Q2 2025 ON Semiconductor Corp Earnings Call

Good day, and thank you for standing by, welcome to the on semi second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session.

And to ask a question at the time you need to press star 1, 1 on your telephone. If your question has been answered, you wish to move yourself from the queue. Please press star 1 1 again, please be advised. That is conference being recorded. I would like to hand the conference over to your speaker today. Parag Agarwal, please go ahead.

Thank you. Kevin.

Good morning, and thank you for joining on summing. Second card out of 2025 results conference call. I'm joined today by Hassan Curry, our president and CEO and Tech plan our CFO.

This call is being requested on the investor relations section of our website at www.sm.com.

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 earning release. And this presentation include certain non-gaap Financial measures reconciliation of this non-gaap financial measures to the most directly comparable, gaap, Financial measures and discussion of certain limitations. When using non-referential measures are included in our earnings release, which is posted separately on our website in the investor relation section.

During the course of this conference call, we will make projections or other forward-looking statements regarding the future events or future financial performance of the company.

We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to defer materially from projections.

Important factors that can affect our business including factors that could cause actual results to defer material relief. From our forward-looking statements are described in the most seasoned recent form 10K from 10 q and other filings with the cities and Exchange Commission and in our uninsured list for the second 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, change assumptions, or other events that may occur except as required by law.

Now, let me hand it over to Hassan. Hassan

Thank you parag. Good morning, and thank you all for joining us.

In the second quarter, we made meaningful progress across our strategic priorities and advanced critical initiatives in automotive industrial and AI Data Center.

In automotive, we're helping customers like Xiaomi improve range and enhance the driving experience, and we're expanding our engagement with more global OEMs and tier ones, including our collaboration with Schaeffler.

In AI data centers, we are enabling next-generation power architectures that drive efficiency and performance at scale through collaboration with market leaders like Nvidia to accelerate the shift to 800-volt DC power architecture.

We remain focused on making strategic Investments to extend our Competitive Edge and deepen customer relationships to build long-term value.

At the same time, we are making structural improvements across the business to enhance efficiency.

This combined with disciplined cost management creates significant leverage in our model as we prepare to capitalize on a market recovery.

On the financial side, we delivered Q2 revenue of $1.47 billion, exceeding the midpoint of our guidance, and non-GAAP gross margin and EPS of 37.6% and $0.53, respectively.

According to the demand environment, we are seeing signs of stabilization across our end markets.

We have not seen any pull-ins to date due to tariffs, and our diversified manufacturing footprint remains a competitive advantage. We are providing sourcing options to our customers as they work on optimizing their supply chains.

By market, automotive revenue in Q2 was down 4%, performing better than anticipated. It is expected to grow in the third quarter with continued EV ramps.

In China, select Xiaomi You electric SUV models integrate our 1200-volt Elite Sick M3E, enabling better performance and the longest range in this class.

China remains a growth driver for ON Semiconductor, with strong traction in both BEV and PHEV platforms.

China's revenue in Q2 grew 23% sequentially, driven by silicon carbide with the new EV ramps. I mentioned this last quarter.

We also expanded our collaboration with Scheffler to deliver our next-generation traction inverter for a global OEM's PHEV platform, using our latest EliteC, M4T, trench technology to unlock higher energy, efficiency, and reliability.

We expect adoption to continue to expand, and our customer engagement to continue to diversify as OEMs redesign hybrid architectures to meet emissions targets and extend range.

Industrial revenue increased 2% quarter-over-quarter.

Revenue for AI data center, which we report as part of our other bucket nearly doubled again in Q2 over the same quarter last year.

As outlined in the President's Day, our action plan, AI infrastructure has become a focus of national priority in the United States.

We will be limited by power delivery rather than computer load, and ON Semiconductor is the only broad-based U.S. power semiconductor supplier. Addressing this challenge with our intelligent power semiconductors dramatically increases power density and reduces energy loss.

We are actively working with leading XPU providers on smart power stages.

that address the power requirements of current and next-generation platforms.

We are in production on single SPS products in an industry. Standard 5x, 5 package and began sampling a dual SPS in the same footprint.

As part of our ongoing transformation, we will continue investing in next-generation technologies where we have clear competitive advantages while reducing our exposure to areas with limited differentiation.

This includes the end of life of legacy products, exiting non-core businesses, and repositioning our image sensing portfolio toward higher value segments such as ads and machine vision.

These actions are reshaping ON Semiconductor into a company with a distinct value proposition powered by leadership and intelligent power, sensing, and analog mixed-signal technologies.

A strong example of the strategy in action is Trail.

Momentum continues to build around our Trail platform, with a design funnel that has more than doubled quarter over quarter as we progress towards our billion-dollar revenue target.

We are on track to double the number of products sampling from last year.

Trails differentiated technology, modular SoC-like design, and the ability to integrate high and low voltage domains are driving stronger customer engagement across all our end markets.

An example in automotive is 10 based t1s where we sampled over 10 customers as they work on their zonal architecture.

After delivering our first tray of Avenue in Q1, we've also reached an important milestone. We've now shipped over 5 million units from our East Fish Scale facility this year.

These milestones reflect the strength of our innovation engine and the strategic investments we've made to support long-term growth.

By reducing complexity, sharpening our operational focus, and allocating capital more efficiently, we are building a more resilient and higher quality business for the long term.

As the global economy accelerates toward our electrification and intelligent automation, next-generation vehicles, sustainable energy systems, and AI data centers are converging around a shared need for a new era of power solutions.

Beyond silicon carbide, our strategic investments in next-generation wide bandgap semiconductors have delivered transformative gains in power density, thermal performance, and energy efficiency.

We started sampling customers on these new breakthrough technologies, and I will talk more about it soon.

Let me now turn it over to Sate to give you more detail on our results and guidance for the third quarter.

Thank you, everyone. There are ongoing transformations. We remain dedicated to building sustainable long-term value for our shareholders.

We have progressively rationalized our portfolio and manufacturing footprint to expand gross and operating margins at scale.

These efforts will continue in future quarters, and we are committed to extracting value through our Fabrite initiative.

Investments in next generation technologies across the portfolio. We'll continue to expand our position as a leader in power and sensing and drive the shift in our portfolio mix to move on, semi up the value chain with our customers.

As a reminder in q1, we took aggressive action to reduce our manufacturing capacity and restructure our Workforce to continue driving. Long-term operational efficiencies.

In the second quarter, we began to see the benefits of those structural changes, with a substantial reduction in operating expenses.

In parallel, we are increasing our 2025 target share repurchase to 100% of free cash flow.

We are executing to that target, and after repurchasing an additional $3 billion of shares in the second quarter, we've returned 107% of our free cash flow to shareholders on a year-to-date basis.

Turning to the second quarter Financial results, we exceeded the midpoint of our Guidance, with revenue of 1.47 billion increasing 1.6% over q1.

Automotive Revenue was 733 million which decreased 4% sequentially driven by weakness in America and Europe and offset by continued strength in China.

Revenue for Industrial was $406 million, up 2% sequentially.

Continue to grow. Traditional industrial declined slightly in Q2 versus Q1.

Outside of auto and industrial, there are other businesses that increased 16% quarter over quarter, with AI data center being one of the significant contributors.

Looking at the quarter between the split between the business units.

Revenue for the Power Solutions Group (PSG) was $698 million, an increase of 8% quarter-over-quarter and a decrease of 16% year-over-year.

Revenue for the Analog and Mixed Signal Group, or AMG, was $556 million, a decrease of 2% quarter-over-quarter and 14% year-over-year.

Revenue for the intelligent sensing group, or isg was 215 million.

And 8% decrease quarter of recorder and 15% over the same quarter last year.

Turning to gross margin in the second quarter, GAAP and non-GAAP gross margin was 37.6%, above the midpoint of our non-GAAP guidance.

Manufacturing utilization was flat compared to Q1.

Accounting for the capacity, impairment completed in Q1, utilization is now 68%, based on a reduced manufacturing capacity.

We expect to see approximately 5 million reduction in depreciation on the income statement starting in Q4.

Now, let me give you some additional numbers for your models.

Gap. Operating expenses for the second quarter were $359 million, as compared to $396 million in the second quarter of 2024.

Gap. Operating expenses decreased sequentially in Q1, as Q1 included restructuring charges of $539 million.

Non-GAAP operating expenses were $298 million compared to $308 million in the quarter a year ago.

Non-GAAP operating expenses decreased $17 million sequentially.

And we're above the midpoint of our guidance. This was due to delays and realizing the full benefit of our restructuring activities in the quarter, which we expect to recognize fully in Q3.

Gap. Operating margin for the quarter was 13.2%, and non-GAAP operating margin was 17.3%.

Our GAAP tax rate was 12.6%, and the non-GAAP tax rate was 16% looking forward. We expect no material change in 2025 due to the "Big Beautiful Bill," while we see a positive impact in 2026 and beyond, reducing our non-GAAP tax rate to approximately 15% from our previous expectation of 19%.

Diluted GAAP earnings per share for the second quarter were 41 cents, compared to 78 cents in the same quarter a year ago.

Non-GAAP earnings per share was $0.53, compared to $0.96 in Q2 of 2024.

GAAP and non-GAAP diluted share count was 415 million shares.

Turning to the balance sheet, cash and short-term investments were $2.8 billion, with total liquidity of $4 billion, including $1.1 billion undrawn on a revolver.

Cash from operations was $184 million, and free cash flow was $106 million.

The sequential decline in free cash flow was driven by the timing of working capital, which created lumpiness between quarters.

Our year-to-date free cash flow is 19% of revenue, and we remain on track to deliver 25% free cash flow margin for the full year.

Total expenditures during Q2 were 78 million or 5% of Revenue.

Inventory was up quarter over quarter on a dollar basis, by 9 million and decrease by 11 days to to 208 days.

This includes 87 days of bridge inventory to support fab transitions and silver books silicon carbide, down from 100 days in Q1.

Excluding the strategic builds, our bass inventory is healthy at 121 days.

Distribution inventory was 10.8 weeks versus 10.1 weeks in Q1 and within our target range of 9 to 11 weeks.

Looking forward.

Let me provide you with the key elements of our non-GAAP guidance for the third 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 expectations that there is no material direct impact of terrorists announced as of today.

Million dollars.

Our non-gaap gross, gross margin is expected to be between 36.5 and 38.5%, which includes share-based compensation of $9.

Our third quarter guidance includes 900 basis points of non-cash under absorption charges, and we expect utilization to be flat to up slightly in Q3.

Moving on to non-GAAP operating expenses. We expect Opex to be in the range of $280 million to $295 million, including share-based compensation of $32 million.

We anticipate our non-GAAP other income to be a net benefit of $8 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 410 million shares.

This results in non-GAAP earnings per share to be in the range of $0.54 to $0.64.

We expect capital expenditures in the range of $35 million to $50 million.

As we look forward, we continue to rationalize our product portfolio to force the shift towards higher value and higher margin products in 2026. We expect that approximately 5% of our 2025 revenue will not repeat.

This includes the end of life of certain legacy products, ongoing non-core exits, and the repositioning of ISG that it's on talked about.

We've also been executing our Fabrite strategy to align capacity with this shift as we drive to a higher quality of revenue and long-term earnings power.

To wrap up, we can continue to operate with financial discipline and a clear focus on shareholder value.

By taking decisive action to streamline our portfolio and align operations, we are well positioned for a recovery.

We continue to invest in next-generation technologies and capabilities that will strengthen our competitive advantage and support our transformation.

With our focus on intelligent power and sensing, we are reshaping ON Semiconductor into a more focused and differentiated company.

With that, I'd like to turn the call back over to Kevin to open up the line for Q&A.

Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press *1, 1 1 on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press *1 to win again. We'll pause for a moment while we compile our Q&A roster.

Our first question comes from Ross Seymour with Deutsche Bank. Your line is open.

Hi guys, thanks for letting me ask a question. It's on the first 1's for you and I guess just kind of 2 parts to it. Uh, you sound better cyclically than you have in a while. So, the first part is, what are you seeing cyclically? And and you know, where are there? Still headwinds, where are you seeing main mainly, the tailwind and and perhaps more importantly, when we move to the secular side, you talked about the AI data center side, the trio side of things, but we still have the offsets of businesses. You're exiting like, that just mentioned probably a 5% headwind. Can you talk a little bit about the traction in those secular drivers and when the good ones are going to offset the exits?

Yeah. Alright, thanks. That's, uh, that's a great segue into what really the call is about. So as far as uh, what we're seeing we're seeing stabilization, you know, relative to where we have been uh overall call it. The last 3, 4 5 quarters uh, that is a positive development. You know, we talked about Automotive, uh, hitting the uh, the low end in, uh, the second quarter that talked about, uh, also expecting, uh, we expect Automotive to be up in the third quarter. So you're starting to see that that stabilization. I'm not their calling, uh, a recovery. There's still a lot of uncertainty and customers are being cautious about relatively speaking. Uh, I do have uh uh more uh, I guess, positively optimistic looking forward, but I remain cautious in the way we run the company until we see that stabilization turned into a better foundation for recovery.

Uh, we doubled from, uh, last year as well. So that's getting the traction that, uh, we are expecting. Treyo, as a broad-based, uh, product, you know, it is differentiated. You know, we hit a very important milestone. Uh, last quarter, I talked about we already recognized revenue a few quarters ahead of, uh, what we described prior to that.

We expected the revenue in the second half of this year, but we posted the first Revenue in q1 of 25. And the second milestone is really the volume and that tells you a little bit on on the breath and the traction that we're seeing with customers, all of these Investments that we've been making over the last few years are what's driving, our longer term View and why it's important for us to start focusing on really reshaping the company. Into the high value product company that we want and really a, a, a much better, uh uh, Revenue quality.

From a margin perspective and from a capital allocation perspective. So all of these pieces of the puzzle that we've been investing in and putting in place, now, they're starting to come together with Traction in the market that we are able to use as a as a foundation for where we go next.

Thanks for that, Hassan, I guess. This is my follow-up 1 for Thad and the gross margin side. Again, a little bit of a near-term, long-term balance. In the near term, why is it flat to slightly down if your revenues are up? And then longer term, especially given the changes in mix that you're talking about, what are the key levers you think you can pull to get to the 53% long-term target, if indeed that is still the target?

Yeah, Ross. I mean the the the key to margin expansion for us is all about utilization, right? Um, it's we've been saying that for a few Quarters here as as we see a recovery utilization will will, uh, improve and that will fall through on a, a gross margin line, you know, a couple quarters later as, as you think about burning through that inventory, uh, in the short term, look, we're being cautious right now, right? We've, we've got inventory on the balance sheet. We're going to burn through. We're leaning there. Uh, we're leaning in the distribution channel. Uh, we're in a good spot that when, when the market does turn, we take utilization up, but we're being cautious here. So we, we think it's, you know, flat to slightly up here in Q3, uh, as we get better visibility in the Q4 and to early next year, we'll think about taking utilization up and, uh, you know, that will give us a nice Tailwind as you go into, uh, 2026 in terms of, you know, the march to to the the target of 53%, you've got about 900 basis points of underutilization charges in our Q3 guide, that's consistent with Q2.

Um that that obviously uh every point of utilization is 25 to 30 basis points of gross margin Improvement that mass still holds. Um so as you see the the utilization coming up, you'll see us get that 900 basis points back. We also have the monetization of the divested Fabs. Uh, as we move that production back in-house and uh, and we're continuing to do more uh, work on our our fab right initiative, which will uh, get us another, you know, 200 basis points kind of in the in that neighborhood.

Uh, and then, you know, is this on talked about, as we ramp these new products, they're a favorable margins. So I think, when you start to add that up, you can start to get, you know, within uh, within kind of a, a, a pretty tight range of getting into that 53% long-term Target. But like I said in the short term and it's, it's all about utilization. That's the number 1 driver.

Thank you.

1 moment for our next question.

Our next question comes from Vivic Arya with Bank of America Securities. Your line is open.

Uh thank you for taking my question, for the first 1. Um, I just wanted to go back to Q2 um results. For industrial was a bit softer than I think you had, um, thought before. Um, so what drove that and then the other was um, you know, much stronger. Um, is it really the data center part of uh that other? And if and if that is the case, how large is the data center part of your other business right now?

Yeah, on the industrial, um, you know, wasn't up as much as we were expecting. That's primarily because of the, what we call the traditional industrial, it was it was down just like slightly when we look at our traditional industrial I would say, it's kind of bouncing across the bottom, we think we've stabilized, but you know, there's going to be some ups and downs. Here, it was. It was down slightly and down. Uh, more than we thought it was going to be. Um, so that's the, the primary driver on the industrial on the, the other Market. Yeah, it's the AI Data Center, and the opportunity that we have there, we talked about, uh, year-over-year that that business is doubled. So, uh, still a small piece of the overall, um, company. But growing nicely

Okay.

China appears to be strong for you, is is really the weakness outside of um China especially at the North American EV OEM because I'm I'm trying to contrast what you are seeing versus what, um, you know, several of your analog peers are saying, uh, some of them are within I think 4 or 5% of their prior Automotive, Peaks. Whereas, you know, on the auto business is still I think 30% off uh your your prior Peak. So why is the automotive recovery? So slow uh for on? And when do you uh think that your auto business could start to regrow year on year? Thank you.

Yes. So, I think the, uh, automotive, specifically the regions other than China, both Europe and North America, are weak. Uh, I think there's, uh, there's a lot of uncertainty in the automotive market. I don't think we're, uh, uh, any, uh, I guess, any different other than the portfolio rationalization that we've been, uh, doing. Those obviously will not, uh, uh, repeat moving forward. But where we are in, uh, the EV ramps continue to happen, of course, not at the same rate that we all expected. I think, uh, the unit volume is not where it needs to be, and the rest is just purely on mix and exposure versus our peers. I can't really comment on what our peers are seeing in automotive, but from our side, you know, we hit the bottom in the second quarter. Uh, we're starting to post growth, our expectation and...

Q3 will be growth, and then we'll see based on the visibility we get over the next few quarters where that's going to lead.

Thank you.

1 moment for our next question.

Our next question comes from Blaine Curtis L. Jeffries. Your line is open.

Hey, good morning. Thanks for taking a quick question, actually.

I wanted to ask you about the ISG repositioning. I thought you said that the 5% was related to end-of-life products, and that's what you've been saying for a while. So maybe you can just walk me through, I guess, what the repositioning is, why it’s happening, and is there a revenue number tied to that repositioning in ISG?

Yeah, from a repositioning, the Strategic repositioning. And I've talked about it at a, at a high level in, in Prior quarters, uh, is really our focus on the Machine Vision part of it, you know, as we see some of the, uh, competition coming in. Uh, we've always said we're going to focus on, uh, value and we're going to focus on high quality, uh, Revenue based on the technology and the differentiation. We bring that the differentiation locks with the, uh, Vision, uh, product or Machine Vision product, rather than the human Vision product, to give you an example that I've always, uh, that I've given in the past, you know, reverse, uh, uh, parking, it doesn't matter how good your camera is, but there's always dirt on the lens, because it's outside, the quality, doesn't matter. Uh, that's where we're not.

Going to be engaging on these designs when it comes to proper ads.

Uh, where the CPU or the soc, the central s SOC needs Clarity and the best image quality for safety. That's why we bring. That's why we uh add value with our uh, you know Vision. Uh uh products. That's the difference between where the company used to tackle, which is a lot of the volume aiming for number 1 market, share at uh, across all markets. They very focused value driven, uh, approach, which we've been on for a few years.

Uh, that's really the, uh, the difference that I talked about here. It's no different than the strategy we've been implementing, but right now, we're very confident in the approach that we want and the strategy we're going to, uh, move forward with, followed by the investments that we are making in order to maintain that differentiation in the markets we want.

And and Blaine, uh, to answer the second part of your question. In terms of the, the revenue impact, we think for 2026. It's about 50 to 100 million dollars. That doesn't repeat from the the 2025, uh, Baseline.

That incremental to the 5% from the end-of-life stuff. No, that's inclusive of 5%.

Gotcha. Uh, and then maybe if that just on the just the inventories I guess it kind of came in the high end of the range in in June kind of what's your expectation for for Disney in? Uh the the September guide?

Yeah, I think it's going to be right in this range. You know, um, let's call it 10 weeks plus or minus, right? We came in at 10.8. It's in our sweet spot of 9 to 11, so I don't expect any material change one way or another.

That we have in the third quarter, those ramps kind of we we get through in the second quarter then you drain and you then get to a steady state. So that difference between quarter on quarter as long as it's within the range. Uh, uh for us, it's not something that we want to control at that level as long as we maintain a customer, uh, uh ramp strategy.

Thanks so much.

1 moment for our next question.

Our next question comes from Chris Daley with City. Your line is open.

Hey, thanks, guys. Um, just a couple of questions, uh, digging on the gross margins. Is the 5% of business that's going away next year going to be gross margin of creative? Uh, and if so, how much? And then, how does the silicon carbide business?

Uh, fit into the overall, uh, gross margin ledger. Are those gross margins lower than the corporate average? Now and then, how do we get those, uh, back to the 53% target? Thanks.

Yeah. Chris, um, so the silicon carbide gross margin today is below the corporate average, primarily because of underutilization. The key to getting those back to the corporate average is, obviously, volume and leveraging that manufacturing footprint that we have.

Um, you know, which we will do over time, is that business continues to ramp.

Um, in terms of the exits long-term that is going to be diluted to margins, uh, currently it's somewhere around the corporate average. But when you think about our aspirations to get to a a 50% plus gross margin, that business is not going to support that that aspiration. So, thus, the reason to exit it now. Um, you know, we've we've said that in, you know, we've under called this for a few years here, or maybe overall that, you know, expecting to exit it faster. But, uh, but long term, it will be diluted short term. Um, it will be neutral. Just given the fact that it's around the corporate Average today,

Now we will be right sizing manufacturing as we go through this as well. That's what I said in my prepared remarks. So we are matching the the fabric right capacity with these planned exits.

Okay. And for my follow-up, just real quick, what percentage of your auto business is China? And then how would you expect that to trend over the next couple of years?

Yeah, we don't look, we don't break Auto China. We're uh, disclosing Auto as a whole and China as a whole. We're not getting into that level of uh of of detail from the revenue cut. But we expect China to be a, a target market for us. Uh, we have a 50% share that will continue to grow as as uh, uh, Revenue grows. And as the number of units keeps uh, growing, we're very

Happy with our, uh, position in China.

Uh, just to remind everybody, our focus in China is really where we add on the efficiency and the range. You know, every win that we have in China is tied to the quality and the performance of the products.

Uh, and that's how we differentiate not just against some of our, our, uh, Western peers. But how we differentiate against some of the, the local peers, we will maintain that level of differentiation. I talked about, we introduced our uh, trench, uh, silicon carbide or ready, uh, with some winds behind it. That is the way we're going to keep and stay ahead. Uh, everybody from a competition perspective and that's the reason we're winning in China and really outside of China,

Okay, thanks.

1 moment for our next question.

Our next question comes from Jim Schneider with Goldman Sachs. The line is open.

Good morning. Thanks for taking my question. I was wondering with respect to the Q3 guidance. You talked about Automotive being up in the quarter. Uh, I'm assuming that giving you a commentary, you're less sure about industrial and other being up, I was wondering if you could, maybe give us a little bit of color on what you'd expect going into Q3 for their, I'm I'm assuming that data center. Piece of other would be, will be much stronger. Maybe just kind of clarify, whether you expect to be, uh, Auto, excuse me, industrial will be up flat or down. Thank you.

Yeah, so the comment I made on Automotive is exactly that, but I made it specifically on Automotive relative to the second quarter being the uh, kind of the trough as we ran. But just to clarify my comments. We expect every every, uh, End Market auto-industrial and other, uh, to be up in the third quarter. Other will be up higher driven by the ramps that we see in, uh, in these markets that we put under other specific, uh, which includes AI, of course.

That's pretty helpful. Thanks. And then maybe, um, if you could give us any kind of color on, you know, with an auto you talked about the US and Europe, uh, being a little bit weaker, or I don't think that's particularly surprising to anybody. But, you know, can you maybe talk about the reasons for that? Is it purely tariff based on certainty, in terms of their End Market certainty? Or do you think there's a little bit of excess inventory or buffer? Stocks still trying to work out internally. Thank you.

I would say it's, uh, all of the above.

I mean, I, I don't know what to point, uh, specifically at, uh, it's not a, it's not an industry or Market, you know, every customer has their, uh, uh, pain points. You know, some have some inventory. We don't believe that's uh, uh, a broad statement from an inventory perspective. You have the Tariff and you have just a general uncertainty of and market demand. Uh, so you see customers, uh, waiting to the last minute to place an order. And, and it that's the, uh, cautious approach that we're taking, uh, we've been more right than wrong in our, in our approach. So we're going to continue to manage to the visibility and to what we can see, uh but what you think about Auto and uh, or sorry and um,

In general, Europe and North America are really all of the above that we all read in the headlines.

Thank you.

Just a moment for our next question.

Our next question comes from Quinn Bolton with Native & Company. Your line is open.

Yes. Thanks for let me ask you a question that I just want to come back on that needle impact. I think he said each point of utilization is 25 to 30 basis points but you said there's 900 basis points of underutilization charges including guidance. And so it kind of implies you need to get to 98% utilization to get that full 900 basis points. And I thought, you know, you guys in the past had said, full utilization was more low to mid 80s. So could you just clarify, you know, kind of what? Where do you see full utilization?

Yeah, good question. So, you know, previously we had said, fully utilized for us, was kind of in that that mid 80% range post. The impairment that we've done in q1. That is now kind of the low 90s call it somewhere around 92%, right? So if you, if you do that math on the 25-30 basis points for every point of utilization, you get to somewhere around 700 points of of uh Improvement. There's also another 200 basis points of fabric initiatives that we're still taking that will get you to that 900 between the 2 combinations. But uh but yeah, there's our expectation.

Now, the lower footprint is fully utilized and is now kind of in that low 90% range. So, it's improved.

Got it. And then the rest, sort of from the 46% or so, of 53% that would all be mixed in new products.

Yeah, yeah, exactly.

Exactly. Yeah. And then, sorry, one more thing. As well as the Fab to Messengers, right? So you got about another 200 basis points of the Fab devs. Users that will recognize.

You mentioned the smart power stages, both single and dual faith. And I think he said you're sampling now um, wondering if you could give us, you know, is that sort of a about a year-long qualification? Uh timing do you think you could ramp faster and maybe a similar question just on the 800 volt uh rack opportunity, would you expect that to sort of ramp in the 2027 time frame? Given, you know, like what Nvidia is stated uh about its 800 volt rack timeline.

Like, given the sensitivity of mentioning customers, I'll say that whatever we have specifically on that opportunity is listed in the press release.

Okay. How about just the power stages then?

Uh, the power stages is really a standard, uh, design cycle. So we're expecting anywhere, you know, you can think about it as the 12 to 18 months, uh, qual cycle and production, of course we're, uh, uh,

That depends on on and adoption uh, as far as if there's any change in the road map. The most important thing is we're tied up with the on a road map uh specific with the xpu suppliers. So as they ran into their new uh, platforms, we will be ramping with them.

We have a roadmap, and we have a good cadence of new products now, starting to get into that AI data center space across the whole power tree, from high power jets to really SPS close to the GPU or XPU. We've talked about it in the last few years that we needed the new product engine to pick up. That's happening, and those are kind of the proof points that I'd like to highlight.

Perfect, thank you, sir.

1 moment for our next question.

Our next question comes from Joshua Buckle through TD. Cow, your line is open.

Hey guys, thank you for taking my question. Um, I wanted to ask about inventory levels, I believe last quarter, you mentioned that they you were expecting them to Peak in 2 q and then declined to the rest of the year, is that still, um, is that still the right way to think about inventors for the year and any amounts that you, um, expect to take out through the balance of 2025? Like, how should we think about utilization rates? I guess I'm a bit surprised to see them up. Um when you're trying to bleed inventory given you know revenue is up modestly in the guidance. For third quarter. Thank you.

Yeah, now keep in mind that the utilization is flat quarter over quarter. The calculation now is 68%, but if you normalize to pre-impairment, it's 60%. Right? So it's flat quarter over quarter. The new calculation gets you to 68% utilization given that we have a smaller footprint and less capacity.

Um,

first part of your question. Oh, inventory. Yeah, uh, so inventory. Yeah, we're still on track here. Uh, we think we're, we're peaking in, in inventory, in Q2. We think it'll be down slightly here in Q3, uh, and I would expect, in Q4, we continue to see that Trend. As we burn through that strategic inventory, that's always been our pass. Our our pass is that, you know, we'll bridge that was Bridge inventory for the Fab Transitions and silicon carbide, but we will be burning through that. So, you know, that's a, that's a nice Tailwind to cash flow.

Okay, thank you. I appreciate the color there, and I'm sorry to keep picking at gross margins, but I want to ask about pricing. I think last quarter you mentioned pricing a bit more aggressively to defend market share. How did that develop into the quarter, and are there any changes in the pricing environment that you've seen over the last 90 days? Thank you.

Yeah, no change, no change to the pricing environment. It's actually, uh, stable. So within our expectations, so there's no, uh, uh, nothing. Nothing new here.

Okay, thank you both.

1 moment for our next question.

Our next question comes from Gary Moby with Loop Capital. Your line is open.

Hi guys. Thanks for taking my question.

Uh, I believe you said, um, roughly a $100 million revenue headwind in fiscal year 2026 or roughly 5% of revenue. Uh, as you exit the core business, how much of a headwind, you know, is it for fiscal year 2025? And should we think about it as spread over 8 quarters, you know, roughly $30 to $40 million per quarter headwind? Or is it linear like that, or is there any sort of step function?

Yeah. For uh, for 2025 it's roughly, we're expecting about 200 million dollars of exits, uh, year to date. We're on track uh, through Q2 of a hundred million dollars. Uh, you know, like I said earlier we've, we've continued to overall this, we think we're going to exit it faster, so that pushes, you know, a 100 out in into next year uh, in terms of the exit. So that is the impact of, uh, 2025.

Appreciate that.

I was hoping you can give us an update on the East fishfield bring up the sort of, you know, where you're at. And you know, looking forward with the impact of gross margin might be

Yeah, so from Easter scale, obviously it's, uh, it's the utilization impact, overall, that that mentioned from our Fab network, uh, East Fishkill is, is part of that Fab Network. So, it comes with utilization. Uh, the important thing is we already have our power products, our silicon Power Products qualified and uh, uh, shipping from there, uh, high high voltage. And uh, medium to low voltage our, uh, image sensor. Uh, qualification is, uh, on track as expected and the trio, uh, has started. I wouldn't call it a soft ramp at 5 million units already, but that's again, uh, brand new product that we ramped up with a brand new technology in East fish scale. So the Fab is is, uh, uh, running and qualified where we want to qualify. And right now, it's primarily driven by utilization, but from a technology perspective, uh, we're pretty happy with the performance.

Thank you, both.

1 moment for our next question.

Our next question comes from VJ Rash with Muo. Your line is open.

Yeah. Hi, thanks. Uh, just a quick question on Section 232301. Obviously, there’s a lot of noise around that. How are you guys preparing for that? What are you expecting in terms of, you know, when this happens? Thanks, and I’ll follow up.

I mean, I don't know immediately if anybody told you I have a crystal ball better than my peers, but I think the way we prepare for it is we remain focused on what we can control.

You know, we're talking about our our uh footprint our uh fap footprint or manufacturing footprint as a competitive Advantage uh that has been recognized by customers especially as as the whole uh tariff. Uh uh talk has been for a few quarters now. The 2332 I believe will be uh uh uh very similar to the changes that we have to go through with customers. Uh the thing is there's no planning to be uh done here because we don't know where it's going to where it's going to land on either side except the fact that we need to maintain flexibility and we need to maintain the the focus on what we can control.

Got it. And then, um, and in terms of silicon carbide, Obviously good to see you guys picking up some share, their 1 of your peers, uh, declared bankruptcy just wondering how that's playing out. Um, you know, from a business this perspective, obviously people might be, uh, you know, moving, uh, or, uh, reallocating but just wondering how, uh, that's kind of playing out on the road map. Thanks.

Yeah, look from a road map perspective, that doesn't have an impact. You know, I've always maintained my focus on, we're going to win. We're going to win because of our own products and because of our own investment, not because, you know, one of our peers is struggling. So, we're going to win because of the things we are doing.

Having said that, you know, the the

The the changes in, uh, in 1 of our peers, with the bankruptcy, that is not the trigger that, uh, a force customers to think otherwise, uh, we all know they, they struggled, uh, way before, uh, uh, uh, uh, the bankruptcy filing. I think a lot of, uh, uh, road map changes from our customer. A lot of sourcing decisions have already been made. Uh, so that to me is all I would say, part of the Baseline, part of the funnel part of the ramps, uh, I wouldn't call the bankruptcy, uh, as, as a trigger

Thank you.

1 moment for our next question.

Our next question comes from William Stein with True Security. July is open.

Great. Thank you for taking my question. I'd like to also dig into silicon carbide for a moment. I think one of the things that came out in the last quarter or so, Hassane, is that...

Perhaps for some of your customers, there's been an interest in purchasing chips instead of modules. Modules had been the story, but now we're hearing more about trench and some other aspects of individual chip design. Can you comment on that change? And if customers continue to choose chips over modules, does that influence your long-term thinking about the attractiveness of this market for you? Thank you.

Yeah. So that, by the way, the the, I guess, the shift or the change in mix between modules and and what we call Dye is is not new, uh, that's been happening for a few years, that's already part of our Baseline. As far as your reference to trench, uh, that's totally, uh, independent of dye versus module. Trench is another step in, uh, uh, device, uh, Geo or device, uh, uh, design. It was planer, uh, with our M3, our planer performed better than, uh, everybody else's trend.

We introduced, and we have been winning with our new trench, which is our latest generation. We're winning because of the performance, whether we put it in or whether we sell it to a customer as dye.

To all of flexibility. You know, we've always said our intent is to provide the most optimal solution to solve the customer problem and bring value. Value is in the range of efficiency, and that comes on the diet, I die side.

With our, uh, trench technology, it does not change our view of the market, uh, obviously from our results and the market share that we have been gaining and ramping. We've shown success no matter what the mix is and will continue to do that. But the name of the game here is to maintain R&D, maintain investment in key areas to provide the differentiation, and that's the markets we're in.

If I can follow up um, in a in a similar uh area, um, 1 of the big consumers of silicon carbide has discussed uh a migration to uh hybrid.

Uh, inverter from silicon carbide to silicon carbide combined with IGBT. I think they said that they intend to reduce.

Uh, sick by 75% in that traction inverter, but I think they haven't done it yet. Uh, I wonder if you're seeing that influence your, uh, go-forward view of this market. Um, if it changes anything for you, thank you.

Uh, no change. Uh, this is not again. Uh, it's not, uh, uh, the commentary from one customer. If you go back two years ago in our Analyst Day, Simon already showed how the migration or the mix is going to be for higher-end, higher range, higher performance with silicon carbide; and as you go to more mainstream, you'll end up with a hybrid, all the way down to there's still life in IGBT. Uh, so those commentaries are nothing new. I've addressed them multiple times. Uh, that doesn't change our view of the market. Our competitiveness in the market is to be able to provide a slew of technologies, from silicon carbide, trench, planar, all the way to highly differentiated IGBTs. Because some vehicles still have IGBT on one axle, silicon carbide on another axle, or a full IGBT. It does not change the view of the market. Uh, we will continue to win based on the performance of the product specifically.

Thanks.

1 moment for our next question.

Our next question comes from Harsh Kamar with Piper Sandler. Your line is open.

Yeah, hey guys. I have a question for maybe Hassan El. As you think about the recovery, and maybe the fuel for recovery, you talked about 900 basis points when the utilization...

Can I ask if there's an element of written-off inventory here as well? That might come into play as you look at recovery.

No know when you talk about like reserved inventory or written off inventory. Uh no because we have a very disciplined approach on what you reserve and uh, what inventory we write off inventory. We're right. Off does not have the main, so it cannot be part of the recovery. So when we talk about purely a, uh, uh, the 900 basis point being on utilization, it is purely demand driven that will drive utilization with healthy inventory that we build and ship to customers. Uh, if you recall, we we saw the the shift in in Market before a lot of our peers. So we took down our utilization ahead of most of our peers and ahead of the market really softening so that puts us in a much better position from the inventory. Uh, we have

Uh, we are already draining our inventory. And as demand picks up, we can, uh, pick up, uh, more utilization on the fab that will help the margin, uh, help cash flow when we, uh, ship the bridge, uh, inventory. So everything we've done and the discipline we've shown all the way here is what's going to drive that healthy recovery?

Any kind of side notes?

Yeah, and harsh, we've got you know, if you if you go back to our base inventory, take out the Strategic It's 121 days, right? In our sweet spot, right? So it's very healthy. Uh, we don't see an inventory risk on that and the Strategic is just a matter of time of of, uh, burning that through as demand comes back. Those are products that typically have long lives to them. So, uh, we don't see because we sit here today. We don't see a significant risk to any any, uh, write off of inventory.

I understand and then as my follow up, can I ask um you know you've got the Legacy piece that you mentioned 50 to I think 100 50 to 100 million you you peel off this year. Uh you've also got some growth areas which you've called as other that are showing outside growth. I was curious if you can help us understand what are the major components of the other uh, outside of AI data center piece and then maybe how big it is.

Yeah, look, the, the primary, uh, Focus for the others bucket that I will, uh, talk about is really the AI data center. You know, we have some, uh, client Computing. They're very uh, small part of our business. That's why we we put in another we're not breaking those out. As far as AI data center is still uh, is showing a lot of growth. It's uh uh, showing or per expectations because we're investing in that business. Uh, as we, uh, get more and more into that business and it becomes sizable. We met, uh, uh, talk about it more in more detail. But for now, we're just keeping it in other. And that's really the driver for the growth. You're seeing there.

Okay, fair enough. Thanks guys.

Oh, ladies and gentlemen, this concludes the Q&A portion of today's conference. I will now turn the call back over to Hassane El, President and CEO, for any closing remarks.

Thank you all for joining us. I want to take a moment to thank our global teams for their relentless execution, our customers for their continued partnership, and our shareholders for their ongoing support. Together, we are building a more resilient and higher quality business, and I'm confident that the strategic progress we've made this quarter positions ON Semiconductor for long-term success. Thank you.

Ladies and gentlemen, just include today's presentation. You may now disconnect and have a wonderful day.