it’s a ramping business, ramping product revenue, and more importantly at more favorable margins. We talked about the margin profile for that Treo platform being 60% to 70% - that remains true as we start to ramp and will continue as we expand. As far as material revenue in 2026, obviously it’s going to be more material than it is this year, but material from a company perspective, you’re still not going to see it at a company level given the scale of our other business, and other business is ramping as well. But where we are today, based on where we expect it to be, we’re on track, actually slightly ahead, but we’re very excited about the promise of the franchise that we’ve built.

Yes, thank you for that color. As my follow-up for Thad - Thad, capex 6% of revenue this quarter, with the new footprint, how should we think about capex for the second half of the year?

Yes, for the whole year, there’s some lumpiness, right, in terms of the capex, just based on timing of equipment coming in; but most of our capex now is just maintenance capex, so for the year, you should think about capex as being in that mid-single digit percentage of revenue. With the lower capital intensity, this is what’s giving us confidence in the free cash flow and why we’re increasing our buyback to 100% of free cash flow.

Hey, good morning. Thanks for taking the question. I guess first is can you give us a revenue run rate to get to that full capacity utilization, just given what you’ve taken out this quarter?

Look, I don’t have a specific number as you think about it sitting here, because it’s going to depend on internal versus external. I think if you model the downside of as capacity came out or utilization decreased, it’s likely the same going up. We manufacture about 70% of our products in-house, but I think it’s going to be very linear as revenue increases, but I don’t have a top line because it depends on mix. If higher value products are ramping first, that will have a different impact than lower ASP products, but I think from a modeling standpoint, you should just look at the downside and the upside is very similar.

Thanks for the color there. Then just secondly, and I think Hassane, you spoke to this earlier, but just wondering what you’re seeing in terms of the silicon carbide competitive dynamics within the domestic market in China. It sounds like we’re seeing more of that, but just kind of curious how you’re seeing that. Obviously your performance is better, but how do you think this plays out over the next 12 to 18 months? Could we see that shift back into maybe the more domestic side, given the tariff situation? Thanks.

I don't believe we are in the same category as some of the local competitors. They aren't really competing with us at the level we engage with our customers. Most of our competition comes from global peers rather than local ones. There may be a niche market, similar to IGBT, where some are not focused on performance but just need an on/off switch, and that could involve local competitors. However, that is not our primary target market. Our focus is on performance, particularly as automotive OEMs in China seek to compete globally, which most of them do. They will prioritize performance, integration, and system-level performance impact, areas where we excel. I feel confident about this based on the 50% penetration noted at the Shanghai Auto Show a few weeks ago. We are also advancing, as I've mentioned, by introducing our trench technology, representing a new generation that sets us apart from both global and local vendors. We are committed to maintaining our technological leadership as they develop their local solutions. This situation is not influenced by tariffs since our silicon carbide is produced outside of the U.S. with a global manufacturing footprint, and our flexible supply chain enables us to meet customer needs effectively. Ultimately, customer decisions are centered around technology and performance, which have always been our strengths and will continue to drive our success.

Thanks for squeezing me in, guys. Hassane, perhaps just back to your last answer there, just as we think about potential reciprocal tariffs, you were talking about flexibility in your footprint. Some people have a China for China strategy. How do you serve China without these reciprocal tariffs, and do you increase a fab-less relationship in country? I know you deal with SMIC, I think, do you increase that relationship? What is the flexibility that you do have to address reciprocal tariffs in China, let’s say?

I don't want to speculate on the potential changes in tariffs given their volatility. Instead, I’ll focus on what we can control. We have manufacturing operations in China, with several sites based there. Our relationships with foundries mean that we have a strong presence in China, so I’m not concerned about the impact of tariffs. Globally, we operate 19 factories, providing us with significant flexibility. Most of our products are qualified in multiple locations, allowing us to serve customers in China and those who export from China effectively. We continuously evaluate our strategic footprint, considering any specific actions in China based on genuine needs rather than just reacting to potential tariffs. Our focus remains on technology and competitive advantage, and we believe we are well positioned with our current operations.

Thank you for that. As a second question, just as I look at disti inventory, this is the lowest level of disti inventory you guys have had in quite some time. I’m just wondering, is there a change in strategy here or is it just a reflection of the softer outlook? How do you guys know that this is the right level, and I would think given the macro uncertainty, your distis would also want more geographic-based inventory and flexibility there, so why drain the channel at this point in time? Is this where we’re going to hold these inventory levels?

No, so if you think about it from a weeks of inventory, we are where we want it to be - that’s our sweet spot. I said we are focused on 9 to 11 weeks, and we’ll go up or down depending on if we have a ramp in the following quarter or not, so we’ll manage the business within that range. As far as the dollars, we’ve always said we maintain very high discipline on disti inventory. I’ll tell you distribution will take more inventory from us, but however what we are waiting on is really sustainable recovery. We’ve seen starts of it, so as the top line revenue grows into the outlook, then we will continue to feed the inventory in the channel to service the customer. But for us, it is a customer-focused effort. I mentioned earlier 50% of our distribution is what we call named customers, so we do have outlook, we do have forecasts, and we do have really backlog from these customers directly, whether we service them through distribution or not. We don’t see that as, call it a strategic drain of inventory but more of a management of the inventory with the outlook that we see and the macro environment. From a dollar perspective, that very well can change as we see more sustainable signs of recovery, but you can expect the weeks of inventory to remain in that range that we described.

Thanks Hassane.

Thank you for joining us on the call this morning. As we navigate the rest of this year, on behalf of the executive team, I’d like to express my gratitude to our global employees, our customers, and our shareholders for their commitment and dedication to Onsemi. Thank you.