ON Semiconductor (ON) Q2 FY26 earnings call: guidance and Q&A

How should we think about the automotive business in Q3 given the Q2 sequential decline, typical seasonality, and whether pricing levers apply to automotive customers?

Q2 automotive decline was due to typical seasonality in Europe, but overall demand is stable with content gains. Pricing actions to offset material cost increases apply across all markets, including automotive, as these costs are material in nature.

“our pricing actions that Thad and I both talked about last quarter are offsetting those costs across all of our markets. We do have some surgical cost increases where we see strength or we see really allocation. But in general, where we're offsetting cost, that's across the board, including automotive.”

asked by Vivek Arya · answered by Hassane El-Khoury

Why did gross margins only increase 80 bps with an 800 bps utilization increase, and what is the future impact of utilization, mix, and pricing?

Q2 gross margin was impacted by a Q4 utilization headwind (due to a 2-quarter lag), which was offset by favorable mix. The Q2 utilization increase will benefit Q4 margins. The company expects continued gross margin expansion as utilization consistently rises.

“you actually need to go back and look at the Q4 utilization because remember, there's about 2 quarter for utilization to hit the P&L. So in Q4, utilization actually dropped 6 percentage points from Q3 to Q4. So that would have been a headwind to Q2.”

asked by Vivek Arya · answered by Thad Trent

Is the rubric of 30 bps gross margin improvement per point of utilization still accurate, implying a significant margin increase by Q4?

Yes, the math is 25 to 30 basis points of gross margin improvement for every point of utilization. This implies additional margin expansion in Q4, assuming a consistent mix.

“The math is 25 basis points to 30 basis points of gross margin improvement for every point of utilization.”

asked by Timothy Arcuri · answered by Thad Trent

Did prioritizing AI data center demand over automotive and industrial impact revenue in those segments, and how does that dynamic work?

Yes, there was a short-term impact on other businesses as AI data center shipments were prioritized due to supply constraints and rapid demand. This was a strategic call for long-term benefit, and manufacturing is catching up.

“we did prioritize AI data center that took away from our other businesses in the short term as manufacturing really catches up to the updated signals of demand.”

asked by Joseph Quatrochi · answered by Hassane El-Khoury

Is silicon carbide growing slower than the overall AI data center business, or what other products are driving the growth?

AI data center growth is broad, encompassing solutions 'from the wall to the core,' not solely silicon carbide. While SiC is growing, other high-voltage and low-voltage solutions are also contributing significantly, with growth across the entire power tree.

“Our data center revenue is very, I would say, very equal across all of them. So the growth that we are seeing in AI data center is not necessarily anchored on the high voltage.”

asked by Quinn Bolton · answered by Hassane El-Khoury

What is driving the almost fourfold increase in the AI data center TAM from $12 billion to nearly $50 billion?

The increased TAM is correlated to projected gigawatt-scale installations by 2030, reflecting higher power and compute demand. Additionally, new products introduced in recent years, such as vertical GaN and silicon carbide JFETs, are expanding the addressable market.

“the number we're anchoring on is 2030. And the projection we are basing on the increase is really correlated to a -- I'm going to call it, a gigawatt scale that would be installed by 2030.”

asked by Christopher Rolland · answered by Hassane El-Khoury

Could you provide context on extending lead times, and why utilization isn't ramping faster given delinquencies?

Lead times have stretched from approximately 27 weeks to 32 weeks on average. While utilization is ramping sharply, fab cycle times of 4-6 months mean it takes time to catch up to sudden demand increases. Not all capacity is fungible, but the company is not capped out.

“lead times stretched out from about 27 weeks to somewhere around 32 weeks on average.”

asked by Blayne Curtis · answered by Thad Trent

Are you seeing OEM customers start to expand their inventory or take more risk on their balance sheets given extending lead times and expedites?

The company is not seeing an inventory build from customers; they believe they are shipping to end demand. They maintain a disciplined, KPI-based approach to manufacturing and inventory management to prevent potential inventory builds.

“we're not seeing -- from our perspective, we're not seeing an inventory build. We are seeing really consumption to demand”

asked by James Schneider · answered by Hassane El-Khoury