ON Semiconductor Corporation Aktie

Thank you for standing by. Welcome to the call to discuss onsemi's acquisition of Synaptics. [Operator Instructions]

Now it's my pleasure to hand the conference over to the Vice President of Corporate Development and Investor Relations, Parag Agarwal. Please proceed.

Thank you, Carmen. Good afternoon, and thank you for joining us today to discuss onsemi's acquisition of Synaptics. I'm joined today by Hassane El-Khoury, President and CEO of onsemi; Thad Trent, CFO of onsemi; and Rahul Patel, President and CEO of Synaptics.

This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast, along with the accompanying slides referenced in the call, will be available on our website approximately 1 hour following this conference call, and a 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.

During the course of this conference call, we'll 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 could cause actual results or events 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-Qs and other filings with the Securities and Exchange Commission. Our estimates or other forward-looking statements may 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.

The purpose of this call is to discuss onsemi's acquisition of Synaptics. We request that you focus your questions on the transaction and we will not be able to answer any questions on current business conditions or other topics. During this conference call, the speakers will refer to the presentation related to this transaction, which is posted on onsemi's Investor Relations website.

Now let me turn it over to Hassane. Hassane?

Thank you, Parag. Good afternoon, everyone, and thank you for joining us. Today, we are excited to announce our proposed acquisition of Synaptics. This marks the next chapter in our journey as we position ourselves to become a leading provider of intelligent systems. I'll walk you through the strategic rationale and why this is the right time for us to go down this path.

Moving to Slide 4. This combination starts with a shared mission of intelligent technologies for power and sensing for onsemi and connected devices for Synaptics. It will enable us to deliver intelligent systems to support AI applications from the data center to physical AI and provide us with the 4 key pillars needed to win. Those are power, sense and control coming from onsemi and the connected compute from Synaptics. And together, we would become a leading provider of intelligent systems expanding our total addressable market while enabling us to capture more content value per platform.

Turning to Slide 5. The technologies this combination brings together will expand our AI capabilities from AI data centers into physical AI. We anticipate it will expand our total addressable market by $30 billion to $243 billion by 2030. As we are positioned to enable AI from infrastructure all the way to the edge, and to increase the value we can deliver to our customers and our shareholders. We're integrating a differentiated Edge AI compute franchise with a strong portfolio of human-machine interface and wireless connectivity solutions.

And together with our differentiated power portfolio spanning from silicon to wide-bandgap, our image sensors and our Treo portfolio of products, we would become an industry leader positioned at the intersection of power, sense, connected compute and control addressing the 4 pillars of physical AI. We expect the transaction to be accretive within 18 months from close, strengthening our long-term financial model.

On Slide 6, you'll see our business is already well positioned across AI infrastructure ecosystem, where we are a leader in energy storage systems and AI data centers from the grid to the core, and many of our products are also used across various edge AI applications today. With Synaptics portfolio, we will be able to extend our reach and content opportunity across physical AI applications like robotics and humanoids. As a result, we believe we will address an AI TAM of $100 billion by 2030, growing at a CAGR of 25% over that period.

Now let me hand over the call to Rahul, the architect behind Synaptics' transformation. Rahul?

Thank you, Hassane. It's a pleasure to join you on today's call. We are excited about this transaction, and I share your vision of building intelligent systems and scalable platforms for customers.

First, I'd like to sincerely thank my entire One Synaptics team for their dedication and execution in reaching this important milestone.

Let me briefly introduce Synaptics on the platform that we have built. Throughout our 40-year history, Synaptics has consistently anticipated major technology shifts and capture emerging market opportunities through innovation. Today, we offer a broad portfolio of edge compute, connectivity, interface and sensing solutions. Over the past several years, we have focused on AI-native compute and connectivity while extending our leadership in human machine interfaces into new physical AI applications. As intelligence moves from the data center to the physical world, the convergence of these technologies is becoming increasingly important and we have built strong and strategic relationships with companies leading AI at the edge.

Slide 8. At the center of our strategy is the Astra platform. We have developed AI-native microprocessors and microcontrollers that integrate multiple compute engines, including a neural processing unit, Google's Coral NPU, GPU, general-purpose CPU and multimedia processors within a monolithic SoC. We have architected the platform for performance, power efficiency and scalability with an open source and developer-friendly software framework and tools that simplify deployment of AI models across a broad range of applications.

Since joining Synaptics, I have focused the company on delivering solutions that accelerate customer innovation and time to market. Through this combination with onsemi, we are advancing a shared vision, I would say, a vision that I believe is shared between Hassane and I of bringing intelligent AI systems to a broad range of markets, particularly industrial and physical AI. Additionally, onsemi's established sales organization and global distribution network will accelerate the adoption of our solutions and expand our reach.

The One Synaptics leadership team is excited to work with Hassane and onsemi team to realize the full potential of the combined company. I'd like to turn it back to Hassane.

Thank you, Rahul. You can see why we're excited about this combination and the capabilities it would bring to onsemi and how with Synaptics, we will be positioned at the intersection of the 4 pillars of physical AI. We have a long history of supporting leading customers across auto, industrial and AI data centers, giving us the right foundation to expand into the world of physical AI. With Synaptics, we expect to provide all the key building blocks required for machines to sense, decide, act and adapt to the physical world. The transaction would create a category-defining leader in intelligent systems and enabler of the physical AI world while expanding our automotive and industrial pedigree, which are already in the physical AI realm.

Together with Synaptics' strength in human machine interface, wireless connectivity solutions and connected compute, we can accelerate our strategy and expand our reach to a wide range of established and emerging markets such as autonomous vehicles, robotics and AR/VR. As these markets ramp, we will continue to be at the center of it. We're already designed into many robotics platforms via our motor drivers, power converters for motors, our position sensors and our power devices, and this acquisition would extend those capabilities.

Moving to Slide 10. The complementary portfolios enable us to unlock and drive significant value creation opportunities and deepen customer engagements. And more importantly, beyond the technology and capabilities, this combination will bring in a world-class team that has made substantial R&D investments to establish this platform, which would help us accelerate innovation and unlock new markets as a combined company.

Our onsemi global sales network can help accelerate the go-to-market for our combined business, and we have a history of moving products quickly into new markets. Also, the onsemi executive team, myself included, have firsthand experience in managing and scaling businesses from connected compute to HMI.

Now let me turn the call over to Thad to cover the financial aspects of the transaction. Thad?

Thanks, Hassane. I'm now on Slide 11. This transaction is compelling from both financial and strategic perspectives. It provides us with a market-leading technology portfolio that enables us to deliver intelligent systems to support AI applications from the data center to physical AI. From a financial perspective, we believe this combination has significant value creation opportunities to drive revenue and earnings growth with a very attractive margin profile. The combined pro forma company would be $7.8 billion in revenue in 2026 based on Street estimates.

The pro forma company on the right side of this chart includes our expected $200 million of annual run rate synergies and includes stock-based compensation for Synaptics, consistent with onsemi's non-GAAP reporting. The combined scale strengthens the financial profile with attractive gross margins and accelerates our path to our long-term model. We expect non-GAAP EPS accretion 18 months after close.

Turning to Slide 12. Let me provide a brief summary of the transaction details. The acquisition is an all-stock transaction. Synaptics shareholders will receive 1.350 onsemi shares per Synaptics share, implying a total enterprise value of approximately $7 billion. Our offer represents an approximately 19% premium to the volume-weighted average closing prices of onsemi and Synaptics over the last 10 trading days. Pro forma ownership will be 88% onsemi and 12% Synaptics. The acquisition is expected to be accretive within 18 months of closing with $200 million of synergies.

Turning to the balance sheet. We maintained flexibility with pro forma net debt of $1.2 billion as of today and net leverage well below 1. With this flexibility, we remain committed to our existing capital return policy, returning 100% of our free cash flow to shareholders through our share repurchase program between now and close. We anticipate closing the acquisition in mid-2027, and the transaction is subject to Synaptics shareholders' approval, regulatory approvals and other customary closing conditions. Also, as highlighted in today's press release, both companies are reiterating previously provided financial guidance for the current quarter.

To wrap up, this combination would expand our total addressable market and our solutions to enable AI from infrastructure all the way to the Edge, increasing the value we can deliver to our customers and our shareholders.

With that, I'll turn the call back over to Carmen to open up the call for questions.

[Operator Instructions] It comes from the line of Ross Seymore with Deutsche Bank.

Congratulations on the deal. I wanted to see what your thoughts were on revenue synergies. I can see how this diversifies the end markets for both companies, and I can see how the scale of ON could be beneficial to Synaptics. But I wondered how you thought about any revenue synergies where the actual combined company can grow faster than the 2 individual companies could.

Yes, Ross, this is Hassane. Clearly, as you can imagine, there is going to be revenue synergies. If we look at about intelligent systems as we define it, we have our core market, Synaptics has their core markets, and there's not a lot of overlap between them. So to simplify the outlook of the way we look at it, the systems we are in, where we have power, sensing both on the power conversion and control there's always a compute connected or not at the center of it. And the systems that Synaptics is very strong and where they have the architectural control from the compute side there are always parts that we are able to deliver around those same systems.

So with that, small overlap, if any, and the complementary nature of both the portfolio and the markets and the customers, the net benefit for the combined company is the revenue synergies. And that's what we're looking at. On top of that, of course, we talk about the expanding TAM that both Thad and I talked about. So you put all of these together and then you can see the excitement that we have with the combined company as we go to market together.

And I guess as a quick follow-up, the $200 million in synergies, any color? Is that -- anything in the COGS line? Or is that all in OpEx? And then the regulatory approval? Anything unique in that, do you need China?

On the $200 million of synergies, most of that is on the OpEx line. If you think about it, it's probably 85% to 90% on the OpEx line and the remainder being in the COGS line. We think most of that will come out of SG&A. And I just want to also point out that also includes the stock-based compensation. So when you think about your models, you need to adjust the Synaptics' historical reporting to include stock-based compensation.

From the regulatory, it's customary regulatory based on our -- on the work that we've done, obviously, we have to continue to do the work. We do expect China regulatory but other than that, it's very customary. And of course, we're comfortable given the complementary nature of our portfolio, as I described before, and really the benefit that all that brings to customers worldwide.

One moment for our next question. It comes from Vivek Arya with Bank of America Securities.

Hassane, as of your last earnings call, the assumption was that ON's preferred area of expansion is the cloud data center and power rather than consumer and Edge. So I'm curious, what tipped you in this direction of doing more in kind of consumer and Edge as opposed to doing more in the AI data center? I realize it's not either/or, but I imagine there is still a level of opportunity cost to expanding in this direction as opposed to kind of reemphasizing the AI data center more. So just curious to hear what kind of tipped you in this direction?

Sure. So as you know, that doesn't change our direction at all. That's what I mentioned by the complementary in nature and really the expanded nature of that combination. We have already established a very strong foundation in the -- call it, the AI data center and the AI infrastructure, what we call the AI Halo. We have a leadership position in industrial that is benefiting from AI data center. We have all of the technologies that are required and that are needed, and we are winning and have strong growth in these markets. Of course, as the market for SSDs, as you know, develops, we are already present and have the technology for those.

Going into the AI data center. We've talked about our revenue position last year and what we expect this year. We've done some of the acquisitions for capabilities already. So not to say that we have a very strong foundation already that we have built over the last few years for, call it, the AI data center and AI infrastructure. What this combination adds is a more strategic and forward looking. You can think about it as we're skating where the puck is going to be while continuing to build upon the foundation that we've done so far, and we have been very successful. So it is not one or the other. It is continue to do what we're really good at and we have built while we think about how to expand because the natural extension of AI out of the data center is into the physical realm, Which is physical AI. We see it in automotive. We see it in humanoid. Both of these markets we play in. We see it in, of course, robotics as an overall market, which includes humanoid and we see it in industrial.

So getting that complementarity with the connected compute, it strengthened the whole portfolio beyond just where we're strong at and what we've built for the last 3 years.

Got it. And for my follow-up, what do you see as the structural growth rate of Synaptics for the next few years? Because when I look at consensus right now, it's showing a 9% to 11% kind of growth rate from '26 to '28. I appreciate that parts of the business are growing faster. But regardless, as an enterprise, people see their growth rate as 9% to 11%, which is a little bit lower than ON's expected growth rate. So what do you think the market is missing and projecting Synopsys' -- Synaptics', sorry, growth rate that ON can perhaps add to in terms of revenue synergies?

Yes. So I'm going to give you the opportunity that we see as a combined company. Of course, the -- there are 2 parts for Synaptics. You have the Astra that Rahul talked about. That is growing actually much faster. You can think about, I think, 25%. That small portion of the revenue today, but that is the high growth that is at the center of what I talk about intelligent systems, that's going to accelerate growth of both the combined company and really it's a higher growth for Synaptics proper as well.

Now I think what -- there is an untapped missing concept of technology is, I think, from the human machine interface side of it, what is new and emerging is the applicability of human machine interface beyond just what we all know, including me, the touch interfaces or the touchscreen or capacitive touch screen into the sensing for humanoid and robotics in general, that is a forward-looking growth that we together because we are strong in those markets as well. We can take that part of our sensing portfolio. We already do position sensing with inductive. This brings the tactile sensing. That, I believe, is an untapped opportunity that the technology exists, Synaptics have been investing in it and the go-to-market of the combined company will help accelerate that.

[Operator Instructions] It comes from the line of Quinn Bolton with Needham & Company.

I'll offer my congratulations on the acquisition as well. Hassane maybe just wanted to get your thoughts on any potential manufacturing synergies. I know the COGS synergies are only 10% to 15%. But longer term, is there any opportunity to in-source any of the Synaptics product portfolio to your fabs or back end that might give you a longer-term COGS benefits? And then I've got a follow-up.

Sure. Obviously, we'll have a lot more once we start doing the integration planning and do a lot of that detailed work. But at a high level, I can tell you from the Astra or the advanced nodes, anything below the 65-nanometer, we don't expect that given just where our manufacturing footprint. However, from the prior answer that I gave Vivek on the human machine interface and as we push towards that road map, there's definitely potential there that we have to look at. It is very synergistic with the capabilities that we have built part of our Treo Platform, or BCD65 that we run in East Fishkill. So of course, that will be a favorable gross margin that brings it in.

And I just want to highlight that is not at an expense of capacity that will be taken away from Treo. It's actually, again, complementary to what we do. We already do the sensing with Treo, and this adds that synergistic capabilities that we can bring in. So some of the business, yes, the other, we don't plan on that.

Perfect. And then maybe for Rahul, just any thoughts. Can you give us some sense of the design win pipeline that you have for Astra and your tactile sensing in humanoid or other sort of physical AI applications? And maybe for everybody on the line, do you have a sense what your dollar content could be as a combined company, say, now in a humanoid as you bring the 2 companies together?

Well, Quinn, first, on the design pipeline, I think we haven't broken out the design pipeline. At some point, we will start sharing what our total design pipeline is. But let me go back to first Astra. Astra absolutely is seeing momentum build up better than what we had anticipated. For the year FY '26, our fiscal year ends in June. So we had anticipated a certain pipeline, and we are ahead of that plan.

On humanoids and robotics from tactile sensing point of view, last conference call that we had in May, I had indicated we have 35 engagements, 35 unique company engagements, multiple SKUs within these companies that we are engaged on, and that number has gone up even more since then. And I'll be more than happy to share with you the next level of detail at the next conference call or the next opportunity comes about. But the growth in that design pipeline has been just phenomenal in terms of where we thought it would be versus where it is right now.

And I go back to what Hassane is saying. I think the amount of momentum that we are seeing in physical AI and as a result, the new importance that is being put on the function of tactile sensing in these humanoids as they come to become not only contextually aware, but human aware and interactive to humans and machines on a forward-looking basis. The tactile sensing component has seen a lot more traction.

I had indicated on the last call that we have a major hyperscaler out of San Francisco engaging with us along with another big company that -- where we are already shipping and they have announced shipments of humanoid. And so there are inbounds coming into us before our sales guys get a chance to react to some of these opportunities. And so really excited about what the opportunity is for the combined company in the realm of physical AI.

In terms of dollar content, just for Synaptics, I had indicated on the last call, it's a few tens of dollars. You can model anywhere from $30 to $60 range for us. And so what comes together with ON is a much higher number in these platforms. So now again, they vary by the platform.

And we'll be, obviously, disclosing more on the content as we explore and expand our strategic intent here. But that goes back to what Rahul mentioned, the untapped potential for what is considered today as purely HMI and how we look at it part of this combination as enhancing the sensing portfolio that we bring into the market. And together, we will have a lot more modalities that we can address.

One moment for our next question that comes from the line of Joe Quatrochi with Wells Fargo.

Yes. Maybe first, I was curious if you could talk about how do you think about just the potential integration of some of Synaptics technology around connectivity and wireless for the Treo platform?

I think you can't think about it as a combination for the Treo platform. It is complementary to what we do because the connected compute that Synaptics does is a much different node, and it really is a much different application. How you can think about it is Synaptics' compute or connected compute at the center of an intelligent system and multiple Treo around it controlling the loads, whether it's a driver to our silicon carbide or driver to our JFET and connected to wirelessly or connected through 10BASE-T1S Ethernet, which also is on Treo.

So I just explained to you what an intelligent system in the Physical AI realm would look like and how each one of the companies and the technologies each bring into this combination will play a complementary role in achieving what the system is supposed to achieve. So we do a lot of wireless. We're leaders in the wireless -- sorry, in the wired connectivity. Leadership comes from Synaptics on the compute and wireless compute. And together, we are basically a leading force in the physical AI when it comes to intelligent systems.

And then as a follow-up, is there any way you can comment, was this a competitive bidding process?

Obviously, the nature of the combination, given the 2 public companies, just stay tuned. We'll be filing all of the appropriate filings when the time comes. So I'll leave that answer to when the filing goes publicly.

Our next question comes from Joshua Buchalter with TD Cowen.

I guess, I was hoping to understand a little better like how does this change your portfolio from a competitive standpoint? In particular, onsemi, obviously has a rich legacy in power and analog, and you're adding the assets from Synaptics which will have the Edge AI processors. But do you feel like you're inhibited by the lack of a general-purpose microcontroller business? Or like can you speak maybe more broadly to what you'll be able to offer from a processing standpoint for some of these Edge AI applications.

Yes. So I think, obviously, with every system we target, I wouldn't say we're -- we've been inhibited because this is the complementary nature of the combined companies expands the market. We've always been very consistent that our outlook and our strategy and our financial model is organic and independent of outside acceleration. We have been introducing our own compute different level than what Synaptics brings.

So what Synaptics really brings is an acceleration and a faster time to market with a much larger TAM that we talked about. So it's really an additive, if you will, not a plugging a hole that we have. And that's why the market expanded with the top line outlook expansion that they bring, plus, of course, the potential for revenue synergies that I mentioned to Ross earlier.

So that's the -- I don't look at it as lacking. I look at it as additive and a very natural additive because as we engage with these intelligent systems with our customers, there is a compute at the center of it, that we have been also very successful before this announcement. This adds that to the customer where customers now get a, you can call it, a synergistic system level that works very well together. Yes, go ahead.

If I may add, I think, to what Hassane just shared, just to be very specific, the Synaptics processing platforms include both microprocessors and microcontrollers. And they both are multi-compute fabric implementations. And they scale from an architecture point of view, depending on the end application. Obviously, the portfolio today is at a certain level in terms of scale. And with the combination, it can broaden the scale very quickly because of the architecture choices we've made, not only in silicon, but also in the software strategy, which is largely open source developer-friendly and scale across a broader ecosystem.

And that's really the exciting part of adding that capability, the way Rahul just described it with our global reach of sales and how quickly we can scale that with the engine that we have built at onsemi.

Okay. And then maybe for Thad, can you maybe walk through the rationale behind using stock instead of cash here?

Yes, Josh, I mean, if you look at the deal, right, I mean, it's a low premium deal, all stock gives us flexibility on the balance sheet. I mentioned that in my prepared remarks. So we have flexibility to continue to return capital to our shareholders through the repurchase. And I think that's the key, right, versus using cash tends to be a higher premium. We partnered with the Synaptics team, and we think there's a lot of value that we'll create for both shareholders here.

Our next question comes from the line of Christopher Rolland with Susquehanna.

Congrats on the deal. I am calling it Cypress 2.0. And with that, maybe you could describe how the playbook, is it going to be exactly the same as Cypress or do you see some differences here as to how you run that business?

No, of course, it's a very different business. You have always held the -- no 2 companies are alike. In this case, no 2 combinations are alike. The technology and the platform, call it, the Edge AI platform that Synaptics brings is much further and above what Cypress had at the time, which was a microcontroller only or traditional microcontroller. So this is beyond what that capability is. That's point number one.

Point number two is the opportunity for both the connected compute and the sensing that Synaptics has with the combination of what onsemi already has on the power sense and control, that is playing in a very different market than it was, whatever, 7, 8 years ago with Cypress.

So the market has grown tremendously. Physical AI was not a thing. AI data center was not a thing. Therefore, the content -- and that's where the TAM is exciting for us. We're playing in a much bigger pie overall. And the coverage of the combined company is much bigger slices of that larger pie. And we intend to deliver the wins and the leadership as the combined company for that larger pie with differentiated technology, way more differentiated than what it was when I was running in my past life.

Familiarity, however, with -- that adds credibility. That's why for us, it's not a deviation. It's a continuation of what we are doing at onsemi and of course, the executive team at onsemi in combination with the leadership at Synaptics is a natural technology and really a market that we can target together. That's what makes this exciting and very natural combination.

Excellent. And perhaps a question for Rahul. Hassane just mentioned the low premium. It's particularly even lower, perhaps for an all-stock deal. So what was the thinking here? Like in terms of that, the ultimate deal price, but also for your future stand-alone versus tied up, if you could maybe talk about that.

Yes, Chris, I think, look, I definitely got a chance to kind of understand onsemi's strategy on a forward-looking basis. I'm truly excited about a couple of big things. First, their strategy in itself presenting an upside potential for the Synaptics shareholders from where they are headed on their road map and their plans independent of Synaptics. Number two, the combination with onsemi presents Synaptics scale. I'll go back to something I said earlier during the presentation, the like-mindedness of building solutions, it's not point product anymore. It's solutions, all the way, taking the entire tech stack, including software capabilities into account. And so you now have a formidable platform across multiple market segments.

And the third big thing, again, going back to the revenue dimension is the scale of global reach. I have discussed on behalf of Synaptics at some point over the next 2 to 3 years, we may plan on getting our distribution setup. However, this happens on day 1 with the combination. And so with our developer-friendly open source platforms that are virally scaling through our partnership with Google and others this distribution capability that's onsemi brings to the partnership further accelerates our reach into the global markets and especially in the markets that are industrial and physical AI, the combination with onsemi. So if you net it out, it was not a difficult decision in context of coming together with onsemi to go with the all-stock deal.

Our next question is from the line of Tore Svanberg with Stifel.

From Stifel, congratulations on the deal. Hassane, my first question is on sort of the road map eventually you think about the competency that you offer in power and sensors and combining that with compute and connectivity. Should we think of sort of the products to be discrete? Or is there a potential road map here where you could develop some SoCs that contain all the IPs needed in physical AI?

Yes, of course. Look, this is day 1 of announcement. Now the team is going to shift into -- to the extent, of course, we are allowed as 2 separate companies post announcement of what we would call integration planning to understand more depth about what day 1, which is what we would call the closing day would be.

From a work that we've done, part of this process, we do see complementary technologies, whether we meet at the Board in a system or whether we meet in a package, that's yet to be defined. That's not a one-size-fits-all. It depends on the technology and what is the best thing to do for the customer to get that value that the customer will get from a system level with the combined technologies we offer.

Very good. And that's my follow-up. As you evaluated Synaptics perhaps with other companies, you may have looked at other technologies. What were some of the things that were really unique? Was it the NPU? Was it the connectivity portfolio? I mean, I assume it's a little bit all of the above, right? But I'm sure you must have looked at other technologies as well. So just curious if there was any few things that really stood out for you.

Yes. I would say, look, I mean, obviously, we chose -- for us Synaptics was the choice we've made for a lot of reasons. I will do 2 of them. One is the strategic and the obvious reasons that we announced this deal and we announced this combination. And the strategic one is you can think about getting a microcontroller or traditional microcontroller with some peripherals and getting into AI is very different than starting with an AI native and then getting into the rest of the market. So when our intent is to complement our power and sensing in the physical AI, you need an AI first microprocessor, an AI first engine. That is what Synaptics has done.

So we gravitated towards that from a strategic perspective. Of course, as we engage, we like the rest of the portfolio. I talked about the HMI. I didn't -- I see it as HMI, of course, but I also see the untapped potential that I talked about in the tactile feedback or in applications that are critical for the physical AI where tactile becomes a need of sensing. So that's more of, I would say, a positive surprise on top of the strategic intent. And of course, you add all of that with the synergies we announced and the deal being accretive.

And of course, the combination where some of that business, while you invest in the forward-looking AI platforms that I discussed, the rest of the business brings in cash flow to invest in high growth. That's always what you want in a growth business. So it's not a drag on earnings. It's actually -- you can think about it as self-funding. It's what we've done at onsemi. We've been really good at it. They have done a very similar. And that, together with our combination delivers a compelling financial profile for the combined company on top of the strategic profile that I described. So it basically clicked all of the boxes that we were looking at when we were looking for a strategic partnership.

Our next question comes from Jim Schneider with Goldman Sachs.

First question I wanted to ask is in terms of the design wins and the market share position that Synaptics has with Astra in both humanoid and maybe industrial robots, how do you sort of frame roughly what you think your market share position is with the embedded processors in that submarket, realizing that's growing very quickly. So you can either frame that in terms of today's wins or tomorrow's pipeline?

Well, I think, look, the marketplace for humanoids is still evolving. And so there is not a clear way to say what the design potentials are in terms of revenue over time. I will say this, we have a lot more HMI traction. We also have something that we didn't talk thus far on this call is interface technology as well. And so the combination of tactile sensing and interface is already in multiple platforms out there. We are shipping silicon already. There is one that is North American franchise that's been publicly talked about and the company has already indicated that they're going to have pilot humanoids by the end of this year and about 1 million unit run rate on humanoids by the end of '27. And we are in there, right?

And so without going into names because it would be prohibitive to do so at this early juncture, I would go back to the 35 designs that I had announced during the last earnings call in May. And since then, we have graduated to a newer level, which I will definitely, at some point, disclose. And so really excited about overall content dollars that we are seeing from our product portfolio, along with in many situations, gaining traction with Astra as we pull in along with tactile sensing.

I go back to what Hassane initially touched on as well with multiple sensing capabilities now in a combined portfolio, tactile, we didn't talk about, but ISP capabilities, image sensor capabilities, audio capabilities from Synaptics, wireless sensing capabilities for Synaptics, the AI native processor capability becomes a very natural hub for supporting multimodal AI inference capability right there in the functional section of the humanoid, right?

And so you can see, again, I indicated earlier, a very like-mindedness between Hassane and I as systems first -- system solution first. This effectively builds that platform equation, not only in humanoids, but many other industrial applications that would be in the realm of physical AI on a go-forward basis. So really excited as this market evolves, the potential and the like-mindedness of bringing system solutions brings the benefit for the combination.

Yes. And that's really what gets us very excited about this combination because you talked about share in market and so on. None of that is possible without a strong technology foundation that Rahul described, point number one. And point number two is, it all starts with winning with the winners and going broad as much -- as fast as you can. They've done a great job with that. We would help with the combined company with our sales and distribution network. And those are the foundation for a leadership position as a combined company that benefits the customers. So that's what gets us excited about this combination.

And just as a quick follow-up, can you talk about if you think about Synaptics customer base, roughly how many of those customers would you say are ON customers as well today?

So that's a hard one to say of how many because you have to imagine we have tens of thousands of customers. But I would say there's a complementary and there's some overlap. Obviously, we are leaders in auto and industrial. A lot of the -- Synaptics has some auto and industrial in addition to consumer and the Edge AI customers that Rahul discussed. And together, there's not a lot of overlap, but more of an expansion of a customer base. And this is where I answered the potential for revenue synergies where we would be able to support their existing customers with our portfolio and vice versa. That, I guess, the minimum overlap is what makes this also exciting and beneficial for the combined customer list that we would have together.

One moment for our next question. It comes from the line of Harlan Sur with JPMorgan.

Congratulations on the acquisition. Synaptics team has been gaining pretty solid traction, right, with the Astra AI processor and MCU platform, as you mentioned, strong growth profile. I know the Synaptics team was also focused themselves on driving higher analog, mixed signal, power, sensing content attached to deliver more systems level solutions, right? But it seems like this is where the onsemi team can really fill almost the entire system/board level form with its broad portfolio of power, power management, Treo, mixed signal and intelligent sensing portfolio. So if you look at the Astra compute reference design and platforms across different applications? Like what percentage of the entire systems BOM outside of the processor can the onsemi team address? Is it 50%, 60%, 70%, like more?

Harlan, I'll buy you a drink afterwards, but you gave me the thesis of the combination. That is exactly how we look at it. And it is like every system is different, of course. But if you think about the components of it, which is what the 4 pillars that I summarized at a high level, where if you think about the pillar being 100% of that bill of material, which is power, sense, connected compute and control, together, we're able to do 100% of the 4 pillars in a nonoverlapping manner. You mentioned the reference design. That is a good design to kind of anchor on for a lot of the customers that have that at the center.

And I would flip it around where a lot of our designs that we do with customers have a compute platform that could be beneficial for the customer for it to be Synaptics. That is exactly the -- why this combination with the complementary nature of our technologies and our portfolio is such an exciting combination for the systems that we talk about or intelligent systems.

Harlan, if I may add to what Hassane is saying, I'll just give you a customer perspective. Given the interactions with some of the companies that have been in data center, for example, a company in San Francisco, big in AI, wanting to get into the realm of physical AI, they clearly told me they would rather focus on data and not on systems. The engineering, time, expertise needed to build a system from where they would ultimately get to data and machine learning to build inference training and machine inference capabilities is a very long tenured cycle.

And if somebody can come in, provide the entire system solution and the tech stack that enables them to get jump started in this arena first with data and ML capabilities that they would invest in engineering capabilities in, it is bingo for them. And so long story short, increasingly, the partnership with onsemi portfolio and Synaptics' portfolio brings that capability of system solution delivery at the customer and effectively taking that complexity and engineering burden outside of that company or the customer.

And in the process, if you net it out, we create through system solutions, engineering economies of scale that scales across multiple customers in terms of delivering system solutions. And so that is the benefit of the combination that ultimately we'll see a tremendous dividend. And obviously, I go back to -- I said this earlier, the open developer platform and the tech stack accessibility to a broader engineering community and the customer base is very compelling in this context as well.

I appreciate that. Very insightful. Just a quick follow-up. Any dynamics or challenges in transferring the connectivity technology license between Synaptics and Broadcom to onsemi, the technology license is quite broad, right? Wi-Fi 8, UWB, GCS, et cetera. Any challenges in transferring that technology license?

Obviously, we can't discuss that -- those specifics, but we're focusing more on announcing the deal today. And obviously, the announcement of the deal is what got us -- all of us on both sides comfortable with moving forward.

One moment for our last question, please. It comes from the line of Vijay Rakesh with Mizuho.

Congratulations on the deal. Just a couple of quick questions. With -- as you combine and get this IoT business in Synaptics, do you expect to keep that as a separate reporting segment within -- after the -- post the combination? And are you seeing any divestitures? Anything that you feel is not strategic in this? And I have a follow-up.

Yes. So obviously, we intend on having Synaptics be an operating business unit within onsemi. And of course, any reporting will come when we post close of the deal. And like I said, until then, we're 2 separate companies. And we are committed to the product lines that Synaptics has. I mentioned how each one of them is strategic and the reason why it is strategic from an end market. So that is a complete deal with all completed technology. So we're excited about every segment of technology that Synaptics has invested in that they post close would bring into onsemi.

Got it. And just a quick one. Any thoughts on it -- does it need a MOFCOM approval? Or -- and any thoughts on -- is there a breakup fee in this?

So obviously, the details are all -- will be all filed, which is customary for a deal of this size for 2 public companies. And I mentioned before, this is normal regulatory approvals which includes China in this case.

Thank you. And this will conclude our Q&A session. I will turn it back to Hassane El-Khoury, President and CEO of onsemi for closing remarks.

All right. Thank you all for joining us on the call. We're very excited for the prospect of this combination and the compelling strategic and financial benefit to position the combined company at scale to win where the market is going, while maintaining our focus and success where we are winning today. Together, we would become an industry leader, positioned at the intersection of power, sense, connected compute and control addressing the 4 pillars of physical AI.

I can say it's been a pleasure working with Rahul and his team during the process. We look forward to continuing this journey together with the extended Synaptics family. I look forward to welcoming them to onsemi, and together, we will execute and deliver the value for our customers and shareholders. Thank you.

And with that, we will conclude our conference. Thank you for participating, and you may now disconnect.

Good afternoon. Welcome back to this afternoon session at the BofA Global Tech Conference. Really happy to be here with the team from ON Semiconductor. We have Hassane El-Khoury, CEO; and Thad Trent, the Chief Financial Officer.

And as usual, I'll go through my questions, but please feel free to raise your hand if you would like to bring something up. Thank you so much, Hassane and Thad, for being at our conference. Really appreciate your time.

Maybe, Hassane, if we could start at the top, I think when you reported the last quarter, you kind of described Q1 as an inflection right point. If you could give us a little more color on what led you to kind of describe the quarter that way. And then more importantly, where are we in this kind of cyclical recovery cycle for ON across your biggest end markets?

Sure. So at a high level, a lot of people, even going through last year is, they kept pressuring of, well, when are you going to call the bottom, or is it the bottom or when is the recovery and so on. And I've always said, I'll call it when we see it. So when we saw, it was in the first quarter, and both Thad and I talked about the signals that we're looking at, and it's not just one signal. You can think about it as a whole slew because they're all interlocked.

So from an operational perspective, we started looking at, okay, how backlog is layering in, how far out in time is backlog layering in, meaning the visibility we are getting into a demand signal that is out in time. When maybe 180 days ago or 2 or 3 quarters ago, we were talking about visibility being a quarter.

So as you start getting the visibility, then lead times will start extending which is, again, a sign that there's more and more demand layering in on top of that. And then we look at, for example, on the industrial side, PMI has been hovering in 49 to 50 PMI start clicking above 50. So these are all signs, not just operational of our business, which are the KPIs I talk about, but from a PMI perspective, it's more of an industry or a market inflection.

So all of these put together, you start seeing a benefit. Now within the end markets, it's also, however, it's a slightly different story depending on the end market. In automotive, overall, we talked about very strong China business because we are the leaders in electric vehicle with our power products over there. So that was very clear.

With the energy challenges in the Middle East, we -- you can see the headline of all the export market is very strong. We're with all the exporters. So we are winning with the winners. So that was very clear of why the business is doing well.

Industrial, again, we have the AI halo effect, a lot of our energy storage system, a lot of the microgrid that infrastructure that is supporting the data center doing well. And of course, the AI data center business itself is doing well. And from a general market, automotive, we've been undershipping demand. So automotive just going from undershipping to shipping to demand looks like up, but it's not a recovery yet. So outside of automotive, I would say it's overall, and that's a healthy environment to be in.

Got it.

So looking forward, you have the replenishment. You still have the tailwinds that are yet to come. But where we are today, that's where the bottom is there, but we're not off to the races as yet, which is fine because there's still headroom.

Got it. And how is the bookings momentum, right, to the best extent that you can describe it? And I asked that question in the context of the last 2 or 3 years, where -- and the analog industry has usually had a very strong first half and for all kinds of geopolitical other tariff or other reasons. In hindsight, there was a level of pull-in. And then second half, right, there was kind of muted growth. But I think this time around, you actually described the second half to actually outgrow, right, the first half. So what is different about this year versus what we saw in the last year?

So. So you mentioned the difference from the analog names. I just want to make sure, last year, we said the second half is going to be better than the first half. So we have always called and managed our business to the extent we see the signals rather than the signals we would love to see. So that has been very consistent.

And we're under that same umbrella or guiding principle this year as well. So now what we see and why we again call the second half better than the first half is the program ramps that we have started in the first quarter are going to continue throughout the year. To give you an example, our AI data center business did 2x better than what we expected walking into the quarter. So there's strength there that will continue. That has nothing to do with potential pull-ins or not because there's none of that. So these are healthy demand signals that we can correlate to the end units being built.

I mentioned about the EV I see the end units being built. So those are all tangible signals that we see that will continue to grow. Designs that are ramping now, when they start ramping in a quarter, you're going to get full quarters moving forward. So those are ramps that tangibly, we are ramping, whether they ramp in March, and they will -- now you have full quarters or they're ramping in the second quarter, we'll get a full second half.

Those are tangible signals of design wins we've done, design wins we started ramping. And on top of that, we have the recovery that we talked about where we believe the renewable energy side of it, the microgrid and the ESS will resume growth in the second half. And that, again, is based on the outlook that we have in the backlog. So you layer all of these on top of each other, you would get a better half mathematically, a better half second half than the first half based on what we already saw of a ramp in the first quarter.

Yes. And if you take all of that and you put some data to it, if we look out to Q3 and Q4 today, we're better booked out in those quarters than we were last year or the previous year. So while we keep looking to make sure we're not going to see a head fake. Everything Hassane described, customers are actually layering in the backlog further out than they have in the past. That gives us that confidence the market's recovered. The auto hasn't gone through replenish, but things are improving compared to where they have been in the last couple of years.

That's right. Got it. Because you have a better mix of secular and the cyclical auto recovery, is that a reasonable way to look?

Well, I wouldn't say we have seen the cyclical recovery. So the talk -- we talked about is, we have ship to end demand now from an under-shipping to burn inventory to end demand. We haven't seen the automotive recovery. What we're seeing in auto is 2 things. One is the click up to natural demand and the content. Every EV that we ramp is more content than a non-EV. So the content for us has outgrown SAAR by high single digit consistently. And we talked about Treo on the call. We talked about 10BASE-T1S Ethernet, which is the new backbone of automotive connectivity within the vehicle. All those are content we didn't have two years ago. So although we've delivered the content growth on top of SAAR over the last 5 years, looking forward, our new products and the investments we've made in the downturn are generating more content for us in automotive moving forward that we haven't seen yet. So that's the secular and cyclical that were combined are where we outgrow the market.

Got it. Now we'll talk about autos, and then get to the data center. I think whenever people hear about ON Semiconductor's automotive business, right? Investors are immediately reminded of silicon carbide that had a very strong cycle, and then in hindsight, right, there was overinvestment right in this space. And just this morning, I saw some headlines that there's a number of substrate suppliers in China that are struggling right with some excess capacity. Hassane help us understand what silicon carbide means to ON, which parts of that supply chain are commoditized, and there's potential for versus what is your kind of more durable and differentiable moat in the industry?

Sure. So we started the silicon carbide journey, I would say, 5 years ago. And we've been very consistent about one thing is nobody is going to win because the word substrate. Nobody talks about silicon substrates. They all talk about what product do you put on the silicon. Why? Because everybody's got the same silicon. There's one way to do silicon.

Silicon carbide is the same thing. Yes, you can get wafers in China, that's not new. And I'm glad that there is enough supply, so we get a favorable pricing environment for it. That's all fine. Now we don't sell wafers in the market. We also make our own wafers internally for a supply assurance. So it's not to differentiate based on the technology of the substrate, it is to differentiate on the supply assurance for our customers and supply resilience. So we have a hybrid model.

But where China competes and people talk about, oh, there's so much capacity in China is the substrate, the lowest common denominator of silicon carbide, where there is 0 differentiation. What you put on it is the device. We have consistently had the best devices generation after generation in silicon carbide. That's what we win due to, and where are we?

In North America, we are the largest share gainer in North America. That's a fact. China, I report on the China auto show every year. We're about 50% last year market share. We're over 50%, this year. With the exporters, we're much higher percent. We made the announcement with Geely. We made the announcement with NEO. We have engagements. Of course, we've made other announcements prior to that with every single of the top OEM. And these are all the OEMs that are winning the export with the whole -- you go to Southeast Asia, all China EV, Australia, all China EV, the Arab Peninsula, all Chinese EVs. Europe, Chinese EVs. So we're winning with the winners that are exporting. Why are we winning? That's the differentiation of the device.

So you mentioned China, you can get substrate, yes. So why are we winning in China because they can't make the devices that we make. That's the differentiation. That's why it's sustainable. We're 2 to 3 generations ahead. People say, "Well, can they figure it out? Yes, if we stand still, but we're not. And that's where we put our R&D to work to create the next generation to win.

And one thing on the silicon carbide specifically, silicon carbide is no longer an automotive story, right? AI data center is moving to 800 volts. Everything I said about our success in automotive is all 800 volts. So the AI data center just came into our competitive domain. So we're winning in automotive because of technology at 800 volt. That is exactly the same reason we are winning the transition to 800 volts because our products are the superior products. That's the beauty of having that breadth of portfolio of power conversion.

Got it. Since you stole my question on the data center, I'll ask it a little later. But let's -- just on the topic of autos, outside of silicon carbide and the powertrain, what else is on really good at where you see content growth kind of coming back? Because I think everyone is nervous about automotive units because of all kinds of geopolitical, inflationary and other pressures. And at the same time, there seems to be kind of a shortage of supply that can hit some of the trailing edge, and there's a lot of talk of pricing. So let's just first talk about outside of silicon carbide. What are the other areas in automotive where you're seeing the recovery? And then I had a question on pricing.

So overall, we see -- again, outside of the China EV, the strength on the export and so on, there's EV in North America where we see strength due to share gain, not necessarily, of course, any volume strength there is a tailwind for us, but we've been increasing that share. So that's favorable. But that's on the power. 53% of our revenue is automotive. So the rest of it is content. Let me give you a few examples of where the world is going.

You've all heard about automotive going to a zonal architecture. So zonal architecture, what that creates is an opportunity for companies, and we're one of those leading companies to create a differentiation in how do you get to the zone. Think about boxes distributed in the car. Instead of having a box for the headlight and a box for the -- you have a left front box, the zone. We do the communication to that zone, and we do the power distribution to that zone.

The only thing that goes to that zone is power and communication, and we do both. When we talked about in the last call that we're ramping 10 based E1s, that's the Ethernet communication in automotive in the second half of this year, that's content we didn't have last year. That's new content. We're #1 in ultrasonic sensing or in automotive and you fast forward in robotics, ultrasonic sensing is obstacle detection. We're #1 in the world today.

We're #1 in the world in inductive position sensing. Why is that important, brake by wire, accelerated by wire, steer by wire and what has a ton of positions, humanoids and robots. So that even transitions to that. So these are content we didn't have a few years ago. We're #1 in these markets. That's what's going to drive the content growth in a flat SAAR.

Got it. One last thing, just on auto and silicon carbide was. I think there was a time when the industry was very tight and was able to ship at very, very high ASPs. And I think the industry then went through kind of a period of readjustment right, towards more device-type sales rather than module inverter-type sales. Are we kind of past that transition? So now what we see is actually truly representative of industry growth?

Yes. So you're right. We -- and I've talked about this. So it wasn't a surprise for us that we had to go through this transition or rebalancing. That's primarily behind us. Now if I look at the underlying data, which I normalize to devices, like you said, we have continuously shipped more devices per year than the year before. So when I talk about share gain, that's going to sustain growth in the long term, although it wasn't visible in the top line because of the mix of ASPs from a unit number of devices shipped, which is really the determinism for market share, that's been increasing every year.

So when I say we've been a share gainer, the data on a device is showing the share gain continuously moving forward. What I also want to say, however, it's not a one-size-fits-all. It's not like the market is moving to devices. It went from a 100% modules to a rebalancing of module devices, but also, we announced a program, the VW SSP program last year, that actually went the other way.

Instead of shipping three modules for an inverter, we'll be shipping three modules in the power box. So a vertical integration the other way. So that's what I mean by rebalancing. It's not like, oh my God, everything is going to device. We're still differentiate on device. It's not a margin hit for us because we extract the same value on the device than it is on the module, but it's an ASP delta, but we have some customers that are going the other way also because they value the packaging and the cooling technologies we provide. So we're able to differentiate at a system level.

Got it. Now let's talk about the data center. I think well expected that as the power consumption of these accelerators goes up, right, that the move towards wideband gap becomes very, very important. Right now, I think you've described AI as kind of in the mid-single digit or so of sales. It grew very nicely, right, year-on-year. How do you see the path forward, Hassane? And have -- do you already have specific design wins? Or do you have the capability and now you have to go and win specific designs to have that multiyear visibility of growth?

So both. So the -- obviously, the growth, and we talked about we're doubling the revenue in AI data center this year. And just for a clarification. What we define as the AI data center is within the walls of the data center because we do have a large opportunity also outside the data center with the microgrid and the energy storage. But for this conversation, we're talking about within the walls. So we talked about doubling. That's devices and wins we already have that started to ramp and will continue to ramp this year. But we also have the capability to sustain the design and momentum and so on moving forward. You heard me talk about JFT, that is as you start getting to more and more power, that's where that starts to play a role. You heard me talk about vertical GaN. As we get more into 800 volts and more density, power density vertical GaN is the solution of choice and so on.

So those are all capabilities we've developed, capabilities we've had, and that will continue to proliferate and the opportunity for us moving forward on top of what we have today is the content when we start looking at 800-volt racks is an outsized dollar content than today for the high voltage it.

Got it.

And that, to me, from a dollar content, so to put it in perspective, we talk about today, we talk about the ON Semi opportunity in a rack about $15,000, 1-5-0-0-0 dollars. About 30% of it is high voltage, 70% is low voltage. Think about SPS and so on, just for easy math, 5,000 of high voltage. 800-volt rack, think about 600 to 1 megawatt. There's a $115,000 of content for ON Semi. Half of it is going to be high voltage, right? So half of it, 55,000. So now you're going 5,000 to 55,000. That jump is an opportunity forward-looking of capabilities we have today back to my comment on 800 volts, we have it.

So it's not like we have to go make it and so on. We have to -- we're designing it in. We're deploying it, and we're working with customers, and that delta is what we're capturing on top of what we have today, just on the high voltage. That's the opportunity ahead.

Got it. How do you get visibility and confidence about the certain market share, right? Because from the outside, we look at many analog vendors who have this capability, right? We have our products that all sound similar. And there's only a handful of 2 or 3 vendors who can really lead this transition. So how do you kind of get the comfort, Hassane that you will have your fair share?

I can give you one vendor. I don't know who the other two are that you're referring to. You want 2 or 3, I can give you one. Look, without getting into a lot of segments. So when you're talking about power conversion, you are solving a multiphysics problem. Anybody who's in the power domain knows electrical is one, thermal is one, magnetic is the other. Three big components. High voltage, high conversion, high conversion gap going from 800 to 6.

Actually, the biggest chunk, physical chunk on the board is magnetics. How do you solve magnetics, you increase frequency. How do you increase frequency? You use GaN. How do we compete because you'll say, well, others have GaN? Nobody in the world has GaN that can do 800-volt in a single chip. You need vertical GaN 1,200 volt. We are the only company that does that. So you may be able to solve the frequency problem, but you're solving it with 2x the size that ON Semi does. And if anybody knows AI data center, the real estate on a data center rack is more expensive than real estate in San Francisco.

So if you save on power density and you make it smaller, 2x, you win, not because on the product itself, on what the product does to the physical density. So when I say we differentiate, I'm not talking about we differentiate, oh, who's got better resistance and who's got a better system footprint at a performance that is superior than everybody else. That's how you win the conversion. Because if somebody says, yes, I can give you the conversion on a box this big. And I say, I'll give you the same conversion this big. Who do you think is going to win? Who do you think the customer will pay more for, which is back to the margin. There's value, not in the conversion only and how effective the physical real estate you use for that same conversion. So when I talk about differentiation and I talk about us winning because of technology and capabilities we have, I'm not talking about electrical capabilities only because that's now the easy thing.

Where do you see data center as a percentage of mix in the next 2, 3, 4 years? Do you think you get to like double digit sooner rather -- like do you have that kind of conceptual visibility or?

Yes, you got to come to our Analyst Day later this year.

It's going to grow as a percentage of the pie. But the other 2 are going to grow as well. Now it's going to grow at a faster rate, but it's not like the other 2 segments, industrial and auto, are going to stay flat, right? So it will become a larger piece of the pie, but it's assuming the others are growing as well.

My favorite question to ask any CFO is how are you feeling about gross margins, right? So Thad, how are you feeling about that?

I feel great. I felt great about gross margins. Look, there is a ton of operating leverage in our model. Through the downturn, we didn't sit still, right? We continue to execute on our fab right initiatives. We invested through the downturn in terms of OpEx, right? So if you look at our OpEx today, we've got to grow back into that OpEx. On the gross margin side, we've done a lot of work. We've created these differentiated products through those investments. The big capital investments are behind us, right? We've invested in silicon carbide. We invested in our 300-millimeter fab. So on the gross margin side, today, it's primarily that the headwind is underutilization, right? So we're at 77% utilized. As the market continues to rebound in revenue growth, that's all a noncash charge that goes right to the gross margin line and falls all the way through to the operating margin line.

If you think about some of the other self-help things that we've done, we have more fab right initiatives that we're doing, right? So it's about another 200 basis points. I think over time, there's going to be another 200 basis points of mix shift that's going to be positive, everything that Hassane talked about, these differentiated products. And then we divested 4 fabs a few years ago. Once we start manufacturing that inside of our footprint, you get another 200 basis points. So it's why on the last call, I talked about I expect margin growth, gross margin expansion through the remainder of this year, for sure. But over a multiyear period, I feel really good about it. I mean there's just a ton of leverage.

And a lot of this is because it's what we've done to set the company up for this rebound, right? I mean if you look at our free cash flow margin today, 24% in a downturn, right, that's what it was last year. So that shows the structural changes inside the company, that the dollar per wafer that we get is much larger, much higher than what it has been historically. So now it's just a market expansion and then us doing more self-help. So really good about it.

And at a high level, I think about like if I you think about the trajectory and what enabled it is a fundamental change in the company, where ON Semi historically or ON Semiconductor historically has been a manufacturing company. ON Semi today is a product company that happens to manufacture differentiated product inside and outside.

But in the -- and that fundamental shift in mindset of manufacturing to product is what had allowed us to get through the downturn with the free cash flow margin that Thad is talking about. Historically, the company would be filling fabs, which burns cash and the grades margin and destroys value because once you crash your pricing to fill the fab, it doesn't always happen that you can raise pricing. So that fundamental belief got us through the downturn, investing in the differentiated product and setting ourselves up for a much better recovery than the company has ever done. And that's the exciting part.

The other thing is -- from a pricing standpoint, right, we've had a lot of our input costs go up. We're raising pricing to offset that, right? So we raised pricing effective April 1. That will start to really have an impact on the P&L in the second half, where the input cost is kind of already hitting us on the P&L, right? So that's why I feel really good about even when I rattled off there, you got a pricing tailwind of what's going on in the market as well.

Got it. You stole my next question also. When your gross margins were in the high 40s, it was easier to visualize getting to your kind of low 50s target, when gross margins are now in the high 30s, then it gets a little bit you have to take a little more leap. So are you still comfortable with kind of the gross margin expectation?

The math I just gave you gets to a 5 handle very quickly, right? Now we need a market backdrop to improve, which it's doing, right, which is getting there. I mean just look at last quarter, we took our utilization up from 68% to 77% in 1 quarter, right? Every point of utilization is 25 to 30 basis points of gross margin improvement, 2 quarters later. So that's coming out.

When I look at where kind of consensus expectations, I know you have not given a specific right, top line you've given a long-term model. People are thinking on is a low double-digit kind of sales growth company for the next 2, 3 years. Do you think if you are successful in the data center, Hassane, as you described, that there is potential for upside to that kind of growth rate? Or do you think that is kind of a natural growth rate for ON even when one includes the data center business?

Yes. Look, I don't want to give you a different growth rate because that's the you have to show up to hear at an Analyst Day, but let me give you the business today, the business we are in today. If you take out the if you give credit for the exits we've had which we're done with, but just do annualized last few years on the exits, we have consistently outgrown the market. Even in '26, if you think about, if you put back the exits, the $300 million exits, and then we've outgrown the market in '26 with no recovery in our primary markets. The -- so when you fast forward, assuming a recovery and a healthy growth in this and normalization and the secular growth that we talked about and so on, I feel very good about what we've done over the last few years structurally in the company to set ourselves up to benefit from the upturn, higher than what we had to slug through the downturn because we did the work, and the work hasn't shown up yet.

That's the leverage that Thad is talking about. That's forward-looking. Not just -- the market top line is going to do what the top line is going to do. We have the technology. We have the capability. We have the leverage in the model and everything on top is going to fall through. OpEx is not going to grow anywhere close to the top line growth. There's only positive leverage in the model. That's what excites me.

Got it. Final question, use of cash. The stock has had a pretty good move, right, along with the sector. Is buyback still the best kind of use of cash? And is it still -- what you intend to do with that $6 billion buyback?

Yes, we had a $6 billion authorization. We've been buying back shares, right? We've said our stated policy is we'd return 100% of our free cash flow, right? If you go through the priorities on capital allocation, invest in the business, right? We've just talked about we've been huge invest, right? It's that flexibility on the balance sheet, if there's M&A, checkmark on that one. Third is return capital to shareholders. If you go back to Q1, we stretched up. We saw a dislocation in the market, right? Our average share price that we're buying back was just over $60. I think that was a good use of cash.

Good CFO. How about at $130. Is it...

We still like it.

Okay. With that, thank you so much, Hassane.

Thank you.

Really appreciate your time.

Good day, and thank you for standing by. Welcome to the ON Semi First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Parag Agarwal, Vice President of Investor Relations and Corporate Development.

Please go ahead.

Thank you, Daniel. Good afternoon, and thank you for joining On Semi's first quarter results conference call. I'm 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 1 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 includes 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'll 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 could 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-Qs 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 afternoon to everyone on the call, and thank you for joining us. This quarter marks a clear inflection point for ON Semi, improving demand signals, accelerating AI data center growth and sustained gross margin expansion demonstrates that the structural changes we made over the past several years are now translating into tangible financial results. .

We delivered revenue of $1.51 billion and non-GAAP diluted earnings per share of $0.64, both above the midpoint of guidance, driven by growth in AI data center. We expanded gross margin for the third consecutive quarter to 38.5%, while returning meaningful capital to shareholders.

As volumes recover and new products ramp, our focused portfolio and lean cost structure are driving the operating leverage we designed this model to deliver. Turning to the demand environment. We saw a clear improvement as the quarter progressed, with strengthening order patterns and an increase in short lead time orders.

Taken together, these signals give us confidence that this cycle has found its low point, and we are now on a path to recovery. On the new products front, our execution on Treo continues to accelerate as the platform moves from product proliferation into ramping revenue and design wins.

In the first quarter, revenue increased more than 2.5x sequentially, and we saw broader adoption across high-volume automotive, industrial and AI applications. with Treo design wins supporting the transition to software-defined vehicles. Programs in our funnel includes zonal architectures, built on 10BASE-T1S, paired with SmartFet auto ADAS park assist system using ultrasonic sensing, power management for AI client platforms and inductive position sensing for humanoid and advanced automation use cases.

These wins reinforce Trio's penetration as customers move to a more centralized compute model with Zoner for a scalable software architecture and require a faster time to market. Our trail-based driver ICs and inductive physician sensing, combined with our gallium nitride products deliver high-power density, efficiency and ease of use in humanoid applications, AI data centers and automotive.

Our overall GaN solutions design funnel, which includes vertical GaN, now exceeds $1.5 billion, supported by a rich product portfolio spanning 40 to 1,200 volts. Ten products are already sampling with another 20 sampling in the second half of 2026 with a balanced model that combines internal GaN development and foundry partnerships -- we have a differentiated road map and resilient supply chain that positions us to begin ramping in these markets with revenue starting in 2027.

Diving deeper into automotive. In the first quarter, we began production shipments of our trail-based 10-based T1s Ethernet solutions for a leading North American customers next-generation zonal architecture. The platform integrates more than 30 trailer devices, enabling in-zone connectivity.

Higher energy costs are accelerating EV demand. with cost-optimized EV platforms driving increased adoption of IGBT-based traction inverter solutions. Our latest generation IGBTs deliver a compelling balance of performance, efficiency and cost complementing our silicon carbide wins, particularly in front axle applications.

During the quarter, we were awarded a new IGBT-based traction inverter program with a North American OEM and that is transitioning to direct semiconductor sourcing. As the industry transitions to 900-volt EV architectures led by Chinese OEMs, we are the preferred power solution and are already in production at customers in their next generation of EV platforms, enabling flash charging and higher efficiency for a longer drive range.

Our China automotive revenue grew year-over-year in Q1 despite a decline in the China passenger vehicle market of 6% for the same period. Our silicon carbide share of new EV models deployed at the 2026 Beijing Auto Show in April is approximately 55%.

Recent expanded collaborations with Geely and Neo highlight our role in enabling these customers to scale globally with their next-generation 900-volt platforms. The latest reports from the China Association of Automobile Manufacturers, highlight continued strength in new energy vehicle exports in the first quarter, supporting our view that EV adoption is extending beyond the China domestic market.

With ongoing fuel supply disruption and elevated energy costs, we expect demand for high-efficiency EV platforms and silicon carbide content to remain durable, supporting long-term growth opportunities for ON Semi and automotive power globally.

Turning to AI data centers. Our revenue grew more than 30% quarter-over-quarter, nearly double our expected growth rate entering the quarter, driven by a broader adoption across the power tree with multiple XPU vendors and all the leading hyperscalers.

Looking ahead, we now expect our AI data center revenue to double year-over-year in 2026. As the only broad-based U.S. power semiconductor supplier, ON Semi continues to build a leading position in AI data centers across the full set of power capabilities required to modernize the power tree including high-voltage conversion, intelligent power stages, production and control and system-level integration from the grid to the processor.

As policymakers push for greater transparency in the U.S. data center energy use, it reinforces the trend we have been aligned with for some time. ON Semi's power portfolio helps hyperscalers overcome power density and efficiency constraints, reducing losses from the grid to the processor.

We are engaged with all major power supply vendors serving every major AI hyperscaler. With Flex Power, for example, our partnership now spans more than 30 active programs across intermediate bus converters power supplies, battery backup, supercapacitors and next-generation 800-volt DC architectures.

The AI halo effect continues to drive incremental demand in adjacent infrastructure markets particularly energy storage systems as rising energy costs and declining battery prices accelerate project economics.

Driven by our differentiated SiC hybrid modules, we are seeing renewed growth in our String ESS and microgrid business globally from China to North America. We now expect to outpace the power semiconductor growth for this market in 2026 with more than 40% revenue growth year-over-year and a market share approaching 60% and are now ramping revenue for a large U.S. OEMs microgrid deployment.

Our announcement with Senan Electric highlights our hybrid power integrated modules combining Elite SiC technology and FSV IGBTs, enabling higher efficiency and higher power density for utility-scale solar inverters and liquid-cooled energy storage platforms.

These solutions deliver the best system-level electrical and thermal performance and reinforce our position as a technology partner of choice as customers scale next-generation renewable and storage deployments. Turning to sensing. We are delivering a multimodal sensing capability that customers can deploy across industrial autonomy, automotive sensing and emerging robotics applications.

We secured a meaningful design wins with a leading global robotics platform where our high-resolution image sensor and indirect time-of-flight technology were selected to enable reliable depth perception and navigation in autonomous systems.

Our road map spans complementary modalities, including high-resolution imaging, depth and other sensing approaches like SWER that are designed to work together with automotive-grade reliability and long lifetime performance.

As we move forward, we are encouraged by improving market conditions and the momentum we are seeing across our highest value applications. Our continued evolution towards a product and solution-centric portfolio, combined with disciplined investment decisions and our fab right actions is strengthening our operating model and enhancing margin durability.

We are executing a clear strategy with deeper customer intimacy and a portfolio aligned to the most important long-term power and sensing transitions. This positions us well to deliver sustainable growth, expanding profitability and long-term value creation.

I'll now turn it over to Thad to give you more details on our results and guidance for the second quarter.

Thanks, Hassane. The improving market conditions are coming through in our financial results and outlook as demand visibility improves. This year, we expect the impact of the structural changes we have made to become increasingly visible in our results. .

With a leaner cost structure, a more focused portfolio and differentiated power and sensing investments, we have built a model that delivers strong operating leverage with incremental revenue driving expanded margins, earnings and free cash flow.

In the first quarter, order patterns and improving backlog visibility indicate that we are moving away from the bottom of the cycle, and we are on a path to recovery. We delivered revenue of $1.51 billion, better than normal seasonality and non-GAAP earnings per share of $0.64, both above the midpoint of our guidance.

We expanded non-GAAP gross margin for the third consecutive quarter to 38.5%, and we expect sequential gross margin expansion throughout the year. And we returned $346 million to shareholders through opportunistic share repurchases, representing nearly 160% of free cash flow.

Q1 revenue was $1.51 billion, down 1% versus the fourth quarter and up 5% year-over-year. As expected, there was roughly $50 million of planned noncore exits in the quarter.

Turning to the end markets. Automotive revenue was $797 million in the first quarter, roughly flat quarter-over-quarter and grew nearly 5% year-over-year marking the first year-over-year growth after 7 quarters of decline.

We continue to see stabilization in the automotive market, and we now believe we're shipping to natural demand. China electric vehicle programs continue to outperform other regions driven by a strong export market. Industrial revenue was $417 million, down 6% sequentially, but ahead of our expectations.

We saw broad-based strength across our traditional industrial business for the second consecutive quarter, partially offset by typical Chinese New Year seasonality. Our AI data center business is accelerating with Q1 revenue growing more than 30% quarter-over-quarter and doubling year-over-year, reflecting platform ramps and expanding engagement across the Power Tree.

We expect our 2026 AI data center revenue to double compared to full year 2025. For the first quarter, total revenue for the Other category was $299 million and increased 3% quarter-over-quarter due to AI data center strength.

Looking at the first quarter split between the business units. Revenue for the Power Solutions Group, or PSG, was $737 million, an increase of 2% quarter-over-quarter and 14% year-over-year. Revenue for the Analog and Mixed Signal Group, or AMG was $540 million, a decrease of 3% quarter-over-quarter and 5% year-over-year.

Revenue for the Intelligent Sensing Group, or ISG, was [ $236 ] million, a 5% decrease quarter-over-quarter and a 1% increase over the same quarter of last year. Moving to gross margin in the first quarter. GAAP and non-GAAP gross margin of 38.5% increased sequentially in a seasonally down quarter.

The improvement in gross margin is a result of the structural changes we have made over the last several years that have improved our manufacturing performance. Manufacturing utilization increased sequentially to 77% and as we ramped production quickly to respond to stronger demand signals in the quarter.

In Q2, we expect utilization to be flat to up slightly. Given the improving demand outlook and our ongoing fab rate actions, we expect sequential gross margin expansion throughout the year. GAAP operating expenses were $637 million, including $329 million in restructuring expenses.

Non-GAAP operating expenses were $294 million, a decrease of 7% from Q1 2025, driven by cost optimization actions. GAAP operating margin for the quarter was negative 3.5% and non-GAAP operating margin was 19.1%. Our GAAP tax rate was 26.2%, and non-GAAP tax rate was 15%.

The Diluted GAAP loss per share was $0.08 and non-GAAP earnings per share was $0.64. GAAP diluted share count was 394 million shares and non-GAAP diluted share count was 396 million shares.

We opportunistically purchased $346 million of shares at an average price of $6.54. Turning to the balance sheet. Cash and short-term investments was approximately $2.4 billion, total liquidity of $3.9 billion, including $1.5 billion undrawn on our revolver.

Cash from operations was $239 million and free cash flow was $217 million. Capital expenditures were $22 million or 1.4% of revenue. Inventory increased by $60 million to 201 days from 192 days in Q4.

The sequential increase was a result of higher internal loadings and customer commitments. This includes 75 days of strategic inventory, which is down from 76 days in Q4 as we continue to deplete this inventory over the next 2 years.

Excluding the strategic bills, our base inventory is at 126 days. Distribution inventory was flat at 10.8 weeks. Looking forward, let me provide the key elements of our non-GAAP guidance for the second quarter of 2026, and -- as a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance.

We anticipate Q2 revenue will be in the range of $1.535 billion to $1.635 billion. We expect to exit an incremental $30 million to $40 million of noncore revenue in the second quarter. Excluding these exits, our revenue is expected to increase approximately 7% at the midpoint and be above seasonal.

Our non-GAAP gross margin is expected to be between 38% and 40%, which includes share-based compensation of $6 million. Non-GAAP operating expenses are expected to be between $287 million and $302 million, which includes share-based compensation of $28 million.

We anticipate our non-GAAP other income to be a net benefit of $6 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 15% and our non-GAAP diluted share count is expected to be approximately 394 million shares.

This results in an anticipated non-GAAP earnings per share in the range of $0.65 to $0.77. We expect capital expenditures in the range of $25 million to $35 million. To wrap up, our first quarter results demonstrate continued execution and the operating leverage embedded in our model.

I would like to thank our teams around the world for their commitment to excellence. Looking ahead, as our end markets continue to recover, we expect to deliver sequential gross and operating margin expansion throughout 2026.

With that, I'd like to turn the call back over to Daniel to open it up for questions.

[Operator Instructions]

Our first question comes from Ross Seymore with Deutsche Bank.

I guess my first one, Hassane, 1 for you. cyclical cations are clearly getting better, but I think the structural and secular stuff is more important to investors when they think about on -- so you rattled off a bunch in your preamble, whether it be the AI data center, the electrical grid, the zone old.

There's a whole bunch of them. 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?

Yes. So I'll take them one at a time. So if you think about the AI data center, you're going to start seeing that -- well, you're already seeing it in 2026. If you recall, we entered the year with thinking we're going to be in the high teens growth, sequential growth for AI data center.

We ended up at 30%. So you see the strength is starting already to come in and for the year, doubling our revenue from last year. So that's going to be a top line growth for the call it, the zone oil, the 10BASE-T1S and so on, that's all really related to the trail traction that we've been talking about. That's already been seen obviously in the revenue with the 2.5x increase that I talked about.

But more importantly, that's going to start showing up in the top line as we progress in '26, '27, '28 towards that $1 billion in 2030. And but that's more important that it's going to come with the margin expansion that this product line will offer not just the top line.

If you recall, the margin range for the Treo product is 60% to 70% gross margin. So you can think about it as both a top line driver but also a gross margin driver. That's going to be both on the AI data center and the auto with the zonal -- and then other opportunities, obviously, as they progress for the AI halo effect that I talked about, you will see that in the industrial business.

I already talked about just that side of the business growing 40% year-on-year. As the rest of industrial starts to grow, you're going to start seeing that as a reflection of our overall industrial business.

So overall, I would say investors are going to see a lot of the growth in the right markets and the right applications, both from a top line, but more importantly, the margin expansion.

And even in '26 had in his prepared remarks, talked about margin expansion throughout 2026. So you're going to already start to see that shift. And that's all a lot of the portfolio rationalization and the manufacturing work that we've been doing is starting to reflect.

I guess as my follow-up is a good segue to the gross margin side for AD. The 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?

And I guess what I'm getting at is A lot of things are heading in the right direction, but 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?

Yes. Look, we expect expansion throughout the year as we're seeing the favorability from our fab right activities that we've been taking through as utilization improves, you'll see that as well.

We've also had some headwinds on cost input costs going up and our pricing actions are now going to offset that as we think about later in this year. But Russ, the puts and takes are similar to what we've talked in the past, right, it's utilization.

So you think about every point of utilization is being 25 to 30 basis points of gross margin improvement. We think longer term, there's another 200 basis points of action or improvement from the fab right initiatives that we're driving.

Hassane just talked about favorable mix, and I think you're going to see over 200 basis points longer term and impact to gross margin there. And then we divested the fabs back in 2022. I think we're going to see that here in '26. But in '27, you should start to see some impact from that in longer term. That's another 200 basis points.

So when you start to stack it up, you can get over 50% when you do the math. But look, we expect expansion throughout the remainder of this year and probably larger step functions than what you saw here in the first quarter.

Our next question comes from Vivek Arya with Bank of America.

So 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. .

How do you think this year's second half plays out? Is this year -- can it be different than what we saw last year? What are you seeing in terms of your customer discussions, your demand visibility because you mentioned a lot of positive word, right, demand infection and demand strengthening and whatnot.

So just how do you think this year's second half plays out? Like should we be expecting seasonal -- better than seasonal trends in the second half? How should we think about the second half of this year?

Yes. Look, I don't want to guide the outlook from a seasonality perspective. But let me give you how the year is laying out. The signs, the signals that I look at, whether it's book-to-bill, whether it's order pattern, lead times, et cetera, -- all these are pointing in the right direction.

We are expecting the second half to outgrow the first half. And I'm not talking about flattish, but I'm talking about good outlook that we have based on all the customers. It is driven by programs that we started ramping already, which will continue to ramp.

So you can think about it as we've gotten 1 quarter and then we're going to get the rest of the quarters as the ramp happens, whether it's AI, data center I talked about automotive and driven primarily in China, those models that I referenced with 55% being with on semi-silicon carbide those just got released.

Those will be in production in the second half. So you can start seeing a lot of the leading indicators of a solid ordering pattern -- and you can extend that to -- I mentioned AI data center. You can extend that to the industrial.

All of these positive patterns started and will continue through the second half of the year. That was not the sentiment that I personally had last year. So in contrast, we see a much better outlook than we did last year.

Got it. And for my follow-up, on the AI data center, you mentioned that, that grew 30% sequentially. How big is it for on right now? Is it something like, I don't know, mid-single digit percent of sales because there's 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?

Sure. So let me first tackle the first one. So as far as overall, we talked last year about $250 million in AI revenue. I just mentioned that we will be doubling that this year. That's pretty healthy growth given where we started.

However, I will say one thing. We have all the technologies and all the power technologies from the wall, call it, to the core, both inside the data center which is the revenue that we report, but also outside the data center, which we report under the industrial.

So from a technology perspective, I feel very good. We've done some inorganic acquisitions in 2025. Those are playing to our advantage. We talked about the AURA semi acquisition, we did JFET, silicon carbide acquisition.

All of these are pieces of that puzzle that gave us a very well-rounded power technology platform that we can deliver. And of course, Treo is a very big player on an internal technology for the AI data center. Those together cover the technology from a team -- you've seen our -- obviously, our actions on OpEx, but both Thad and I have always said, we are very focused on capital or R&D allocation in the areas of growth.

That's where they are going. So to answer your question directly, we absolutely have the focus that we need to be a major player in power for AI data center.

Our next question comes from Quinn Bolton with Nine.

This is Neil Young on for Quinn Bolton. So you talked about addressing the full AI data center power from the energy infrastructure, UPS, rack level power and point of load. -- sort of as architectures move towards higher voltage distribution, how should we think about the biggest incremental content opportunities for semi is the larger dollar opportunity still outside in there or the core point of load side, is that becoming a more material contributor? And then I have a follow-up.

Sure. So if you think about -- I guess I'll cover it from the RAC or 800-volt or HVDC all the way to, call it, the outlet, if you will, there's more incremental dollars for us, which is exactly where we play.

Outside of the data center, you can think about a very large opportunity for us with SSD, solid state transformers as well that is forward-looking and incremental to the opportunity we have today.

So to break it down, there's more incremental opportunity from where we are today for the high voltage, all the way to the infrastructure if I include the solid state transformers. But also within the rack, you can't forget that today, the rack today, you can think about 120-kilowatt rack at $9,500 at the 800-volt or high-voltage track, we're thinking about $115,000 content.

So although our content is almost 10x inside the rack, there is additional incremental content from the rack all the way to the infrastructure that we also participate in because this is all high voltage, which is exactly right in our sweet spot.

Great. And then you noted the company has moved beyond the cyclical trough for automotive inventory digestion largely been behind you or is behind you.

As automotive begins to recover, how much of the improvement are you seeing is true unit demand normalization versus content growth from docenparbide image sensors, done architecture, et cetera.

And you talked about China but beyond China, are you seeing any meaningful differences by region?

Yes. So if I look at -- let me answer the question, the regional question first. So obviously, China, very healthy automotive followed by North America, followed by Europe, if you think about it from a recovery in health. As far as your question about content, I think we absolutely leverage more content than SAAR.

Because if you look at the global SAAR, Boeris flat, maybe slightly down or slightly up, depending on what outlook you look at. And to give you an example of what I had in my prepared remarks, I talked about China specifically, given you brought it up.

Q1 is seasonally down. The number of passenger vehicle was down 6%. Our revenue was actually up Therefore, that tells you it is a content story. In certain areas, it is a share gain story as well.

So we are both gaining share but also gaining more and more content. I talked about 10 based T1s for zonal architecture with an OEM in North America. That is a net new content that did not exist about a year ago because Zonal is new, 10BASE-T1S or Ethernet base is new that is content that we are adding to an existing SAR as vehicles upgrade to a software-defined vehicle.

So more importantly, we are more leveraged to content than SAAR, but in certain areas, we are gaining share.

Our next question comes from Joshua Buchalter with TD Cowen.

Maybe following up on some of the previous ones about data center. As 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 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?

Yes. So look, we're not breaking it down to that level by product family. But I will tell you, it is everywhere from the low voltage all the way through the high voltage. .

So that includes mixed signal analog or on the GPU or XPU side for, I'd call it, low voltage, but high power, along with silicon carbide and silicon carbide FET and of course, our medium and high-voltage silicon anywhere in between. We keep focusing on semi as the only U.S.-based supplier with the breadth of power technologies that we can offer and that is starting to come to bear.

I gave the example of the applications with FlexPower. That gives you an indication of the breadth of our approach. It is not just tied to a single call it, XPU. It is with ASIC vendors as well as hyperscalers.

So the breadth is what we are leveraging. That's where the growth came in better than we expected as they proliferate and where the 2026 outlook is to double.

Okay. And then follow-up. I think entering the year, you gave us sort of a growth algorithm of take whatever we think for the industry growth and take 5% of that off for the business exits. .

Is that still the right way to think about it? And in particular, the reason I ask is, a few years ago, when you were walking away from some of this business it took you longer than anticipated because the pricing environment was better and your customers didn't react as you expected them to.

Any risk of that happening again this year? Or has anything changed with that growth algorithm overall?

Yes, Josh, this is Thad. No change. As I said, we've exited approximately $50 million in Q1. There's another piece here, $30 million to $40 million here in Q2. If you annualize that you roughly get to that $300 million that we planned on exiting.

So we're done at the end of 2026. So the algorithm is still true. Take the market growth rate, take 5% off and that would be our comparable. But the way that we're seeing it right now is we've got line of sight to that, and we're executing to those exits. I don't plan on that changing here in the next -- well, I don't plan on that changing for the rest of this year.

Our next question comes from Vijay Rakesh with Mizuho.

Just a quick question on the auto industrial. Any thoughts on how you see that progressing how that trends in the June quarter into the back half? .

Yes. So let me give the end market for Q2 because I'm sure that question will come up. So automotive in Q2, we think will be roughly flat. So as I said, we think we're shipping to natural demand. We haven't seen the full recovery or the replenishment cycle in automotive yet. .

If that were to happen later in the year, that's going to be a good thing. But right now in Q2, we're looking at flat. For our industrial business, we're looking up mid-single-digit percentage wise. That will be driven by the broad industrial kind of our traditional market that has been growing the last 2 quarters sequentially.

And then our other market, which includes our AI data center will be up mid-teen percentages quarter-on-quarter.

Got it. And then as you look at the gross margin into '27, you mentioned the puts and takes, any thoughts on how we should think about like EFK utilization improving? And are there any exits that is still left in the core business, I guess, that's it?

Not as I mentioned on the previous question, there won't be further exits beyond '26. EFK is in our calculation, we are at 77% utilized. We took utilization up quickly within the quarter to support the strong demand signals that we were getting, which is a good sign.

I expect it to be flat to up here in Q2. And if the market continues to recover, we'll see some slight improvement over time. We're going to basically match our utilization to whatever the demand signal is for the remainder of this year.

So that utilization, obviously, is the biggest factor in driving gross margin expansion. And that's why we're comfortable with incremental expansion through the remainder of the year.

Our next question comes from Gary Mobley with Loop Capital.

Let me extend my congratulations. I'm sure you're pleased with the upturn in the cycle, so to speak, in the secular drivers as well. But I wanted to ask about utilization.

I assume it's going to be trending above 80% broadly across all your manufacturing assets exiting 2026. So at what point do you need to take up your capital intensity above the 5% level you've been running at for a while now? To support the growth in 2027 and 2028?

So Gary, I don't anticipate any change to our capital intensity. Are expected to be in the mid-single-digit percentage of revenue for the foreseeable future and that goes into 2027 as well. If you think about where we are today to get to fully utilized for us, which is just over 90%, let's call it, low 90s we've got to have revenue that's 25% to 30% higher than where we are today. .

Once we hit that, we start flexing to the outside as well. So we actually have a lot of capacity here. And that's why, as we sit here today, we don't look at having to bring on capacity.

So just to give you an example, Treo is already ramping out of East Fishkill, that investment has been made a few years ago. So a lot of the investment we made over the past call it, 2 to 3 years is to build the capacity that we need for the new products, which are what is ramping today like the Treo, like the AI data center for silicon carbide or to JFD, et cetera. .

So it's not about adding more capacity. It's about utilizing the capacity we already invested in, and that's the leverage in our model with the fall-through and the mid-single-digit CapEx.

Got it. That's actually helpful. And for my follow-up, I wanted to ask about pricing. You did mention passing along some inflationary pressures in your supply chain on to your customers.

How -- how pervasive are those pressures are asked differently how pervasive are your pricing adjustments as we look forward over the next few quarters?

Yes. So there's -- I would say a couple of things. So -- coming into the year, the pricing environment is better than we anticipated walking into the year. There is some -- obviously, when you talk about the commodities and the energy pricing or energy costs, that we're passing that to customers as a -- just a matter of fact. .

In areas where we are fully constrained, those are more surgical based on the technologies that we are constrained on. So it's not a one-size-fits-all. It is either a cost offset cost -- material cost offset or a, call it, the allocation methodology that comes with the pricing adjustment and those are [indiscernible] .

And Gary, we're already seeing the impact of input costs being higher in the P&L, although we're not seeing the impact of the higher pricing yet. It just takes a while for that to become effective and hit the P&L. .

So again, in the second half, we think you'll start to see that pricing impact show through on the margin line.

Thank you. Our next question comes from Christopher Rolland with Susquehanna.

Thanks, guys, so much for the question. 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 this something else? And when you say the chip guys, are you talking about like GPUs or merchant XPUs. And any other details here would be great.

Yes. So I guess I have to make. See what the level of detail I would give. So let me give you the -- what are wins and what the reference is for. The references across the XPU.

So whether it's GPU or CPU, the power delivery right at the GPU in whatever form that is required, whether it's an or anything else. And then if you keep going out from that point and you go outside to the rest of the rack, you have the medium and high voltage discrete fats, integrated analog mixed signal.

And then when you get more on the power boxes, whether it's the UPS and so on, like I mentioned with Flex -- Flex Power those are across a multitude of technologies that we offer, whether it's silicon, silicon carbide MOSFET or silicon carbide JPET.

So it changes as you get from the low voltage, which is more integrated, mixed signal power all the way to discrete or module-level high-voltage power as you get out to the -- I guess, the outside of the rack. So it's across the board really.

We don't break it out by which one. We -- my view is it's across the power tree because of our broad portfolio. 1 more thing. When I talk about hyperscalers, obviously, with the hyperscalers, it's -- a lot of it is in the power domain, -- when you get to the power domain, it's a power rack.

A UPS is a UPS with the defined output for the hyperscaler. We work with the likes of FlexPower across all hyperscalers, but it is architecturally defined with the hyperscaler -- so that gives you kind of a little bit on the breadth, but also the go-to-market.

Thanks for the clarity there, Hassane. Maybe secondly, just geographically, it looked like EU and Japan bounced back a little bit here. Maybe you could just talk about what you're seeing geographically and if there are any differences in the recovery.

I think from a -- it depends on the market and the geography. Automotive, obviously, automotive strength in China. We have industrial AI strength in North America. So it's hard -- these days, it's hard to talk about regional we're not talking about markets specifically that drives the regions.

So it's no longer a regional conversation. It is more a market. So you can think about Europe -- the automotive market has not really recovered. So you can think about it as being going sideways, and that really matches what our customers, all the OEMs have been reporting.

But industrial is better than we expected. North America is AI. Auto is better than we expected with a certain names in North America. So we're doing very well there. Industrial is doing well and starting the recovery. So that really depends on nonregional but it's more market dependent.

Looking forward, I talked about we're resuming the aggressive growth in the energy storage or renewable energy side of the business in industrial with the 40% growth.

That's going to be fueling the second half of the year as that comes back to recovery, that's primarily in North America and China.

[Technical Difficulty]

Tom, your line is open.

I wanted to ask about the channel. Channel was flat into the quarter. When you look into the second half of the year, you're seeing some more robust trends in your business. Can you talk about your appetite to potentially expand the channel?

And then the second one, I'll kind of wrap up 1 question is just around the direct customers. There was a time during the pandemic where we went from just in time to just in case. And it feels like you've moved away from that as inventory has burned down. as you're seeing a recovery, are you seeing customers move more towards building back up inventory?

Or do you see that kind of being something that you're going to have to carry on your balance sheet in the future? .

So Tom, on the channel, we've been running 9 to 11 weeks in our sweet spot. We were at 10.8 weeks last quarter, consistent with Q4 I expect it to remain at this level. Now the good news is we've been investing in inventory in the channel. We did take it up early last year, for the mass market.

And so what we've seen is that mass market revenue going through distribution grew quarter-on-quarter and year-on-year, and that's what we want to see. And just as a reminder, about half of the business through the distribution channel is fulfillment, where we own that customer.

So what we really focus on where the distributors do demand creation, and we're seeing growth there. As we go through the year, we'll watch the demand signals, obviously, and we'll match that, if it goes up, it's because we have to seed that market for a future revenue ramp, right?

You've got to have that inventory sitting out there. But right now, line of sight is to keep it kind of in this 10 to 11 weeks.

Look, as far as this just in time, just in case, whatever acronym people and I use in the industry, that's all cool. At the end of the day, if you don't place your orders with enough visibility, you're not going to get your order.

Some technologies are already on allocation. And we just said that automotive has not seen a recovery. So technology is technology, whether it goes in AI data center or automotive. We've been pushing for getting the backlog. Backlog is starting to layer in and lead times are starting to extend.

So my view is it's irrelevant what model the industry is going to end up landing at we're not going to carry all of it on our balance sheet. What we are carrying is our WIP on our balance sheet, and we will ship it as fast and as quickly as we get the orders.

So that's our view of the just in time and just in case.

Thank you. Our next question comes from Joe Moore with Morgan Stanley.

Yes. I mean on the same lines, are you seeing any kind of lead time extensions? Are you seeing any hotspots just anything like that? And I know at our conference, you had talked about maybe the automotive OEMs looking to take on some inventory because the Tier 1s weren't.

Just anything around that and any anxiety that you see around the inventory situation?

Joe, our lead times have stretched slightly in Q4, we were around 23 weeks. Q1, we're about 26 weeks. So it's gone out just slightly here. And that's across the board kind of on average. .

What we are seeing is a number of orders coming on -- coming in inside of lead time. And expedite. And I think that's kind of this market recovering faster than many had expected. So thus, we took utilization up quickly trying to match that as fast as we can. I'll let you comment on the inventory.

No. I think, obviously, some of the OEMs, you heard in my prepared remarks, some of the arms are starting to do directed or direct semiconductor sourcing. Whether they hold the inventory or we have an agreement with them at a cost associated with it, that will be an operational decision.

But I do think the anxiety is there I am starting to get calls. We are on allocation in certain technologies. I'm very clear about that. How they resolve it, whether they hold it now or they force the Tier 1, we'll see.

But that is -- the strength is not yet shown in automotive, but it will come and it will come with even stronger allocation with the automotive market, given that AI data center has been showing a ton of strength.

Our next question comes from Jim Schneider with Goldman Sachs.

Maybe related to the last one. I was wondering if you could kind of broadly characterize your customers' willingness to take up their -- the OEMs 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?

No, I don't think you're already seeing that. So I'll give you, obviously, the other ones. AI data center, there's no inventory. It's all going to end consumption or end build-out. Industrial, I think it's a ramp.

We can see the deployment, whether it's energy storage system or the standard industrial. A lot of my peers talked about that. That is not an inventory build that is in actual end demand recovering.

Automotive, that talked about it, we're shipping to natural demand. So I don't believe there's inventory being built out. Now how they protect from shortages like we know is we're headed to or will happen.

That is a question for them about how do they want to put it on their balance sheet or really went in line. We'll see how that plays out when automotive starts to show a little bit more strength.

And then just as a follow-up, about capital allocation, you've done a very good job of opportunistically buying back shares when the stock price is low.

With the stock price having recovered quite nicely at year. How are you thinking about the calculus for buybacks versus other things to do with the capital?

Well, just as a reminder, the capital allocation is after investing in our business, so right, after making the R&D investments that we've been doing, the CapEx investments, and then we've been returning 100% of our free cash flow to our shareholders. .

Last quarter, it was 160%. Over time, our goal is to return 100%. You can see that we will flex up at times that when we think there's at -- as I noted, we were buying last quarter at an average share price of $6.54.

So you saw us flex up. And -- but over a longer period of time, you should think about 100% of our free cash flow being returned to shareholders.

Thank you. Our final question comes from Harlan Sur with JPMorgan.

For a while now, you've been giving us metrics on customer comps in your mass market business. It's actually feel like been a good or a leading indicator of the cyclical improvement dynamics, right? Or call a discussion a couple of quarters ago, I think he actually reiterated it today that mass market is roughly 25% of your DC business, kind of small- to medium-sized customers your business was strong this quarter, right?

It was almost up like 24%, 25% year-over-year. How much of this was mass market strength? And then for the mass market, are you guys targeting trail for like more general purpose catalog for some of these customers as well?

Yes. So the mass market, as I highlighted earlier, was up quarter-on-quarter and year-on-year. So it's about a 35% growth -- so that's accelerating. I think a few quarters ago, we said it was about a 30% growth.

So you can see that, that is accelerating as we've been seeding the distribution chain with the right inventory for that mass market.

For the Treo, absolutely. Treo is a very versatile platform. And as in my prepared remarks and really in conversations we've had in general about Trail -- it is a analog mixed signal platform upon which we build a lot of solutions and products and all these products are all application-specific products that are definitely for the mass market.

We don't make ASICs or custom chips we make chips to solve specific problems for customers, and we do deploy those in the mass market through our distribution channel and distribution network. So absolutely, Treo is part of our broad mass market push.

I appreciate that. And then during the downturn stabilization period last year, because you guys really focused on building your portfolio of products right across your power portfolio, your mixed signal analog portfolio.

Two of those acquisitions like Vcore from NextGen I think you were targeting to have products into the market in the first half of this year for COR sampling of your vegan products. Is the team executing to this and with VCORE, I think as you mentioned, I mean, there's a pretty sizable market opportunity, especially on the CPU side, where we see all these new server CPU SKUs, x86, custom arm CPUs in the data center.

Is the team seeing quite a bit of strong interest for your new multiphase controllers/regulated products?

100%. We're fully focused on it. The team -- we have a dedicated team that does and covers that not just from a go-to-market, but from a product. So there's complete focus on it.

It is, like you said, a very large opportunity. And by the way, it's the same focus that we have across the company, across the whole power tree. But definitely, at the, call it, at the GPU level or on the board level -- late level, for sure, there's a focus across all technologies.

Now the Vegan is more on the high voltage. I mentioned last time, we are sampling vegan. And we're on track to continue to do that with revenue starting in '27, and that's still on track, as I talked about it, I think, in the fourth quarter when we announced it.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Hassane El-Khoury President and CEO, for closing remarks.

Thank you for joining us on the call. Before we close, I'd like to recognize the extraordinary efforts of our global teams -- over the past several quarters, they have navigated 1 of the most challenging cycles our industry has seen while continuing to execute, invest and move the company forward. Their focus, resilience and commitment are what we have positioned on semi to deliver consistently today and to perform even more strongly as conditions to continue to improve. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.

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

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

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

So things are getting better incrementally, not where we would call a recovery, but at least it's trending in the right direction.

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

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

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

Yes. From an automotive, a lot of it is content. We've always been very consistent in our approach for automotive, where we're not as dependent on SAR as we are on the content within the vehicles made. So -- what does that mean in numbers? The ups and downs, the inventory drain and the inventory build that we talked about in automotive, if you want to abstract all of that normalize, if you go back to 2019, automotive revenue for onsemi, 2025 automotive revenue for onsemi, that revenue grows 70%, 7-0, which means you're about a 9% to 10% CAGR for that 5-year period.

Where we said about -- that's in a flat SAAR. So our content, net content, natural demand. So I took out the COVID and all of that, is SAR plus mid- to high single digit or high single digit above SAAR. That's the content. That's coming from electrification, not just EV, but plug-in hybrids, range extending vehicle, software-defined vehicles, SDV, inclusive of the zonal architecture. We're extending our power approach where we've been really servicing the ex EV in a power architecture. Now we have 10 based T1s Ethernet, so more communication. We have the smart fats for, again, the zonal architecture. All of this is new content we didn't have a few years ago. So as we deliver on that high single digit above SAAR, historically, forward-looking, we have more content coming in to support that trajectory.

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

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

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

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

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

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

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

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

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

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

Well, on the way into the downturn, it was the LTSAs because when you have a contractual obligation for a certain level and then you can't fulfill that obligation. And the obligation is over a multiyear period, you're going to place the call to start negotiating early. So we started getting those calls from customers. That gave us that visibility.

And because I've always been very consistent, those LTSAs are very helpful to get the call and then talk about a win-win because it wasn't our advantage to just keep shipping inventory just because we have a contract. And we've done a good job through that period. And on the uptake, if you recall every January and '23 in January of '24 and January of '25 A lot of people are talking about second half of whatever year recovery and I've always been consistent of, I don't see it. I don't see the catalyst. I don't see the signs. CMI is flat to down, and now I'm seeing it differently. So not yet a recovery, but it is different and it is stabilization and the KPIs are actually trending in the right direction. Now what I'm looking for is the sustainability of these KPIs. Is book-to-bill going to be consistent? Is the fill rate is going to be there? As we get closer to those outer quarters, our order is going to retain and go up. Those will start leading to a recovery. So that's the next step for us post-stabilization, replenishment and full recovery.

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

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

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

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

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

Yes. So there's 2 types of restructuring that we've done, just to clarify, Joe. So we've done our fab right initiatives, and then we've done OpEx restructuring as well. And that's because we've been driving efficiencies across the organization, we've been investing through the downturn. So even though the top line has been compressed, we've been investing. So year-on-year, our OpEx is actually going to be down in '26 a couple of percentage points. This is our new baseline at this point. We're still above our model in terms of the OpEx percent, but in terms of dollars, we're investing the right amount of dollars. So we'll grow back into that. So if you think about it, as the market recovers, there's a lot of leverage in the model because OpEx isn't going to grow at the same rate as revenue.

On the fab right side of things that we have executed on, we took about 12% of our capacity offline between the actions that we started in '25 and that we'll complete here in 2026, that's because we're getting more efficiency out of our footprint. So the first thing we did, if you remember is we divested some fabs then we've been driving efficiency within our existing footprint. So we don't need all the capacity, especially as we exited some of these businesses. So we've been taking that capacity offline. The impact there is for 2026 is about $45 million to $50 million of depreciation benefit in '26 versus 2025. And that will hit the P&L in the second half of the year as we bleed through that inventory. So that's a favorable margin impact in the second half of the year.

As we go forward, we think there's more in fab rate that we'll be doing over the next several years. And we think there's another couple of hundred basis points of gross margin improvement that we can execute when it comes to just the fab right initiatives over the next few years. So we're not done. We're continuing to drive efficiency.

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

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

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

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

Yes. So let me start with -- so silicon carbide in general, we got a couple of flavors of silicon carbide. We have the traditional call silicon carbide and what we call silicon carbide FET -- from a market perspective, in automotive, you're right, I mean the automotive outlook for the market is not what it was 2 years ago. However, it remains a growth market. So it's lower growth, but nevertheless, it is a growth market, and it is a large growth market. What changed in the last couple of years to put us in this good position with the outlook of silicon carbide. A couple of things. I'll start with automotive. One is the penetration of silicon carbide into EVs. So forget about needing -- having more EVs. The number of EVs is going up year-on-year. So that's growth number one. Penetration of silicon carbide into EVs. If you take out the North America EV company, the silicon carbide penetration, the EV is only 14%, 1-4. So there's a lot of ways to go just without even units of EVs growing just more silicon carbide and TVs.

Another positive dynamic that's happened in the last couple of years, a lot of people are talking about plug-in hybrids. Historically, plug-in hybrids have been IGBT base, plug-in hybrids, ranging in the 40 to 50-mile range. New generation plug-in hybrids, OEM are pushing into 100-mile range. When you get to 100 mile, now you're using silicon carbide. So even plug-in hybrids now are using silicon carbide from silicon. That's a positive catalyst that wasn't around a few years ago.

AI data center power as you get to higher -- higher and higher voltage on the PSU, you're getting more into silicon carbide Jafet land. Again, that was not -- that opportunity was not there a few years ago. So all of these are -- although we talk about EV not being the growth not being to the level that we thought it's still growing, but there's also a lot more opportunities that we didn't know about a few years ago that now is coming into our domain. We're shipping to all of these demand. That's why we still see silicon carbide as a favorable market, number one.

And number two, we already talked about our advanced technology and how we position that against competition, whether it's China or elsewhere. So these 2 together, growth market and a technical competitive advantage, make this a good position for onsemi.

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

Yes. So if you think about today's AI rack, you can think about it as a 120-kilowatt power rack. The content -- serviceable content for us is about $9,500. You look at future generation or next-generation racks, when you talk about 800-volt rack 1 megawatt, that content opportunity goes up to $105,000. So a tremendous increase in content. How we service that content? We service that can all the way from high voltage to lower voltage at the core. So throughout the power treat going from 800 volts down through the, call it, 3 or 4 transitions. 400 to 50, 50 to 12, 12 to whatever core it is.

As you move forward into 800-volt domain, one, the content goes up, point number one. Point number 2 is what customers are trying to do is reduce the number of conversions to try to go from 800 volts to something much lower. When that happens, that becomes an on family domain because we do both the high voltage and the low voltage. So when you combine them, you can't combine them if you don't do both bookends. We do both bookends with very differentiated technologies that others do not have. Silicon carbide JFET, vertical GaN. We're the only company in the world today that does gain on GaN at 1,200 volts sampling, not some advanced R&D project. We are sampling those both in automotive and AI data center. You put those together, that gives us a competitive advantage, not just today but also forward looking as the architecture of the rack starts to change.

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

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

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

It is. For sure.

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

Yes. So just, I guess, to anchor everybody. So Treo is our advanced analog mixed signal platform and technology. And I say platform and technology. So it's 65-nanometer BCD -- it is high voltage. It is the only 65-nanometer technology in the world that can support up to 90 volts inherent in the technology. So that puts it perfect for 48-volt applications like Zona or AI data center. And it puts a grade for in general, automotive. So that's on the technology.

And the platform that we've introduced is an IT-based platform, which means that we can create products to service a multitude of end markets. What does that mean? In automotive, we talked about 10 based C1S Ethernet. That's based on our trail platform. We've talked about our drivers for our high-power switches. That's based on entree. Onsemi is #1 in ultrasonic sensing in the world in automotive and now in robotics. That is also based on trail. So you see medical devices based on trail. So it gives us a franchise that is very high margin, 60% to 70% gross margin, but very versatile as far as targeting a lot of the end markets we play in. So where is the -- where are we on progress towards that?

We've given the outlook of $1 billion in revenue by 2030. Where we ended 2025 was $1 billion funnel already. We have doubled the number of products in '25 that we had in '24. So new product momentum, which is what you need for the funnel in driving for the revenue. We've delivered on that momentum. We have also put a goal out there that we were going to get first revenue at the end -- in the second half of '25. We achieved first revenue, high-volume revenue in the first half of '25. So a couple of quarters ahead. So all of these give us the confidence that, one, the technology is robust because of the volume. And two, the technology is compelling because of the momentum that we're having with the customer and the pull-in of the revenue we saw in 2025. So all of these give us higher confidence about achieving our $1 billion of revenue in 2030. And to remind you, this is all manufactured in-house. So as that ramps, it helps with the utilization that Tad is talking about.

And with very high gross margin.

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

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

Yes. So we obviously go to market with our distribution partners, one, but a lot of the stuff also is design-in capability, which is a 10-based T1s ethernet for automotive zonal, nobody is going to pick it off of catalog. It's an architectural design that we get involved with the architects of the vehicle. So it is an architectural cell that we have a very skilled sales and field application engineers that work directly with the customers. But to get the breadth of it, yes, we do have also products that go through distribution.

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

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

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

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

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

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

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

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

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

I would say it's a good question. Hopefully, a lot of the non-AI customers listening. If you think about it from a technology perspective -- and from a technology perspective, it's all landing on the same technology. So call it, from a wafer technology. It's -- while we talk about train the AI data center on -- next to the XPU is the same tray on the technology, same fab, same wafer technology that we do in automotive ultrasonic sensing. From a technology, it's fully fungible. From a product, the, call it, the SBS-type product, which is the, call it, the PMIC that sits next to the GPU or XPU, that is not fungible. All the power devices I just mentioned, our silicon carbide, medium and low-voltage MOSFETs. All that is the same across all of our markets. So highly fungible.

Let me answer the next question that people will think about, which is, so if the market all comes back at the same time, what happens? It will be a good day.

Guys get what they want. I could tell you this.

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

We have 1 more question. Here?

Hassan, maybe help us understand the market share for you in PSUs for GaN. So if you listen to 1 of your European peers, they talk about process IP thin wafer handling $300 million as their advantages. And you've got an architecture advantage in vertical GaN. So what does that mean for market share in that PSU slots?

So from again specific market share, time will tell. It's too soon to tell. We're sampling the vertical gain. From a technology perspective, it doesn't matter if you have how thin the wafer is and how big the diameter is. And at the end of the day, in lateral GaN, which is what my peers are talking about, lateral gain to get to 1,200 volts, you have to stack 2 of them. Vertical GaN, you do it with a single chip, which means your density is better. So from a technology perspective, high voltage, you cannot do it with lateral GaN unless you stack them, which is what everybody else what everybody is doing today. They tell you, you stack to 650 volts. That's the topology today. It's no -- not a secret. So the difference is the technology underlying. It doesn't matter how you manufacture it, all the thinner, the wafers inning, all of that stuff is manufacturing. It's not a product.

And 1 thing I will remind is, like in the last 5 years, what we have done at onsemi is we have moved from being a manufacturing company to a product company, which means we will compete on products first, then we'll figure out the best way and most efficient way to manufacture and go to market, which is how you extract the margin that we have it targeted for.

Okay. Well, it looks like we're out of time. Wrap it up there.

Thank you. Thanks, Joe. Appreciate it.

Good day, everyone, and welcome to onsemi's Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. Now it's my pleasure to turn the call over to the Vice President of Investor Relations and Corporate Development, Parag Agarwal. Please go ahead.

Thank you, Carmen. Good morning, and thank you for joining onsemi's Fourth Quarter and Full Year 2025 Results Conference Call. I'm 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 fourth quarter and full year 2025 earnings release will be available on our website approximately 1 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 information includes 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 could 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 the forward-looking statements are defined in -- described in our most recent Form 10-K, Form 10-Qs and other filings with the Securities and Exchange Commission and in our earnings release for the fourth quarter and full year 2025. 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 turn the call over to Hassane. Hassane?

Thank you, Parag. Good afternoon, and thank you all for joining us on this first call of the year. In 2025, amid a challenging demand environment, we delivered $6 billion of revenue and non-GAAP gross margin of 38.4% by staying disciplined in our execution and tightly aligning to our long-term strategy. With focused investments, we advanced our technology leadership while positioning ourselves better in the growth markets that define our future. We strengthened our portfolio through organic investments, acquisitions and partnerships. We launched a multi-market growth engine with our Treo Platform. We delivered more than $250 million in AI data center revenue across the Power Tree. We expanded our content in automotive for zonal architecture. We further optimized our cost structure through Fab Right actions, and we returned $1.4 billion of free cash flow through share repurchases.

Over the last 5 years of our transformation, we have evolved from a manufacturing company to a product-centric company, launching more breakthrough products than we had in the prior decade and strengthening our portfolio with technologies that position us to win the most critical market transitions. Our disciplined investments, combined with our Fab Right actions have created operating leverage in our model and set the foundation for long-term growth and margin expansion.

On the new product front, market proliferation continues with our Treo Platform. We doubled the number of products sampling year-over-year reinforcing Treo as a key contributor to our long-term mix shift towards high-margin product revenue and supporting our new design funnel, which is now over $1 billion. Treo is already being designed into a broad set of automotive applications, including zonal architecture, ultrasonic sensors and LED drivers, and we are proliferating into industrial applications like HVAC, energy storage systems or ESS and medical with customers like Dexcom, who designed our low-power analog front end in their continuous glucose monitors or CGM.

We broadened our leadership in wide band gap technologies by introducing our lateral and vertical GaN or vGaN strategy with a differentiated product road map, solving our customers' problems at favorable margins. This year, we are preparing to sample more than 30 new GaN devices spanning 40 to 1,200 volts, including both discrete devices and integrated driver plus GaN solutions. To deliver lateral GaN to the market, we announced new foundry partnership to broaden regional supply options, giving us the product breadth and manufacturing flexibility to serve high-growth applications with revenue beginning in 2026.

For vGaN, we are already collaborating with GM on the development of electric drive systems. As a reminder, vGaN is built on proprietary GaN-on-GaN technology, is manufactured in our fab in the U.S. and positions us for multiyear competitive advantage in high-voltage and high-power density applications spanning AI data centers, EVs, renewables and aerospace, defense and security. We expect first vGaN revenue in 2027.

Turning to the demand environment. We are seeing seasonal patterns and are encouraged by improving order trends across our core markets, contributing to fourth quarter revenue of $1.53 billion, non-GAAP gross margin of 38.2% and earnings per share of $0.64, both exceeding the midpoint of our guidance. Automotive inventory digestion is largely behind us, AI data center is increasingly becoming a meaningful growth engine for the company, and we believe we have seen the bottom for industrial with global PMI trends pointing to early signs of expansion.

In automotive, we continue to expand our content as the industry accelerates towards a zonal architecture for software-defined vehicles and autonomous driving. We are proliferating our 8-megapixel image sensor for front-facing vision and have introduced our Treo-based advanced ultrasonic sensors for ADAS. In zonal, we have already exceeded $400 million in design funnel for our SmartFETs, e-fuses and 10BASE-T1S Ethernet transceivers as customers rearchitect their vehicles. Most OEMs have already started their migration towards zonal and industry estimates suggest that in the next 5 to 8 years, nearly 40% of new vehicles will feature this architecture. All of this is incremental to our existing leadership in silicon and silicon carbide devices in xEVs.

In industrial, we are expanding our opportunity in machine vision, factory automation, drones and robotics with new families of image sensors with competitive performance, differentiated features and strong interest from customers seeking a U.S.-based supplier. In aerospace, defense and security, revenue increased 70% year-over-year, driven by North America and Europe. We secured a strategic design win for a solid-state circuit breaker using our SiC JFET, demonstrating our ability to win in high-barrier industrial segments where mission-critical performance depends on resilient, reliable power distribution and optimized size and weight.

Turning to our AI data center business. As previously mentioned, we delivered more than $250 million in revenue in 2025. With the rapid expansion of AI compute infrastructure and our unmatched ability to deliver power efficiency across all stages of power conversion, this market remains one of the strongest and fastest scaling opportunities for us. Over the last year, we have reinforced our role as the only broad-based U.S. power semiconductor supplier, addressing power density bottlenecks that limit AI growth, aligning with national priorities for resilient AI infrastructure. With a broad portfolio of silicon, silicon carbide, SiC JFET, GaN and our newest Vcore assets, we are perfectly positioned to deliver the power efficiency requirements our customers need.

Going through the Power Tree, starting outside the data center, we lead the utility string ESS market with more than 50% worldwide share. We are ramping our IGBT hybrid power module to multiple global customers and seeing strong interest in our next-generation SiC MOSFET hybrid power module, delivering even higher power efficiency nearing 99.5% and the highest power density at 430 kilowatts with a first win at Sungrow in their global platform. We are already sampling our 1,200-volt ultra-low RDS SiC JFET for AI data center platforms, and our AI data center funnel is increasing as AI workloads scale and more platforms move to higher voltage bus architectures, expanding opportunities from power supplies to battery backup disconnect and hot swaps. At the UPS stage, we won a high-end design with a leading U.S. power supplier that cuts their system footprint by about 50% using our SiC power module to increase power density and improve thermal performance. We expect production volumes to begin this quarter.

At the rack level, we have secured designs for our SiC and silicon MOSFET and our SiC JFET in both the BBU and PSU systems with Delta, LITEON and Great Wall to serve both their Western and China customers as the AI ecosystem continues to build out. At the XPU board level, we extended our reach by securing several next-gen design wins with our multiphase controllers, smart power stages and point-of-load devices. We began sampling our dual 5x5 Vcore solutions as well as 2-phase power modules using a next-generation regulator architecture that dramatically improves transient response for AI and server processors, referred to as TLVR or trans inductor voltage regulator. As we integrate our recently acquired Vcore assets, we are strengthening our portfolio and positioning ourselves to win the next-generation architectures.

As we move into 2026, we are encouraged by a market environment that is showing clear signs of improvement across automotive, industrial and AI infrastructure. The groundwork we have laid out over the last several years has positioned us to benefit as demand conditions continue to get better. Our portfolio is aligned to the highest growth opportunities in power and sensing. Our manufacturing footprint is structurally stronger, and our customer engagements are deeper and more strategic. I'll now turn it over to Thad to give you more details on our results and guidance for the first quarter.

Thanks, Hassane. In 2025, our teams remain focused on disciplined execution and long-term value creation for all stakeholders against the backdrop of uncertainty and limited demand visibility. We strengthened our financial foundation through structural cost actions, tighter operational rigor and a relentless focus on expanding our customer base. These efforts allowed us to navigate the macro environment, maintain our strategic investments in intelligent power and sensing and position the company for margin expansion as market conditions improve.

There are 3 key areas I'd like to highlight as we exit 2025. First, we delivered record free cash flow margin of 24% in 2025. Free cash flow increased 17% year-over-year to $1.4 billion due to tight expense control and lower CapEx as our large capacity investments are behind us. We returned approximately 100% of our free cash flow to shareholders through share repurchases in 2025, demonstrating a disciplined capital allocation strategy. And we also announced a new $6 billion share repurchase program in November after repurchasing $2.6 billion under the prior program that expired at the end of 2025.

Second, we are improving the quality of our revenue and margins through investments in differentiated products. We have been reshaping our product mix through targeted investments, improving long-term margin potential while supporting our leadership in high-growth markets. We continue to rationalize our portfolio by exiting volatile noncore businesses while reallocating investments to differentiated power, sensing and analog mixed-signal technologies.

And the third point, we have positioned the company for margin expansion by aligning our manufacturing footprint and product mix, enabling meaningful operating leverage in our model. As part of our Fab Right strategy, we reduced our fab capacity in 2025 by 12% as we improved our operational efficiency. In the fourth quarter, we announced additional measures to further rationalize our manufacturing footprint. These actions together will lower our 2026 depreciation by approximately $45 million to $50 million, and we expect to see the gross margin impact in the second half of the year. Our Q4 gross margin includes approximately 700 basis points of underutilization charges, which will dissipate with increasing utilization as market conditions improve. These actions, along with other operational improvements, position us for margin expansion in 2026.

As we look ahead, our financial priorities remain consistent: drive sustainable and predictable results, expand margins and increase earnings and free cash flow. Shifting to results for the fourth quarter. We met the midpoint of guidance with revenue of $1.53 billion, in line with normal seasonality. Automotive revenue was $798 million, up approximately 1% quarter-over-quarter. We continue to see stabilization in the automotive market as much of the inventory digestion is behind us. Revenue for industrial was $442 million, up approximately 4% quarter-over-quarter, driven largely by the traditional industrial business and factory automation. Following 8 quarters of year-over-year declines, Q4 marked the first quarter of year-over-year growth in our industrial revenue, increasing 6% over the fourth quarter of 2024. Our AI data center revenue, which is classified in the Other segment, grew quarter-over-quarter and contributed more than $250 million for the full year. For the fourth quarter, revenue for the other category decreased 14% quarter-over-quarter due to seasonality and soft demand conditions in areas outside of AI data center.

Looking at the fourth quarter split between the business units. Revenue for the Power Solutions Group, or PSG, was $724 million, a decrease of 2% quarter-over-quarter and a decrease of 11% year-over-year. Revenue for the Analog and Mixed Signal Group, or AMG, was $556 million, a decrease of 5% quarter-over-quarter and 9% year-over-year. Revenue for the Intelligent Sensing Group, or ISG, was $250 million, a 9% increase quarter-over-quarter, driven largely by the industrial market and a decline of 17% over the same quarter last year as we repositioned the business for the long term.

Turning to gross margins in the fourth quarter. GAAP gross margin was 36% and non-GAAP gross margin improved to 38.2% as we're seeing the initial impact of our Fab Right actions executed in 2025. As planned, manufacturing utilization is down quarter-over-quarter to 68% to align to seasonal revenue trends in the first half of 2026. We expect utilization to increase to the low 70% range in the first quarter and additional Fab Right actions to drive margin expansion through the year. GAAP operating expenses were $351 million, including $59 million in restructuring expenses. Non-GAAP operating expenses declined 3% sequentially to $282 million at the lower end of our guidance range. GAAP operating margin for the quarter was 13.1% and non-GAAP operating margin was 19.8%. Our GAAP tax rate was 16.2% and non-GAAP tax rate was 16%. Diluted GAAP earnings per share was $0.45, and non-GAAP earnings per share was $0.64, above the midpoint of our guidance. GAAP and non-GAAP diluted share count was 402 million shares. We repurchased $450 million of shares in the fourth quarter. And as I indicated earlier, in 2025, we deployed approximately 100% of free cash flow to repurchase $1.4 billion of shares.

Turning to the balance sheet. Cash and short-term investments was approximately $2.5 billion with total liquidity of $4 billion, including $1.5 billion undrawn on our revolver. Cash from operations was $555 million and free cash flow was $485 million. 2025 free cash flow was a record at 24% of revenue, and we expect to deliver strong free cash flow in 2026. Capital expenditures were $69 million or 4.5% of revenue. Inventory decreased by $58 million to 192 days from 194 days in Q3. This includes 76 days of strategic inventory, which is down from 82 days in Q3 as we continue to deplete this inventory over the next 2 years. Excluding the strategic builds, our base inventory is healthy at 117 days. Distribution inventory increased slightly to 10.8 weeks from 10.5 in Q3 and is within our target range of 9 to 11 weeks.

Looking forward, let me provide the key elements of our non-GAAP guidance for the first quarter of 2026. As a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance. We anticipate Q1 revenue will be in the range of $1.44 billion to $1.54 billion, in line with normal seasonality at the midpoint. This marks the first quarter with expected year-over-year growth since the downturn started over 3 years ago. We expect to exit $50 million of noncore revenue in the first quarter. Excluding these exits, our revenue would be above seasonal. Our non-GAAP gross margin is expected to be between 37.5% and 39.5%, which includes share-based compensation of $7 million. Our Fab Right actions that I described earlier and other operational improvements are expected to contribute to gross margin expansion of 30 basis points at the midpoint in a quarter in which margins have historically declined with seasonality. Non-GAAP operating expenses are expected to be between $285 million and $300 million, which includes share-based compensation of $29 million. We anticipate our non-GAAP other income to be a net benefit of $7 million with our interest income exceeding interest expense. We expect our non-GAAP tax rate to be approximately 15% and our non-GAAP diluted share count is expected to be approximately 397 million shares. This results in non-GAAP earnings per share in the range of $0.56 to $0.66. We expect capital expenditures in the range of $35 million to $45 million -- to close, with stabilization across automotive and industrial markets and our momentum in AI data center, we are entering 2026 from a position of strength. We have built a structurally different company with a more resilient model, a sharper product mix and a clear strategy to expand margins and generate strong free cash flow. As demand improves, we are positioned to scale efficiently and convert that demand into profitable growth. With that, I'll turn the call back over to Carmen to open it up for questions.

Our first question comes from Ross Seymore with Deutsche Bank.

A couple of questions. I guess the first one is going to be a near term and the second one will be a longer-term question. On the near-term question, what was going on in the other category? Everything else was better than expected, but other was pretty weak. And then I guess you sound better on your tone about everything to do with the cycle and secular, et cetera, but you're kind of still at seasonal. So when do you think you could be above seasonal given the point of the cycle that we're at right now?

Yes. Two things, Ross. One is, if you exclude the exits, we are above seasonal, right? So if you look at the reported numbers, they're in line with seasonality, similar to what we've been saying for a couple of quarters here. But if you exclude the exits, we are above seasonal. On your question about the other buckets, so we saw strength in AI data center. There's clearly growth there. We have normal seasonality in Q4 in that other bucket that's down. And then there are also about $40 million of exits that are in there. So that's why that bucket was down sequentially.

Got it. And then I guess as my longer-term question, perhaps for Hassane, you talked about the AI data center side of things, the $250 million or slightly more than that. I know you don't want to get anchored to a specific number for this year, next year, et cetera. But can you just talk a little bit about the TAM you think you can address in that? When do you think it could be 10% of sales or something larger like that? And how On differentiates to give you the confidence that you can gain that share?

Yes. So I'll -- obviously, I will stick with -- I'm not guiding specifically in '26 or the AI data center yet, but I'll give you why the confidence in the continued growth at a, I would say, at a pretty good rate because our growth rate accelerated from '24, '25 and will continue. I described a little bit on how we tackle from a technology perspective from the Wall to -- from the outside data center all the way to the board. With that is how we differentiate. If you look at it, we're the only company or one of the very few companies that are able to do the high voltage, I think 800 volts with our 1,200-volt devices all the way to the SPS-type devices closer to the core.

You have to be able to do that conversion with the highest efficiency at every step of the conversion. But more importantly, architectures moving forward are collapsing the conversion tree, which means you have to be able to do high voltage and low voltage. We're the only company that has vertical GaN, which is the highest power density at the highest voltage. Again, a competitive advantage, we will flex to continue to gain share with the high-voltage power supply makers. And closer to the XPU, we're in with the standard companies you talk about, not only with the standard GPUs, but also the nonstandard GPUs or ASICs and so on.

So we're approaching it with a broad portfolio, number one. And more importantly, we're targeting where the market is going to be in a few years, which is the high-voltage rail, which is exactly where we play very well in automotive already. Those two are angles we are flexing. They're the angles that already delivered the $250 million in '25 from almost nothing, and that will continue to grow with the proliferation of the road map. And add to that, of course, the Vcore, which we've acquired in 2025 that will add cumulatively to the power devices we have.

It comes from Vivek Arya with Bank of America Securities.

You mentioned, I think, $40 million of noncore exit in Q4, I think $50 million in Q1. Is this the kind of quarterly run rate that we should expect through '26? And Hassane, if we set kind of these things on the side, then can On get to your long-term 10%, 12% kind of top line growth target conceptually if -- for this year, if the macro environment is getting better?

Yes. So I'll take. So first off, on the exits, we talked about the $50 million. If you think about it for the whole year at $300 million, you have the couple of quarters kind of Q2 and Q3 would be higher than that. And then you can apply kind of the seasonality where we'll be exiting. But it's not flat at $50 million because it's a $300 million total. So that's point number one. Point number two, on the growth. So if I take into account the exits for Q1 or even for the year, Vivek, you can think about our core business has been growing above market even in the downturn almost. This is the stuff we've been investing in, and that's delivering already over or multiple of market growth. That's why in Thad's prepared remarks, he clearly articulated that if I -- if you account for the $50 million exit in the first quarter, we're actually above seasonality as a baseline. That's what products that we've been introducing over the last few years are starting to contribute on a base. So to answer your question longer term, we expect '27 to resume that over market growth, if you think about it that way, now that we net out the exits. Does that make sense?

Yes. And then maybe, Thad, on gross margin, I think you gave a new number for depreciation. I was hoping you could just give us kind of a walk of -- for gross margin. So let's say, conceptually, if you are -- if you do go through these exits and you are in kind of the run rate of your long-term model, how should we think about your fab utilization and then gross margin kind of broad bracket this year?

Yes. So for Q1, we expect utilization to be in that low 70% range. Depending on what this market does and what this potential recovery looks like, we'll match utilization to whatever the market does. Sitting here today, I think we're going to be -- for Q2 and beyond, we're going to be running kind of mid-70s, plus or minus. If there's a sharper recovery, we will match that very quickly, and that will fall through to gross margin. As I said in my prepared remarks, we believe there's margin expansion through the year. We have the Fab Right activities that will start to hit the company later in the year. And as utilization goes up, that will impact later in the year as well. So we -- sitting here today, we feel good about the gross margin progression from this point.

Our next question is from Alex Fernandez with Jefferies.

Sorry, it's Blayne Curtis.

I just want to ask on the AI data center, obviously, a huge focus. You did throw out a kind of target for the year that you exceeded. I was just curious thoughts about growth in that segment for '26.

Yes. So Blayne, as I mentioned, we will see growth. Actually, we're starting off the year with a better growth than we did starting off last year. So I'm very bullish about that segment, but I'm not giving a guidance on that segment specifically. But it will be a driver of our baseline revenue net of the exits.

We do expect that our AI data center revenue in Q1 will grow high teens percentage-wise to give you an indication of our trajectory here.

And then I wanted to just ask on the exits of the business. I mean I'm assuming these are lower margin, but I also -- I was just curious the impact to utilization. Can you kind of net that out for us? Like you're walking away from $90 million a quarter over 2 quarters. Is that a positive or a negative for gross margin?

It's neutral today. So the margin on that business today is near the corporate average. The reason we're exiting is because we're seeing margin pressure and pricing pressure on that business that's been volatile historically. And a part of the business is why we've called it our noncore business that we would exit over time. So it really doesn't have an impact on gross margin. We've got the capacity. It's not going to be a headwind to utilization. So you can see that even with these net of these exits, what I answered in the previous question is that our utilization, we expect to go up throughout the year.

Our next question comes from the line of Joshua Buchalter with TD Cowen.

Maybe can you quickly walk through the puts and takes on gross margins into Q1? I mean utilization rates are coming up, but margins are down sequentially. I know there's a timing element and it doesn't immediately match utilization rates, but any other puts and takes on pricing or other factors or mix we should be considering when we're thinking about gross margins?

Yes. So Josh, the key element here is that the Q1 -- midpoint of our Q1 guidance is up 30 basis points on gross margin. So if you go back to our utilization in Q3, which was 68% if you remember, we -- I'm sorry, we took it up to 74%. We're -- Q4 was 68%. So we took it up to improve the mass market. So we've got a number of things. Typically, Q1 is seasonally down and gross margins are down. The fact that we're actually expanding gross margins 30 basis points shows you that our Fab Right initiatives are taking cost out are offsetting the headwind. So it's actually up quarter-on-quarter.

Okay. That would be my mistake. Sorry about that. And could you maybe provide outlook by end market for Q1? In particular, I was hoping you could comment on the auto market. It sounds like the inventory restock -- sorry, the inventory correction is complete. Should we expect autos to grow sequentially in the March quarter?

Yes, I'll give it to you by end market. So auto is roughly flat. As you remember, the Chinese New Year has a little bit of a headwind on auto. So when we think about sequential, it's roughly flat. Industrial, we're planning on being down low teens, and that's primarily due to seasonality in energy infrastructure, again, with the Chinese New Year and some lumpiness in the factory automation. Our traditional industrial will be seasonal within that bucket. And then our other bucket is up low single digits, and that's driven by the AI data center that I referred to, up high single digits and offset by seasonal declines as well as our noncore exits.

The AI data center is up high teens, sorry.

Our next question comes from the line of Quinn Bolton with Needham & Company.

Just a clarification on the first quarter gross margin. You saw the uptick in utilization rates in the third quarter, and you said it usually takes a quarter or 2 to flow through. So is the first quarter really the benefit you saw in that utilization in Q3? Or is it more product mix and other factors in Q1?

It's a combination of both. I mean you got mix, but you got a combination of the utilization impact as well, Q4 step down. And then you have our cost benefits as well with the Fab Right activities.

With the Q4 step down in utilization to 68%, would that hit you more in Q1? Or would it hit you more in Q2? I know utilization from here is trending in the right direction. Just trying to get -- is it a 3-month lag or a 6-month lag usually on that utilization impact.

It's about 2 quarters. But sitting here again, I think we're going to have the kick in of that depreciation that I mentioned, and I don't see that as a headwind in Q2 of next year this year.

So basically to drive it for you, in Q4, the utilization going down would have hit us in Q2. But we don't -- sitting here today, we don't see that because we're offsetting it with cost actions and the Fab-Right that will offset any utilization. So that's back to the strength of the gross margin based on the work we've been doing.

Got it. And then, Hassane, in your prepared comment, I think you said you're going to be introducing over 30 GaN-based solutions this year. Wondering if you could just give us -- do most of those target sort of mid or low-voltage applications in the data center? Does it target products across all three of the target end markets? Just any more sort of color on where you're going to be targeting some of those GaN solutions that you're introducing this year?

Yes. It's basically across the voltage range that I mentioned, 40 to 1,200 volts. So that includes, obviously, the lower voltage that target the data center, call it, closer to the XPU all the way to high voltage, 1,200 volts that go into the higher voltage and in automotive and industrial. So broader range of voltages targeting a lot of our end markets. I mentioned one of the things we're working on, for example, with vertical GaN with a traction -- vertical GaN-based next-generation traction with GM as an example.

Our next question comes from the line of Joe Quatrochi with Wells Fargo.

Maybe one on the data center side. I saw that you had an updated slide in your deck relative to last quarter. And I think now your opportunity, you're talking about what that looks like per rack in 2030, which is a pretty significant increase versus the prior deck. I think you're at like $105,000 per rack versus like $50,000 for 2027. Just curious like what's driving that and the significant growth per rack from '27 to 2030.

Yes. So as new generation architectures start to firm up and we are introducing a lot more products to address it. So our overlap of product's availability that we're making and investing in or have invested in versus the opportunity of content in the rack has increased. And this is kind of the list of new products I've been talking about, whether it's silicon carbide JFET or the vertical GaN or even the 5x5 or SPS point of load, we have been heavily investing over the last year or so in order to capitalize on the content that the AI opportunity provides. So that's exactly the reason for the increase is more products mapping on to more content that we can address with our portfolio.

And then as a follow-up, you talked about strong free cash flow again in 2026. Just curious if there's any targets that we should be thinking about for this year? And then how you're thinking about returning or what percent of that returning to shareholders?

Yes. Our stated target is 25% to 30%. In 2025, we delivered 24%. I talked about expanding the free cash flow margin. And so I think we're going to be in that range of within our target. Our plan, as you can see, with our announced repurchase authorization of $6 billion is to continue to return 100% of our free cash flow to shareholders.

Our next question comes from the line of Gary Mobley with Loop Capital.

You're clearly signaling better revenue visibility, albeit met with some seasonal headwind and some business exits in the first quarter. But maybe if you can share with us a few more specifics on the forward-looking revenue KPIs like beginning of quarter starting backlog or any sort of customer expedites or just any sort of revenue visibility change that you've seen in just the last 3 months?

Yes. Yes, this is Hassane. So like you said, visibility or kind of the outlook is better sitting here than we were 90 days ago, and this is across all the KPIs. Book-to-bill is trending up. We are walking into the quarter with less turns needed than the prior quarter. Expedites, we're seeing more expedites than we did 90 days ago. So all of the metrics that you mentioned are exactly what is giving us that confidence in the outlook or improved visibility in the outlook. What we're talking about, for example, is we're not seeing the replenishment yet, but this is strong signals for stabilization in the market. And you've seen going back to seasonality, inclusive of the exit highlights the strength of our base business, which is what we've been investing in.

And regarding your, I guess, refocus on GaN products, forgive me if that's not the right term, but in vertical GaN, you've got, I guess, your own manufacturing supply chain. In lateral GaN, it sounds like you've forged 2 manufacturing relationships with Innoscience and GlobalFoundries. And I assume that's the geographic specificity that you're hinting to in your prepared remarks. But the question is, do you feel like you've invested enough there? Do you feel like you've built out -- rebuilt the product portfolio to the degree you hope across the different voltage spectrum and whatnot?

Yes. I think if you look at it from a voltage range and capability, having 40 volts through 1,200-volt native. And I say native is it's not about stacking 2 lateral GaN devices to get to the high voltage. This is a single 1,200-volt GaN-on-GaN high-voltage device, which gives you the power density. I say yes. What I -- what maybe wasn't clear here, and I did mention it in my prepared remarks, is the GaN with drivers, so not just the GaN devices. And those drivers are -- you can think about them as covered by Treo, which we already have invested in and is already in-house. So combined devices and the smart drivers that we do on Treo, that gives us the complete portfolio that we need to tackle GaN, whether it's in the AI data center, automotive or the humanoids.

Our next question comes from the line of Christopher Rolland with Susquehanna.

Mine is on silicon carbide, both EV and AI. I guess, first of all, on EV, if you could give us an update, particularly geographically, how that business is progressing and what to look forward to in the future? And then we're also on the AI side, starting to hear about potentially using silicon carbide for substrates. This might require a movement to 300-millimeter, for example. Are you guys -- is this an opportunity that you guys might address? And is there an ability to convert your furnaces to 300-millimeter?

So let me first cover on the silicon carbide in automotive, we still see the silicon carbide opportunity, although the xEVs tapered down from a growth perspective. We're still a major share in China, which is all silicon carbide because they all are on the 800 volt. We are still gaining share in North America, and we continue to proliferate in European OEMs. And those obviously are still trending up from a unit perspective. So overall, we've -- the work is done, the design-ins are done, and now we're working on proliferation within the OEMs and within the geographies. I spoke a lot about silicon carbide JFET, which is in the AI data center. We've seen tremendous design and growth. Part of that $250 million in AI data center is driven by silicon carbide JFET. So that continues to go there.

As far as the 300-millimeter, we are not going to be converting furnaces to 300. I think from an internal silicon carbide manufacturing, we're happy with our footprint. Remember, this was more on supply and regional resiliency than anything else. We will continue to focus on that from a resiliency, but you're not going to see a CapEx cycle going to the furnaces or substrate manufacturing.

Perfect. And as a second question, one of your competitors is buying Silicon Labs and the rationale behind it was to fill out other parts from their catalog on their customers' boards, but in addition to fill their fabs. And from either of these perspectives, does this compel potentially an acquisition on your part or push you even more towards doing a deal? Or is the environment just from a valuation perspective, just a little too elevated right now?

Yes. So I'll give you kind of our view. So one, you're not going to hear me talk about doing M&A to fill a fab. We're going to do -- for us, M&A is more strategically driven and portfolio-driven, and you've seen us do that over the last few years, very targeted M&A regardless of size, but to fit a purpose of either portfolio completion or acceleration of something we were doing, and we'll continue to go down that path.

From a compute perspective, I don't know if I've talked about it on these calls, but our Treo Platform already provides for an embedded compute capability. So our focus for now is really embedding compute where it makes sense to control the output, which is at the power stages or at the analog mixed signal or at the DSP for hearing aids and so on. So we have microcontrollers that are fit for purpose already going down to 22-nanometer all the way to 65 nanometers. So where we see a gap, we are targeting that gap organically, and we already are in the market with that. As a general comment, we're always looking for value, and we're always looking at complementing and being a service -- full service provider for our customers. So that's a strategic conversation, but it's not to fill a fab or to bridge an immediate need. It will be more for a margin -- or a market expansion than anything else.

Our next question comes from the line of Vijay Rakesh with Mizuho.

Just on the -- Hassane, just on the Fab Right and the EFK utilization improvement. As you look out to '27, do you expect gross margins to get back to the low 40s, looking at the margin accretion from EFK and Fab Right?

Yes. Look, in the short term and even the long term, I mean, gross margin is going to be driven by utilization. So as I was saying earlier, we can match our utilization to whatever this recovery looks like. We've got lean inventory on our balance sheet, lean inventory are right in our sweet spot on the distribution channel. We don't need to wait to burn through inventory before we can adjust utilization, and we can match that very closely. If you think about the progression, yes, getting to something with a 4-handle is within sight, assuming that the market continues to recover.

Got it. And then on the AI data center side, I'm sorry to keep harping on it. But as you look out, given how big that market could be, do you expect that to get to like a 10%, 15% of revenue run rate given some of the peers seem to be targeting somewhere like that?

Yes. I mean, look, it's a matter of the when, not the if because we have the products, the market is there. The question is how quickly do we get in there. Remember, we started that journey last year with new products. So you give a design cycle and proliferation of products, and I see that happening. Again, it's a question of when.

Our next question comes from the line of Joe Moore with Morgan Stanley.

I saw you reiterated the long-term targets, the 53% gross margin, 40% operating margin. And I know it's been clear for a while that was going to take a little longer than your original thoughts. But can you talk to those targets? And is that an achievable number? And it seems like utilization gets you partway there. Can you remind us what it takes to get to those levels over time?

Yes. Let me walk through the bridge and kind of relates to Vijay's question there as well. So as I said in the prepared remarks, there's about 700 basis points of headwind from underutilization just in the Q4 margin. So if you take our utilization from the 70% range up into the low 90s, you're going to get 700 basis points. So back to the market recovery matching that. And so that's just a matter of time to be able to get that. In addition, we believe there's another 200 basis points of Fab Right activities that we can continue to execute to. So we're not done there. That's driving efficiencies in our manufacturing footprint. And you can tell we've been working on that for several years, and now it's starting to pay off.

Another thing is we've got the fab divestitures from a couple of years ago, it was $160 million of fixed costs when we start manufacturing that inside. So that's roughly another 200 basis points. And then with the new products that are coming out that are all at favorable gross margins that we're talking about here, you've got another 200 basis points plus that we can get out of that. So you start adding that all up, you're getting to that -- pretty close to that 53% gross margin target, and that's why we're holding that target out there.

That's helpful. And then I've asked you a couple of times over the course of this quarter, but it seems like there's a number of indications that the automotive inventory is kind of lean. You had Nexperia kind of caused people a lot of trouble a few months ago. Now DDR4, and I know you're not in those direct product areas. But does that catalyze at some point a restocking in the automotive space? And maybe why aren't we seeing that yet?

Well, I think I gave the answer. You think it would, but it's not because I think a lot of the automotive market, especially on the Tier 1 layer, they're running on thin margins, and they can't afford the capital. Right or wrong, it's irrelevant. But neither me, and I think most of my peers that are exposed to auto have talked about the same thing that we're not seeing the restocking, whatever the reason may be, which I think is setting automotive to a risky ramp when the demand does pick up.

Our next question comes from the line of Chris Caso with Wolfe Research.

The first question, I wanted to ask a bit more about GaN and specifically the manufacturing strategy. I think what you said there is that the Treo product, you would do in-house. But what about the GaN switches? What's the manufacturing strategy there? And where do you think you are from a competitive standpoint in that technology?

Yes. So if I understood correct, so from the GaN switches, this is what we're -- we have two sources. We have an engagement or a partnership with Innoscience and a partnership with GlobalFoundries. So we'll be doing the switches or the switching element with those partners and then combining it with, call it, the control and drive on the Treo side of it, combined in a smart switch, so the customer only sees a smart switch as far as market from an onsemi product. So we'll be going to market with 100% onsemi product with a, call it, a foundry model, bringing the switches from third-party Global and Innoscience. So that's our go-to-market today. And with that, we have a full coverage of what the GaN market needs and what customers are expecting.

Understood. Just a follow-up question. Just so you can perhaps level set us as to what you consider to be normal seasonality for the June quarter. And you've already mentioned some of the exits in the June quarter, which are a little higher than the March quarter. Is there anything else that we should consider looking into the June quarter, understanding that you're not providing guidance?

Yes. The June quarter is typically up 3% to 4% naturally. I believe the exits are probably going to be somewhere around $100 million, so doubling over the Q1 $50 million. But I think Q2 and Q3, you're probably looking at $100 million plus exits for both quarters. But to answer your question, seasonality is up 3% to 4% in Q2.

Our next question comes from Harsh Kumar with Piper Sandler.

I wanted to ask about the relative velocity of your two key end markets, Hassane. As you look at automotive and industrial, in the near term, it looks like industrial is rising faster. But I would think with the content and just the growth in the markets, is it not fair for me to assume that maybe 12 months out that it flips over and automotive is a bigger driver of growth? And then I'll ask my second one as well, maybe for -- right now for Thad. Is the 700 points of underutilization, I wanted to just understand that a little bit better. You've had a lot of exits, divests. You're writing off a bunch of products, $300 million this year. So what is the right level of revenue for me to think about getting rid of all of that $700 million -- I'm sorry, 700 bps of underutilization on a quarterly revenue run rate basis?

Yes. So Harsh, let me give you first the revenue. Your assumption is correct. If you think about it, our -- and let me give you numbers to illustrate and support it. So if you look at our content growth, we've always said we have content growth. So we're not as tied to the SAAR as we are to content from an automotive growth perspective. We have added more products to that lineup in automotive like 10BASE-T1S Ethernet, SmartFETs and so on. So that will continue to expand our content. Over the last 5 years since we started this journey, our automotive actually grew 70% 5 years. That's pretty much -- on a flat SAAR. So that gives you kind of our target of the high single-digit growth on top of SAAR. So what you can think about it in the long term is we will resume that growth in automotive, and we are sticking with the model and the outlook we've given in our last Analyst Day, which is high single-digit growth in auto driven by content above the SAAR. And we've delivered that over the last 5 years. Of course, there's lumpiness given the cycle, but we've delivered on that. So you would expect that from onsemi with the additional content moving forward as well over a multiyear period.

Yes. And Harsh, on the utilization and the charges for underutilization, the 700 basis points. So as that dissipates, we've got to get up into the low 90 percentage utilization. In order to get there, if you take a consistent mix of where we are today, it's roughly about 25% higher in revenue to get to a fully utilized based on a consistent mix. So obviously, as new products ramp, that will help us as well.

And this does conclude the Q&A session for today. I will pass it back to Hassane El-Khoury, President and CEO, for closing comments.

All right. Thank you again for joining us today. And I'd also like to thank our employees around the world whose focus and commitment drive these results. Their innovation and execution are the reasons we continue to strengthen our position in intelligent power and sensing and deliver for our customers in the most important market transitions. As always, we appreciate your support, and we look forward to our next update.

This concludes our conference. Thank you for participating. You may now disconnect.

So people are still coming into the room, but welcome back. I'm Joe Moore. Happy to have with us here today the management team onsemi, Hassane El-Khoury and Thad Trent, CEO and CFO, respectively. So thank you guys for coming.

I guess I'd like to start off giving you guys credit a couple of years ago at this event. You sort of talked about industrial starting to weaken, and you were right about that. Last year, it was auto and like it's probably not all that rewarding to be a good early warning indicator, but it helps me a lot so -- and I appreciate it a lot, and you guys have built a lot of credibility through that. And now it feels like we're kind of through the worst of it and sort of maybe tracking near term, but feeling better about next year. Can you just maybe give us an overview of what that inventory correction has looked like and kind of where you feel like we are now?

Sure. So you -- it's good memory there. But one thing I would say, it's not good to be right about that, but what it allowed us to do is position the company with lean inventory in the channel, lean inventory on the balance sheet. We took utilization down early on. So that proactive view of the market really allowed us set the company up for the next upturn. So I'll just say, that's the positive that came out of our visibility.

Now where that puts us today in the market, we see industrial stabilized. It's been stable for a few quarters. It's kind of bouncing at the bottom, but at this point, stabilization is actually a positive, relatively speaking to where we were. Automotive is in the same spot. We do believe that we're, by the end of this quarter, so next couple of months, we'll be done with the inventory burn, where we'll see, and we have seen stabilization. This conference last year, we're still talking about degradation. So sitting here and talking about stabilization, which is the first step in a recovery is a much more positive situation we're in.

Visibility is not where we want it to be, but it's better. Booking patterns are better. So things are incrementally better, not where to the point where I would sit here and talk about a -- the recovery is imminent, but stabilization and improvement from the baseline we've been dealing with the last couple of years is a much better improvement where we are.

And would you say in both of those markets that you're shipping below the level of end demand still, you still see that?

Yes. Yes. So stabilization, I talked about stabilization. It's kind of the first step in recovery because we're under-shipping to burn inventory. So next, when you burn inventory, you have what we call the replenishment cycle that comes next. We haven't seen that yet. So there's a replenishment cycle, and then there's the demand, which is the incremental demand from the base. We haven't seen the replenishment cycle. So that's a positive sign that we will still get that, call it, the bump that is not a demand recovery, but just basically shipping to natural demand, which is a replenishment, and then obviously, whatever the macro does, would the demand will benefit from that.

Back to my earlier comment, based on our inventory position in the channel and our inventory position on the balance sheet, as soon as we see demand clicking up, we take utilization up, margin goes up, top line goes up, everything, and we're off to the races from all the work that we've done in the last couple of years.

Great. I appreciate that. You talked about bookings being a little bit better. I guess what does that indicate? Is that lead times a little bit longer, people giving you a little bit more visibility? Just, can you frame that a little bit?

Yes. Actually, lead times have not really moved, maybe contracted a little bit.

Yes, they've come down slightly. It's about 14 weeks on average for us right now.

So that's not -- that wasn't a lever or a catalyst that changes it, but it could mean a lot of different things. You hear conversations in the market and some of our customers. I get more questions about, hey, do you think we're going to be on an allocation? Or have you heard of some shortages here or there? So there's that conversation. It's not yet leading to a replenishment cycle, but it's more on, we have customers that don't want to have to deal with it. They're placing the backlog. So they don't lose their spot online, but it depends on the customer and what markets they're in. Some -- the more confident you are in your outlook, the faster you're going to put backlog on us. So what I would read into it as bookings are getting better is potentially the customer sentiment is getting better, because now they're placing backlog earlier?

That's helpful. I guess one of the surprising things in the last, kind of, cycle of quarterly earnings, this Nexperia situation, pretty short-term disruption with one of your competitors based on geopolitics. The semiconductor companies didn't see a lot of difference from it, but the Tier 1s, all were stressed by it. We saw a number of kind of line down situations. And it's like kind of surprised me that a few days of disruption took us into that situation where suddenly we were struggling a little bit. And after the sort of once-in-a-generation shortage 2 years ago that there's been seems like very little memory of that, can you just talk to that situation? Does that tell us that inventories are getting to the point where they're too...

Yes. This is another spot. This is another one where I wish I wasn't right also. But I did send a letter to Tier 1 saying your inventory is to a very low level, any disruption or any uptick in demand is going to cause a ripple. Of course, nothing happened. Fast forward, there's a disruption, and then some OEMs 3 days later, screening lines down.

That tells you exactly there is no inventory. So back to the replenishment, the replenishment is a critical aspect of being able to deal, not just a disruption of one of our peers having a dislocation or disruption, any disruption. If one of my peers has a power outage in the fab for a day, you're going to have that ripple. So that's how lean the inventory is, when you go lines down in 3 days, when there is no really -- when there's just a hiccup. So that tells you that we're down back to what we talked about earlier, inventory replenishment is kind of almost behind us. There's a few pockets that will work their way out by the end of the year, but we're bound to have a replenishment cycle, because of that lean inventory out at the Tier 1s.

And couldn't it be pretty significant? I mean, you talk about people asking you, are we going back on allocation? Like it seems like there should be some memory of how, 2 years ago, I couldn't -- I literally couldn't buy an internal combustion vehicle because there was no semis. Just shouldn't there be a significant replenishment at some point?

So from a business and resilience perspective, I'd say absolutely, there has to be, but you also can look at who's going to carry inventory on their balance sheet. It's a working capital. And the margin, the cost of capital is very expensive, and a lot of these business models are really on thin margins.

So unless you see back to the end-to-end demand confidence, nobody is going to be a risk in placing backlog, or even placing backlog and taking the orders on their balance sheet. So we're in that just-in-time kind of ordering pattern. The problem is just-in-time is fine if there's no disruption, but that's the risk versus risk adjustment or risk analysis that our customers have to do. And of course, we're here to help also with the Nexperia disruption. We wanted to support our customers. We're -- you said it, we're not interested in the short-term side of it, but from a supply resiliency perspective, I think we've proven we are a company with a very strong supply resilience strategy that we've implemented from the COVID days. Even when demand softened the last few years, we did not stop our effort of supply resilience, because there's going to be a disruption. I don't know from where, I don't know what's going to cause it, but one thing I can guarantee, there will be a disruption of some kind.

There's a lot of potential.

There's a lot of potential. So for us, resiliency became a strategic vector, not just something that we had to work around the shortages. So we maintained that strategy, and now it's paying off by being able to help customers that are in need during disruption. And that's a value -- that's a long-term value we provide to customers.

Great. And just a couple of other macro questions before we get into some of the markets. The role of price, you guys have sort of talked about you had long-term agreements. You were flexible in terms of scheduling, but tend to be pretty disciplined about price. Can you just talk about where you are in kind of like-for-like pricing now? And do you see any change going forward?

Yes. I think we're back. Part of the stabilization, I think we can -- we talked about it on the last call, low single-digit pricing. We don't talk about it as a meaningful impact to any of our results, because part of the industry, part of what we do is we also have cost reductions from ourselves, from an efficiency gain, from a cost of products gain and so on. So it tend to offset it. So where we are now from a pricing environment, I would call it stable pricing environment, which is where we go to historical. So nothing really notable that I can talk about pricing that is out of the ordinary here.

Okay. And then where you overlap with Chinese competitors? I guess people worry about Chinese IGBTs, silicon carbide, image sensors and areas of overlap. They're not really automotive grade. They're not really at the same caliber, but they're probably not going to get worse at it over time. But it also seems like a cyclically improving environment there. I was just in China, I met with a bunch of people talking about shortages of Chinese discretes and things like that. So can you just talk generally about what it's like competing in that market over time with the domestic competition?

Yes. So a little bit different than some of your reference, especially when you talked about IGBT, impact some of our peers and they've talked about the China headwind. So we don't have that same exposure as most of our peers because recall, the last kind of 3 to 4 years, we've talked about exiting some of the noncore business. A lot of those exits were the products that have a, call it, a match or an equivalent Chinese or a not just Chinese, a low-cost alternative or a low-margin alternative, meaning if the customer doesn't see the value in the product, they can take a non-semi product or an Infineon product or a China domestic product and so on. Those are the businesses we exited.

So when we talk about China being a competitive to and causing a headwind to some of the -- weather margin or products, we're not exposed to that because that's behind us. We've exited that business. What we supply to China are high-value products, meaning what we compete with is Western or there's no competition because there's no equivalent product. Our performance is much better than what's in the market and so on. So we can command a better margin or better structure from an ASP perspective.

So we feel we're in a pretty good position. Of course, competition is not a sleep at the wheel, neither are we. So a lot of our R&D is going into advancing those products at a much faster pace, and that's going to keep us ahead, not just versus competition in China, but competition in Western peers as well.

Great. So maybe if we shift to some of the growth opportunities. Starting with silicon carbide, it seems like we're evolving from silicon carbide being thought of as mostly automotive. There's a lot of other opportunities for silicon carbide materials. Can you just talk about your general position there and what you see going forward?

Yes. So if I break down silicon carbide, so obviously, automotive electrification, EV or battery electric vehicle was the primary use of silicon carbide as far as technology. Then while remaining in the automotive, actually, 2 announcements that we've made over the last couple of quarters on plug-in hybrids, which is we can talk about EV, not at the rate that it used to be, still growth.

Plug-in hybrids is another growth vector for us. Plug-in hybrid historically has been IGBT-driven or silicon-product-driven.

Now they're converting to silicon carbide. So that's a new market that is evolving, which is plug-in hybrid, that is also utilizing silicon carbide. When we go outside of automotive, we talk about microgrids or energy storage systems, whether it's industrial, utility scale or commercial scale energy storage, think about it the big container-sized batteries that sit next to a site that supply power in the case of a disruption or in the case, the grid can't support it.

So anything microgriding energy storage that is making its way there. That plays a very big role as I transition the conversation to AI, where a lot of the AI data center now need energy storage systems outside of them to support the power from the grid that is not yet up to par.

Going into the data center, silicon carbide also finds its way in the UPS or at the entry point in the server of the power, especially as you go up to the 800-volt rail. That's where silicon carbide comes in. For us, it's a sweet spot. We've been doing automotive 800-volt battery for a few years now. So our devices are already ready for it. And on top of that, the difference we can talk about silicon carbide JFET, which is a different technology based on silicon carbide, that is actually the most optimal silicon carbide product that can go into the data center.

Great. Maybe we could talk about that data center opportunity a little bit more. The -- you don't have the current revenue exposure that some of your competitors have into AI servers, but you just talked about a very strong position heading into particularly 800-volt in the future. Can you just talk about the priority that you're putting on that? And I think there's 14 suppliers that are partnered with NVIDIA on 800-volt. Of those, how should we think of onsemi being positioned?

Sure. So a couple of things. So one, on the AI data center product, obviously, the growth that we talked about: in Q1, I talked about that revenue doubling year-on-year; Q2 doubled year-on-year; Q3 doubled year-on-year. So we went from almost no revenue to 2025 being around the $250 million. That will continue to grow with the opportunity ahead as we get to the 800 volts.

Answering directly on kind of the breadth of the competitors out there. If you take the list of companies that were listed with partnering with NVIDIA, and you talk about which one of them has capability to go to 800 volts, just high voltage. It turns down to 2, us and Infineon. Everybody else kind of taps out 48-volt, 100 volts and so on.

So why is that important? At 800-volt, today, to get to the GPU, you get from high voltage, let's talk 800-volt, 400-volt, maybe 48-volt, 12-volt and then down, right? So you have multiple phases of conversion, to get from the plug to the core. So if your technology is, call it, the 48-volt technology, like some -- like most of those companies are because they're sitting next to the core today. When you want to get to 800 volts, you don't have that. So when you go from 800 volts to 48 volts, you need to have both of them in-house. And only 2 companies have all these voltages in-house, it's us and Infineon. So that's how we differentiate.

Now how we differentiate now within the 2, us and Infineon, I talk about silicon carbide JFET. We're the only company that has that. So we differentiate based on fundamental technology where our portfolio is broader in these applications. And we've announced last quarter, vertical GaN, which is GaN-on-GaN that goes up to 1,200 volts, which is now putting natively GaN at the high-voltage rail that lateral GaN or GaN on silicon is not able to achieve today. And that, today, we're the only company that has that as well.

So from a positioning or thinning the competitive field, it's end-to-end, high voltage to low voltage. And within that thinner field of 2, we differentiate by having technologies that others do not have, that play very well in that data center.

Great. And then within silicon carbide, you control your own vertically integrated substrate. I know in GaN, you signed a deal with Innoscience. Can you just talk generally about the capabilities that you're bringing to these markets and that sort of, even in silicon carbide, I know you have been one of the first to actually source from China as well as having your own substrate. How do you think about that balance?

So we think about back to supply resilience. We've always said, just starting with silicon carbide, we've always said we didn't want 100% internal. So we've always said that gives us the best of both worlds where we have our internal vertical integration, and we can flex outside as the market evolves. And that played very, very well where we are today where we're able to source inside and outside for silicon carbide. So fast forward for GaN, same kind of concept.

GaN today is a technology that is available from foundry. When a technology is available at foundry or multiple foundries, then the differentiation happens of what you do with the technology. So what do we bring to the table? We've introduced -- you've heard me talk about the Treo platform. We have a very compelling and differentiated portfolio of drivers for silicon carbide, but also for GaN, packaging technology that we're very good at, that's the differentiation.

So in order to do GaN with high value and very well, you need technology, GaN, you need drivers and you need packaging for thermals. Have with the Innoscience agreement that we talked about that we announced, we get now all 3. It gives us the technology from Innoscience, and it gives us all of the value adder that we provide with the drivers and the packaging. So it's a win-win for us and a win for Innoscience.

Great. So I have a number of growth opportunities I wanted to come back to, but maybe ask that first, can you give us a sense first of where you are with factory utilization today? Where do you see it going? It seems like you've managed that pretty tightly. Just generally, are we near the bottom of your cycle there?

Yes. So we're -- so last quarter, we were at 74% utilized. I said it was going to step backwards slightly because we're building some inventory for the mass market and holding that in die bank. We started investing in the mass market about a year ago, moving inventory into the distribution channel. That's where the mass market gets handled. And a year later, we're seeing the customer count go up by 19%. So we seeded that market now we've got to seed the die bank to be able to move quickly inventory into the channel when it's needed, but back on the utilization, utilization is what's going to drive gross margin in the short term.

So let's assume we're 70% to 74% utilized today. If you think about where we can get to with some type of market recovery, as Hassane was saying, we can match our utilization very closely to whatever the market response looks like given that we have lean inventory on our balance sheet and in the channel. So for every point of utilization, it's 25 to 30 basis points of gross margin improvement.

So there's -- to get to fully utilized, there's about 650 to 700 basis points of gross margin improvement, just getting from where we are today to fully utilized. If you look at our free cash flow this year in 2025, we're running close to 25% free cash flow margin.

So the impact on gross margin is noncash. So as we think about this market and whatever it's going to do, we're going to closely match that utilization, hopefully taking it up. And it takes about 2 quarters for that utilization to hit the P&L as you bleed through the inventory that's on the balance sheet. But that's our opportunity in the short term when I think about 2026 is the primary driver of gross margin is going to be utilization.

Yes. And so if you think about a path back to 40%. How linear should we think of that utilization improvement being? You mentioned there's a little bit of inventory build this quarter. I know you have this kind of buffer inventory that you've been working through to deal with some of the footprint consolidations. Can you just kind of outline the path to 40%?

Yes. So that strategic build that we did for the fab transitions is outside of utilization because that's all manufactured outside. So it's all about what's inside. So look, I think if you're assuming some market recovery early mid next year, that utilization is going to match it, and we should see the benefit in the second half of next year, just all going to depend on how quick the market and what that recovery looks like. I'll also say, in Q1 of this year, we took 12% of our capacity offline, not because demand was down, but because we're getting more throughput out of our existing footprint. So for 4 years, we've been working on what we call our fab right initiative, just driving more efficiency in our fabs and our back ends, and we're getting it. A couple of weeks ago, we announced another $200 million impairment where we're taking equipment offline.

That equates to about $45 million to $50 million next year in 2026 of depreciation benefit. So just taking that off on an annualized basis. So that starts to impact us later in the year as well. So all things equal, we should see margin improvement in the second half, if not sooner.

Great. And then just one more question and then I'll open it. So can you talk about cash return, your strategy there? I know, there's been...

Yes. So a few weeks ago, we announced a $6 billion share repurchase authorization over 3 years. We've been returning 100% of our free cash flow to our shareholders. Our priorities in capital allocation is: one, invest in our business. We've been doing that through R&D. You've seen the products that we've announced, whether it's Treo, the vertical GaN, all these new products. The big CapEx investments are behind us. We invested in silicon carbide. We invested in our 300-millimeter fab in East Fishkill. So the big investments are behind us. So when you think about our capital intensity, mid-single-digit percentage-wise, and that's really maintenance. And I'd see for many years, we're going to be kind of in that mode. So that's one, investment in the business.

Second was balance sheet flexibility, which we have. If you think about our leverage on a net basis, we're pretty close to 0. We have a lot of firepower for M&A if something opportunistically came along. We've done some technology tuck-ins. Absent any meaningful M&A, we're returning 100% of our free cash flow. We've been doing that over this last year. So this year, generating roughly $1.5 billion of free cash flow, we're returning 100% of it.

Okay. So if we have questions from the audience?

Have I understood it right that you're basically buying back 6 billion shares?

$6 million.

$6 million.

Yes, that would basically mean 30% of your market capital.

That's the number. Now that will depend on free cash flow. We return 100% of our free cash flow.

And you're hoping the market cap go up as well.

Yes. I mean obviously, right? I mean, again, back to where we're running today, if you assume some growth, we should be able to get to $6 million.

In the downturn today, we're generating $1.5 billion.

But why are you basically giving back all the free cash flow? Is it because the share price is so attractive? Or are there no growth opportunities?

No. Look, that's why I started with option #1. Our priority #1 is investing in our business, and we have been doing that, right? We're continuing to invest in our business, investing in R&D. We've invested in CapEx. So that's the first priority is fund the business for long-term growth. So we definitely see above-market growth when we return to market growth. We see that we will outgrow the market. So that's priority #1. After that is return it to shareholders.

But you're basically returning 100% of your free cash flow back to...

After making all the investments, yes.

And you said unless M&A opportunities present...

Yes, of course. But you can't, M&A is not deterministic. That doesn't mean we're not going to do M&A it means if there's an M&A, we go in that order.

Okay. Then basically, you were to reduce the share.

Yes, of course. That's why he mentioned the priority order. The last few years, the focus was on the business, so we invested in CapEx.

So just on M&A, if I can. You obviously looked at Allegro. What is the strategic gap, if you like, that you saw there that you wanted to plug? And can you develop that organically? Or are there other assets like that, that you can find?

Yes. It wasn't more of a gap. The -- if you look at the portfolio, it was more complementary. It was an expansion of the SAM. So it wasn't a gap that we have today to address the market. It was more of a market expansion, but that's the strategic impact of it. So it doesn't cause or create a gap that we have. We still have a ton of organic opportunities, like Thad said, on investments that we've made that will just start to grow.

Maybe we have 1 minute left. Maybe I didn't give you a chance to talk about Treo. Can you give us a little bit of an overview of what you're doing there?

Yes. So just to remind you, we announced the Treo platform, which is our 65-nanometer BCD mixed-signal analog. It is a revolutionary platform because it's the only 65-nanometer platform in the world that is able to do low voltage, all the way to 90 volts monolithic. And the importance of it is, of course, AI data centers, automotive and industrial. So that was November of '24 when we announced it, and we said that revenue will start the second half of 2025. So we are in the second half of 2025. So where are we on that progress? We're ahead of schedule on revenue. We actually recognized revenue on the platform in the first half of '25, so that was ahead of schedule. We also talked about doubling the number of products in 2025 from 2024. We're on track to do that. So the product momentum is coming in where we want it. We talked about $1 billion of revenue in 2030.

We just talked in our last earnings, I talked about crossing the $1 billion of design funnel, getting us. So all of these are leading indicators that build that confidence into the $1 billion in 2030. So the platform is going very well. Market adoption is going very well. Customer design in is going very well. And just to explain a little bit, how do we tie the platform to the technology? What I talk about in product, we talk about data center products on the board on the server. In automotive, anywhere from 10-based T1S Ethernet to drivers for silicon carbide or GaN, like I talked about. Ultrasonic sensors onsemi is #1 in ultrasonic sensing and automotive. So that is going also on the Treo platform.

If I go into industrial, medical, continuous glucose monitor. So I'm giving those examples just to show that this one platform that we've presented and the technology that underlines it is a versatile technology that covers all of these end markets with a multitude of products. So when I talk about doubling the number of products, it's actually very important because it broadens the addressable market for us across all of these applications that I've talked about.

So it's an important thing for us. And the margin profile on the Treo platform that we're able to achieve already is that 60% to 70% gross margin. So as that business grows, that's going to be a contributor to our margin expansion crossing that 50% that we talked about in our long-term model. So part of it is mix, and mix is coming from new product and a big portion of it is from the Treo platform.

Great. Well, I'm afraid we're out of time, but congratulations on all the progress. Thank you.

Thanks, Joe.

Good morning. I'm Tim Arcuri. I'm the semi and semi equipment analyst here at UBS. Very pleased to have ON Semiconductor with us. And we have Hassane El-Khoury, who's the President and CEO; and we have Thad Trent, who's the EVP and CFO. So thank you to you both.

Thank you.

So it's been a little over a month since your earnings call in late October. We've now heard reports from the entire sector since you reported. How do you feel just about demand, how it's progressing versus what you thought when you hosted your earnings call?

Yes. I think, like you said, a few months have passed. No real change from what we talked about as far as the demand environment. Demand is overall, we see signs of improvement, but stabilization. To me, at this point, stabilization is actually a very positive thing given where we've gone. Ordering patterns have improved from where we were even 90 days ago or where we were at this point in time last year as far as what the outlook looks like. So we're looking at stabilization. We're looking at kind of return potentially to normal seasonality.

So if you talk about orders having gotten maybe a little better over the past 90 days, is there a customer base that's getting a little better? Is there an end market that's getting a little better, autos maybe getting a little better?

I think my comment is more across because where we are in the demand environment today is not any more specific to a certain segment or end market. It's more on a macro improvement or macro health. We expect the inventory drain to kind of be behind us by the end of this year. We won't be talking about inventory drain, but inventory remains at a very low level. So although customers drained inventory and that's behind us, we are at a very low level, which means that even before a demand cycle happens, there's a replenishment cycle that has not happened yet.

So typically, after an inventory drawdown, you see a replenishment to get back to kind of your normalized demand. And then you have the recovery. So we have a double positive still ahead of us, and we haven't seen that replenishment. So that's what we're looking at now. And from our position, how we've been managing the company operationally, we're in the best position we could be. Our inventory in the channel is exactly where we want it. Inventory on the balance sheet is exactly where we want it. So the replenishment and the demand, we can take utilization up right away. We don't have to wait to burn balance sheet inventory and what have you. As soon as we take utilization up to match that, margin will follow up, margin expansion, 2-quarter lag, but margin expansion will happen, and we're off to the races again.

So the last few years, we've managed the company operationally. We've had the fab right. We've had operational improvements as far as our footprint to position us to capitalize on whatever and whenever demand starts to go up again.

So what -- why do you think customers have yet to start to build inventory? Why hasn't this begun yet? I mean is it just macro? Is it tariff uncertainty? And what are you looking for to get more bullish about?

Yes, it's all of the above, really, is customers -- I have a lot of engagements with customers. And the common denominator is what visibility or what demand do we want to build to.

So when you talk about do we believe '26 is going to be whatever you believe the market is going to be, customers say, "Yes, we hope so." But they're not going to build balance sheet inventory until they see that demand. So what needs to happen for them to commit to it? And what I mean by commit is put it in the backlog and commit to the order, not just give me a forecast because I'm not going to build to forecast and strap cash. I'd rather have free cash flow to buy back shares.

So what needs to happen? One is certainty, outlook certainty. That comes from geopolitical certainty. It comes from tariff certainty. It comes from a lot of that macro uncertainty we're living through. That's what we need to see first and foremost because that builds consumer confidence. Consumer confidence builds demand, demand builds backlog. That's what we need to see. And we look at all of these metrics internally, both Thad and I every week to make sure that, one, we're not getting a false positive. One uptick or one big order or one short-term order doesn't mean a recovery is happening. But we do have signals that we're monitoring that are going to be a leading indicator for us to start building that inventory.

And are there some -- so some of your peers have talked about this sort of odd dynamic where it's the end of the year and nobody wants to build inventory because it's the end of the year, but there's some sort of risk mitigation. People are putting bookings into the backlog just because they're worried about shortages. And so maybe some optimism growing about the first half of the year.

I'm smiling because I don't sell insurance. You want an insurance policy for potential shortages and so on, then put the order and buy it, and put the inventory on your book. What I mean in all seriousness, I'm not going to start taking utilization up and building inventory just in case because then it's on my balance sheet, it's on my cash flow. And then if the demand doesn't really materialize, I have to take utilization down again. That's more harmful than having the conversation with.

Look, our lead times are low, call it, about 14 weeks. Okay, you want orders in Q1, place it in December. You see what I mean there is no benefit for the customer because if the customer puts an order for, call it, June, what do you think I'm going to start building it now? I'm not going to build it. I'm going to build it sometime in April, whatever cycle time. I may have it in die bank already. You see what I mean? I don't think that's a sign that I use to change our approach to operational excellence.

Got it. So it's the time of the year or it's the time for end of the year annual price negotiations. So I have to ask about the pricing environment, how you see it?

I think it has not really changed. We're looking at overall kind of as an industry that low single-digit pricing. It's not kind of all a cliff in the January or February. It's just staggered throughout the year. But you can talk about overall for the year is low single digits.

And that plays out throughout the year basically.

That plays out through out, I would say.

Got it. Let's talk about silicon carbide. The market has been pretty challenging. You don't tell us a whole lot about the business anymore, but you do think that you -- it sounds like you think that you outgrew the market this year.

So overall, we don't talk about the business as a stand-alone business because we consider it now part of our baseline or part of our core. I don't break out every business we have.

So from a market share gain, we've been very successful gaining share, one in North America. We've been very successful gaining share in China. I've been very vocal about our China market share, reaching the 50% from models introduced. And we continue to make progress with ramps in Europe. So from a market position versus the ramps that customers are having, we feel very comfortable, and we feel pretty good about where we need to be. So as that market continues to evolve, we're just going to keep continuing to grow with it and gain share.

And so you do think that this year, you gain share and you expect to gain share?

Yes.

Okay. Can we talk about silicon carbide, some of the emerging applications inside the rack? How big is this? Customers trying to optimize efficiency and power density. How much of a driver could this be?

So it is a driver. We talked about our AI revenue reaching -- well, for 2025 being at the $250 million range. And I've always said we're coming at it from the high-power side, getting all the way to the smart power stage. So silicon carbide plays a big role for us. And if you recall, we acquired the silicon carbide JFET business a few quarters ago from Qorvo. That business has done very, very well for us because JFET -- silicon carbide JFET specifically is one of the best technologies from an efficiency and power density for the UPS and the power in the rack, especially as customers start moving to the 800 volt.

And maybe we can talk about the competitive landscape for silicon carbide in China. I continue hearing investors who are concerned about some of the Chinese customers moving to more of an ODM model rather than just buying the integrated devices. And I'm sure that you get this question all the time. So can you just talk about that? Is that completely overblown?

Well, I think it's overblown for a few reasons. One is the competition in China, and I'll take it in 2 ways. One is we've been talking for 2 years about how silicon carbide competition in China is going to be so intense. Well, here we are today, and I'm still gaining share in China because I've been very consistent in my approach of you're not going to win based on pricing. What you're going to win, especially in China, where EV is really a key advantage is you're going to win based on the technology. And the technology, meaning efficiency, the number of die, if I'm able to do in 3 die, what my competition needs 4 or 5, I'm already ahead from a cost and system level. That's how we win. That's why we win. That's why we gain share in China, and it's not against the China silicon carbide suppliers, it's also against Western companies in China. So that's why we're winning.

Now the transition, you talk about ODM and integrated and so on. I've talked about that transition even last year, where we have seen a transition from modules also to die. So we have a mix of both. That's not positive or negative. That's more of a cost. If they want to bring it in, that's great. They still use our die because we still have the best die. Where you need advanced packaging and differentiated packaging, those customers are still buying our modules and packaging. So it's really dependent on the customer capability and really the use case. We still tackle both. But with the transition from what used to be 100% module when this market was brand new to now there are capabilities out there just from assembly houses that can do some of these, call it, the prior generation modules, there's an ASP change. So if you look at it from a volume perspective, our volume has been increasing. That's why I referred to the market share. And I think the '25 is going to be that transition year.

And just to point out, on both those scenarios, whether it's module or die, it's favorable margin for us.

That's right.

It's just a difference in ASP.

But does it pressure utilization for your packaging operation?

No, no, because packaging from a utilization perspective and so on for these is not the overhead. We resize our packaging because our investment, and Thad has said this, part of our fab or manufacturing right approach is we only want to manufacture internally what is differentiated, meaning what we cannot get outside. So that actually fits very well with our strategy because I don't want to build modules internally if somebody else can do it. So our utilization is dependent on that differentiated packaging that I talk about, and that's still internal. That's not going outside.

So there's no change to our manufacturing optimization approach because the market dynamic actually fits very well with our manufacturing strategy.

Got it. Thad, maybe we can talk about gross margin and some of the puts and takes headed into '26 with a few maybe more normal seasonal quarters, maybe even some above seasonal quarters. Utilization maybe begins to have a bit of a modest tailwind if we begin to go above normal seasonal.

So how do you think about the puts and takes on gross margin and maybe how mix could be a little different next year than it was this year?

Yes. So you've hit it, right? I mean the short term, meaning '26, gross margin is going to be driven by utilization, right? And as Hassane said, we can match our utilization with whatever the market recovery starts to look like, given our portfolio or profile of inventory in the channel, inventory on our balance sheet.

So as utilization goes up, every point of utilization is 25 to 30 basis points of gross margin improvement. Today, we're running at 74%. I said Q4 was going to be flat to down slightly as we're building some mass market inventory in Q3. But if you think about fully utilized for us is in that low 90%. So if you do the math on that, getting from where we are today to that maximum level, you get 650 to 700 basis points of gross margin improvement. Now you need revenue to get there, obviously, but we'll be able to match that utilization with the market.

On top of that, we announced the impairments. So in Q1, we took 12% of our capacity offline. A couple of weeks ago, we announced more capacity coming offline. This is a result of all the activities we've been doing in our manufacturing footprint, our fab right initiatives to get more output out of the existing footprint. So you think about it from a depreciation standpoint for next year, it's $45 million to $50 million of benefit in depreciation just with these impairments for next year. Now there's some lag for that to hit the P&L. But exiting next year, it's almost another 100 basis points right there, if you think about the impairments.

Favorable mix longer term as Treo ramps and these other products, we think we'll get another 200 basis points of gross margin benefit there over time. We believe there's more on our fab right initiatives, so another 200 basis points there. And that kind of includes our divestitures of fabs that we did a couple of years ago. So if you start adding all that up, you can get greater than 50%, which is what we aspire to be on a gross margin standpoint. So when we think about our line of sight, we see improvement. It's a matter of what this market recovery looks like. That's the #1 driver.

And just on the divestiture piece that's an additional 200 basis points. How will the timing of that lay out? Will that all be recognized next year?

No, we won't see it all next year because we've built inventory as a part of that fab transition. Now the market has come down, right? So it's going to take a little bit longer for us to burn that through. The benefit is when we burn that inventory and then we start manufacturing it in side. That's where you get the true leverage. We'll see a little bit of it next year, probably a lot more of it in '27.

Yes, that's a lot market and demand dependent. The faster we burn that strategic inventory, the faster we can start bringing it inside, which helps both from a cost and mix but also from utilization.

Got it. So all things considered back to your point about next year really will be about utilization. So if utilization is flat, gross margin should be about flat. All these other things really help more in '27 than in '26.

Yes. But I believe that if there is some recovery, we're going to match that. And I think we will see margin benefit in the latter half of the year next year, assuming that there is some recovery that we start to see early next year.

Also, keep in mind, all this underutilization is noncash, right? So if you look at our free cash flow margin, we talked about the free cash flow margin being around 25% this year. That -- as that utilization goes up, gross margin improves, it improves operating margin. But free cash flow is already there.

And can you talk about maintenance CapEx? The fab network is far from fully utilized, obviously. Where -- what kind of projects are you directing CapEx toward for this year?

Basically maintenance. So we're in this mid-single-digit CapEx intensity, right? So we were there this year. We'll be there for the foreseeable future. It's maintenance. We're not having big investments. I mean I just talked about taking capacity offline, right? So we've got plenty of capacity.

And it seems to me like if the market doesn't recover, there's an argument that maybe you should further consolidate the fab network. How do you think about that?

We're always looking at it. We're not done, as I said, with Fab Right. We've done a lot on the front end. We haven't done a lot on the back end, but we're tuning up that footprint. We'll continue to consolidate where it makes sense.

Yes. But we have to also be very, very clear on there's the operational efficiency, operational excellence and strategic intent. What we've been doing are things we're doing regardless of market being up or down because those are efficiency improvements that we've had, improve cost, improve margin, improve the structure of the company.

Of course, we're not looking at the market as we sit today in the short term, even in 2026 and saying, "Oh, if the market is going to be at this level, we have to take capacity out because now you're starting to stifle your strategic growth." Everything we've done so far is driven by efficiency, driven by getting more throughput out of our existing footprint because all the fab rights we've done. So they don't have an impact to our long-term trajectory of growth.

So we're balancing the 2. We have to have the most optimal footprint based on where our strategic plans go. Treo, for example, we talked about Treo being a very successful launch, and we're starting to generate revenue. We're starting to get customers across all of the end markets. That CapEx is already in. That's already in East Fishkill. So we look at capacity rationalization and footprint rationalization, not as a market kind of navigating the current market environment, but more on 2, 3 years from now, do we have the most optimal capacity from a cost and throughput. And that's the decisions we've been making now.

Got it. And I get this question all the time from investors, why not just buy something to fill the fabs? And I know your answer is, well, we're not in the fab filler business. So you've said that before. But I mean, given how much capacity you do have, this might not be a bad time for you -- if something was strategic and for you to make an acquisition.

But again, it's -- we're not -- first off, your first comment is true. We're not going to make an acquisition to fill the fab. Acquisition, we're going to use our firepower to do strategic acquisitions. Now of course, a strategic acquisition that we can bring internal is very valuable as well.

But practically speaking, let's say, we announce something. Well, it takes about a year or so to close and a couple of years to bring that technology in unless we already have it, which is if we already have it, why would we buy it? Does that make sense? So that approach doesn't solve a -- it's not a 2026 solution or even early 2027 solution even if I wake up today and I say, I have a deal done. Does that make sense?

Part of our M&A and our discipline, of course, we look at all of the above. We look at strategic intent, technology gap, differentiation versus our financial model. And part of the synergies we can extract from a potential acquisition is can we leverage our manufacturing footprint, both front end and back end. We consider 100% all of these as part of a deal.

Got it. And can you talk about just an update on these noncore pieces of the business that you're walking away from? It's sort of come a little slower than what you would have thought. So can you talk about why that is and sort of what the update is as you look into next year?

Yes. Let me calibrate it. So in 2025, there's 5% of the revenue that won't repeat in '26. So let's call it, roughly $300 million. We've talked about these noncore exits for several years now. The way that we are exiting that business is we are pricing ourselves out of the market. And it turned out we didn't lose all that business because it got to favorable margins and it didn't disappear. The fact is this downturn has gone and prolonged, we've seen competitors now coming back and start to take some of that business.

So today, that business is a healthy business around the corporate average. We're not going to chase it down as the margin comes down and the pricing comes down and that stuff. So there's about $100 million out of that $300 million that is in that category for next year. There's another $50 million to $100 million that is a part of our ISG, our Image Sensing Business that we've repositioned that business, and we've been talking about this for several years, repositioning that business into machine vision away from human vision. So we are exiting some of that business just by the nature of us repivoting that business.

And then the third piece is stuff that we've been EOLing over the last several years, and that's another $50 million to $100 million. So roughly, you get to about $300 million for next year. But the noncore exit that we've talked about for several years is about $100 million going into next year. But there's about a 5% revenue that doesn't repeat in '26.

Got it. And Hassane, do you have -- when you think about gaining content in data center, do you have all the IP you need? You have Treo and that's going well, which I want to ask you about in a second. But from an IP perspective, are there building blocks that you need to gain share?

No. As it stands today, we have built the complete portfolio. So you look at it, we started with power. We complemented our existing IGBT or silicon power, whether it's high voltage or medium voltage with an acquisition of silicon carbide JFET that I mentioned. We've also announced the acquisition of the Aura Semi, which puts us even closer to the controller and closer to the core from the power pedigree. So as it stands today, and we've announced the vertical GaN as well, which is also servicing a high voltage, think about the 800 volts, but also higher frequency, much higher efficiency.

So if you look at overall, the portfolio that we've built over the last couple of years, both organic and inorganic, we have everything we need to deliver on the complete power tree. And as that power tree collapses the number of conversions, you're going to start squeezing out competitors that don't have high voltage. Competitors that can go from 800 volts directly to, call it, 48 or even 12 volt, but they're very strong at 12 volt, they have to go find a solution for that high voltage. We have the whole thing. So we're in a very good spot to navigate and really capture share as the market moves more into a less conversions starting with an 800 volt.

And vertical GaN is more of a 2027 revenue?

That's right.

And can you talk about how big you think that could be and how important a piece that is?

So I'll talk about the market. So the market for vertical GaN is complementary to the other technologies we have. So if you think about -- when you have the silicon carbide brought a higher efficiency to IGBT, higher efficiency and higher power density. Vertical GaN adds to that high voltage, it adds high frequency that silicon carbide can't do it. So it's not a cannibalizing market. It's really a complementary market, which having all of that technology in the portfolio is actually very favorable from a competitive posture perspective.

So the overall market for GaN in general, you can think about it as $2 billion to $3 billion. That, of course, will take time to mature, but that's where having that penetration, having that differentiated technology that as it stands today, nobody has been able to deliver to the market yet. We're already sampling and we have customers engaged. So that's the confidence we have in our technology and innovation that we're putting forward.

And let's talk about Treo. So can you give us an update in terms of how much revenue is flowing through Treo and sort of where you are on that journey?

Yes. So we haven't broken up the revenue, but what I mentioned, I think, a few quarters ago, we've already shipped over 5 million. That was a few quarters ago. That business is ramping pretty quickly. We're way beyond the 5 million units at that time. The importance of that is, I've always said, once you get the first dollar and the first customer, you've just proven the technology. Otherwise, it's kind of a cool toy that you invented. So having these customers and a broad set of customers is really the credibility of the technology and the platform we've done.

Now where is that headed? We are still on track to deliver that $1 billion by 2030 of revenue. The margin, we talk about 60% to 70%. So as Thad mentioned, as the new products ramp and become a higher percent of revenue, that's going to be the tailwind for the corporate margin to get to that 50-plus gross margin.

And then from a market exposure, we talk about industrial, we talk about automotive, we talk about medical. So it's proliferating across many of our existing end markets. So it's a very, very versatile technology that has proven adoption through customers designing it in and customers ramping it in production. So we're very excited about that. We're excited about how quickly we got that signal from the market. Remember, we announced that the Treo in November of last year. So in 1 year, we've done not just an introduction, but a revenue ramp and a volume ramp. That's pretty compelling.

Great. Thad, can we talk about OpEx for a second? I had in my notes at the beginning of the year, you were -- I think you were thinking that it'd be sort of 250 a quarter run rate. And obviously, you're higher than that. Can you just talk about that? I know you were a little bit above even guidance last quarter. So can you talk about OpEx and maybe you're taking costs out, but you're also adding costs from some of these strategic investments and things like that?

Yes. What we've been doing is reallocating OpEx within the company that you haven't seen. We've had huge investments that we've been making in Treo, these other platforms, vertical GaN, a lot of what we've announced, some of these small acquisitions that we've done have come with some OpEx as well.

When I think about where we are today with OpEx here in Q4 is this is our new baseline. If you think about this is going -- where we're going to be going forward. So regardless of what the top line does, OpEx is going to be in this tight range here. Now you'll get the reset early next year with FICA and all that type of stuff. But this is our new baseline of OpEx. So as the revenue grows next year, I don't expect OpEx to grow. I expect it to be -- remain in this range. So if you think about it from '25 to '26, OpEx is actually going to be down. So there's a lot of leverage in that model. As revenue grows, hopefully, as margin improves, OpEx declined slightly, there's a lot of leverage in EPS.

Yes. At this point, from a percent, we expect to grow into the -- our OpEx model, long-term model.

Got it. Maybe one more quick question. The LTSA balance is down a lot year-over-year. I think it's at $8 billion or something like that. I mean, customers don't seem to be interested in LTSAs anymore. So all the orders you're getting are all in backlog, not in the LTSA, I would think. So what are the value of the LTSAs? Like why do you still even have them?

So it's a customer choice really. Some customers said, we're getting what we need. We commit to the backlog, so we're not going to renew or add. Some customers still value because look at it, if a customer is sitting here looking at and hearing some of the shortages that are caused by AI supply and so on, they go, get me in line now.

They're so happy to be in a LTSA.

Yes. So we've always said the LTSA is not a gun to the head. It's really a constructive construct that we have with our customers. And do we tackle and take business without LTSAs? Of course. So the volume or the level of LTSA dropping is purely a factor of we've been shipping against it. So as we ship against it, that balance comes down, and we're not replenishing at the same rate that we had, but that's not a here nor there because it's really a customer choice.

Got it. Well, we've run out of time, but thank you.

Thank you.

Absolutely. Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to onsemi Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would like now to turn the conference over to Parag Agarwal, Vice President of Investor Relations and Corporate Development. Please go ahead.

Thank you, Michelle. Good morning, and thank you for joining onsemi's Third 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 third quarter earnings release, will be available on our website approximately 1 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 could cause actual events or results to differ materially from projections. Important factors that can affect our business, including factors that can cause actual results to differ materially from our forward-looking statements are described in our most recent form 10-K, form 10-Qs and other filings with the Securities and Exchange Commission and in our earnings release for the third 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 thank you all for joining us. We are pleased with our third quarter results, which reflect the strength of our strategy and the resilience of our business model. Our third quarter results exceeded the midpoint of our guidance with revenue of $1.55 billion, non-GAAP gross margin of 38% and earnings per share towards the high-end of our range at $0.63. We have been positioning the company for a market recovery, and we believe we are well aligned to benefit as demand normalizes. We're already seeing stabilization in Automotive and Industrial while continuing to grow in AI. Our Treo platform continues to scale across our core markets, and our recent acquisitions are expanding our portfolio and accelerating our road map.

We are delivering solutions that help customers scale performance while improving energy efficiency and system cost. The growing demand for high-efficiency power delivery across our end markets of Automotive, Industrial and AI positions us for long-term growth. We remain committed to our gross margin expansion strategy through innovation with both organic and inorganic investments in differentiation and have achieved four significant milestones that I'd like to highlight.

First is our Treo platform. Our new products continue to scale, and our design funnel now exceeds $1 billion, driven by strong customer engagement across Automotive, Industrial and AI infrastructure. We remain on track to double the number of products sampling this year. Teledyne Technologies selected our Treo platform to develop next-generation products for infrared imaging systems. Treo's process technology combines precision analog, advanced digital and low-voltage power features to meet the demands of infrared focal plane array systems used in aerospace, defense and security applications.

Second is our vertical GaN or vGaN. Last quarter, I highlighted our strategic investment in our generation wide band gap semiconductors. Last week, we announced our vGaN platform developed on proprietary GaN-on-GaN architecture in our Syracuse fab in New York. vGaN conducts current vertically through the chip, enabling higher operating voltages versus lateral GaN and faster switching and record power density. It reduces energy loss by up to 50%, making it ideal for AI data centers, EVs, renewable energy and aerospace, defense and security. Sampling is already underway with lead customers in automotive and AI. This launch expands our leadership beyond silicon and silicon carbide, giving customers a future-ready toolkit to meet rising performance and efficiency demands.

Third, our SiC JFET continues to proliferate, and we have been ramping revenue in AI data center for high current workloads. We're also seeing traction in aerospace, defense and security, where our SiC JFETs are now deployed in low-orbit satellite platforms, delivering industry-leading radiation ruggedness and power density. And fourth is our Vcore acquisition. In Q3, we expanded our analog and mixed-signal portfolio with the acquisition of Vcore Power Technology and IP assets from Aura Semiconductor. This transaction accelerates our road map for advanced multiphase controllers and monolithic smart power stages, enabling us to close key gaps in our offering and deliver comprehensive solutions for the next-generation AI data centers and compute platforms. These new products will be integrated into our Treo platform, enhancing performance, reliability and energy efficiency at the point of load and support x86 and ARM-based architectures. Sampling begins this quarter with production release expected in early 2026.

Shifting to the demand environment. We are seeing stabilization in the near term with Automotive, which grew 7%; and Industrial, which grew 5% sequentially. And our design wins in both markets continue to reflect a broad global engagement. For example, our industrial image sensor funnel is up 55% year-over-year with traction in factory automation and inspection. We continue to ramp our AI revenue, which again approximately doubled year-over-year in Q3 and is now becoming material with almost $250 million expected in 2025.

Regionally, our revenue in the Americas grew 22% sequentially from momentum in automotive and aerospace, defense and security. Japan was up 38% quarter-over-quarter, driven by traction in automotive and image sensing. Europe was down 4% as macro softness persisted, while China was down 7% sequentially. In China, we secured strategic wins in high-voltage traction inverters with a leading Tier 1 for multiple local OEMs. We also expanded our position at NIO with SiC for their traction inverter across their newest brand and with our 8-megapixel image sensor for their ADAS applications.

AI is shaping -- is reshaping the power landscape, both inside and outside the data center. The International Energy Agency projects that electricity demand from AI optimized data centers will quadruple by 2030, making power efficiency and density critical differentiators, an area where onsemi leads. Onsemi's intelligent power technologies span the full power tree from solar and storage systems to UPS and rack-level PSUs, optimizing every watt before it reaches the processor.

In Q3, we secured strategic wins in solar and energy storage platforms that are foundational to hyperscale AI deployments. Our latest generation of IGBTs and SiC in the most advanced hybrid modules were selected for high-efficiency solar inverters and energy storage systems or ESS, including wins with two of the leading utility solar inverter suppliers in China. We also secured the next-generation large-scale stationary storage with a large OEM in the U.S. as microgrid deployments are rapidly emerging as a key growth vector across our end markets. This business is reported under our Industrial segment, and we expect our latest generation Field Stop 7 IGBT revenue to increase in 2025 over 2024 with continued double-digit growth expected in 2026.

Turning to the AI data center itself. At the UPS level, a leading industrial OEM has integrated onsemi SiC MOSFET into their latest 3-phase UPS platform, where superior efficiency and power density were key differentiators. At the rack level, we secured multiple design wins across high-efficiency PSUs with our SiC FETs, T10, Trench MOSFET and SiC JFET into 5.5-kilowatt AI server PSUs, with top global PSU providers delivering best-in-class thermal performance, supply assurance and switching efficiency for hyperscale deployment.

At the compute board level, we have introduced high-efficiency smart power stages and secured design wins on multiple platforms with leading XPU providers. The acquisition of IP from Aura Semiconductor further strengthened our SPS and controller offerings for power to the core applications. Our collaboration with NVIDIA is also accelerating the industry's transition to 800-volt DC power architecture critical for next-generation AI data center. These technology achievements and customer engagements reflect the strength of our differentiated power and sensing portfolios and our ability to deliver system-level value in the high-growth segments of our core markets.

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

Thanks, Hassane. Our third quarter results were driven by disciplined execution and prudent management of the business. We have made structural changes across our portfolio and our manufacturing footprint that will enable margin expansion at scale and position us for a market recovery. These initiatives will continue in future quarters, and we are committed to extracting value through our Fab Right activities. Our investments in next-generation technologies, including Treo, Vcore, silicon carbide JFET and vertical GaN are reshaping our mix and strengthening our competitive advantage to further our leadership position. In addition, we continue to return capital to our shareholders. Year-to-date, we have repurchased $925 million of shares, returning approximately 100% of our free cash flow to shareholders.

Turning to the third quarter results. We exceeded the midpoint of our guidance with revenue of $1.55 billion, increasing 6% over Q2. Automotive revenue was $787 million, which increased 7% sequentially, driven by increases in Americas, China and Japan. Revenue for Industrial was $426 million, up 5% sequentially, primarily driven by aerospace, defense and security. Outside of Auto and Industrial, our Other business increased 2% quarter-over-quarter with continued momentum in AI data center. Looking at the third quarter results between the business units, we saw sequential revenue growth in all three business units. Revenue for the Power Solutions Group, or PSG, was $738 million, an increase of 6% quarter-over-quarter and a decrease of 11% year-over-year. Revenue for the Analog and Mixed-Signal Group, or AMG, was $583 million, an increase of 5% quarter-over-quarter and a decrease of 11% year-over-year. Revenue for the Intelligent Sensing Group, or ISG, was $230 million, a 7% increase quarter-over-quarter and a decline of 18% over the same quarter last year as we strategically refocused this business.

Turning to gross margin in the third quarter. GAAP gross margin was 37.9%, and non-GAAP gross margin was 38%, above the midpoint of our guidance due to favorable mix within the quarter. Manufacturing utilization was up compared to Q2 at 74% as we started to build die bank inventory to support the mass market. We expect utilization to be flat to down slightly in the fourth quarter as we complete these builds. GAAP operating expenses were $323 million, and non-GAAP operating expenses were $291 million. GAAP operating margin for the quarter was 17% and non-GAAP operating margin was 19.2%.

Our GAAP tax rate was 6.5% and non-GAAP tax rate was approximately 16%. Diluted GAAP earnings per share was $0.63 and non-GAAP earnings per share was also $0.63. GAAP and non-GAAP diluted share count was 408 million shares, and we repurchased $325 million of shares in the third quarter. Since launching our share repurchase program in February 2023, we have repurchased $2.1 billion and had approximately $861 million remaining on our authorization at the end of the quarter.

Turning to the balance sheet. Cash and short-term investments was approximately $2.9 billion with total liquidity of $4 billion, including $1.1 billion undrawn on our revolver. Cash from operations was $419 million and free cash flow was $372 million. Our year-to-date free cash flow is 21% of revenue, and we remain on track to deliver strong free cash flow margin for the full year. Capital expenditures were $46 million or 3% of revenue. Inventory decreased by $39 million to 194 days from 208 days in Q2. This includes 82 days of bridge inventory to support fab transitions and silicon carbide, down from 87 days in Q2. Excluding the strategic builds, our base inventory is healthy at 112 days. Distribution inventory declined to 10.5 weeks from 10.8 weeks in Q2 and within our target range of 9 to 11 weeks.

Looking forward, let me provide you the key elements of our non-GAAP guidance for the fourth quarter. As a reminder, today's press release contains a table detailing our GAAP and non-GAAP guidance. Our guidance is inclusive of our current expectation that there is no material direct impact of tariffs announced as of today. We anticipate Q4 revenue will be in the range of $1.48 billion to $1.58 billion. Our non-GAAP gross margin is expected to be between 37% and 39%, which includes share-based compensation of $8 million. Non-GAAP operating expenses are expected to be between $282 million and $297 million, which includes share-based compensation of $32 million.

We anticipate our non-GAAP other income to be a net benefit of $7 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 405 million shares. This results in non-GAAP earnings per share in the range of $0.57 to $0.67. We expect capital expenditures in the range of $20 million to $40 million.

To close, we remain focused on disciplined execution and financial leverage. The structural changes we have made across our portfolio, operations and manufacturing footprint are driving margin expansion and positioning onsemi for long-term earnings power. With over 100% of our year-to-date free cash flow returned to shareholders, we continue to prioritize capital efficiency and shareholder value while investing in innovation and differentiation. As the market stabilizes, we are well aligned to scale with demand and deliver sustainable growth.

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

[Operator Instructions] And our first question comes from Ross Seymore with Deutsche Bank.

First one, I want to ask about the automotive side of things. Upside in the quarter nicely versus the low single-digit guide that you had. So Hassane, I just wanted to get an update on what you're seeing in that end market, what caused the upside, and perhaps what's the sustainability of that sort of growth as you look into the fourth quarter and then 2026 as well.

Yes. So nothing really out of the ordinary. It's -- you can think about the Q3 and Q4 as I do, which what I've been talking about, I look at the second half versus first half of the year. The quarter-on-quarter lumpiness as customers try, as new designs ramp, I wouldn't read any much into it. What we're seeing in automotive is really stabilization, which is a positive from where we were. So the quarter-on-quarter, I don't think I read anything into it. It's purely between seasonality and ramps. As far as 2026, look, we'll let you know as we get closer, a lot of things going on out in the world. So we're not guiding specifically by market into 2026. But what I can tell you is demand is stabilizing, we're starting to see a seasonal trend. But one thing I would highlight is we haven't seen a restocking cycle yet. So that's still out there.

I guess as my second question, perhaps a little bit of a longer-term one. You, for the first time, I believe, sized the AI business at about $250 million, I think, for this year as a whole. So what is it, roughly 4% of sales. Can you just talk about how ON differentiates in that? You mentioned the collaboration list on the 800-volt with NVIDIA, and that's great to be on that list, but there's 13 other folks on the list as well. So as you look at that market, how do you believe that $250 million will grow? And what's the differentiation ON delivers to drive that growth?

Yes. So that's a very good question. So overall, we expect the AI data center for us to continue to grow. We look at ourselves as really the share gainer from some of the companies that have been in that market longer than we have. So being able to post $250 million or about $250 million of revenue is pretty stellar. You can see our investments accelerating in that across the whole power tree. So from a customer perspective, to answer your question more directly, if you take that "crowded space" of 13 or however many companies and you look at who can go from wall to core, there's only 2. And we will -- we are the share gainer, we're of the two.

So the way we differentiate is we're one of the only companies that are able to support the power delivery from the high voltage all the way to the core, all with the product portfolio that we have that we've grown organically or even inorganically with the Vcore acquisition. So that's how we differentiate. We have proven that differentiation through our JFET silicon carbide, through our AMG with the products that they have been delivering and the revenue growth that has doubled year-on-year every quarter in the first 3 quarters to deliver that number I gave in 2025 is really the proof of that.

And our next question will come from Vivek Arya with Bank of America.

So Hassane, I know it's a little early, and I'm not asking for a quantitative guidance. But I'm curious how you are thinking about seasonality in Q1 and just growth in '26 overall versus how you thought about it 3 months ago.

No change from where we were 3 months ago. So still with the same outlook, same expectation.

Okay. For my follow-up, maybe on utilization and gross margins. Thad, I think you said something about utilization perhaps flat to slightly down. Anything more to read into it? And if you could just remind us what is your seasonal pattern in Q1? And if there is some utilization headwind from Q4, how does that kind of reflect in gross margins in Q1 just based on historical seasonal trends?

Yes. So our utilization increased to 74% in Q3. As I said in the prepared remarks, we've been building die bank inventory for the mass market. This is a market that we've talked about for probably well over a year about we need to seed that market. We've been doing it through the distribution channel. Now we've got to hold inventory in die bank for kind of quick turn on that mass market that we need to invest in. I expect it to be down, the utilization to be down in Q4 because we expect those builds to be completed. So going back to kind of a normalized utilization rate from that point forward.

You can think about utilization, the impact on utilization is having a couple of quarter impact on the P&L. There's always a delay on that, right? So if you think about going into the next year, and obviously, we're not providing any guidance at this point, but we think between Q4 and kind of the next couple of quarters, we're looking at seasonal patterns. If you take the midpoint of our guidance for Q4, it's directly in line with normal seasonality, which is typically flat to down 2%. I think the midpoint of our guidance is down about 1.3%. And to answer your question about kind of what's the normal seasonality in Q1, it's typically down 2% to 3%.

So does that mean slightly lower gross margin in Q1 time? Or just how should we be prepared based on if that kind of seasonality is what actually emerges?

Look, we're not guiding that far out, Vivek, but there's tailwinds as the utilization improves over time.

And our next question is going to come from Chris Danely with Citi.

I'm sure you've seen this ongoing Soap Opera at Nexperia. Have you seen any impact to your business either directly or indirectly? Or do you anticipate any impact longer term from all this stuff going on over there?

Look, as you said, there's a big impact. It's too soon to call anything. We're focusing really on the business that I've really outlined. But what I can say about that, obviously, is we have a lot of the same customers, and we are supporting our customers to the extent we can, and we'll continue to do that with the complete portfolio, not just the parts that may be impacted. So what I can say is I'm not redirecting any changes from where we are, but we are supporting customers as they request it.

Okay. And for my follow-up, so it seems like the Auto market is starting to do a little better than the Industrial end market. We've seen this trend at several of your peers. Going forward, would you expect Auto to keep outgrowing Industrial for the next few/several quarters?

I wouldn't put the two kind of -- I guess I wouldn't compare the two and read anything into a difference in growth quarter-on-quarter. Both of them have growth vectors that we are participating in. But the lumpiness that you see between the two is purely a market timing or a build-out timing. Some of the industrial was from some of the slowdown in the solar deployment in China. That's temporary. As you go from a tariff to a market pricing, there's a shift in there. We see that kind of a temporary and will continue to grow.

We talked about some of the industrial growing because of the AI data center power requirements that I highlighted like energy storage system driven by AI, but we called those out in our Industrial market. So that's some of the growth vectors in Industrial. And Automotive, obviously, it's our major market. We -- you know about the growth vectors that we have there. So both are growing, but the delta is purely market-driven and macro driven. So I wouldn't read anything into kind of the deltas in the few quarters here short term.

The next question will come from Blayne Curtis with Jefferies.

I just want to ask about normal seasonal for December. Obviously, your company has gone through a lot of changes. But I think in the past, particularly auto has been up in December. So I'm just kind of curious how you're thinking about this guide, which is down 1%. Do you feel like that is a more normal range for you? Or do you think you're undershipping the market?

Yes. So as I mentioned, our normal seasonal pattern for Q4 is flat to down 2%. I think it's very positive that we've gone from the stabilization to now seeing seasonal patterns. I think that's the step -- the first step to recovery. As we think about the guidance there in Q4, both Auto and Industrial, we think will be down low single digits. The Other bucket will be up kind of mid- to high single digits. Hassane mentioned it, right? I don't think you should kind of read into the lumpiness of the autos just because of the ramping of programs and timing, but that's how we kind of think about Q4 as it laying out right now.

Perfect. And then I wanted to ask you about that AI. I'm assuming straddles, Industrial and this Other bucket you have. So I'm just kind of curious, is there a way to think about as we try to layer on that growth, how it impacts those two buckets?

Yes. So the AI data center is reported in the Other bucket. Everything prior to the data center wall is in Industrial. So think about all the energy storage, energy infrastructure, that's sitting in Industrial. But AI data center specifically inside the four walls of the data center is in the Other bucket.

And our next question comes from Gary Mobley with Loop Capital.

I think last quarter, it was communicated the specifics to the revenue headwind as you exit noncore businesses. If I recall correctly, it was assumed to be a $200 million revenue headwind for this fiscal year, $300 million for next year. Is there any change from that outlook?

No change. For Q3, we exited about $45 million of noncore exits. That leaves about $55 million here for Q4. That's right in line with our expectations. And then you nailed it going into '26, there's about 5% of the 2025 revenue that doesn't repeat. So no change from what we're talking about last quarter.

Great. And I guess there's been some news, maybe it's a few months old now about the big analog player raising prices. How do you think that impacts sort of a pricing reset as we transition to the next calendar year?

I think we're expecting normal pricing behavior. I don't know if the other company you're talking about is something specific to them or not. But obviously, things can change. We're monitoring the situation always. As you can imagine, it's very dynamic out there. But right now, we're not expecting any of that in 2026. So you can think about it as if anything does happen, it will be upside.

And the next question will come from Quinn Bolton with Needham & Company.

I'm wondering if you could give us a little bit more detail on the Vcore Power, exactly what comes into the business with that acquisition. I think in the script, you mentioned Vcore for x86 and ARM processors. Obviously, there's a huge number of voltage regulators on the XPU side. Does Vcore help you on that? Or does that come from the existing ON product portfolio? And then I've got a follow-up.

You can think about it as a combination of both. So the way we look at the acquisition is it complements the product offering that we're already offering with Treo. It provides products also in the short term. I talked about revenue generation coming here in 2026. So that gives you time to market while we integrate those architectural and product function into our base Treo platform. So it's a very synergistic approach that gives us the acquisition itself, time to market. And in long term, it gives us an architectural advantage from a performance perspective once we leverage the performance of Treo from a technology base.

So reading between the lines, are you taking those Aura products as they are today into the market for '26, but longer term, you'll redesign them using the Treo platform to get better performance?

Yes, yes.

Got it. And then just you guys mentioned the entry into the vertical GaN market. GaN to date hasn't been used that much in the high-power segments of the market, I think, because of reliability issues. Can you just address how do you feel the vertical GaN technology compares with lateral GaN on reliability? And can you give us any sense on when you think that might start to go into production?

Yes. So it's -- so I'll tell you, vertical GaN is better on the reliability side. It has all the inherent features from the lateral GaN, but better on reliability from a die size perspective. The one thing you need to understand the barrier for lateral GaN to be used in high-voltage application has really been the fact that lateral GaN to get it to high voltage, you have to go laterally, which makes the die size not competitive versus other similar functions.

When you look at the vertical GaN, the current goes vertically, which means that we can go higher and higher voltage without increasing the die size. So not just from a performance perspective, but also from a commercial competitiveness perspective, not just the reliability. So we believe we've solved those. We're sampling. We have lead customers in our -- both in AI and automotive. So we're excited about that, that we crack that code. It is a breakthrough technology. I don't believe anybody is able to sample such technology outside. So it gives our customers the optionality to have really a broad portfolio of high voltage, high-efficiency products. So anytime you need high voltage and high switching frequency, vertical GaN is the solution, the answer.

And our next question will come from Joe Quatrochi with Wells Fargo.

I was wondering with a quarter to go, any sort of color you could provide on your expectations for silicon carbide revenue growth this year?

We didn't provide any guidance on silicon carbide, but I'll tell you silicon carbide is coming in exactly where we expected. We continue to gain share in our end customers. And our position in China remains unchanged as new products are ramping. I mentioned a couple of examples here. One is the NIO launching a new brand where we were designed into that new brand with silicon carbide. And a broader deployment now in China EVs through a leading Tier 1 in China that gives us really exposure to beyond just the top 10 OEMs that we've been engaged to. So that gives you a little bit of an outlook or a feel into our penetration of silicon carbide will continue to increase, and we will continue to gain share.

And as a follow-up, I was wondering if you could talk about the rate of short lead time orders that you're seeing and how that compares in the third quarter relative to prior quarter? And if you're seeing any increased visibility?

So our lead times actually pushed out slightly. We're kind of in the mid-teen weeks. We're up around 20 weeks or so now. I don't think there's been a significant change to the short lead time orders at this point. Customers are layering in backlog as they have visibility. We probably have seen order patterns that continue to improve, which gives us that confidence in the stabilization right now.

And our next question will come from Josh Buchalter with TD Cowen.

I was hoping you could provide a little bit more color on the revenue by geography. It seemed like there was a lot of volatility this quarter with Americas up so strongly and in particular, China down. Could you maybe elaborate on some of the drivers there? Was the Americas strength led by your lead customer? And what's going on in China?

Yes. So there's -- I think in our prepared remarks, we laid out the quarter-over-quarter changes on each of the markets. Now there is some kind of movement of orders between some geographies as well. A large customer is now placing orders out of Japan versus Europe. So I think if you normalize for that, the Japan comes down slightly, Europe goes up a little bit. The rest of it, I think, is just kind of what we're seeing as a normal pattern at this point. So not a lot to read into those bigger swings.

Okay. And then I was also hoping you could elaborate on why -- what you're seeing now and why it's the right time to start building up die bank inventory and taking utilization rates up, especially ahead of a couple of down seasonal quarters. Maybe how we should be thinking big picture about your capacity planning with those utilization rates?

Yes. Look, we've been -- I think we've been very disciplined on utilization versus inventory versus outlook and demand. I think we've proven that the formula works. We're not sitting here on a ton of inventory. Our inventory -- our base inventory is actually closer to the low-end of our target, about -- which is 110 to 120 days. I think we're sitting at like 112.

So I think Thad mentioned that the die bank inventory we're building is really for the mass market. For the last kind of 2 to 3 quarters, we have been consistently talking about how we are going to be growing. Our customer count increased almost 20% year-on-year just in the mass market. Therefore, the demand is there for that, and we will make sure that we have it in die bank internally so we can respond to changes in demand that usually come from the mass market.

So I think we do see the business justification for it, but that doesn't mean that we're going to be building blind. We will maintain our targets. We will maintain inventory and all of our metrics within the range that we've previously outlined. So I don't -- I see this as business as usual, really.

Yes. And just to point out also that even with that die bank increase, our inventory actually declined quarter-on-quarter, $39 million. So it's a mix shift within our base inventory. So to get a better profile of inventory for that mass market.

And the next question will come from Tore Svanberg with Stifel.

Hassane, with the recent acquisitions, I know you have a slide that talks about power delivery from grid to processors, and the content per rack going from maybe a few thousand dollars today to maybe as much as $50,000 by '27 or so. I mean, do you have all the IP and all the building blocks right now to get there? Or is this sort of more of an opportunity and you still need to build out a few more things before you get to those types of numbers?

I think with whatever we need, call it, in the next couple of years, we either have it or are working on it, both organically and inorganically. Obviously, the ecosystem is evolving. Things that are needed 3, 4 years from now are slightly different. We believe we have a very full portfolio of the IP that we need, and we will be creating products very quickly based on that IP. So we have -- you can think about it as we have built a toolbox with all the IP and technology, and we are quickly deploying products.

I mean you've seen us double the number of products in Treo overall year-on-year, which we remain on track to do. You're going to see kind of that same mindset on AI data center along with Automotive and so on. So we do have the toolbox. We do have the IP. We developed it internally and/or acquired it. And we will be deploying it to win in these markets to capture a lot of that share from the dollars you mentioned on the rack.

Great. And as my follow-up, and I want to just take a step back on vGaN. So could you just give us a little bit of history here? I mean I know it's obviously in your own Syracuse fab, but how many years has this been in development? Maybe back to Quinn's question, when do you start to expect some revenues here? Because obviously, this is a very unique approach to GaN. So any sort of historical context and future revenue contribution milestones would be great to know.

Sure. So we started working on it through acquisition of IP and assets back in 2024. Since then, we've "turned on" the fab, launched the first products, first products from a, call it, electrically speaking or yielding or functioning. Therefore, we were very aggressive in our deployment with samples to customers. We have lead customers in our major markets of Automotive and AI data centers that are currently evaluating the first-generation samples, and we're already working on the second generation. We expect revenue, you can think about it in the '27 time frame.

And the next question will come from Christopher Rolland with Susquehanna.

So yes, my questions are really around AI as well and this what seems like a bigger push over the last few quarters. Just some of these applications that you mentioned, I wanted to know if you could address, could you do things like solid-state transformers? It sounds like you're in the PSU 48-volt bus converters. I guess the last one would be hot swaps as well. Do you address these? Or do you plan on addressing these over the next few years?

So we addressed every single one of them already. So when I refer to -- and we have it online, too, when we refer to our ability to address the power tree, that was my answer before as far as how do we differentiate. Our ability to address already today the whole power tree, including all of the IP and functionality required that you have mentioned some of them is the differentiation we bring. So the answer is yes to all. We do that today, and we will continue to expand that portfolio as we gain share.

Excellent. And Hassane, secondly on silicon carbide. As we kind of digest that growth outlook, perhaps you can talk about some of the moving parts like geographically or even across industries. And lastly, do you have the ability to convert to 300-millimeter wafers? We're hearing about the potential for new applications on 300.

Yes. So well, first off, there's a lot of changes in the silicon carbide as new opportunities open up. For example, a few years ago, silicon carbide in AI data centers was not even a conversation point. Today, it is, and we are gaining share and really design into the PSUs with our JFET and even our silicon carbide MOSFETs. So those are new applications that our legacy with silicon carbide in automotive allowed us to really tackle very quickly and gain share with products we already have.

In Automotive specifically, the silicon carbide approach was for battery electric vehicles or BEVs. As now you see a resurgence of a mix into plug-in hybrids or range extender EVs, silicon carbide is now getting designed in even in plug-in hybrids, which historically has been assumed to remain on IGBT. That's not the case, and we are gaining share in the plug-in hybrid market with our silicon carbide.

So within the market itself, there's new opportunities and really breadth of opportunities that just a few years ago, when we started on this journey, was not part of even our addressable market because it wasn't there. As far as geographical, I would say I don't expect a change in the geographical outlook for silicon carbide specifically because to a first order, it's going to match where the electrification, whether it's full electric vehicles or plug-in hybrids is going to come from and where the AI data center deployment is going to come from. And that puts it strong in China and the U.S. And following behind that is Europe and Japan.

Excellent. And 300-millimeter?

300-millimeter, we've seen it, but my point is it's too far from now. I don't think 300-millimeter opens up new applications. It just -- it's a different, call it, throughput, just like 6 to 8. I've always said 6 to 8-inch provides us an additional capacity from the number of die per wafer. We see the 300-millimeter the same, but it's very, very early in development today. I wouldn't put that in any short-term models or anything. But today, we have been -- just I'll use the opportunity to give you an update on our 8-inch. Our 8-inch is in production. We're running 8-inch in our fab at 350-micron thickness, so best-in-class, and we will be shipping production on track in '26. So the 8-inch is full on, and then we're always looking at what's next to come both from a device like the SiC JFET or MOSFET, but also from a technology.

And the next question will come from Harlan Sur with JPMorgan.

Back to the mass market strategy, your long tail of small- to medium-sized customers, this has been a bright spot for the team, right, solid customer count improvements. It serves through distribution, rich gross margins. How big is this segment as a percent of your total distribution revenues? And how did this subsegment do in the September quarter relative to your overall disty business?

So let me give you a breakdown of the distribution revenue that may help you get there. So roughly about 58% of our business goes through distribution. About half of that is fulfillment, half is demand creation, right? So if you think about that half, not all of that's mass market. When we think about mass market, we're thinking small customers, right? We at onsemi, maybe don't know their names, right? They are emerging customers. The distributors do a good job of identifying the opportunity. So you can think about it as being a subset of that half. Maybe it's 25% of the total distribution revenue, somewhere in that kind of camp if you think about it. If they're a medium or large customer of that distributor, we still have -- we still track that. I wouldn't put that in the mass market.

Got it. Okay. And it was good to see the technology and portfolio expansion on the wideband gap with your vertical vGAN technology. As you mentioned, I think, Hassane, looks like this was the technology that you acquired through the acquisition of NexGen late last year. Did the acquisition also include the DeWitt Syracuse fab facility? Or was that already a part of ON? And then it looks like they were able to develop this very differentiated technology, but not able to commercialize it. So what has the onsemi team done to take the technology beyond proof of concept to commercialization?

Great question. So yes, the fab was not part of our base fab. You can think about it as a fab that came with the technology given the differentiation of the technology. You're absolutely right on -- it's such a breakthrough and differentiated technology, very difficult to make. What the onsemi team has brought is our ability to manufacture wideband gap and the team's capability to be able to scale new technologies very quickly and reach maturity very quickly than, call it, a start-up.

By the way, I will mirror this to what we've done with GTAT and silicon carbide. If you recall, same questioning, same conversations, can you guys pull it off? Why would you pull it, the others didn't? And look where we are today. You can think about it, our capability has already been proven with the GTAT acquisition and building a franchise in a couple of years that gives us leadership. You can imagine that same muscle, that same knowledge and that same team is going to do exactly that with vGaN.

And the next question will come from Jim Schneider with Goldman Sachs.

Hassane, you talked about the fact that customers are not willing to restock at this point or you're not seeing that effect. Can you maybe talk a little bit about when you speak to OEMs, what they would need to see to get more confidence to restock? And is that broadly applicable to the distributor side as well?

Yes. Look, well, first, I'll answer the distributor. I think distributors are -- from a mass market, Thad said it, we are increasing our die bank internally because we want to be able to make sure we see the, call it, the shelves as customers pull on the mass market. The OEM is slightly different. The OEMs, what they need to see, one is a credible demand signal. Think about it consumer level confidence, consumer level demand signal that people are going to buy cars or people are going to buy power tools or whatever the market is. That has to be seen.

And the biggest thing that they want to see, which we do also is stabilization in the geopolitical aspect of it. As they're working on shuffling and changing logistical models and manufacturing sites and so on, they're not going to be replenishing given the changes that they're going through. So what I would say is consumer confidence and geopolitical stabilization will start adding more and more confidence for OEMs to restock.

And then maybe as a follow-up, give us a little more visibility on what's happening with your Other segment for a minute. It sounds like data center is doing very, very well for you. Maybe talk about what some of the offsets are that might be headwinds you saw in this quarter and then maybe what you're seeing going forward?

So for Q4, I mentioned that we think that Other segment is going to be up mid- to high single digits. Now there's some normal seasonality in our noncore markets there that helps that you have AI data center that's growing as well in that market. I think those are the big drivers if you sum it up.

And then, of course, we have the exits that a lot of it lands into the Others bucket that's offsetting the growth. So net-net, growing is actually means the strategic market like AI, data center and so on within that is growing very, very nicely.

And the next question will come from Joe Moore with Morgan Stanley.

I wonder if you could give us some sense of the Automotive market by region. Any sort of different behaviors that you're seeing? And I guess, particularly on China EV, there's been sort of a lot of noise in both directions. Can you just talk to the health of that market?

Yes. Look, I think from a market, of course, we've always expected adjustments in that market. I've always said there's over 100 brands. So between consolidation, between success and not success, the only strategy we have, which we've been executing to and it's worked very well for us is customer diversification. So you've heard us always adding new and new customers, leading customers in the top 10, which drive a lot of volume.

And then secondary is trying to reach into that tail of OEMs. So we're not sitting here picking winners or not winners in China. We want to have the majority market share across the market. And as shares shift between them, our customer diversification strategy will work to our advantage. We've proven that very well over the last few years. We're gaining share consistently across a broad range of OEMs and brands have worked for us to really derisk the lumpiness that you're referring. But I don't see that as any change from the headlines. So our strategy is working, and we'll continue to execute to that while we kind of fine-tune it as things change because things do change rapidly.

Great. That's helpful. And then you addressed the Nexperia's situation. But I guess I'm just trying to figure out why that isn't a bigger deal. We've listened to some of the Tier 1 auto suppliers, and they seem quite anxious about the situation. Like shouldn't that be the catalyst for them to start building up inventory to sort of deal with the geopolitics of the situation? Or just why isn't that something that's a bigger deal for you guys in the next quarter or 2?

Well, we're here to support, but I'll make a comment on the Tier 1s panicking. I've been saying that inventory is low for the last 2 years, and we're draining inventory below critical levels. Whether Nexperia or not, any trip in the supply chain is going to cause a chain reaction, and this is the proof. The only way out of this is place the backlog with visibility and we will start planning and shipping. So we are seeing it. We are responding to it, and we will keep supporting it. But regardless of how the next few quarters go, we need the replenishment cycle. We need to make sure that the Tier 1s and the OEM have safety stock in order to buffer any disruption. That's the only solution. We've learned a hard lesson in COVID, and here we are again.

And the next question will come from Harsh Kumar with Piper Sandler.

Hassane, if I can dare say that you seem somewhat, somewhat cautiously excited about your end markets for the first time in a long time. So if I can ask you a question on Auto, it's a two-parter. Could you give us a hint of maybe what backlog or bookings were? I'm trying to gauge that relative to your stabilization comment. And if you are talking about stabilization in Auto, then I'm looking at your 6% odd growth that you put up in the September quarter, is that seasonal growth? Or is that better than seasonal growth? And if it's better, then, of course, what drove that?

Yes. Look, I think I'll go back to the prior answer that I gave earlier. I don't look at the quarter-on-quarter. I would recommend you shouldn't either. I got to look at it first half, second half. And we've always said the second half of the year is going to outgrow the first half of the year in our end markets. Remember, Auto, we said the bottom was going to be in Q2. So that has been the case, and we're going to grow from there. Grow meaning closer to demand, but no restocking yet. So that's coming in exactly as we expected. So that quarter-on-quarter, I wouldn't talk about seasonality within markets and so on. I would talk about the lumpiness in project ramps, some projects ramped in Q3 versus ramping in Q4. Those, I don't think, are a read on how the market is doing.

Visibility, however, with stabilization, we get better visibility. Not where we would like to see it, but it improved and we're getting better visibility. But again, there's more work to do to get the visibility. So that's what I can tell you about where we are in Automotive. I'm cautious, but I am also looking at the data in order to sound like I do. Our work is not done. It's not all behind us. But I think what you've seen from us is we will manage to what we see, and we will deliver the results that we promise. That's the consistency. Of course, we all wish it were different. We all wish it was way better than sometimes it is. Some of my peers did, but we've been very consistent, and we're going to continue to manage the company with discipline, whether in inventory, cash flow or really R&D investments in differentiated technologies.

Fair enough. Maybe one for you, Thad. As sort of you look at stabilization, I understand you'll need to ramp up your factories and fabs to be able to get to that 40% level. But is there a revenue number that I can think of where you start to get close to that 40% number? Or is it just purely a function of utilization and it ebbs and flows depending on how much die bank inventory you're building?

Yes, it's utilization driven, right? So we talked about every point of utilization is 25 basis points to 30 basis points of gross margin improvement. That math still holds. So as we look into the '26, utilization is going to drive the margin.

This will conclude today's question-and-answer session. I would now like to turn the call back over to Hassane for closing remarks.

Thank you all again for joining us today. Before we conclude the call, I want to recognize the outstanding efforts of our global teams. Their focus and execution continue to drive our results and help us deliver for our customers and shareholders. We're encouraged by the signs of stabilization across our core markets and remain focused on delivering differentiated solutions and operational excellence for our customers. We are committed to being a reliable and trusted partner and continue to raise the bar on how we support their success through technology leadership, responsiveness and a deep understanding of their evolving needs. We appreciate your continued support and look forward to updating you next quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Great. Good afternoon, everyone. Thanks for sticking with us on this absolutely [ gorgeous day ] in New York. Next up is ON Semi, by the way, I want to point out that I get a lot of questions and people completely freaked out that ON's margins have dipped to the high 30s. I just want to point out that this was the previous peak gross margins for Hassane and Thad got there.

So it's been an amazing turnaround. You've seen a concomitant increase in the multiple and basically a tripling of earnings since the dream team showed up. So without further ado, we've got Hassane El-Khoury, CEO, Thad Trent, CFO extraordinaire. So I'm...

We're done.

I'll go home now. Okay. So you guys are basically the latest in a long line of analog companies today, and we've got opinions everywhere. We've got things are good. We've got things are bad. We've got things are getting better. We've got things are getting worse. We've got China is good. China is bad, auto this, auto that. We've got dogs and cats living together. So for the Oracle of Austin, what the heck is going on out there, Hassane what's your take on what's happening in the analog space because we've been pulled all over like saltwater tapping man?

So here's the difference between that -- and what we've been saying or what we've been seeing and what I've been talking about. The 1 thing I've always said, and we've been consistent with is I will say what I can see and I will call what I see, not what I hope to see that has been consistent since the first quarter. It's actually been consistent for the last 3 years, where first off, we started the year when everybody is hyperventilating about second half recovery said I have no reason to believe there's a second half recovery.

Therefore, we're going to be managing to what we can see, which is stabilization at best. Then walk into the year, first quarter, we said things are stabilizing Q1 is going to hit bottom and Q2 is going to be the bottom in automotive. And the second half is going to be higher than the first half. We are here today, the last earnings call we had exactly the same -- I say terminology, just so people don't confuse stabilization with the recovery. I have not talked about recovery. I talk about stabilization in the environment today as a positive development from where we were.

The second half of the year is still higher than the first half. Automotive is up in Q3 from hitting bottom in Q2. So what I would say versus a lot of the chatter that's out there, we've been more right than wrong and we've been the most consistent of all of our peers because our focus is on delivering what we can control and manage to and that we've done very well, whether it's on the margin and more importantly, in a downturn like this on the free cash flow. Cash is king when there's a lot of that uncertainty, and we're using cash to buy back shares returning value to shareholders through buyback, while we execute to what we can control.

Got it. So not getting ahead of your skis. We like that. Just in terms of the, I guess, stability, recovery, whatever you want to call it, I mean this is essentially, like you said, started a few months ago into the second half. What do you think has been the catalyst for that? Is it inventory replenishment? Is it demand is getting better, something else going on out there? What are you seeing as for...

So I think from a -- anyway, if you think about phases of the path to a recovery, whenever that recovery happens. There are multiple path -- first, coming off of the inventory, like you said, there's the inventory drain, when you get the inventory drain, then you start shipping to natural demand from under shipping to shipping to natural demand, then you're going to have a replenishment cycle, which -- you have to be careful there not to be a false positive of oh my God, the recovery is happening now that there's going to be replenishment cycle. And then you have the demand recovery.

I think where we are today with the uncertainty related to the geopolitical environment and the whole tariff, no tariff kind of development, the replenishment cycle is not yet -- we're not in a replenishment cycle. Nobody is replenishing inventory until they see certainty in the end demand. What we are seeing now is a stabilization post inventory depletion. So we're now shipping closer to natural demand. It differs by market.

Industrial, I think we're shipping to natural demand now because remember, industrial inventory depletion started much earlier than Auto. Auto, I think by the end of the year, we'll be done with it with the inventory adjustment. Today, there are some accounts that already have achieved it. They're actually too low. You can think about 2 weeks of inventory is too low for an automotive Tier 1. Some are still working on it. By the end of the year, automotive should be back to it. So when I talk about the second half is better than the first half, 1 is shipping closer to a natural demand. And 2, we do have company-specific positives that we've had.

Our medical business in the industrial side is -- has been positive Aerospace and Defense has been positive. We expect a small kind of uptick in the renewable energy. That's on the industrial side. The automotive side, we talked about our ramps and our market share gains in China from an EV into automotive, that's driving the growth in China. So outside of just shipping to natural demand, we do have company-specific ramps and share gains that we've been posting that are delivering results in the second half.

Okay. Just to parse through the stability versus recovery because I think that's causing some of the confusion today. So you would define things as stable now? And is that essentially like normal seasonality or close to seasonality? And then would you define recovery as a little above seasonality with some like inventory replenishment driving that? I'm just trying to...

I think at a high level, I would categorize it that way. Stabilization I chuckle on when you say normal seasonality. I don't think anything about anything we're doing is normal these days. So -- and the reason I say this also is normal seasonality for us from 4 years ago, when things were kind of more stable, like the anchor point from 4 years ago, we're a different company with a different mix.

So we're not even at our normal seasonality pre-covid, so we have to go through the whole cycle to kind of get back to that seasonality. There is, however, an element of seasonality on the ramps. China automotive ramps after the auto show. Q1 is typically down in general. So right now, we're looking at standard, I would say, standard seasonality. But to characterize it the way you did, that's the stabilization. Recovery would be more replenishment and really end demand going up.

Yes. okay. Great. And just for the nervous nellies out there, we're definitely past the bottom in terms of revenue, correct?

Yes.

Great. From your lips to [indiscernible]. How about -- maybe talk about the linearity of bookings over the last couple of quarters. Do you see your like backlog increasing or staying flat or the bookings getting better, stable or still some fluctuation? How has that trended over the last...

Do you want me to take that. Yes. Look, I think entering this quarter, we entered more booked than we have been in the previous 2 quarters, which is a good sign. So the turns that we need within the quarter are less this quarter than what we've needed in the previous quarters. That's what gives us that kind of comfort that stabilization is better and that the second half is going to outperform the first half. That's really when -- back to your question about have we hit the bottom? I think quarter or half on half. Yes, the second half is going to perform better than the first half.

Great. And so it sounds like maybe visibility, at least in the near term, if there's less turns, there's a little better than it was like 3 to 6.

That's right. That's right.

How about like the backlog going out 6, 9 months? Has that changed? Or is the lead time short enough to where it's...

Lead times are short, and customers are cautious, right? Customers are going to order just in time right now given the short lead times and given the uncertainty in the market and the tariffs, right? So we get a forecast from our customers, but backlog is what we really build to. That -- when we talk about visibility, that's what we talk about is that backlog. That visibility is still not great.

Yes. And so we've been asking the rounds of companies this sort of tariff question, and you brought it up. How big of a factor is like the tariff boogeyman out there on demand or inventory management or maybe both from what you guys can see?

So let me take a difference. So what we know today, and I have to put that disclaimer because things do change. Based on what we know about tariffs today, there's minimal to no impact for us as a company. I think the impact, what we call the secondary impact is what Thad referred to as the hesitation from the customer. Customer kind of frozen. Yes, they're not ordering unless they absolutely need it for a build that is happening immediately.

That goes back to the replenishment cycle. Typically, when you get through the inventory, you have the replenishment cycle for customers to put parts and so on, on the shelf, they make units for their end customers and they put it on the shelf. We're not seeing any of that. And that's the uncertainty that's driving the short lead time. Some of my peers talked about, "oh, we were getting short lead time." That's like a positive sign of recovery. I looked at it and I said, yes, we're getting short lead time.

It's actually a sign of uncertainty. Typically, it's a sign of recovery, short lead time. But in this case, it's -- customers are placing blast minutes. So that's back to my comment of I believe we're shipping to end demand now because of that behavioral change. I don't think that's going to be persistent, but that's based on the uncertainty.

What would be your sort of best guess or estimate of your inventory in the channel out there? Do you think that because of all this uncertainty, it's just kept at a bare minimum and when folks start to feel better about things, they start to take it up a little bit? Or I mean, is it possible it could go any lower? It sounds like it's pretty low if lead times at bottom.

So first off. I just want to correct 1 thing. You mentioned the channel for us is distribution that we know exactly what's there. It's that 9 to 11. So that I'm not worried about. We have full visibility, and we manage it. I think what you're referring to is can it go lower and go through another depletion kind of cycle at the end customer. I think it's pretty low. That's why we're at the -- I think it's actually lower than what customers should feel comfortable about.

When you have 2 weeks of inventory on the shelf, if you're a Tier 1 automotive, you are 1 order away from those 2 weeks, turning into 2 days. If you have an uptick, I'm not saying a huge recovery of V-shape or whatever shape you want. But if you have an increase in a sudden increase in demand, 2 weeks we turn it to 2 days, now you're in the lines now situation. It's that's dangerously low. But look, I don't run their companies. I can just advise them that that's way too low. But when you have the uncertainty, they're going to tell you, well, what are you going to base it on to add more. So that's the replenishment that we're not getting there yet.

Okay. Since we've seen the stability, how have you guys seen pricing trend. Has that gotten any better? Has it gotten any worse? Is it not really changing? What's your take on sort of price?

I don't think pricing is stable. I don't think pricing is changing. I think it's what I would call normalized, meaning we offset any price differences in the normal course of running the business that we do, which is taking cost out of our products, so that's what semiconductor company has been doing for decades. That's the same. And you see that with even our margin profile.

Yes. I remember when we met up earlier this year, you said that pricing was getting more aggressive in certain competitors, we're going to sort of follow the pricing down and you guys were choosing to we're not going to participate in that same stance. Has that price.

That's the same. Yes, same stance. And by the way, that's no different than when we outlined our strategy 4 years ago, we talked about a portion of our non-core business that is exactly that price sensitivity and we said we were going to exit it we really exited only half of it so far or a little bit more than half if you include 2025 exits. And that behavior is what I was referring to earlier in the year that, that behavior is what we're seeing our competitors do. Now their margin profile is way lower than ours.

And going lower. Can I say that?

They're willing to take it and our strategy is very clear. We will keep supporting those customers as long as the margin is favorable. It doesn't have to be accretive to where we are, but it can be dilutive. And based on where the pricing trend for that portion, non-core is, we called it last quarter and we said we're going to exit that business. So we're not expecting it to repeat in 2026. So that's the decision we're just executing to our strategy that we outlined 4 years ago. But -- so outside of that pricing the rest is where we expect it.

Great. And what's your take on pull-ins out there? There's been a lot of companies say, we have some pull-ins, some are saying there's still some left. Some are saying that it's all gone. What's the sort of the on view on that?

We don't have any -- we haven't seen any signs of pull-ins. And of course, the next valid question people always ask me, well, how do you know? Because if I look at where, for example, the upside -- the benefit is China. We talked about China automotive seeing growth. Well, 2 quarters ago, in April, I said I was in the China Shanghai Auto Show, and I said exactly what models, we are designed in.

Those models got deployed. I sit and watch how much the NAV registration in China happen on the models we're in and I compare it to what we ship. As long as they're correlating, there's no pull-in. So that's how you modulate your pull-in and your profile is are you shipping to what the customer is manufacturing and the answer is, yes. So we don't have pull-ins. So that I can comfortably say.

Okay. And given all that, how is on managing its own inventory? I think you guys are trying to take it a little bit lower. And what does that mean for your own utilization rates?

Yes. So look, if you look at the inventory on our balance sheet, we have 2 buckets, right? We have what I call our working inventory or base inventory. That's right in our sweet spot. It's 121 days. We've been managing that kind of in that range for a while now. We have a strategic bucket with our fab transitions and silicon carbide ramp, and that's going to bleed out over time.

So if I think about our utilization and how that utilization will get impacted or improve over time is it will closely match whatever the market recovery starts to look like. So we don't need to burn through inventory through the channel, the distribution channel first and then inventory on our balance sheet, both are right in our sweet spots. And so whatever that shape of that recovery looks like, our utilization will match that.

So -- and then you'll see that hit the P&L roughly 2 quarters later in terms of the improvement in gross margin. But the #1 driver for us in gross margin in the short term is utilization, and we'll match that to our recovery. So we're in a really good spot inventory-wise and from a manufacturing footprint wise to take advantage of that recovery, whatever that shape looks like.

Okay. And will your utilization rates essentially match your like revenue forecast for a growth?

Yes. To our first order, it will match very closely.

Yes. And but the other thing is most not all of our inventory is in die bank, so people ask, okay, but isn't that too dangerous that if there's a recovery, you're going to miss it. And my point is we're a few weeks away from turning into finished goods. So we have the inventory stage in the best spot you could in the most fungible spot to be able to address any demand. So I believe the work we've done throughout this downturn on not just operational efficiencies, but the posture of the company, puts us in a much better spot to -- for an upside in recovery better than we were positioned even 2 years ago.

Yes. You guys have changed some things around consolidated stuff on manufacturing restructuring. Maybe reset the table on that, give us an update. Anything left to do?

Yes. Yes, there's definitely more to do. We announced a restructuring and an impairment of our capacity in Q1. We took 12% of our capacity, our front-end capacity offline in Q1. With what we announced, we've done about 2/3 of what we announced. It just takes time. So there's more coming here. So -- and when we think about where we're going with these exits, it gives us a spot where today, the number of units that we're shipping is much lower than what it has been historically. So if you think about it at a similar revenue level, we need fewer wafers, right?

The dollar per wafer is much higher than what it has been historically because we've been moving to this higher-value product over time. And so that will allow us to continue over time to take capacity offline. That will help with the margin as well.

Now will this restructuring benefit your gross margins at a later date even if the revenue stays like flat to slightly up? And then what would be the timing for something like that?

Yes. So again, you got to think through -- you got to burn through inventory that you get manufactured at a higher price, right? But you can think about as we do that, it's, again, about a 2-quarter lag for it really hit the P&L. So even in a flat year, over time, you'll see improvement because utilization will improve.

Sure. So I guess let's just run down the gross margin drivers since we talk about most of them. You've got utilization rates, you've got restructuring. Obviously, there's some mix component. Am I missing anything? And then could you rank the gross margin drivers as well?

Yes. So the utilization, where we're running today, at 68% utilized. There's 900 basis points of underutilization, right, a headwind to utilization, all noncash, right, that's hitting us today. So if you think about with revenue growth, that comes off. You've got a couple of hundred basis points of more fab right, that's taking cost out in the manufacturing footprint. You got the mix, as you talked about. And then the other component is we divested 4 fabs in '22. As we bring that inside, that's roughly another 200 basis points. So you start adding all that up and you're getting up into the 50% range.

Yes, that was going to be my next question is have the gross margin targets changed at all from low-50s...

Build the plan.

Okay. And then how about this push to manufacture more in the U.S. coming from way up above. Does that help you guys? Does that factor in at all? What's your take on that?

Yes. We've...

I can throw in a little 232 commentary in CHIPS Act as well. Everybody is asking about it, so I might as well get it out there. all out there.

Look, from a manufacturing footprint, we've got a diverse footprint, right? We manufacture in the U.S., Japan, and Europe. And so we're able to move production around to help our customers, right? So as our customers are trying to navigate this, not that 100% of our project products are fungible, but we are able to kind of scenario plan with them for these tariffs and how do we help them navigate through this. So that's one advantage that we have as we talk to these customers.

As Han said, they're paralyzed right now, right? They're not doing much until they get more certainty. But the fact is we're having those discussions, which I think puts us in a good position regardless of where that customer is, whether in the U.S., China, Europe, whatever the case may be, hopefully, we can help optimize their supply chain for them.

Okay. Does 232 ever come up in on discussions? Any thoughts there?

No. I mean it's all the same kind of answer that Thad has given because at the end of the day, until we have what it is and what the impact is and what the tariffs are, it's hard to say all scenarios because -- so now if you take a step back on all of this, I'm sorry you said was it's 232 or tariff or reciprocal and so on. The one thing we do control is kind of the manufacturing footprint. So having this diverse manufacturing footprint across many multiple geographies with some overlap in capability, at least gives us optionality.

Now what strength to pull on which option we need that certainty of -- it's not tariff or no tariff. Is what is it, the tariff, so we can navigate the supply chain around it. And that's really what's missing. But the optionality is there, which puts us in a much better spot.

Sorry, just taking notes here. Okay. Great. Before I open it up to the audience Q&A, I just wanted to touch on a few other things that you talked about earlier, specifically on the end markets and your take on the automotive end market. I think most other analog companies are talking about a little bit of weakness in the automotive end market. And you're talking about strength and share gains. Can you just elaborate on that?

Yes. I think -- look, the only thing I don't know what they are seeing because I can't correlate the commentary. But I can only explain it with -- it's relative to what you were expecting. And what I said at the beginning, we've been more right than wrong about our outlook, and we're managing to our outlook, not to what we believe others are seeing and so on. And I think automotive is coming in exactly where we expected, both in Q2 and in the outlook for the second half of the year.

So for us, from an expectation, not just that we set to run the company, but it's the same expectation I set externally, which is how I run the company, automotive is coming in as expected. So I can't justify the commentary from the others.

I was just asking just by yours. Can you just maybe elaborate on the share gains, where they're coming from? Is this pure EVs? Is it China? Is it everywhere?

I think it's everywhere we're playing. So silicon carbide for specifically share gains are -- obviously, the bigger driver is in China, but we have share gains in North America and share gains in Europe. The difference is those are not driving the penetration that we're looking at because it's an end volume gain. We're getting a lot of the share gains in design-ins. Those are slower to ramp than they are in China. So that's on the EV. I even talked about plug-in hybrid.

We -- plug-in hybrids has been kind of this mid-stop between here and full EVs. Even that is going to silicon carbide, and we have captured a large North America OEM plug-in hybrid with silicon carbide. So it's no longer an IGBT play for plug-in hybrid because even plug-in hybrid, you're pushing more of the range. We do that with silicon carbide. We have a similar plug-in hybrid with silicon carbide in China. So those are share gains from a legacy IGBT play. So we are gaining share in EVs, but a lot of it is also new designs, new automotive products that are being launched. We talked about our engagement with Xiaomi. That's a new vehicle that they've launched. that's doing very well in the market. So that's not really a share gain. That's a net new design that was there.

And then you can take that with a long Alliance Treo is allowing us to also gain share in more of the mixed-signal analog ASSP range. So I think it's all of the above. And that's why we're excited about the new products because that's what's going to drive this margin expansion from a mix perspective in the long run.

So would you say your auto strength on the share gain side is mostly silicon carbide? Or is it split between silicon carbide and the rest of the business?

It's both. We have signed both. But obviously, the oversize is silicon carbide because maybe not silicon carbide, but electric vehicle exposure, which includes silicon carbide.

Great. And I know you're the big auto guru, and I always like to ask you this question. So -- what's your sense on the EV market? The growth seems to be slowing, but there also seems to be a tremendous amount of share shifts going on out there. This continual like suckings down from Europe over to China. So what do you see out there? And then more importantly, how does it impact on?

Yes. So let me first put -- so I've been doing automotive for a very long time, and I never get trapped into the comps of automotive from a year ago or 2 years ago. So if I look at when we -- when I set the strategy for the company 4 years ago, we talked about electrification is going to be a wave of growth in the automotive or e-mobility. If you look at the number of EVs or EV penetration from kind of 4 years ago, that 2020, 2021, we're on par to that.

So when we say the growth in EV slowed, yes, it slowed from this peak that we had the last couple of years, but it's really consistent. So I look at automotive over just my brain works in a kind of 3- to 5-year views. So that's still a growth, and that will remain a growth, meaning every year, there's more EVs that are made as part of total SAAR than there are ICE. So the percent of EVs of total SAAR is increasing every year. So that's a positive.

Within EVs, there's a penetration of silicon carbide. So if you take out the North America lead from EV, the penetration of silicon carbide in the rest of the world is 12% to 14% of EVs. So just the conversion into silicon carbide is another uptick even without the growth of units. So all of these are favorable for us from an automotive. Now your comment about China, China is ahead from a penetration perspective, but I also don't look at the China EV market as contained in domestic China. China EV market is a global phenomenon, maybe not in the U.S., but you look at anywhere in the world, including Europe, we have a lot of EVs, China EVs making their way into Europe, South America, Australia, the air world. So there's a lot of China EV.

So I look at the volume and the penetration of EV, not just from a new energy registration within China. I look at it globally because that's the market we address. Now that's not to say that there's no room for the European OEMs in Europe. There's -- because that's a different brand, that's a different market segmentation and so on. But I think there's coexistence for both, and we benefit from both because we're leveraging -- we have great relationships with the European OEMs, and we're helping them move fast and with aggressiveness into the electrification, while we also support our Chinese customers.

Our view and our priority is to ensure every customer we engage with has always the best product and technology we're able to offer across any geography. And that has been a great recipe for success for us.

Great. I have plenty more questions, but we're in the client service business here. So anybody in the audience has any questions right here up front?

Yes. Talk about where you see you have better relationship and your brands...

The question was...

[indiscernible]

On Chinese. Yes. So Chinese OEMs, where do we see the best engagement with some names. I mean I'll give you the names that we've disclosed publicly. And I'll focus on kind of the top 10 where we do. We have engagements in -- we ship into general -- I'm not talking silicon carbide, but general shipments into the OEMs from Xiaomi, Li Auto, Neo, BYD across basically the top 10 brands in China. They are customers.

Of course, China has more than 150 different brands. So we do have a network of Tier 1s that supports kind of the -- more of the tail of the customer because we can't support hands-on design-in for some companies that make 10,000 vehicles a year and so on. So we leverage our -- not distribution, but a Tier 1 as proliferation. But we're with the right players. Our focus on the hands-on approach is really also the global footprint that those OEMs are able to target.

Anybody else in the audience going once, going twice, keep going, I'm not afraid. Great. Just on the geo side, how would you characterize like the overall trend of business or their economy in, say, China versus North America versus Europe right now?

China from an economy?

Just like how the business is trending, if we take your share gains out of the equation.

I think, obviously, China is the healthiest. I think what I'm struggling with, I can't remember the data for Europe and North America, but I think it's kind of similar between the 2.

Yes. I would say Europe is probably a little stronger than North America right now.

Europe, a little better than North America. Yes. Okay. And then one more I want to touch on is the business you guys are getting out of, I guess, the lower-margin business. Maybe just give us the numbers. I think it was $300 million. You've gotten out of $100 million so far and $100 million more this year and $100 million next year?

Yes. So it's about 5% of our 2025 revenue that won't repeat in 2026. So roughly about $300 million. It's 3 buckets, and none of this is new. It's things we've been talking about for multiple years. The first one is the exits of the noncore business, and Hassane talked about this earlier, right? We laid out 4 years ago, we'd exit $800 million to $900 -- there's -- this year, we've -- through Q2, we've exited $100 million. We think there'll be another $100 million through the remainder of this year. That pushes about $100 million into next year. That's $100 million of the $300 million.

There's another $50 million to $100 million that is just from our image sensing business, right? So that's that repositioning of that business into machine vision and away from human vision. And then the third component is just this EOL business that over the long term, as we march to that greater than 50% gross margin would be dilutive, right? So today, it's about the corporate average. But we've EOLed that product, and we'll exit that. So that's the remainder of that $300 million that doesn't repeat for next year.

So again, all of it was in our plan. We drew a box around this to make sure the Street really kind of understood what that headwind was for next year. And I think that's provided a lot of clarity for people that were trying to get their arms around what those figures were.

Yes. And that has not changed, right?

That has not changed.

And what's the gross margin benefit, I would assume when that business does go away because it does tend to be lower margin, right?

So today, it's at the corporate average. So the part we're exiting, right, that's the part that is highly volatile, pricing sensitive that if we were trying to maintain that, it would be dilutive. The other piece of the EOL, it's at the corporate average today, but in the future, it would be dilutive. So if you think about it, if you just pull that out from 2026, it should have really no impact on gross margin for 2026.

Great. All right. And then so silicon carbide, last question, last topic. I think it's slightly dilutive to the corporate average. What gets it back to the corporate average? And then can silicon carbide get back to that 50% gross margin level that the corporate target is? And what would drive that?

I think the primary driver for silicon carbide gross margin in the short term is all utilization. And remember, we put the capacity in place ahead of any of the ramps. So right now, it's purely on utilization because if I compare what you referred to gross margin and I compare -- I take out the utilization and I look at product margin, product margin is where we want it to be. So the rest is kind of that leakage because of the utilization impact. So that's purely a capacity that we built that we knew we were building for a...

Any estimate as to what the like long-term growth of this business should be? What should we be thinking about conceptually?

That -- with the lumpiness, I'm not giving a guidance of that because it's going to be growing. There's a lot of puts and takes in there with the mix shift. But until we get to a post where we are today and we get back to that linearity, at least semi-linear vector, then it's easier to start anchoring on growth above market because the market is just too noisy today.

Yes. Great. I think we're out of time. Thanks again, guys. Thank you very much.

Thank you.

All right, everybody. We'll get started with the next fireside chat. We have both the CEO, Hassane El-Khoury and Thad Trent from onsemi, the CFO. And so guys, thank you very much for coming down to Dana Point.

Why don't we start with just kind of a lay of the land cyclically and where we are. You guys have been, relatively speaking, more cautious on the slope of the recovery -- well, the length of the downturn and the slope of the recovery, and that's proven to be wise because we've had many companies guide for an improvement and then have to backtrack on that over the last nearly 18 months. So as we stand today, it sounds like things are getting a little bit better and maybe the question is on the slope. So how are you guys feeling about your business today?

Look, it's -- I think the answer is I have to give it in relative terms. When I talked about the last few quarters, we're seeing signs of stabilization. I take that as a positive stabilization from where the business -- the business was prior to that. So stabilization is a positive. We're still seeing it that way. You can talk about visibility is slightly better. we still have turns into the quarter. But if you think about where we are today from the same time where we were last quarter, we need less turns. So on a relative basis, I think you can talk about that being an improvement.

We've also said the second half of this year is going to be better than the first half. So that gives you also a stabilization. And I'm very cautious about not talking about a recovery because it's not really your normal cycle where after X, A, B and C happens, you get a recovery. You typically will have an inventory burn and then you have a replenishment cycle and then you have a demand. Well, we're not in a typical cycle because some of the factors that are changing the demand environment are not really only market-driven. You have a lot of the geopolitical overhang on it. So that's how I remain looking at it.

And like you said, we've been more right than wrong as far as how we look at it. We're going to focus on the things that we manage and the things that we control. And that's the operational excellence of the company, whether it's managing inventory, managing customer relations, managing new products and managing cash flow. Those are all things we can manage to in that uncertain environment.

So when you talk about the turns percentage decreasing, the turns needed to make your guidance and those sorts of things. So how does that metric compare to what you would define as a normal period? And I know it's been a long time that normal has occurred, but not the time in COVID where you didn't need any turns or the time a year ago where you needed all turns. Are we closer to the normal or still closer to the trough?

Look, it's hard to say just forget about the normal because of the market kind of cycles that we went through. But even for us as a company, we haven't really gotten to a normal because you can't compare to where we were prior to 2019, if that's kind of your time frame because we're a very different company, totally different mix, right? So our mix of products has been different. Our market approach has been different. I mean, right now, over 80% of our business is auto industrial. It used to be, I think, about 60% back then.

So I can't give you like how does it compare to a normal because we haven't landed on a normal as a new company with the new mix and the new exposure to the markets that we have. So that's the fairness that I would say. That's why I keep answering in relative terms because those are, relatively speaking, their comps. But from a longer period, that becomes a little [ mighty ].

So if you had the time when you had 0 visibility and everything was turns or the extreme of that to what you would desire -- realistically desire. So take the historical anchoring out of it.

My desire is full visibility [indiscernible] quarter.

[ Hence ] realistic.

No, I think we're not where I think we could be. When you have auto and industrial business and so on, you typically have a longer visibility, which is why we like that market. So typically, we will -- there's still improvements to be had there, but we're not going to have 100%. Those days during the shortages and so on, I would consider that a realistic normal.

Right. So how are -- you mentioned the geopolitical side is abnormal, and I think we would all agree on that. How are you seeing the tariffs in the geopolitical side affecting your business? Are you seeing more pull-ins, pushouts, people just with paralysis because there's just too much change, and it probably differs across geos and end markets? So whatever color you could give.

So I can give you from what we see for us as a company. We haven't seen any signs of pull-in. Actually, the growth that we've seen in certain markets or certain submarkets like our business in China is doing well. We could tie directly to commentary I mentioned in the first quarter about, for example, we went to the auto show, we saw all the platforms that we're in, and those platforms are going to ramp. Well, fast forward, the platform ramped, and we delivered the results that we expected.

So the results that we've posted and our outlook all have been what I would call a natural demand, meaning consumption side at the end markets. So what does the tariff overhang kind of do? It's more of the paralysis. And then what do we do about it is offer customers the flexibility. And let me break those 2 into kind of what I mean.

From a customer perspective, if customers are placing order, the last thing you want is the customer places an order when there's a tariff and then the tariff goes away and now their COGS are higher. So they're waiting until the last minute when they need their product to say, okay, now ship it to me because the window between order and build and sell is much shorter. So it's less likely. So that's what we call the paralysis.