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ON Semiconductor (ON): Company Profile, Stock Price, News, Rankings

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ON Semiconductor

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Good day and thank you for standing by. Welcome to the Onsemi First Quarter twenty twenty five Earnings Conference Call. At this time, participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Parag Agarwal. Please go ahead.

Thank you, Kevin. Good morning, and thank you for joining Onsemi's first quarter of twenty twenty five results conference call. I'm joined today by Hassan Al Khoury, our President and CEO and Thad Tran, our CFO. This call is being webcast on the Investor Relations section of our website at www.onsemi.com. A replay of this webcast along with our first quarter earnings release will be available on our website approximately one hour following this conference call and the recorded webcast will be available for approximately thirty 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 could cause actual results to differ materially from our forward looking statements are described in our most recent Form 10 ks, 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 Hassan. Hassan?

Thank you, Parag. Good morning and thanks to everyone for joining us on the call. Despite a challenging macroeconomic landscape, we delivered Q1 revenue of $1,450,000,000 and non GAAP earnings per share of $0.55 both exceeded the midpoint of our guidance with non GAAP gross margin of 40%. Our focus remains on streamlining our operations through our fab right approach and investing in R and D to deliver differentiated products to our customers. Both initiatives aim to deliver gross margin expansion as the market recovers.

In an uncertain geopolitical environment, our manufacturing network is a source of competitive advantage as we have proactively established a flexible and geographically diversified supply chain for our customers that not only enhances supply resilience, but also reduces our risk exposure. With 19 front and back end facilities in addition to our external network, we are well positioned to respond effectively to tariff related concerns. Based on our understanding of current tariff policies, our expectation is that there will be minimal direct impact to our business. At this time, we expect no major issues in servicing our global customer base and are assisting these customers to minimize their impact by optimizing our supply chains. Although we began to see early signs of stabilization with favorable booking trends towards the end of the first quarter in certain parts of the industrial market, inventory digestion persists and customers remain cautious as I described last quarter.

While customers optimize their working capital in this extended downturn, we have used pricing to defend or increase share in strategic areas over the long term and expect low single digit pricing decline in certain parts of our business. On the revenue side, following a strong Q4, our automotive revenue in the first quarter declined 26% sequentially, in line with our expectations. Our industrial revenue was better than expected, decreasing only 4% sequentially. The traditional parts of the industrial market are starting to show signs of recovery. You'll recall this was the first part of industrial to show signs of weakness going into the downturn.

Medical and Aerospace and Defense also increased sequentially and our AI data center revenue, which we report as part of our other bucket, more than doubled year over year in the first quarter. Our differentiated intelligent power and sensing solutions enable us to deliver the performance and power efficiency that our customers need to thrive in their space. Through the downturn, we continued investing to diversify our portfolio and deliver differentiation as the market landscape continues to evolve. In automotive, while inventory digestion persisted in the first quarter, leading OEMs are adopting our silicon carbide in their next platform architectures. We have extended our technology leadership with our fourth generation ELISAQ MOSFET devices based on trench architecture.

We have already secured a new seven fifty volt plug in hybrid electric vehicle or PHEV designed with one of our major U. S. Automotive OEMs. This signals the beginning of a transition from silicon to silicon carbide in new PHEV platforms to extend vehicle range and reach a broader customer base, adding to our penetration in full battery electric vehicles or BEVs, where we continue to gain share over incumbents. Based on the latest electric vehicle launches in China, most of which were unveiled last week at the Shanghai Auto Show, we expect to have our silicon carbide in nearly 50% of the new models.

Most of these new models are set to ramp in late twenty twenty five, including a PHEV with our silicon carbide. Broader adoption of SiC and PHEVs is expected over the next few years as OEMs redesign hybrid platforms to meet tightening global emission standards and capitalize on the performance offered by silicon carbide technology to extend the range. We're also winning with our image sensors in automotive applications, which continue to be a differentiator for Onsemi. The superior performance of our technology makes Onsemi the partner of choice for the top automakers. In the first quarter, we began shipments of our eight megapixel image sensor to the leading OEM in China with a global footprint where we expect to be designed into ADAS systems for their low, mid and high end vehicles.

Another OEM based in Asia has selected our eight megapixel image sensor for their next generation ADAS platform. In AI data center, we continue to make progress in our strategy by leveraging our strengths in intelligent power. Silicon carbide and silicon powered devices anchor that strategy and are instrumental in every branch of the power tree. At the entry point of power into the data center, we are capitalizing on the transition to modular UPS systems with our ELISAQ power module solutions, delivering higher efficiency and power density than traditional silicon solutions. We are shipping to the three largest UPS suppliers, and with a new platform win that began ramping in Q1, we expect our revenue for UPS to grow between 4050% for the full year over 2024.

Within the power supply unit and the battery backup unit, our silicon carbide JFET combined with our T10 trench FETs to create a winning high power AC to DC solution. SIG JFETs are essential in the transition from three kilowatt to five kilowatt PSUs required in the next generation architecture, and only ON Semi has this distinctive technology. SIG JFET is superior in these high current solutions, because it offers the lowest on resistance in a given footprint. Similarly, our T10 MOSFETs offer industry leading ultra low RDS on and reduced switching losses. We are ramping with a large U.

S. Hyperscaler securing the majority share in their PSU and BBU. We are expanding our portfolio of power solutions using a combination of FETs and power management ICs to address the intermediate bus conversion and V Core branch of the PowerTree. With the launch of our Trejo platform last November, we introduced our expanding portfolio, including voltage translators, LDOs, ultra low power analog front ends, ultrasonic sensors, multi phase controllers for clients, and single pair Ethernet controllers for automotive zonal architecture applications. Advancements through the Treo platform are enabling us to accelerate development and deliver innovative solutions to our customers across automotive, medical, industrial and AI data center markets at accretive margins.

We have already recognized diverse production revenue from the Treo platform and are well on our way to doubling the number of products available year over year as we build the franchise towards delivering on our $1,000,000,000 commitment by 02/1930. As we look ahead, while the semiconductor industry is navigating complex macroeconomic factors, there is an increasing need for semiconductors to improve power efficiency and sensing capabilities in rapidly evolving sectors like AI data centers, automotive and industrial. Through this downturn, we have maintained our strategic direction and we have continued to deliver value to our customer base on the performance of our technology. We are focused on operational excellence and are well positioned for recovery with gross margin expansion as we continue to realize the benefit of our Fab Right initiatives. Let me now turn it over to Thad to give you more detail on our results and approach going into the second quarter of twenty twenty five.

Thanks, Hassan. While it was a challenging start to the year, continuing to focus on operational excellence has allowed us to drive cost out of our operations to focus on free cash flow generation. We exceeded the midpoint of our guidance with revenue of $1,450,000,000 and non GAAP earnings per share of $0.55 while Q1 free cash flow increased 72% year over year. We increased our share buyback to 66% of free cash flow, repurchasing $300,000,000 of shares in the first quarter. With our large capital investment behind us, we are confident in our liquidity and strong balance sheet and believe returning capital to shareholders is the best use of capital.

For 2025, we intend to increase our share repurchase to 100% of free cash flow. As of today, there is approximately $1,500,000,000 remaining on our repurchase authorization, and we expect free cash flow will remain strong with the cost control actions we have taken, aggressive working capital management and limited capital investments. Last quarter, I told you that we would be moving aggressively and with urgency in making structural changes to expand gross and operating margins and generate strong free cash flow in the future. In the first quarter, we took two significant steps to benefit the company in the long term and better position us for a market recovery. First, as part of our FabRite initiative, we reduced our internal fab capacity by 12% through our manufacturing realignment program to lower our fixed cost structure.

These actions will reduce our ongoing depreciation cost by approximately $22,000,000 on an annualized basis, and we expect to see the benefit on the income statement in Q4 of this year. We'll continue to rationalize our manufacturing footprint, gross margin expansion towards our long term target and providing greater leverage in our business model as the market recovers. The second action in Q1 was a company wide restructuring initiative. We made the difficult decision to reduce our global workforce by 9% and further reduce our non manufacturing sites, driving sustainable efficiencies across the company. These actions are expected to generate approximately $25,000,000 of savings in Q2 versus Q1, with an additional $5,000,000 per quarter of savings realized in the second half of the year.

These actions are structural rather than temporary, and will drive incremental leverage in both gross and operating margin for the long term. Coupled with our lower capital intensity, we remain on track to our targeted 25% to 30 free cash flow margin for the year. Turning to financial results for the quarter, a slowdown in demand across all end markets resulted in revenue of $1,450,000,000 above the midpoint of our guidance. Automotive and Industrial accounted for 80% of revenue in the first quarter. Automotive revenue was $762,000,000 which decreased 26% sequentially, driven by weakness in Europe and seasonality in Asia, mainly in China due to Chinese New Year.

Revenue for the Industrial was $400,000,000 down 4% sequentially, while our Medical and Aerospace and Defense businesses continue to grow, Traditional and Industrial remained stable. Outside of Auto and Industrial, our other businesses increased 1% quarter over quarter, mainly driven by client computing business offset by normal seasonality in wireless. Looking at the first quarter split between the business units, revenue for the Power Solutions Group or PSG was $645,000,000 a decrease of 20% quarter over quarter and 26% year over year. Revenue for the Analog and Mixed Signal Group or AMG was $566,000,000 a decrease of 7% quarter over quarter and a decrease of 19% year over year. Revenue for the Intelligent Sensing Group or ISG was $234,000,000 a 23% decrease quarter over quarter.

ISG revenue decreased 20% over the same quarter last year. Turning to gross margin in the first quarter, GAAP gross margin was 20.3%, which includes restructuring charges as a part of our manufacturing realignment program. Non GAAP gross margin was 40%, down five thirty basis points sequentially and five ninety basis points from the quarter a year ago. Non GAAP gross margin declined in line with guidance due to the lower revenue and under absorption with lower utilization levels over the last few quarters. Manufacturing utilization increased slightly from 59% in Q4 to 60%, which does not include any impact from our capacity reduction actions.

Now, let me give you some additional numbers for your models. GAAP operating expenses for the first quarter were $868,000,000 as compared to $328,000,000 in the first quarter of twenty twenty four. GAAP operating expenses increased sequentially as it includes restructuring charges of $539,000,000 Non GAAP operating expenses were $315,000,000 compared to $314,000,000 in the quarter a year ago. GAAP operating margin for the quarter was negative 39.7% and non GAAP operating margin was 18.3%. Our GAAP tax rate was 13.5% and non GAAP tax rate was 16%.

Diluted GAAP earnings per share for the first quarter was a loss of $1.15 as compared to earnings of $1.4 in the quarter a year ago. Non GAAP earnings per share was $0.55 as compared to 1.8 in Q1 of twenty twenty four. GAAP diluted share count was $421,000,000 shares and our non GAAP diluted share count was $422,000,000 shares. Turning to the balance sheet, cash and short term investments was $3,000,000,000 with total liquidity of $4,100,000,000 including $1,100,000,000 undrawn on our revolver. Cash from operations was $6.00 $2,000,000 and free cash flow increased 72% year over year to $455,000,000 representing 31% of revenue.

Capital expenditures during Q1 were $147,000,000 Inventory was down quarter over quarter on a dollar basis by $164,000,000 and increased by three days to two nineteen days. This includes one hundred days of bridge inventory to support fab transitions in silicon carbide. We expect this inventory to peak in the second quarter. Excluding the strategic builds, our base inventory is healthy at one hundred and nineteen days. Distribution inventory declined another $27,000,000 with weeks of inventory increasing to 10.1 versus 9.6 in Q4.

Our plan to support the mass market has continued to pay dividends, resulting in another 29% increase in customer count year over year. We do not expect a material change in the weeks of inventory over the near term. Looking forward, let me provide you the key elements of our non GAAP guidance for the second quarter. As a reminder, today's press release contains a table detailing our GAAP and non GAAP guidance. First, our guidance is inclusive of our current expectation that there is no material direct impact of tariffs announced as of today.

Given our current visibility, we anticipate Q2 revenue will be in the range of $1,400,000,000 to $1,500,000,000 Our non GAAP gross margin is expected to be between 36.538.5%, which includes share based compensation of $8,000,000 Our second quarter guide includes 900 basis points of non cash under absorption charges and we expect utilization to decline slightly in Q2. Approximately half of the sequential gross margin decline is from the increased under absorption in Q2 and the remaining is attributable to unfavorable pricing as we are seeing low single digit price declines. Moving on to non GAAP operating expenses, we expect OpEx to be in the range of $285,000,000 to $300,000,000 including share based compensation of 29,000,000 We expect our non GAAP other income to be a net benefit of $11,000,000 with our interest income exceeding interest expense. We expect our non GAAP tax rate to be approximately 16% and our non GAAP diluted share count is expected to be approximately $419,000,000 shares. This results in non GAAP earnings per share to be in the range of $0.48 to $0.58 We expect capital expenditures in the range of 70,000,000 to $90,000,000 We took difficult steps in the first quarter to right size and refocus the company on the key drivers to achieve our long term ambitions.

By continuing to lean into our fab right strategy and focus on higher value product lines, we are committing to building a solid foundation that will be a tailwind when the macro environment becomes more robust. In the meantime, we will remain cautious in our approach and position ourselves to capitalize in the future on strong customer relationships with our intelligent power and sensing platforms. With that, I'll turn the call back over to Kevin to open up the line for Q and A. Thank you.

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

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

Hey, Ross. No, it's not really structural. It's really depending on the end markets that we versus our peers are exposed to. As you know, we have a big focus on automotive for EV specifically. EV outside of China still has not seen the recovery.

China, as I've mentioned, we've gotten a lot of the wins. That's where most of the ramp is happening in the second half of twenty twenty five. So other than just within the markets, whether you're broad or more focused on submarkets like we are for the EV, that's the only thing I could point to.

And for my follow-up, perhaps for Thad, on the gross margin side of things. The charge that you took and then generally looking forward, how what are the metrics we should use to think about gross margin? You've been very overt with your second quarter. But what do we think about, say, half or relative to revenue growth? How much of it is just utilization based, absorption based?

Or are there many ideals that Aon has? Just any metrics to help us hone in on that would be great.

Yes. So, as I mentioned, we took about 12% of our capacity offline, and that was late in the first quarter. So, you didn't really see much of an impact of that in the first quarter. As we go forward with this new footprint, the incremental as utilization goes up for every point of utilization, it's now 25 to 30 basis points of gross margin improvement. Previously that was 20 to 25.

So it's increased because of taking that capacity offline. As I mentioned, there's about $22,000,000 of depreciation savings on an annualized basis. We'll start to see that hitting the P and L in Q4 just because of the lag with the inventory bleed, it takes time for that to hit. But as we go forward, the gross margin expansion in the short term is all about utilization. So as the market recovers, utilization will go up.

Now we are expecting utilization to go down slightly here in Q2. But if we based on early signs of stabilization recovery, we're hoping that we'll see some improvement later in the year. And then we'll see that impact hitting us in late twenty twenty five and in 2026.

One moment for our next question. Our next question comes from Vivek Arya with Bank of America. Your line is open.

Thanks for taking my question. I had a question on pricing. I think Hassan or Tad, in the past you had mentioned your pricing to value, right, and suggested that pricing could stay kind of more resilient. But now I think you're suggesting that pricing could be a headwind, that it could go down low single digit. And I'm curious, you know, what has changed?

If anything, is it a geographic issue? Is it a product? Is it a competitive headwind? Just, you know, what has changed on the pricing side? And how much of this flat Q2 sales is because of pricing?

And then how much is pricing a headwind when we look at the back half of the year?

Yes. So what changed, obviously, we've been in this downturn. It's a very extended downturn. And we have to react to market condition or competitive threats that some of our competitors are using pricing. And we are going to use the pricing to defend and increase share in forward looking programs.

So I don't see that as my comments as going back to the old pricing ways, whereas the first quarter obviously, it's not in the first quarter for us, it's the second. So it's not a plan that I can give you what it is by quarter or what it is for the second half. We're using it as a tool. We have forward looking programs that are actually beneficial from a gross margin perspective that we will defend or even penetrate and increase share based on pricing decisions we make today. So, we are going to take it as a tool, but it is a different environment we are operating in.

It's not geographical, it is not specific to a product, it's really what I would call is more opportunistic approach to it. From the revenue side, I wouldn't read any more into from the revenue in Q2. It's not the revenues specifically or the top line, it's more on demand driven. It is not really on the pricing impact specifically.

Okay. And then, my follow-up question, I think, Pat, you mentioned something on gross margin. When we look at Q2, the low end is 36.5%. And I think you mentioned that some of it was because of under absorption and some of it was pricing. So, if we start to hypothetically see sales grow from Q3 and Q4, what should be the new range of gross margins that we should be thinking about for the back half of the year?

Like even a broad range, I think, would be useful in kind of aligning the models. Thank you.

Yeah. So, as I was saying earlier, the impact of utilization is about a two quarter delay for it to hit the P and L, right, as you've got to burn through roughly two hundred days of inventory to see that benefit. So it takes about two quarters for that to impact. Given that we're expecting Q2 utilization to step down here slightly in Q2, that'll be a little bit of a headwind. So if you think about the rest of this year, we're likely going to be kind of in this, let's use the midpoint of our guidance, kind of in this range.

Again, we think that this is temporary, it's utilization driven. If you take that 900 basis points of under absorption, you add it to guide that gives you an indication of kind of where our standard margins in and kind of where we think sustainability is in the short term. But for the remainder of this year, I think we're going to be kind of in this kind of tight range here with improvement coming, assuming that utilization does improve as the market recovers later in the second half. So I think there's a nice tailwind going forward. I think for the next couple of quarters, are kind of in this, let me call it 37.5%, thirty eight % range, depending on utilization.

One moment for our next question. Our next question comes from Chris Danely with Citi. Your line is open.

Hey, thanks guys. So given the pricing environment and you're saying you're using pricing to defend market share, can you just give us an update on that $350,000,000 to $400,000,000 non core business that you're going to exit? Is that still the plan? Has the size of that changed? How rapidly do you think you're going to exit that this year?

Or will you try and defend your market share and use pricing on that business? Thanks.

Yes. So what I specifically on the pricing, we still expect to exit that. We've always said this is more market dependent than anything else. I do include some of the pricing in there, just to offset some of the utilization in the short term. But it is not on that specific, what I would call the non core exits that we are planning.

We're not defending it to the point where we want to keep it. You can think about it as it helps with utilization. We'll modulate it in the short term, but our expectation remains.

Yes. And Chris, I would add, in the first quarter, we walked away from about $50,000,000 of that business. We still think that $300,000,000 is probably the likely number for the year. It will be market dependent. If we can hold margins on that in a favorable range, we will keep it.

So I think it's really going to be dependent on what how the market plays out and the recovery plays out.

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

Yes. From a long term range, obviously, we're not guiding. We're still expecting growth. We're expecting to be the market share leader in that business based on the traction we've had today and really the wins in the outlook of the wins, just the ones we're ramping in 2025. I mentioned some of the trends for going to the plug in hybrids with silicon carbide.

We have been penetrating that, which will ramp in the outer years. So the outlook remains unchanged. We're still very bullish about the prospects of our silicon carbide within that market and the position we will keep and gain. As far as gross margin, we do believe that the gross margin today, the gross margin is really more impacted by the underutilization. If you recall, we added the capacity for the market that didn't really turn out.

We modulated a little bit on the capacity that we kept online. But from a standard margin perspective, we are still pricing on value. And as we grow into the capacity that we installed, we still believe we have the best cost structure in the industry.

Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

Hey, guys. Thank you for taking my question. For my first one, I kind of want to look backwards. I mean, entering the year, you guys called out that I think demand had gotten appreciably worse. It looked like in the quarter, things tracked to where you were expecting.

But your peers didn't didn't really flag all that much of a demand deterioration in the quarter. Can you maybe look back and reflect on what's happened over the last few months in particular for On Semi? And in particular, was this in your view an inventory issue that you guys needed to clean up or were there legitimate pockets of demand that weakened? Thank you.

Yeah, look, the quarter played out pretty tightly, I mean, to what we expected. We were above the midpoint of our guidance. The industrial was more favorable than we expected. Automotive was right on to what we expected going into the quarter. And our other business, small piece of it, small piece of the total was favorable as well-being up 1%.

So I think in terms of what we saw within the quarter, it pretty much came in line with what we expected. We did see some early signs of stabilization in the industrial market, specifically like the traditional industrial side of that business. There are some pockets that are still down, but we took that as a favorable sign coming out of the quarter. Now, there is uncertainty, given the tariff situation, but there's some early signs of stabilization, which gives us some hope.

Okay, thank you. Then I was also hoping for a little more, can you maybe explain a bit of what's in the $283,000,000 restructuring charge that was in gross margin? Was that primarily inventory write downs? And could you speak to sort of how you're thinking about your on books and channel inventory now? Thank you.

Yes. Okay, there's a lot there. So, on the restructuring, we did a restructuring and then we also did a capacity reduction as well. So, impairment of some of our assets. What hit the gross margin line was as a part of the manufacturing realignment program, we did take inventory out as we took capacity out in some of the areas as we're defocusing there and as our manufacturing footprint changed.

So we had some consumables and other inventory that we took as a part of that charge. What hit the OpEx line obviously was restructuring charges associated with more of the restructuring activity rather than the FabRite activities.

On the distribution, there's no change in our distribution. Obviously, we're taking a very disciplined approach to channel inventory. Although the weeks are, call it flattish around the ten, which is the sweet spot of where we believe we're going to be long term. We said between nine and eleven weeks. We actually drained dollars out of the channel as we remain cautious on the outlook.

Obviously, for our distribution inventory, we're always cautious not to ship in more than what we can see demand for, and we'll remain disciplined on that. So, no change and no impact to the DC inventory.

Yeah, and then on the inventory in the balance sheet, we have two nineteen days. It did go down by $164,000,000 Part of that is the write off that we took as a part of the restructuring activities. But if you look at our base inventory, exclude the fab transitions and silicon carbide, it's at one hundred and nineteen days. So it's healthy, our target has always been one hundred to one hundred and twenty days, so we're within that target. I expect inventory will be peaking here in the second quarter and will start to drain in Q3 and Q4 as the fab transitions continue to get executed and we stop buying from the divested fabs that we divested a few years ago.

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

One moment for our next question. Our next question comes from Blayne Curtis with Jefferies. Your line is open.

Hi, this is Crawford Clark on for Blayne Curtis with Jefferies. Thanks for taking my question and congrats on the results. I wanted to ask about the industrial segment. I think you've talked a little bit about it thus far in response to some other questions. But it sounds like some of your competitors are talking about maybe a little bit more of a broad based recovery in their end markets.

I know you mentioned some strength in aerospace and defense and medical, but was hoping you might be to put a finer touch on some of the trends you're seeing outside of those two sub segments. Thanks.

Yes, obviously, I can only focus and comment on the markets or the submarkets in industrial we're focusing on strategically and not as a broad base, because we're not a broad based industrial supplier. So I would say outside of some of the energy infrastructure, everything is up. So I would say broadly, it is starting to see signs of recovery. That's what Thad said, including some of the, what we call the consumer side of industrial. And if you recall, that was the first one that actually went into the downturn.

So we're starting to see signs of recovery there. So from a green shoot and stabilization perspective, we're actually more positive about industrial now. There's a few pockets, but again, there's still uncertainty given just the geopolitical environment and the tariffs. Outside of that, we do see stabilization and we do see signs of that recovery.

Got it. Very helpful. And then if you could just talk a little bit about your expectations for demand within the automotive segment by geography. I know people are calling out strength. In China.

Obviously, quarter was a little bit tougher given some trends related to Chinese New Year, but if you could talk again about your expectations for demand in auto by geography?

We do see strength in China automotive specifically driven by EVs, and for us it's driven by new ramps for silicon carbide as I've mentioned. Coming out of the Shanghai Auto Show, we do see the models that we are in, the models that are going to production. We said we're about 50% of these new models that are ramping. We expect that to start ramping in the second half.

Therefore, our automotive market, China specifically, other regions, we'll see. But from a positive outlook, I would say China automotive and China EV is the focus,

we see that as remaining favorable. Yes. And let me give

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

One moment for our next question. Our next question comes from Quinn Bolton with Needham and Company. Your line is open.

before your capacity actions, you guys had sized the business to have a 45% gross margin at $1,700,000,000 of revenue at a 65% utilization rate. Post the fab capacity actions you've taken, are there new metrics you can give us sort of just to help level set as demand recovers, utilizations recover where gross margins could go over the next year or two?

Well, yes, I think I gave the data point earlier that every point of utilization is now 25 to 30 basis points of gross margin improvement. So if you think about us today, roughly at 60% stepping down slightly in the second quarter in terms of utilization, you can do the math getting back up to 85%. I also gave the data point that we're the gross margins in Q2 are expected to be negatively impacted by 900 basis points of under absorption. So, as I said, the gross margin is going to be driven by utilization in the short term.

Got it. But the standard, I guess, then utilization or standard gross margin would be about 46.5%, right? If I take the midpoint of the range, add that 900%, that's where you would sort of get back to as utilizations increase. But is that utilization getting back to 65%, seventy five %? Or should we just use the 25 to 30 basis points?

Right. Of utilization is that as and assume that's pretty linear.

Yeah, that's right. That's right. So 25 to 30 basis points is the right move. The 900 basis points is assuming you get back to fully utilized, right? So that'll

us a while to get there, but your math is absolutely right.

One moment for our next question. Our next question comes from Gary Mobley with Loop Capital. Your line is open.

ON Semiconductor (ON) Q1 2025 Earnings Call Transcript

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