ON Semiconductor (ON) Q4 FY25 earnings call: guidance and Q&A

Why was the 'other' category weak in Q4, and when can onsemi exceed seasonal growth given the improving macro environment?

The 'other' category's Q4 weakness was due to normal seasonality, soft demand outside AI data center, and $40 million in noncore exits. For Q1 FY26, excluding $50 million in noncore exits, the company is above seasonal growth, driven by investments in core products. AI data center revenue is expected to grow high teens percentage-wise in Q1.

“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.”

asked by Ross Seymore · answered by Thad Trent

What is the expected run rate for noncore exits in FY26, and can onsemi achieve its long-term 10-12% top-line growth target after accounting for these exits?

Noncore exits are not flat at $50 million per quarter; the total for FY26 is $300 million, with Q2 and Q3 expected to be higher. The core business has been growing above market, and accounting for exits, the company is already above seasonal in Q1. onsemi expects to resume over-market growth in FY27, driven by investments in new products.

“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.”

asked by Vivek Arya · answered by Hassane El-Khoury

What are the thoughts on AI data center growth for 2026, and what is the net impact of noncore exits on utilization and gross margin?

AI data center revenue is expected to see strong growth in 2026, starting with high teens percentage-wise growth in Q1. The noncore exits are neutral to gross margin today, as the exited business had margins near the corporate average but faced increasing pressure. These exits will not be a headwind to utilization, which is expected to increase throughout the year.

“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.”

asked by Blayne Curtis · answered by Thad Trent

Can you explain the puts and takes for Q1 gross margin, and what is the outlook for automotive in the March quarter?

Q1 gross margin is expected to expand by 30 basis points at the midpoint, which is positive given historical seasonal declines. This is driven by a combination of utilization impact, product mix, and cost benefits from Fab Right actions offsetting headwinds. Automotive revenue is expected to be roughly flat sequentially in Q1, with Chinese New Year being a headwind.

“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.”

asked by Joshua Buchalter · answered by Thad Trent

What is driving the significant increase in the AI data center opportunity per rack by 2030, and what are the FCF targets and capital return plans for 2026?

The increased AI data center opportunity per rack is driven by new products addressing evolving architectures, such as SiC JFET, vertical GaN, and Vcore solutions, which expand onsemi's addressable content. For 2026, the FCF margin is expected to be within the 25-30% target range. The company plans to continue returning 100% of its free cash flow to shareholders, supported by the new $6 billion share repurchase program.

“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.”

asked by Joseph Quatrochi · answered by Thad Trent

Can you provide more specifics on forward-looking revenue KPIs and the manufacturing strategy for GaN products?

Revenue visibility has improved, with book-to-bill trending up, less turns needed, and more expedites. These metrics indicate market stabilization, though not yet a full restocking. For GaN, onsemi has a broad voltage range (40-1200V) and combines internal Treo-based drivers with switches from foundry partners like Innoscience and GlobalFoundries to offer complete onsemi-branded smart switch products.

“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.”

asked by Gary Mobley · answered by Hassane El-Khoury

What is the progress of SiC in EV and AI, particularly regarding 300mm substrates, and how does onsemi view M&A in light of competitor actions?

SiC in automotive continues to gain share in North America and proliferate in Europe, with China being a major market for 800V systems. SiC JFETs are a significant driver for AI data center revenue. onsemi is not converting furnaces to 300mm for SiC manufacturing, focusing on its existing footprint for regional resiliency. M&A is strategically driven for portfolio completion or acceleration, not to fill fabs or address immediate needs, and is always evaluated for value and market expansion.

“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.”

asked by Christopher Rolland · answered by Hassane El-Khoury

Can onsemi still achieve its long-term targets of 53% gross margin and 40% operating margin, and what are the key drivers?

The 53% gross margin target is achievable. Drivers include: 700 basis points from increased utilization (to low 90s), 200 basis points from ongoing Fab Right activities, 200 basis points from past fab divestitures, and over 200 basis points from new, high-margin products. The company believes it's a matter of time for market recovery to enable higher utilization.

“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.”

asked by Joseph Moore · answered by Thad Trent