ON Semiconductor Corporation (ON) Earnings

Management highlights

This quarter marks an inflection point. Improving demand signals, accelerating AI data center growth, and sustained gross margin expansion. Treo execution accelerating with revenue increase more than 2.5 times sequentially and broader adoption. GaN solutions design funnel exceeds $1.5 billion. Automotive production shipments of Treo - based T1S Ethernet solutions. AI data center revenue grew more than 30% quarter over quarter, expect to double year over year in 2026. Sensing delivering multimodal sensing capability with design win in robotics. Continued evolution towards product - and solution - centric portfolio

Guidance

Anticipate Q2 revenue in the range of $1.535 billion to $1.635 billion. Expect to exit an incremental $30 million to $40 million of non - core revenue in Q2. Non - GAAP gross margin expected to be between 38% and 40%. Non - GAAP operating expenses expected to be between $287 million and $302 million. Anticipate non - GAAP other income to be a net benefit of $6 million. Expect non - GAAP tax rate to be approximately 15% and non - GAAP diluted share count to be approximately 194 million shares. Anticipated non - GAAP earnings per share in the range of $0.65 to $0.77. Expect capital expenditures in the range of $25 million to $35 million

Segment performance

First quarter revenue was $1.51 billion. Revenue for the Power Solutions Group (PSG) was $737 million, an increase of 2% quarter over quarter and 14% year over year. Revenue for the Analog and Mixed - Signal Group (AMG) was $540 million, a decrease of 3% quarter over quarter and 5% year over year. Revenue for the Intelligent Sensing Group (ISG) was $256 million, a 5% decrease quarter over quarter and a 1% increase over the same quarter last year. Automotive revenue was $797 million in the first quarter, roughly flat quarter over quarter and up nearly 5% year over year. Industrial revenue was $417 million, down 6% sequentially but ahead of expectations. AI data center business revenue grew more than 30% quarter over quarter and doubled year over year. Total revenue for the Other category was $299 million, an increase of 3% quarter over quarter due to AI data center strength

Analyst Q&A

• Q: Cyclical conditions are clearly getting better, but I think the structural and secular stuff is more important to investors when they think about ON Semiconductor Corporation. How do you think those are really going to show through to investors, and when do those become the dominant driver of revenue that we can really see externally? And as my follow - up, a good segue to the gross margin side for Thad. Top line is significantly better. You talked about the loadings being better. Can you just update us on what the levers are on the gross margin side? People expect a little bit more stair - steps than kind of a slow linear ramp on the gross margin side. Is that something we should expect in the second half of the year? And if not, when will those larger steps start to be apparent?

  A: Hassane El - Khoury answered about AI data center, zonal, Treo product being top - line and margin driver. Thad Trent answered about gross margin expansion throughout the year due to FabRight activities, utilization, and favorable mix.

• Q: For the first one, last year we saw the analog industry had a decent first half and then things started to get a little more muted in the second half. Do you think this year’s second half plays out differently than what we saw last year? What are you seeing in your customer discussions and demand visibility?

  A: Hassane El - Khoury said second half is expected to outgrow first half with good outlook based on customer programs.

• Q: On the AI data center, you mentioned that it grew 30% sequentially. How big is it for ON Semiconductor Corporation right now? Is it something like mid - single - digit percent of sales? There is a lot of interest in that segment, so if you could help give us some range on how large that segment is. And do you think you have the scale and the internal resources to become an important player in that segment, or do you think you will need some inorganic resources to help you become a more important player in the AI data center segment?

  A: Hassane El - Khoury said AI revenue was $250 million last year and will double this year, and has the focus and resources to be a major player.

• Q: You talked about addressing the full AI data center power tree, from energy infrastructure, UPS, rack - level power, and point of load. As architectures move towards higher - voltage distribution, how should we think about the biggest incremental content opportunities for ON Semiconductor Corporation?

  A: Hassane El - Khoury said there are more incremental dollars from high voltage to infrastructure and within the rack.

• Q: You noted the company has moved beyond the cyclical trough for automotive, with inventory digestion largely behind you. As automotive begins to recover, how much of the improvement are you seeing is true unit demand normalization versus content growth from things like image sensors and zonal architectures? And beyond China, are you seeing any meaningful differences by region?

  A: Hassane El - Khoury said regional differences exist with China automotive strong, and improvement is due to content growth and share gain.

• Q: When we think about the doubling this year, can you help us understand how much of that is from GaN, how much from silicon carbide, and are we at the point where we can expect any contribution from Treo in the data center? Or are some of those lower - voltage applications more of a 2027 and beyond story?

  A: Hassane El - Khoury said growth is from everywhere including low to high voltage, and breadth of power technologies is leveraged.

• Q: Entering the year, you gave us a sort of growth algorithm of taking whatever we think for the industry growth and subtracting 5% for the business exits. Is that still the right way to think about it?

  A: Thad Trent said no change, with planned exits and line of sight to that.

• Q: Just a quick question on auto and industrial. Can you talk about how you see that progressing in June and into the back half?

  A: Thad Trent said automotive in Q2 will be roughly flat, industrial up mid - single - digit, Other market up mid - teens.

• Q: As you look at the gross margin into ’27, you mentioned the puts and takes. Any thoughts on how we should think about utilization improving? And are there any exits that are still left in the core business?

  A: Thad Trent said no further exits beyond ’26 and utilization will improve with demand.

• Q: I wanted to ask about utilization. I assume it is going to be trending above 80% broadly across all your manufacturing assets exiting 2026. At what point do you need to take up your capital intensity above the 5% level you have been running at for a while now to support the growth in 2027 and 2028?

  A: Thad Trent said no change to capital intensity, and Hassane El - Khoury said investment is in existing capacity.

• Q: I want to ask about pricing. You did mention passing along some inflationary pressures in your supply chain onto your customers. How pervasive are those pressures? Or asked differently, how pervasive are your pricing adjustments as we look forward over the next few quarters?

  A: Hassane El - Khoury said pricing adjustments are surgical, and Thad Trent said pricing impact will show through in second half.

• Q: I think in the press release, you talked about some AI wins, both with chip guys as well as hyperscalers. I was wondering if perhaps you could elaborate a little bit more there. Is this like a vertical power delivery or VRMs or VCORE solutions? Or is it something else?

  A: Hassane El - Khoury said it is across the PowerTree in various power delivery areas.

• Q: Geographically, it looked like EU and Japan bounced back a little bit here. Maybe you could just talk about what you are seeing geographically and if there are any differences in the recovery?

  A: Hassane El - Khoury said recovery is market - dependent with different performances in regions.

• Q: The channel was flat into the quarter. When you look into the second half of the year, you are seeing some more robust trends in your business. Can you talk about your appetite to potentially expand the channel? And then the second one, around the direct customers, there was a time during the pandemic where we went from just - in - time to just - in - case. It feels like you have moved away from that as inventory has burned down. As you are seeing a recovery, are you seeing customers move more towards building backup inventory, or do you see that being something that you are going to have to carry on your balance sheet in the future?

  A: Thad Trent said channel inventory will remain in certain range, and Hassane El - Khoury said backlog and lead times are changing.

• Q: Are you seeing any kind of lead time extensions or hotspots? And at our conference, you had talked about the automotive OEMs looking to take on some inventory because the tier ones were not. Anything around that and any anxiety that you see around the inventory situation?

  A: Thad Trent said lead times have stretched, and Hassane El - Khoury said OEMs are making operational decisions on inventory.

• Q: Maybe related to the last one, I was wondering if you could broadly characterize your customers’ willingness to take up their own internal inventory. Are we starting to see that already in the industrial sector but not yet in automotive? And are there any other areas where you start to see that behavior?

  A: Hassane El - Khoury said no widespread inventory build yet.

• Q: Just as a follow - up about capital allocation, you have done a very good job of opportunistically buying back shares when the stock price is low. With the stock price having recovered quite nicely, how are you thinking about the calculus for incremental buybacks versus other things to do with the capital?

  A: Thad Trent said capital allocation is after investing in business, returning 100% of free cash flow.

• Q: For a while now, you have been giving us metrics on customer comps in your mass market business. It has been a good leading indicator of cyclical improvement dynamics. I recall a discussion a couple quarters ago—you reiterated today that mass market is roughly 25% of your distribution business, small to medium - sized customers. Your distribution business was strong this quarter, almost up 24% to 25% year over year. How much of this was mass market strength? And then for the mass market, are you targeting Treo for more general - purpose catalog for some of these customers as well?

  A: Thad Trent said mass market was strong, and Hassane El - Khoury said Treo is part of mass market push.

• Q: During the downturn and stabilization period last year, you focused on building your portfolio across your power and mixed - signal analog portfolios. Two of those acquisitions—VCORE controllers and vertical GaN from NextGen—were targeted to have products into the market in the first half of this year for VCORE and sampling of your vertical GaN products. Is the team executing to this? And with VCORE, there is a sizable market opportunity, especially on the CPU side where we see new server CPU SKUs. Is the team seeing strong interest for your new multiphase controller and regulator products?

  A: Hassane El - Khoury said team is fully focused on executing and there is strong interest