ON SEMICONDUCTOR Q4 FY25 earnings call ON

onsemi concluded fiscal year 2025 with $6 billion in revenue and a non-GAAP gross margin of 38.4%, demonstrating disciplined execution amidst a challenging demand environment. Over the past five years, the company has transformed from a manufacturing-centric to a product-centric organization, launching more breakthrough products than in the prior decade. This strategic shift has strengthened its portfolio with technologies aligned to critical market transitions, supported by focused investments, acquisitions, and partnerships.

The Treo Platform continues to drive market proliferation, doubling the number of products sampling year-over-year and contributing to a design funnel exceeding $1 billion. Treo is being designed into diverse applications, including automotive zonal architecture, ultrasonic sensors, LED drivers, HVAC, energy storage, and medical devices. The company also broadened its leadership in wide band gap technologies by introducing a lateral and vertical GaN (vGaN) strategy, with plans to sample over 30 new GaN devices (40-1200V) in 2026. A new foundry partnership will support lateral GaN, with revenue expected in 2026, while vGaN, manufactured in the U.S. and developed in collaboration with GM for EVs, is projected to generate first revenue in 2027.

onsemi is observing seasonal patterns and improving order trends across its core markets. Automotive inventory digestion is largely complete, and the AI data center segment is rapidly becoming a significant growth engine. The industrial market is showing signs of bottoming, with global PMI trends indicating early expansion. The aerospace, defense, and security segment experienced a 70% year-over-year revenue increase, driven by North America and Europe, securing strategic design wins for mission-critical applications.

The company delivered over $250 million in AI data center revenue in 2025, leveraging its broad portfolio of silicon, silicon carbide (SiC), SiC JFET, GaN, and Vcore assets. onsemi positions itself as a key U.S. power semiconductor supplier, addressing power density bottlenecks across the entire Power Tree, from utility string ESS (where it holds over 50% worldwide share) to XPU board-level solutions. Design wins include high-end UPS systems with a leading U.S. power supplier, and BBU/PSU systems with Delta, LITEON, and Great Wall, along with next-gen multiphase controllers and power modules for AI and server processors.

onsemi strengthened its financial foundation in 2025, achieving a record 24% free cash flow margin and returning approximately 100% of its $1.4 billion free cash flow to shareholders. The company is actively reshaping its product mix towards higher-margin offerings and optimizing its manufacturing footprint through the 'Fab Right' strategy. This included a 12% reduction in fab capacity in 2025 and additional measures expected to lower 2026 depreciation by $45 million to $50 million, with gross margin benefits anticipated in the second half of 2026.

Despite Q4 gross margin including 700 basis points of underutilization charges, management expects gross margin expansion throughout 2026, with Q1 guidance showing a 30 basis point increase at the midpoint. The company aims to reach its long-term gross margin target of 53% by increasing utilization to the low 90s (contributing 700 basis points), further Fab Right initiatives (200 basis points), benefits from past fab divestitures (200 basis points), and the introduction of new high-margin products (200+ basis points). This comprehensive strategy underpins confidence in achieving significant margin expansion.